The tough U.S. fuel economy standards announced by President Barack Obama on Tuesday represents a bonanza for companies that supply hybrid technology and other gas-conserving components needed to meet the new benchmarks.
Potential winners range from established suppliers such as BorgWarner Inc, Honeywell International Inc and Johnson Controls Inc to battery makers such as start-up A123 Systems, Continental AG and LG Chem Ltd, analysts say.
To improve fuel efficiency by as much as 40 percent, major automakers will need to order a lot more turbochargers, more advanced lithium-ion batteries and more electric motors for cars and trucks already under development.
There are a lot of suppliers out there with credentials that are lining up to get into this gold rush, said Larry Rinek, an expert in fuel efficiency at consulting firm Frost & Sullivan. This is going to be a drama to watch.
Other analysts expect steel to be swapped for lighter aluminum and plastics. Copper demand could grow as electric motors are rolled out to meet the rising production of hybrids.
The hitch: analysts expect American consumers will pay more than projected and face sharply limited choices.
With General Motors Corp and Chrysler LLC operating under government funding, analysts also expect demands for large new subsidies to automakers and incentives to get consumers into greener and smaller cars.
S&P equity analyst Efraim Levy said he was keeping his hold recommendation on shares of Ford Motor Co, the only U.S. automaker to have steered clear of a bailout.
We do think it will burden an already struggling industry, Levy said in a note for clients.
Barclay's Capital analyst Brian Johnson, meanwhile, said the new policy reinforced his view that BorgWarner and Johnson Controls could benefit from increased demand for turbochargers and lithium-ion batteries.
BorgWarner and Johnson Controls shares each closed around 3 percent higher at $29.82 and $19.95, respectively, while Honeywell was up less than 1 percent at $33.09.
SEND FOR MORE LITHIUM AND ALUMINUM
The bump in demand for those advanced batteries, now widely used to power everything from cell phones to power tools, reflects the view that more automakers will be pushed into the market for hybrids now dominated by Toyota Motor Corp and Honda Motor Co Ltd.
The new regulations will ensure that manufacturers immediately reconsider conventional hybrids, plug-in hybrids, electrically powered vehicles and battery electrics to have a variety of them ready for consumer purchase in the next decade, Kelley Blue Book analyst Jack Nerad said.
Analyst Charles Bradford of Affiliated Research Group expected the steel content in vehicles to drop, while aluminum and plastic usage would rise.
That is bad news for some because the auto industry is the second biggest user of steel, behind construction. ArcelorMittal SA , United States Steel Corp and AK Steel Holding Corp are the three steelmakers with the biggest exposure to the car industry, he said.
Bradford also expected a boom in demand for lithium that has to be imported from markets such as China, Chile and Bolivia and could be in short supply.
Frost & Sullivan's Rinek expects hybrid vehicles to make up 7 percent of U.S. vehicle sales by 2015, up from under 3 percent currently, but is reviewing that projection.
Now that looks conservative. We would probably nudge that up, he said.
HOW MUCH WILL IT COST?
Sandy Stojkovski, an engineering and fuel economy expert at auto industry consulting firm Ricardo, estimated it could cost consumers between $5,000 and $12,000 more per vehicle under the federal fuel economy targets.
The Obama administration has said the efficiency upgrade could cost just $1,300 per vehicle and consumers could look to recoup much of that by spending less on fuel. If that estimate proves low, evidence suggests American consumers will balk.
A poll conducted for Johnson Controls in March found an overwhelming 88 percent of adults surveyed said the United States should become a leader in hybrid vehicles. But an almost equal margin -- 80 percent -- said the extra cost of a hybrid would prevent people from buying one.
The technology isn't the hard part here. It's aligning consumer demand with the technology that is going to be the hard part, Stojkovski said.
Erich Merkle, an independent auto analyst, said the new standards threaten to cut into margins on the big trucks where GM, Chrysler and Ford have dominated in recent years.
Merkle also expected Congress would have to double the amount budgeted for taxpayer-backed loans to offset the cost of producing a new generation of greener cars.
We're going to have to start at $50 billion and work from there, he added.
(Reporting by Kevin Krolicki and David Bailey in Detroit and Steve James in New York; Editing by Andre Grenon)