Profitable Growth for All Ford Motor Company 2012 Annual Report
Ford Motor Company | 2012 Annual Report
On the Cover The One Ford plan enables accelerated development of products that customers truly want and value, resulting in a full-line of cars, utilities and trucks that meet and exceed owner expectations across global markets. The upper photo includes the stylish Ford Focus hatchback, the sporty subcompact Fiesta ST and the distinctive Escape utility vehicle. From left to right, lower photos illustrate the innovative new Lincoln MKZ, the family-friendly Ford B-MAX and the iconic F-150 pickup truck.
Revenues 2012 2011 Worldwide wholesale unit volumes by automotive segment (in thousands) Ford North America 2,784 2,686 Ford South America 498 506 Ford Europe 1,353 1,602 Ford Asia Pacific Africa 1,033 901 Total 5,668 5,695
Revenues (in millions) Automotive $ 126,567 $ 128,168 Financial Services 7,685 8,096 Total $ 134,252 $ 136,264
Financial Results Income before income taxes (in millions) Automotive $ 6,010 $ 6,250 Financial Services 1,710 2,431 Total $ 7,720 $ 8,681
Amounts Attributable to Ford Motor Company Net income (in millions) $ 5,665 $ 20,213 Diluted net income per share of Common and Class B Stock $ 1.42 $ 4.94
Cash and Spending Automotive capital expenditures Amount (in billions) $ 5.5 $ 4.3 As a percentage of Automotive sales 4.3% 3.3%
Automotive cash at year end (in billions) Automotive gross cash (a) $ 24.3 $ 22.9 – Cash net of Automotive debt 10.0 9.8
Shareholder Value Dividends paid per share $ 0.20 $ 0.00 Total shareholder returns % (b) 23% (36)%
Content 1 More Products People Want 2 A Message from the Executive Chairman 3 A Message from the President and CEO 7 Board of Directors and Executives 8 Shareholder Information 9 Financial Content 161 Global Overview
(a) Automotive gross cash includes cash and cash equivalents and net marketable securities. (b) Source: Standard & Poor’s, a division of the McGraw Hill Companies, Inc.
Ford Motor Company | 2012 Annual Report 1
S More Products People Want Ford designs, builds and sells cars, utilities and trucks of all sizes to meet the needs of a diverse global customer base. From small cars such as the Ka and Fiesta to large trucks like the venerable F-150 and Super Duty, Ford Motor Company vehicles cover the full spectrum of global automobile requirements.
Small Sporting a refreshed look, the Fiesta boasts the three-cylinder 1-liter EcoBoost engine providing better power and fuel efficiency than previous models. The Ka and Figo round out a global lineup that offers premium features in smaller packages.
Small The EcoSport, a market leader in South America, debuted globally. This SUV is specifically designed for the urban environment in South America, India and Thailand and is now offered in China.
Small The Transit Connect provides highly configurable interiors, generous cargo space, easy loading and unloading, and exceptional maneuverability with car-like driving dynamics and safety features.
The new Lincoln brand will be defined by great new luxury vehicles, such as the new MKZ, that feature unique style and innovative technology. These elements enable Lincoln to appeal to today’s new luxury customer.
Lincoln introduced the MKC Concept, a vision of how Lincoln will enter the industry’s fastest-growing segment – small luxury utilities. The MKC Concept builds on the foundation of the Lincoln design DNA found in the new MKZ.
Medium The C-MAX Hybrid and C-MAX Energi plug-in hybrid, two ecofriendly yet practical vehicles large enough to fit a family, debuted in 2012. In the same segment, the redesigned Ford Focus is one of the top-selling vehicles in the world.
Medium The redesigned Kuga offers class-leading technology, fuel efficiency, safety, and comfort in Europe, South America and Asia. Known as Escape in North America, three robust engine options provide strong fuel economy and technological features.
Medium The new Ranger is the truck for work and play in Europe, South America, Asia and Africa; offered in three versatile cab bodystyles. It comes with a choice of two powerful and economical diesel engines, and with a 4×2 or 4×4 drivetrain.
Large The Mondeo, known as the Fusion in North America, will debut its striking new look next year in Europe. Both offer a wide array of driver assist technologies. Fusion offers a Hybrid and Energi plug-in hybrid, providing enhanced fuel economy in a stylish package.
Large The redesigned, sleeker Explorer combines enhanced fuel economy with new safety features such as Curve Control, which can slow the vehicle by up to 10 mph if it senses a curve is being taken too fast.
Large F-Series Trucks are the ultimate work tool for various industries. The dependable F-150 is the top-selling light-duty pickup in the U.S. and the F-Series Super Duty is the most popular heavy-duty truck.
Lincoln MKZ Lincoln MKC Concept
For detailed product and financial information, view our
full online annual report at: www.annualreport.ford.com
2 Ford Motor Company | 2012 Annual Report
“ WE ARE ANTICIPATING NEW CHALLENGES AND OPPORTUNITIES THAT ARE EMERGING, SPECIFICALLY THOSE AROUND THE FUTURE OF TRANSPORTATION.”
In 2012 Ford Motor Company continued to go further to meet the needs of our customers, the challenges of our industry and the issues confronting our world. Our efforts produced strong financial results and our fourth year in a row of positive net income.
We expect 2013 to be another strong year for our company.
We anticipate our outstanding performance in North America will continue, with higher pre-tax profits than in 2012. We are refreshing our entire product line in South America and continuing to invest for growth in Asia Pacific Africa. The transformation of our European operations, which is aimed at achieving profitability under difficult economic conditions, is on track and ongoing.
We will continue to focus on producing vehicles with best- in-class quality, fuel efficiency, safety, smart design and value – built on global platforms. They will help us toward our goal of increased global sales and market share, as well as support our ongoing commitment to reducing the environmental impact of our vehicles and operations.
Our strong showing in the electrified vehicle market is a good example of how great products can help build a strong business as well as a better world. In 2012 we introduced six new electrified vehicles in North America, including hybrid, plug-in hybrid and pure battery electric models. By offering a variety of vehicles, we make it easier for customers to embrace fuel-saving technologies.
As a result of our aggressive move into this growing segment we sold more hybrids in the U.S. in the fourth quarter of 2012 than in any other quarter in our history, and that strong momentum has continued in 2013.
Looking further ahead, we are anticipating new challenges and opportunities that are emerging, specifically those around the future of transportation. Currently there are a billion vehicles on the road worldwide, a number that is expected to double by 2020 and double again by mid- century. As the number of vehicles on the road continues to grow, mobility issues are expected to emerge in many major urban areas, potentially presenting a serious challenge to economic, social and environmental progress.
To help address this issue, we are committed to being the automotive leader in wireless communication technology, developing vehicles that communicate with each other and the world around them to improve safety and reduce traffic congestion.
As we move forward, our employees around the world continue to work together as a global team. We have a great plan, outstanding leadership and positive momentum. We are determined to keep going further so that we can continue rewarding our shareholders and all of our stakeholders.
Thank you for your continued support of our efforts.
William Clay Ford, Jr. Executive Chairman March 14, 2013
A Message from the Executive Chairman
Ford Motor Company | 2012 Annual Report 3
“ OUR PROVEN ONE FORD PLAN PUT US ON THE PATH TO PROFITABLE GROWTH, AND WE ARE CONFIDENT IT WILL KEEP US ON THAT PATH GOING FORWARD.”
A Message from the President and CEO Ford Motor Company continued on our path to deliver profitable growth in 2012 by following our proven One Ford plan, despite the ongoing challenges in the global market.
Along the way, we achieved several important milestones, including restoring Ford’s investment grade status and reclaiming the Ford Blue Oval, resuming regular dividend payments to our shareholders and achieving 14 straight quarters of operating profit.
In a strong North America market, we set full year records for pre-tax profit and operating margins. In South America, we are in the middle of launching a new global product lineup. In Europe, we responded to challenging economic conditions by beginning a transformation plan to aggressively accelerate our new product rollouts, strengthen our brand and restructure our manufacturing operations. In Asia Pacific Africa, we are undertaking an unprecedented investment program to grow our business in what is now the world’s largest automotive market.
The success of our One Ford plan to date gives us confidence that it will continue to create profitable growth for us in the future. We remain laser focused on the key aspects of our plan, which remain unchanged:
• Aggressively restructure to operate profitably at the current demand and changing model mix.
• Accelerate development of new products our customers want and value.
• Finance our plan and improve our balance sheet.
• Work together effectively as one team, leveraging our global assets.
By following this plan, we will continue to build great products, a strong business and a better world.
Great Products The great products that we build at Ford drive our success. We launched 25 vehicles and 31 powertrains globally in 2012, a testament to our ongoing commitment to product development. We also announced plans to revitalize our Lincoln brand as the Lincoln Motor Company, which will introduce an exciting new lineup of great luxury vehicles.
Our plan is centered on serving customers in all markets around the world with a full family of vehicles – small, medium and large; cars, utilities and trucks – that offer the very best quality, fuel efficiency, safety, smart design and value.
The best way to measure the success of our products is sales, and 2012 was a strong year. We sold 2.3 million vehicles in the United States in 2012. Ford is the only brand to top the 2 million mark in the United States since 2007, and it has topped 2 million for 2 years in a row. In Asia Pacific Africa, we sold more than 1 million vehicles for the first time, including record sales in China.
Our strong global performance was led by Focus, which was the best-selling nameplate in the world in 2012, and Fiesta, which was the best-selling B-Car in the world based on the latest global data. Ford also was the only brand to have three vehicles among the top 10 best-sellers worldwide, with the F-Series truck coming in as the fourth best-selling global nameplate.
Leveraging key new technologies across multiple regions and on global platforms helps drive tremendous scale and efficiency savings that can be reinvested, enabling us to have one of the freshest showrooms in the industry. Our outstanding product lineup, which we are continually transforming and improving, is the foundation on which we have built our strong business.
For more information visit www.annualreport.ford.com
4 Ford Motor Company | 2012 Annual Report
Ford’s Senior Management Team The senior management team continues to successfully advance the company’s One Ford global plan. Pictured with the Ford Escape, all-new Transit Connect and Fiesta ST from left to right: Bob Shanks, Jim Farley, Ray Day, Tony Brown, Nick Smither, Felicia Fields, David Schoch, Stephen Odell, Mark Fields, Alan Mulally, Bernard Silverstone, Joe Hinrichs, Ziad Ojakli, Robert Brown, David Leitch, Bennie Fowler, Raj Nair and John Fleming.
Strong Business Our 2012 full year pre-tax operating profit, excluding special items, was $8 billion, or $1.41 per share. We delivered record results of $8.3 billion in North America, continued solid performance from Ford Credit of $1.7 billion, positive results in South America, continued investment in Asia Pacific Africa and began a challenging transition in Europe.
We remain committed to strengthening our balance sheet. We ended 2012 with Automotive gross cash of $24.3 billion, exceeding debt by $10 billion. We also have a strong liquidity position of $34.5 billion, an increase of $2.1 billion over 2011.
We also worked to de-risk our pension obligations, contributing $3.4 billion in cash contributions to our worldwide funded plans.
With an eye to the future, we continued our largest and fastest manufacturing expansion in more than 50 years, adding capacity to support growth plans in North America and Asia Pacific Africa.
In 2012, we added more than 8,100 hourly and salaried jobs in the U.S. as we increased production capacity and expanded other areas to meet the growing demand for our fuel-efficient, high-tech vehicles.
In Europe, we are moving quickly to carry out our transformation plan. As we did in North America, we are making tough choices and intelligent investments now to transform our European business for profitable growth in the future.
Additionally, we further strengthened and developed our leadership team by announcing the appointment of our chief operating officer, a new chief financial officer, a new Global Product Development leader and senior leadership changes for the Americas, Europe, Asia Pacific, Ford Credit and our Lincoln Brand.
Ford Motor Company | 2012 Annual Report 5
Better World Even as we strive to improve our products and enhance our business, we recognize that doing our part to contribute to a better world is at the core of our business. In addition to economic goals, we also pursue environmental and social objectives.
Ford is going further than our competitors by offering an industry-best seven Ford-brand vehicles in the U.S. that deliver 40 or more miles per gallon.
We reached this milestone by developing the best conventional and alternative powertrains. In 2012, we produced our 500,000th fuel-saving EcoBoost engine just three years after its launch. We also introduced six new electrified vehicles, including hybrids, plug-in hybrids and a pure battery electric vehicle.
We are giving customers the power of choice among a range of powertrains that generate fewer emissions and consume less gasoline.
Serving in our communities is another important part of building a better world. In 2012, 25,000 Ford employees and retirees volunteered more than 115,000 hours at 1,350 projects to help people in their local communities. As part of that effort, our seventh annual Global Week of Caring featured 12,000 employees, retirees and dealers working on more than 300 community projects on six continents.
ONE FORD: ONE Ford expands on the company’s four-point business plan for achieving success globally. It encourages focus, teamwork and a single global approach, aligning employee efforts toward a common definition of success and optimizing their collective strengths worldwide. The elements of ONE Ford are:
ONE TEAM: ONE Ford emphasizes the importance of working together as one team to achieve automotive leadership, which is measured by the satisfaction of our customers, employees and essential business partners, such as our dealers, investors, suppliers, unions/councils and communities.
ONE PLAN: • Aggressively restructure to operate profitably at the current
demand and changing model mix. • Accelerate development of new products our customers want
and value. • Finance our plan and improve our balance sheet. • Work together effectively as one team.
ONE GOAL: The goal of ONE Ford is to create an exciting and viable company delivering profitable growth for all.
For more information visit www.annualreport.ford.com
6 Ford Motor Company | 2012 Annual Report
Going Further In the coming year, we expect global growth to continue, despite ongoing challenges in the external environment. We anticipate global economic growth in the 2 to 3 percent range, and global industry sales of 80 million to 85 million units.
In North America, we expect our strong performance to continue, and we anticipate higher pre-tax profits than 2012, due to our strong Ford brand and products, the growing industry, a lean cost structure and our continued success in matching production with demand.
Conditions in South America will be uneven, with some countries experiencing growth while others face increasing economic and political risks. We expect results in the region to be about breakeven in 2013, as the benefits of new global products will be tempered by the competitive environment and currency risks across the region that are expected to affect our profits adversely.
Asia Pacific Africa also is expected to be about breakeven in 2013, as growing volume and revenue are offset by continued strong investment across the region. This investment will pay off as we look even further forward, and our goal is to have a full third of our global sales in Asia Pacific Africa by 2020.
In Europe, we are working to deliver our European transformation plan, but we expect weak economic
conditions in several markets to extend into 2013 and industry volume to be lower in 2013 than 2012. As a result, we expect to incur another substantial loss in Europe in 2013. We believe that 2013 is likely the trough for European industry sales volume, and we expect industry sales volume and our results to begin to improve in 2014.
Overall, we expect 2013 will be another strong year for the Ford Motor Company with pre-tax operating profit about equal to 2012, Automotive operating-related cash flow to be higher than 2012, and pre-tax profit for Ford Credit to be about the same as 2012.
Our proven One Ford plan put us on the path to profitable growth, and we are confident it will keep us on that path going forward.
As always, we thank you for your support of our efforts.
Alan R. Mulally President and Chief Executive Officer March 14, 2013
Nine hundred Ford employees formed a human Ford logo outside Ford World Headquarters to celebrate the return of the “Blue Oval” and other assets that had been used as collateral to secure Ford’s revolving credit facility. The celebration took place on May 22, 2012 after Fitch and Moody’s Investor Service restored Ford’s credit rating to investment grade.
Ford Motor Company | 2012 Annual Report 7
Executive Officer Group William Clay Ford, Jr. Executive Chairman and Chairman of the Board
Alan R. Mulally President and Chief Executive Officer
Mark Fields Chief Operating Officer
James D. Farley, Jr. Executive Vice President, Global Marketing, Sales and Service and Lincoln
John Fleming Executive Vice President, Global Manufacturing and Labor Affairs
Joseph R. Hinrichs Executive Vice President and President, The Americas
Stephen T. Odell Executive Vice President and President, Europe, Middle East and Africa
Robert L. Shanks Executive Vice President and Chief Financial Officer
Thomas K. Brown Group Vice President, Global Purchasing
Raymond F. Day Group Vice President, Communications
Felicia J. Fields Group Vice President, Human Resources and Corporate Services
Bennie W. Fowler Group Vice President, Quality and New Model Launch
David G. Leitch Group Vice President and General Counsel
J Mays Group Vice President and Chief Creative Officer, Design
Raj Nair Group Vice President, Global Product Development
Stuart J. Rowley Vice President and Controller
Ziad S. Ojakli Group Vice President, Government and Community Relations
David L. Schoch Group Vice President and President, Asia Pacific
Bernard B. Silverstone Group Vice President, Chairman and Chief Executive Officer, Ford Motor Credit Company
Nicholas J. Smither Group Vice President and Chief Information Officer
Board of Directors Stephen G. Butler (1,5) Kimberly A. Casiano (1,3,5) Anthony F. Earley, Jr. (2,3,5) Edsel B. Ford II (3,4) William Clay Ford, Jr. (3,4) Richard A. Gephardt (3,5) James H. Hance, Jr. (1,4,5) William W. Helman IV (3,4,5)
Irvine O. Hockaday, Jr. (1,5) Jon M. Huntsman, Jr. (2,3,5) Richard A. Manoogian (2,5) Ellen R. Marram (2,3,5) Alan R. Mulally (4) Homer A. Neal (3,4,5) Gerald L. Shaheen (1,5) John L. Thornton (2,4,5)
William Clay Ford (Director Emeritus) Committee Membership ( 1 ) Audit (2) Compensation (3) Sustainability (4) Finance (5) Nominating and Governance
Other Vice Presidents Joseph Bakaj Powertrain Engineering
Stephen E. Biegun International Governmental Affairs
Marin A. Burela President, Changan Ford Automobile Corporation, Ltd.
Robert D. Brown Sustainability, Environment and Safety Engineering
Kenneth M. Czubay U.S. Marketing, Sales and Service
Roelant de Waard Marketing, Sales and Service, Ford of Europe
Elena A. Ford Global Dealer and Consumer Experience
Kumar A. Galhotra Product Development, Asia Pacific and Africa
Gary A. Johnson Manufacturing, Asia Pacific and Africa
John T. Lawler Chairman and Chief Executive Officer, Ford Motor China
Paul A. Mascarenas Chief Technical Officer, Research and Advanced Engineering
Martin J. Mulloy Labor Affairs
Barb J. Samardzich Product Development, Ford of Europe
Neil M. Schloss Treasurer
James P. Tetreault North America Manufacturing
Hau Thai-Tang Engineering
Frederiek Toney President, Global Ford Customer Service Division
Jeffery C. Wood Manufacturing, Ford of Europe
Board of Directors and Executives*
*As of March 14, 2013
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8 Ford Motor Company | 2012 Annual Report
Corporate Headquarters Ford Motor Company One American Road Dearborn, MI 48126 (313) 322-3000
Shareholder Account Assistance Computershare Trust Company, our transfer agent, maintains the records for our registered stockholders and can help you with a variety of stockholder-related services. Computershare offers the DirectSERVICE Investment and Stock Purchase Program. This shareholder-paid program provides an alternative to traditional retail brokerage methods of purchasing, holding and selling Ford Common Stock. You can contact Computershare through the following methods:
Ford Motor Company c/o Computershare Trust Company, N.A. P.O. Box 43087 Providence, RI 02940-3087 Telephone: (800) 279-1237 (U.S. and Canada) (781) 575-2732 (International) E-mail: [email protected] Website: www.computershare.com
Stock Exchanges Ford Common Stock is listed and traded on the New York Stock Exchange in the United States and on stock exchanges in Belgium and France.
The NYSE trading symbol is:
F Common Stock
Investor Information Investor information including this report, quarterly financial results, press releases and various other reports are available online at www.shareholder.ford.com.
Alternatively, individual investors may contact us at:
Ford Motor Company Shareholder Relations One American Road Dearborn, MI 48126
Telephone: (800) 555-5259 (U.S. and Canada) (313) 845-8540 (International) Fax: (313) 845-6073 E-mail: [email protected]
Security analysts and institutional investors may contact:
Ford Motor Company Investor Relations One American Road Dearborn, MI 48126
Telephone: (313) 390-4563 Fax: (313) 845-6073 E-mail: [email protected]
Annual Meeting The 2013 Annual Meeting of Shareholders will be held in Wilmington, Delaware on May 9, 2013. A notice of the meeting and instructions for voting will be mailed to shareholders in advance.
Ford Motor Company | 2012 Annual Report 9For more information visit www.annualreport.ford.com
10 Management’s Discussion and Analysis of Financial Condition and Results of Operations
58 Quantitative and Qualitative Disclosures About Market Risk
63 Report of Independent Registered Public Accounting Firm
64 Consolidated Income Statement
65 Sector Income Statement
66 Consolidated Balance Sheet
67 Sector Balance Sheet
68 Condensed Consolidated Statement of Cash Flows
69 Condensed Sector Statement of Cash Flows
70 Consolidated Statement of Equity
7 1 Notes to the Financial Statements
156 Selected Financial Data
1 5 7 Employment Data
158 Management’s Report on Internal Control Over Financial Reporting
159 New York Stock Exchange Required Disclosures
* Financial information contained herein (pages 10-159) is excerpted from the Annual Report on Form 10-K for the year ended December 31, 2012 of Ford Motor Company (referred to herein as “Ford”, the “Company”, “we”, “our” or “us”), which is available on our website at www.shareholder.ford.com.
10 Ford Motor Company | 2012 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Automotive sector’s revenue is generated primarily by sales of vehicles, parts, and accessories; we generally treat sales and marketing incentives as a reduction to revenue. Revenue is recorded when all risks and rewards of ownership are transferred to our customers (generally, our dealers and distributors). For the majority of sales, this occurs when products are shipped from our manufacturing facilities. This is not the case, however, with respect to vehicles produced for sale to daily rental car companies that are subject to a guaranteed repurchase option. These vehicles are accounted for as operating leases, with lease revenue and profits recognized over the term of the lease. When we sell the returned vehicle at auction, we recognize a gain or loss on the difference, if any, between actual auction value and the projected auction value. In addition, revenue for finished vehicles we sell to customers or vehicle modifiers on consignment is not recognized until the vehicle is sold to the ultimate customer.
Most of the vehicles sold by us to our dealers and distributors are financed at wholesale by Ford Credit. Upon Ford Credit originating the wholesale receivable related to a dealer’s purchase of a vehicle, Ford Credit pays cash to the relevant legal entity in our Automotive sector in payment of the dealer’s obligation for the purchase price of the vehicle. The dealer then pays the wholesale finance receivable to Ford Credit when it sells the vehicle to a retail customer.
Our Financial Services sector’s revenue is generated primarily from interest on finance receivables, net of certain deferred origination costs that are included as a reduction of financing revenue, and such revenue is recognized over the term of the receivable using the interest method. Also, revenue from operating leases, net of certain deferred origination costs, is recognized on a straight-line basis over the term of the lease. Income is generated to the extent revenues exceed expenses, most of which are interest, depreciation, and operating expenses.
Transactions between our Automotive and Financial Services sectors occur in the ordinary course of business. For example, we offer special retail financing and lease incentives to dealers’ customers who choose to finance or lease our vehicles from Ford Credit. The estimated cost for these incentives is recorded as revenue reduction to Automotive sales at the later of the date the related vehicle sales to our dealers are recorded or the date the incentive program is both approved and communicated. In order to compensate Ford Credit for the lower interest or lease rates offered to the retail customer, we pay the discounted value of the incentive directly to Ford Credit when it originates the retail finance or lease contract with the dealer’s customer. Ford Credit recognizes the amount over the life of the related contracts as an element of financing revenue. See Note 1 of the Notes to the Financial Statements for a more detailed discussion of transactions and payments between our Automotive and Financial Services sectors.
Costs and Expenses
Our income statement classifies our Automotive total costs and expenses into two categories: (i) cost of sales, and (ii) selling, administrative, and other expenses. We include within cost of sales those costs related to the development, manufacture, and distribution of our vehicles, parts, and accessories. Specifically, we include in cost of sales each of the following: material costs (including commodity costs); freight costs; warranty, including product recall and customer satisfaction program costs; labor and other costs related to the development and manufacture of our products; depreciation and amortization; and other associated costs. We include within selling, administrative, and other expenses labor and other costs not directly related to the development and manufacture of our products, including such expenses as advertising and sales promotion costs.
Certain of our costs, such as material costs, generally vary directly with changes in volume and mix of production. In our industry, production volume often varies significantly from quarter to quarter and year to year. Quarterly production volumes experience seasonal shifts throughout the year (including peak retail sales seasons, and the impact on production of model changeover and new product launches). As we have seen in recent years, annual production volumes are heavily impacted by external economic factors, including the pace of economic growth and factors such as the availability of consumer credit and cost of fuel.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
As a result, we analyze the profit impact of certain cost changes holding constant present-year volume and mix and currency exchange, in order to evaluate our cost trends absent the impact of varying production and currency exchange levels. We analyze these cost changes in the following categories:
• Material excluding commodity costs – primarily reflecting the change in cost of purchased parts used in the assembly of our vehicles.
• Commodity costs – reflecting the change in cost for raw materials (such as steel, aluminum, and resins) used in the manufacture of our products.
• Structural costs – reflecting the change in costs that generally do not have a directly proportionate relationship to our production volumes, such as labor costs, including pension and health care; other costs related to the development and manufacture of our vehicles; depreciation and amortization; and advertising and sales promotion costs.
• Warranty and other costs – reflecting the change in cost related to warranty coverage, including product recalls and customer satisfaction actions, as well as the change in freight and other costs related to the distribution of our vehicles and support for the sale and distribution of parts and accessories.
While material (including commodity), freight, and warranty costs generally vary directly in proportion to production volume, elements within our structural costs category are impacted to differing degrees by changes in production volume. We also have varying degrees of discretion when it comes to controlling the different elements within our structural costs. For example, depreciation and amortization expense largely is associated with prior capital spending decisions. On the other hand, while labor costs do not vary directly with production volume, manufacturing labor costs may be impacted by changes in volume, for example when we increase overtime, add a production shift or add personnel to support volume increases. Other structural costs, such as advertising or engineering costs, do not necessarily have a directly proportionate relationship to production volume. Our structural costs generally are within our discretion, although to varying degrees, and can be adjusted over time in response to external factors.
We consider certain structural costs to be a direct investment in future growth and revenue. For example, increases in structural costs are necessary to grow our business and improve profitability as we expand around the world, invest in new products and technologies, respond to increasing industry sales volume, and grow our market share.
Automotive total costs and expenses for full-year 2012 was $121.6 billion. Material costs (including commodity costs) make up the largest portion of our Automotive total costs and expenses, representing in 2012 about two-thirds of the total amount. Of the remaining balance of our Automotive costs and expenses, the largest piece is structural costs. Although material costs are our largest absolute cost, our margins can be affected significantly by changes in any category of costs.
Key Economic Factors and Trends Affecting the Automotive Industry
Global Economic Conditions. During 2011, global economic growth slowed to about 2.5% from 4% in 2010, as the worsening debt crisis in Europe, regime changes in North Africa, natural disasters in Japan and Thailand, and moderating economic growth in several key newly-developed and emerging markets all contributed to slow growth. Global growth in 2012 remained at the relatively low level of about 2.5% due to the European debt crisis, slowing of Chinese economic growth, and moderate pace of recovery in the United States. During 2013, global economic growth is expected to remain in the 2% – 3% range. The European debt crisis remains a key risk to economic growth. The current economic performance in many European countries, particularly Greece, Ireland, Italy, Portugal and Spain, is being hampered by excessive government debt levels and the resulting budget austerity measures that are contributing to weak economic growth. The EU, the European Central Bank, and the International Monetary Fund have provided important support for many of these countries undergoing structural changes. During 2013, economic growth is likely to remain weak in these markets, even though financial markets have begun to stabilize. The U.K. government has implemented budget cuts and tax increases that will depress growth, although the labor market has stabilized in recent months.
Uncertainties associated with the European debt crisis, and policy responses to it, could impact global economic
performance in 2013. Although housing is stabilizing in some of the worst hit markets, such as the United States, the prospect of a strong economic rebound is hampered by fiscal tightening.
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12 Ford Motor Company | 2012 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Global industry vehicle sales volume (including medium and heavy truck) is estimated to have increased to 81 million units in 2012, up more than 4 million units – or about 5% – from 2011 levels. In 2013, in light of the volatile external environment, global industry sales are projected to be in a range of 80 million – 85 million units.
Excess Capacity. According to IHS Automotive, an automotive research firm, the estimated automotive industry global production capacity for light vehicles (which as of 2011 includes an expanded truck segment compared with previous years) of about 108 million units exceeded global production by about 26 million units in 2012. In North America and Europe, the two regions where the majority of industry revenue and profits are earned, excess capacity as a percent of production in 2012 was an estimated 11% and 37%, respectively. According to production capacity data projected by IHS Automotive, global excess capacity conditions could continue for several years at an average of about 31 million units per year during the period from 2013 to 2017.
Pricing Pressure. Excess capacity, coupled with a proliferation of new products being introduced in key segments,
will keep pressure on manufacturers’ ability to increase prices. In North America, the industry restructuring of the past few years has allowed manufacturers to better match production with demand, although Japanese and Korean manufacturers also have capacity (located outside of the region) directed to North America. In the future, Chinese and Indian manufacturers are expected to enter U.S. and European markets, further intensifying competition. Although there has been some firming of pricing in the U.S. market, particularly in 2011, it seems likely that over the long term intense competition and apparent excess capacity will continue to put downward pressure on inflation-adjusted prices for similarly-contented vehicles in the United States and contribute to a challenging pricing environment for the automotive industry. In Europe, the excess capacity situation was exacerbated by weakening demand and the lack of reductions in existing capacity, such that negative pricing pressure is expected to continue for the foreseeable future.
Commodity and Energy Price Increases. Despite weak demand conditions, light sweet crude oil prices increased
from an average of $80 per barrel in 2010 to $95 per barrel in 2011, before declining slightly to about $87 per barrel in late 2012. Commodity prices have declined recently, but over the longer term prices are likely to trend higher given global demand growth.
Vehicle Profitability. Our financial results depend on the profitability of the vehicles we sell, which may vary
significantly by vehicle line. In general, larger vehicles tend to command higher prices and be more profitable than smaller vehicles, both across and within vehicle segments. For example, in North America, our larger, more profitable vehicles had an average contribution margin that was about 130% of our total average contribution margin across all vehicles, whereas our smaller vehicles had significantly lower contribution margins. As we execute our One Ford plan, we are working to create best-in-class vehicles on global platforms that contribute higher margins, and offering a more balanced portfolio of vehicles with which we aim to be among the leaders in fuel efficiency in every segment in which we compete.
Increasing Sales of Smaller Vehicles. Like other manufacturers, we are increasing our participation in newly- developed and emerging markets, such as Brazil, Russia, India, and China, in which vehicle sales are expected to increase at a faster rate than in most mature markets. The largest segments in these markets are small vehicles (i.e., Sub-B, B, and C segments). To increase our participation in these fast-growing markets, we are significantly increasing our production capacity, directly or through joint ventures. In addition, we expect that increased demand for smaller, more fuel-efficient vehicles will continue in the mature markets of North America and Europe and, consequently, we have seen and expect in the future strong demand in those markets for our small car offerings (including our new Ford Fiesta and Focus models that are based on global platforms). Although we expect positive contribution margins from higher small vehicle sales, one result of increased production of small vehicles may be that, over time, our average per unit margin decreases because small vehicles tend to have lower margins than medium and large vehicles.
Currency Exchange Rate Volatility. The European debt crisis has contributed to recent financial market volatility.
Coupled with the ongoing policy actions taken by central banks to support the financial system, exchange rates have remained volatile. Most recently, the euro currency value has fluctuated as progress toward a solution to the sovereign debt crisis remains highly uncertain; the yen has depreciated significantly as a result of policy changes by the Japanese government and Bank of Japan. The high inflation in newly-developed and emerging markets and capital flight to perceived stable investments have started to erode the strength of some local currencies. In most markets, exchange rates are market-determined, and all are impacted by many different macroeconomic and policy factors, and thus likely to remain volatile. In some other markets, exchange rates are heavily influenced or controlled by governments.
Ford Motor Company | 2012 Annual Report 13
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Trade Policy. To the extent governments in various regions erect or intensify barriers to imports, or implement currency policy that advantages local exporters selling into the global marketplace, there can be a significant negative impact on manufacturers based in markets that promote free trade. While we believe the long-term trend is toward the growth of free trade, we have noted with concern recent developments in a number of regions. In Asia Pacific Africa, for example, the recent dramatic depreciation of the yen significantly reduces the cost of exports into the United States, Europe, and other global markets by Japanese manufacturers. Over a period of time, the emerging weakness of the yen can contribute to other countries pursuing weak currency policies by intervening in the exchange rate markets. This is particularly likely in other Asian countries, such as South Korea. As another example, government actions in South America to incentivize local production and balance trade are driving trade frictions between South American countries and also with Mexico, resulting in business environment instability and new trade barriers. We will continue to monitor and address developing issues around trade policy.
Other Economic Factors. The eventual implications of higher government deficits and debt, with potentially higher long-term interest rates, could drive a higher cost of capital over our planning period. Higher interest rates and/or taxes to address the higher deficits also may impede real growth in gross domestic product and, therefore, vehicle sales over our planning period.
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