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The Only CAFE That Makes You Lose Weight

Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In late August the White House and EPA announced that new Corporate Average Fuel Economy (CAFE) standards had been finalized. The new laws will bind automakers to flaunt fleets with an average fuel economy of 54.5 mpg by 2025. The average for 2011 model years was just 28.6 mpg. In English: this will be no easy (or inexpensive) feat. 

Yo car so fat it wishes it was made of carbon fiber

Perhaps the most obvious area for automakers to improve upon is the weight of their vehicles. Steel may be strong and cheap, but it is extremely heavy. Looking for long-term answers, Ford (NYSE: F) has teamed up with a consortium of universities and companies to develop an economical process for producing large amounts of carbon fiber. General Motors (NYSE: GM), not to be left behind, has partnered with Teijin to do the same.

If Ford’s carbon fiber Mustang goes mainstream it could achieve 30% better fuel economy AND greatly enhanced 0-60 times. Will the government reward automakers by increasing speed limits? Pretty please?

The material weighs much less than steel and is up to 500% stronger. However, the difficulty in scaling-up production has made it 10 to 20 times more expensive than steel and limited its adoption for use in larger applications.

One small cap company looking to break that stigma is Zoltek Companies (NASDAQ: ZOLT), which recently partnered with automotive supplier Magna International (NYSE: MGA). The partnership is a no-brainer given the ferocious push to shed weight from vehicles, but it also gives Zoltek a potentially lucrative revenue stream to offset its stumbling wind turbine segment. A major red flag for the company is the fact that it generates over 50% of its revenue from the slowing wind turbine giant Vestas Wind Systems.

Although Zoltek remains profitable and trades below book value it is highly susceptible to fluctuations in carbon fiber price. A Zoltek spokesman stated that the company’s profit margins could be volatile until the industry is “three to four times” larger than it was at the end of 2010. As with any high growth company there is plenty of risk to stomach with the possible rewards.

Despite the unknowns analysts are hoping carbon fiber will reduce vehicle weights by up to 750 pounds by 2020. A ridiculously optimistic figure, but it’s not hailed as a wonder material for nothing!

Right under our noses

While the new CAFE standards have provided plenty of motivation for automakers to pursue next generation materials they are still pressured to make steady and continual progress in the short term. To be blunt, 2025 is right around the corner and automakers must achieve 35.5 mpg (24% increase over 2011) by 2016. Betting the house on one technology – EVs, carbon fiber, etc. – could be devastating if it doesn’t pan out.  

That’s why the industry has turned to the same short term solution: aluminum. It is three times lighter than steel, but even after accounting for weight it costs about 50% more. It may not seem like much, but Ford and GM are replacing or revamping everything from welding (18 pounds per car) to riveting (2 pounds per car) with aluminum parts and processes.

Given that the amount of aluminum used in cars is expected to double by 2020 one would figure Alcoa (NYSE: AA) stands to benefit. That would certainly be a nice boost to its automotive segment, but is it enough for a long-term revenue stream? Does the metal giant face too many other headwinds from slowing worldwide growth?

Foolish bottom line

According to Ronald Krupitzer, vice president of automotive for the Steel Market Development Institute, automakers will need to turn to a mix of materials to achieve the 54.5 mpg standard by 2025. Not all steel parts can be replaced with aluminum or carbon fiber, and vice versa. It would be great to see the automotive industry use its financial reach to speed carbon fiber’s arrival to the mainstream marketplace. It is also encouraging to see a new wave of confidence and action throughout an industry that was one of the most inefficient in the world just a few short years ago. Although, if I had to double my fleet’s fuel economy in the next 12 years I wouldn’t be sitting around either.

Did you enjoy this post? Follow me on Twitter to keep up with my future posts on energy, sustainable chemicals, and biopharmaceuticals @BlacknGoldFool.

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Drive Home With More Analysis

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