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A new bi-state soft magnetic material has been developed that can have its normally high magnetic permeability reduced permanently to that of air by means of heat treatment. As a result, localized heating via laser or other means can be used to locally "unmagnetize" regions in machine laminations while retaining the high permeability of adjacent untreated regions. A 6 kW interior permanent magnet (IPM) direct-drive starter/alternator machine was used as the target for this investigation. Two alternative designs for the same set of starter/alternator specifications are presented using the new magnetic material for the rotor laminations. Lumped-parameter magnetic circuit models including saturation were used to design both machines and the electromagnetic performance results were subsequently confirmed using finite element analysis (FEA). These results indicate that the performance specifications can be met using this new material while significantly increasing the mechanical integrity of the rotor at high speeds. Advantages and limitations of using this new bi-state magnetic material in IPM machine designs for starter/alternators and other applications are discussed.