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Morgan Stanley

In light-weighting, auto makers are faced with a manufacturing technology shift that threatens near-term margins but promises long-term improvements in customer value.

Among U.S. original equipment manufacturers (OEMs), Ford Motor (ticker: F) and Tesla Motors (TSLA) lead. Alcoa (AA) and Constellium (CSTM) benefit. U.S. Steel (X) impact concerns are overblown, we believe.

Making cars lighter has a major economic impact. There are more than one billion cars on the road, traveling 10 trillion miles a year, consuming 500 billion gallons of fossil fuel with an annual cost of $2 trillion. A 50 kilogram weight savings per vehicle can save 2% in fuel economy, saving the global car fleet $40 billion annually. Advances in metallurgy, joining and production and design have emboldened key auto players (Ford, Volkswagen, Jaguar Land Rover) to make big bets on material substitution to aluminum and advanced high-strength steel (AHSS). As autonomous vehicles bring accident-free driving, material substitution in cars can reach even more radical levels longer term.

More than 100 years after Henry Ford pioneered the use of vanadium steel in the Model T, Ford is at it again. The F-Series is America's No. 1 selling vehicle, by itself accounting for over 1% of the global car market (and most of Ford's profit). Cutting 700 pounds from this truck entails one of the most audacious engineering projects undertaken in the history of the company. A challenging industry structure ensures the benefits are passed onto the consumer while the cost and execution risk is borne by the OEM. With long-term industry survival the priority, it's hard to spin the trend positively near-term for OEMs.

Ford's margins may compress in the early phases of the transition, while General Motors (GM) appears to be planning more radical changes to its new truck just as its "current" new truck arrives on dealer lots.

Tesla (our top U.S. auto pick) is already 100% aluminum. It's easier to move to light-weight with high value-added products from scratch than retooling an existing infrastructure with a more mass-market offering.

BMW, VW and Tata Motors (TTM) stand out as international players who have pushed into light-weighting and have the resources and expertise to see it through.

We believe the biggest beneficiaries of the light-weighting revolution include aluminum-sheet makers (e.g., Alcoa and Constellium), leveraging their expertise in making aerospace and packaging products. While we forecast a 22% drop in steel use per vehicle by 2025, higher-margin advanced high-strength sales will offset the blow. In fact, we see negligible margin loss at Nucor (NUE) and Steel Dynamics (STLD), and only 2% decline in midcycle earnings before interest, taxes, depreciation and amortization (Ebitda) at U.S. Steel. AK Steel Holding (AKS) would be challenged by an 8% drop in midcycle Ebitda.

-- Adam Jones

-- Ravi Shanker

-- Paretosh Misra

-- Evan L. Kurtz

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