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Ford Motor Company 10-K 2008 Documents found in this filing:
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
FORM
10-K
Ford
Motor Company
(Exact
name of Registrant as specified in its charter)
313-322-3000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
__________
Securities registered pursuant to
Section 12(g) of the Act:> None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes R No £
Indicate
by check mark if the registrant is not required to file reports pursuant to
section 13 or Section 15(d) of the Act.
Yes £ No R
Indicate
by check mark if the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. R
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "
accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one)
Large
accelerated filer R
Accelerated filer £
Non-accelerated filer £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £ No R
As of
June 29, 2007, Ford had outstanding 1,827,947,574 shares of Common Stock
and 70,852,076 shares of Class B Stock. Based on the New York Stock
Exchange Composite Transaction closing price of the Common Stock on that date
($9.42 per share), the aggregate market value of such Common Stock was
$17,219,266,147. Although there is no quoted market for our Class B
Stock, shares of Class B Stock may be converted at any time into an equal number
of shares of Common Stock for the purpose of effecting the sale or other
disposition of such shares of Common Stock. The shares of Common
Stock and Class B Stock outstanding at June 29, 2007 included shares
owned by persons who may be deemed to be "affiliates" of Ford. We do
not believe, however, that any such person should be considered to be an
affiliate. For information concerning ownership of outstanding Common
Stock and Class B Stock, see the Proxy Statement for Ford’s Annual Meeting of
Stockholders currently scheduled to be held on May 8, 2008 (our "Proxy
Statement"), which is incorporated by reference under various Items of this
Report as indicated below.
As of
February 11, 2008, Ford had outstanding 2,136,150,054 shares of Common
Stock and 70,852,076 shares of Class B Stock. Based on the New York
Stock Exchange Composite Transaction closing price of the Common Stock on that
date ($6.39 per share), the aggregate market value of such Common Stock was
$13,649,998,845.
DOCUMENTS
INCORPORATED BY REFERENCE
__________
PART
I
ITEM
1.
Business
Ford
Motor Company (referred to herein as "Ford", the "Company", "we", "our" or "us")
was incorporated in Delaware in 1919. We acquired the business of a
Michigan company, also known as Ford Motor Company, that had been incorporated
in 1903 to produce and sell automobiles designed and engineered by Henry
Ford. We are one of the world’s largest producers of cars and trucks
combined. We and our subsidiaries also engage in other businesses,
including financing vehicles.
In
addition to the information about Ford and its subsidiaries contained in this
Annual Report on Form 10-K for the year ended December 31, 2007 ("2007
Form 10-K Report" or "Report"), extensive information about our Company can be
found throughout our website located at www.ford.com,
including information about our management team, our brands and products, and
our corporate governance principles.
The
corporate governance information on our website includes our Corporate
Governance Principles, our Code of Ethics for Senior Financial Personnel, our
Code of Ethics for Directors, our Standards of Corporate Conduct for all
employees, and the Charters for each of our Board Committees. In
addition, amendments to, and waivers granted to our directors and executive
officers under, our Codes of Ethics, if any, will be posted in this area of our
website. These corporate governance documents can be accessed by
logging onto our website and clicking on the "Investors," then "Company
Information, " and then "Corporate Governance" links.
Upon
accessing our website and clicking on the "Corporate Governance" link, viewers
will see a list of corporate governance documents and may click on the desired
document. In addition, printed versions of our Corporate Governance
Principles, our Code of Ethics for Senior Financial Personnel, our Standards of
Corporate Conduct, and the Charters for each of our Board Committees may be
obtained free of charge by writing to our Shareholder Relations Department, Ford
Motor Company, One American Road, P.O. Box 1899, Dearborn, Michigan
48126-1899.
In
addition to the Company information discussed above that is provided on our
website, all of our recent periodic report filings with the Securities and
Exchange Commission ("SEC") pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, are made available free of charge through our
website. This includes recent Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any
amendments to those Reports. Also, recent Section 16 filings
made with the SEC by the Company or any of its executive officers or directors
with respect to our Common Stock are made available free of charge through our
website. The periodic reports and amendments and the Section 16
filings are made available through our website as soon as reasonably practicable
after such report or amendment is electronically filed with the
SEC.
To access
our SEC reports or amendments or the Section 16 filings, log onto our website
and click on the following link on each successive screen:
Viewers
will then see a list of reports filed with the SEC and may click on the desired
document.
The
foregoing information regarding our website and its content is for convenience
only. The content of our website is not deemed to be incorporated by
reference into this report nor should it be deemed to have been filed with the
SEC. ITEM
1. Business
(Continued)
OVERVIEW
Segments. We
review and present our business results in two sectors: Automotive
and Financial Services. Within these sectors, our business is divided
into reportable segments based upon the organizational structure that we use to
evaluate performance and make decisions on resource allocation, as well as
availability and materiality of separate financial results consistent with that
structure.
Our
Automotive and Financial Services segments as of December 31, 2007 are
described in the table below:
We
provide financial information (such as revenues, income, and assets) for each of
these business sectors and reportable segments in three areas of this
Report: (1) "Item 6. Selected Financial Data," (2) "Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations," and (3) Note 25 of the Notes to the Financial Statements located at
the end of this Report. Financial information relating to certain
geographic areas also is included in these Notes. 2
ITEM
1. Business
(Continued)
AUTOMOTIVE
SECTOR
General
We sell
cars and trucks throughout the world. In 2007, we sold approximately
6,553,000 vehicles at wholesale throughout the world. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional discussion of wholesale unit volumes. Our
vehicle brands include Ford, Mercury, Lincoln, and Volvo; our Jaguar and Land
Rover brands are held for sale as of the fourth quarter of 2007.
Substantially
all of our cars, trucks and parts are marketed through retail dealers in North
America, and through distributors and dealers outside of North America, the
substantial majority of which are independently owned. At
December 31, 2007, the approximate number of dealers and distributors
worldwide distributing our vehicle brands was as follows:
__________
In
addition to the products we sell to our dealers for retail sale, we also sell
cars and trucks to our dealers for sale to fleet customers, including daily
rental car companies, commercial fleet customers, leasing companies, and
governments. Sales to all of our fleet customers in the United States
in the aggregate have represented between 23% and 31% of our total U.S. car and
truck sales for the last five years. We do not depend on any single
customer or small group of customers to the extent that the loss of such
customer or group of customers would have a material adverse effect on our
business.
In
addition to producing and selling cars and trucks, we also provide retail
customers with a wide range of after-the-sale vehicle services and products
through our dealer network and other channels, in areas such as maintenance and
light repair, heavy repair, collision, vehicle accessories and extended service
warranty. In North America, we market these products and services
under several brands, including Genuine Ford and Lincoln-Mercury Parts and
ServiceSM, Ford
Extended Service PlanSM, and
MotorcraftSM.
The
worldwide automotive industry, Ford included, is affected significantly by
general economic conditions (among other factors) over which we have little
control. This is especially so because vehicles are durable goods,
which provide consumers latitude in determining whether and when to replace an
existing vehicle. The decision whether and when to make a vehicle
purchase may be affected significantly by slowing economic growth, geo-political
events, and other factors (including the cost of purchasing and operating cars
and trucks and the availability and cost of credit and
fuel). Accordingly, the number of cars and trucks sold (commonly
referred to as "industry demand") may vary substantially from year to
year. The automotive industry is also a highly competitive, cyclical
business that has a wide and growing variety of product offerings from a growing
number of manufacturers.
Our
wholesale unit volumes vary with the level of total industry demand and our
share of that industry demand. In the short term, our wholesale unit
volumes also are influenced by the level of dealer inventory. Our
share is influenced by how our products are perceived in comparison to those
offered by other manufacturers based on many factors, including price, quality,
styling, reliability, safety, functionality, and corporate
reputation. Our share also is affected by the timing and frequency of
new model introductions. Our ability to satisfy changing consumer
preferences with respect to type or size of vehicle, as well as design and
performance characteristics, impacts our sales and earnings
significantly. 3
ITEM
1. Business
(Continued)
The
profitability of our business is affected by many factors,
including:
In
addition, our industry continues to face a very competitive pricing environment,
driven in part by industry excess capacity. For the past several
decades, manufacturers typically have given price discounts and other marketing
incentives to maintain market share and production levels. A
discussion of our strategies to compete in this pricing environment is set forth
in "Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Overview."
Competitive
Position. The worldwide automotive industry consists of many
producers, with no single dominant producer. Certain manufacturers,
however, account for the major percentage of total sales within particular
countries, especially their countries of origin. Detailed information
regarding our competitive position in the principal markets where we compete may
be found below as part of the overall discussion of the automotive industry in
those markets.
Seasonality. We
generally record the sale of a vehicle (and recognize sales proceeds in revenue)
when it is produced and shipped or delivered to our customer (i.e., our dealer
or distributor). See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations – Overview" for
additional discussion of revenue recognition practices. We manage our
vehicle production schedule based on a number of factors, including dealer stock
levels (i.e., the number of units held in inventory by our dealers and
distributors for sale to retail and fleet customers) and retail sales
(i.e., units sold by our dealers and distributors to their customers at
retail). We experience some fluctuation in the business of a seasonal
nature. Generally, production in many markets is higher in the first
half of the year to meet demand in the spring and summer, which are usually the
strongest sales months of the year. Third quarter production is
typically the lowest of the year, generally reflecting the annual two-week
vacation shutdown of our manufacturing facilities during this
quarter. As a result, operating results for the third quarter
typically are less favorable than those of other quarters.
Raw Materials. We
purchase a wide variety of raw materials for use in production of our vehicles
from numerous suppliers around the world. These materials include
non-ferrous metals (e.g., aluminum), precious metals (e.g., palladium), ferrous
metals (e.g., steel and iron castings), energy (e.g., natural gas), and resins
(e.g., polypropylene). We believe that we have adequate
supplies or sources of availability of the raw materials necessary to meet our
needs. However, there are always risks and uncertainties with
respect to the supply of raw materials that could impact their availability in
sufficient quantities to meet our needs. See
"Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations – Overview" for a discussion of commodity and energy price
trends, and "Item 7A. Quantitative and Qualitative Disclosures About Market
Risk – Commodity Price Risk" for a discussion of commodity price
risks.
Backlog Orders. We
generally produce and ship our products on average within approximately 20 days
after an order is deemed to become firm. Therefore, no significant
amount of backlog orders accumulates during any period.
Intellectual
Property. We own or hold licenses to use numerous patents,
copyrights and trademarks on a global basis. Our policy is to protect
our competitive position by, among other methods, filing U.S. and international
patent applications to protect technology and improvements that we consider
important to the development of our business. We have generated a
large number of patents related to the operation of our business, and expect
this portfolio to continue to grow as we actively pursue additional
technological innovation. We currently have approximately 14,400
active patents and pending patent applications globally, with an average age for
patents in our active patent portfolio of just over 5 years. In
addition to this intellectual property, we also rely on our proprietary
knowledge and ongoing technological innovation to develop and maintain our
competitive position. While we believe that these patents, patent
applications, and know-how, in the aggregate, are important to the conduct of
our business, and we obtain licenses to use certain intellectual property owned
by others, none is individually considered material to our
business. We also own numerous trademarks and service marks that
contribute to the identity and recognition of our company and its products and
services globally. Certain of these marks are integral to the conduct
of our business, a loss of any of which could have a material adverse effect on
our business. 4
ITEM
1. Business
(Continued)
Warranty Coverage and Additional
Service Actions. We presently provide warranties on vehicles
we sell. Warranties are offered for specific periods of time and/or
mileage, and vary depending upon the type of product, usage of the product and
the geographic location of its sale. Types of warranty coverage
offered include base coverage (e.g., "bumper-to-bumper" coverage in the United
States on Ford-brand vehicles for 36 months or 36,000 miles, whichever occurs
first), safety restraint coverage, and corrosion coverage. Beginning
with 2007 model-year passenger cars and light trucks, Ford extended the
powertrain warranty coverage offered on Ford, Lincoln and Mercury vehicles sold
in the United States, Canada and select U.S. export markets (e.g., powertrain
coverage for certain vehicles sold in the United States from three years or
36,000 miles to five years or 60,000 miles on Ford and Mercury brands and from
four years or 50,000 miles to six years or 70,000 miles on the Lincoln
brand). In compliance with regulatory requirements, we also provide
emissions-defects and emissions-performance warranty
coverage. Pursuant to these warranties, Ford will repair, replace, or
adjust all parts on a vehicle that are defective in factory-supplied materials
or workmanship during the specified warranty period.
In
addition to the costs associated with the contractual warranty coverage provided
on our vehicles, we also incur costs as a result of additional service actions
not covered by our warranties, including product recalls and customer
satisfaction actions.
Estimated
warranty and additional service action costs for each vehicle sold by us are
accrued for at the time of sale. Accruals for estimated warranty and
additional service action costs are based on historical experience and subject
to adjustment from time to time depending on actual
experience. Warranty accrual adjustments required when actual
warranty claim experience differs from our estimates may have a material impact
on our results.
For
additional information with respect to costs for warranty and additional service
actions, see "Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Critical Accounting Estimates" and
Note 28 of the Notes to the Financial Statements.
United
States
Sales Data. The
following table shows U.S. industry sales of cars and trucks for the years
indicated (in millions of units):
__________
We
classify cars by small, medium, large, and premium segments, and trucks by
compact pickup, bus/van (including minivans), full-size pickup, sport utility
vehicles, and medium/heavy segments. With the introduction of
crossover utility vehicles ("CUVs"), however, the distinction between
traditional cars and trucks has become more difficult to draw, and these
vehicles are not consistently classified as either cars or trucks across vehicle
manufacturers. In the tables above and below, we have classified CUVs
(i.e., vehicles with sport utility features built on a car platform) as sport
utility vehicles ("SUVs"). In addition, we have classified as
"premium" all of our luxury cars, regardless of size; premium SUVs and CUVs are
included in "trucks." Annually, we conduct a comprehensive review of
many factors to determine the appropriate classification of vehicle segments and
the vehicles within those segments, and this review occasionally results in a
change of classification for certain vehicles. 5
ITEM
1. Business
(Continued)
The
following tables show the proportion of U.S. car and truck unit sales by segment
for the industry (including domestic and foreign-based manufacturers) and Ford
(including all of our brands sold in the United States) for the years
indicated:
As the
tables above indicate, the shift from cars to trucks that began in the 1980's
started to reverse in 2005. Prior to 2005, both industry and Ford's
truck mix generally had been increasing, reflecting higher sales of traditional,
truck-based SUVs and full-size pickups. In 2005 and 2006, however,
overall industry as well as Ford's car mix trended higher, primarily due to
increases in the small car segment. In 2007, contrary to industry
trends, Ford's overall car mix decreased, reflecting reduced sales to daily
rental companies. Gains in the SUV/CUV segment, largely explained by
the strength of our new Ford Edge and Lincoln MKX CUVs, also contributed to this
shift.
Market Share
Data. The competitive environment in the United States has
intensified and is expected to continue to intensify as Japanese and Korean
manufacturers increase imports to the United States and production capacity in
North America. Our principal competitors in the United States include
General Motors Corporation ("General Motors"), Chrysler Corporation
("Chrysler"), Toyota Motor Corporation ("Toyota"), Honda Motor Company
("Honda"), and Nissan Motor Company ("Nissan"). The following tables
show U.S. car and truck market share for Ford (including all of our brands sold
in the United States), and for the other five leading vehicle manufacturers for
the years indicated. 6
ITEM
1. Business
(Continued)
The
percentages in each of the following tables represent the percentage of the
combined car and truck industry:
__________
Our
decline in overall market share is primarily the result of several factors,
including increased competition, an industry shift away from our traditionally
stronger segments (e.g., traditional SUVs and full-size pickups), reduced
vehicle sales to daily rental companies, and the discontinuation of a number of
our vehicle lines over the last several years.
Fleet Sales. The
sales data and market share information provided above include both retail and
fleet sales. Fleet sales include sales to daily rental car companies,
commercial fleet customers, leasing companies and governments. The
table below shows our fleet sales (including all brands) in the United States,
and the amount of those sales as a percentage of our total U.S. car and truck
sales for the last five years (in thousands):
Lower
fleet sales in 2007 primarily reflected planned reductions in sales to daily
rental car companies, and elimination of the former Ford Taurus sedan and
Freestar minivan. The decrease in commercial fleet sales reflected
lower industry volume. We continue to maintain a leadership position
in both sales and market share for government fleet sales. We expect
total fleet sales to decline slightly in 2008, primarily reflecting the
continuation of our strategy to reduce sales to daily rental car
companies. 7
ITEM
1. Business
(Continued)
Europe
Market Share
Information. Outside of the United States, Europe is our
largest market for the sale of cars and trucks. The automotive
industry in Europe is intensely competitive. Our principal
competitors in Europe include General Motors, Volkswagen A.G. Group, PSA Group,
Renault Group, and Fiat SpA. For the past 10 years, the top six
manufacturers have collectively held between 70% and 76% of the total
market. This competitive environment is expected to intensify further
as Japanese and Korean manufacturers increase their production capacity in
Europe, and as other manufacturers of premium brands (e.g., BMW, Mercedes Benz
and Audi) continue to broaden their product offerings.
For
purposes of this discussion, 2007 market data are based on estimated
registrations currently available; percentage change is measured from actual
2006 registrations. We track industry sales in Europe for the
following 19 markets: Britain, Germany, France, Italy, Spain, Austria, Belgium,
Ireland, Netherlands, Portugal, Switzerland, Finland, Sweden, Denmark, Norway,
Czech Republic, Greece, Hungary and Poland. In 2007, vehicle
manufacturers sold approximately 18 million cars and trucks in the 19
markets we track in Europe, up 1.3% from 2006 levels. Ford's combined
car and truck market share in Europe (including all of our brands sold in
Europe) in 2007 was 10.9% (up 0.2 percentage points from
2006).
Britain
and Germany are our highest-volume markets within Europe. Any change
in the British or German market has a significant effect on our total European
automotive profits. For 2007 compared with 2006, total industry sales
were up 2.5% in Britain, and down 7.7% in Germany. Our combined car
and truck market share in these markets (including all of our brands sold in
these markets) in 2007 was 19.5% in Britain (down 0.3 percentage points from the
previous year), and 8.0% in Germany (down 0.2 percentage points from the
previous year).
Although
not included in the primary 19 markets above, several additional
markets the region contribute to our Ford Europe segment
results. Ford's share of the Turkish market decreased by 0.4
percentage points to 16.7% – nonetheless, the sixth year in a row that the Ford
brand has led the market in sales in Turkey. We also are experiencing
strong sales in Russia, where sales of Ford-brand vehicles increased
approximately 50% to about 175,800 units in 2007.
Motor Vehicle Distribution in
Europe. On October 1, 2002, the Commission of the European
Union ("Commission") adopted a new regulation that changed the way motor
vehicles are sold and repaired throughout the European Community (the "Block
Exemption Regulation"). Under the Block Exemption Regulation,
manufacturers had the choice to either operate an "exclusive" distribution
system with exclusive dealer sales territories, but with the possibility of
sales to any reseller (e.g., supermarket chains, internet agencies and other
resellers not authorized by the manufacturer), who in turn could sell to end
customers both within and outside of the dealer’s exclusive sales territory, or
a "selective" distribution system. These rules make it easier for a
dealer to display and sell multiple brands in one store without the need to
maintain separate facilities.
We, as well as the vast majority of
the other automotive manufacturers, have elected to establish a "selective"
distribution system, allowing us to restrict the dealer’s ability to sell our
vehicles to unauthorized resellers. Within this regulation, the
Commission also has adopted sweeping changes to the repair industry, and while a
manufacturer may continue to require the use of its parts in warranty and recall
work, repair facilities may use parts made by others that are of comparable
quality for all other repair work. We have negotiated and implemented
Dealer, Authorized Repairer and Spare Part Supply contracts on a
country-by-country level and, therefore, the Block Exemption Regulation applies
with respect to all of our dealers.
With
these rules, the Commission intended to increase competition and narrow price
differences from country to country. The Block Exemption Regulation
has contributed and continues to contribute to an increasingly competitive
market for vehicles and parts and ongoing price convergence. This has
contributed to an increase in marketing expenses, thus negatively affecting the
profitability of our Ford Europe and PAG segments. We anticipate that
this trend may continue as dealers and parts suppliers become increasingly
organized and established. The current Block Exemption Regulation
expires on May 31, 2010. 8
ITEM
1. Business
(Continued)
Other
Markets
Canada and
Mexico. Canada and Mexico also are important markets for
us. In Canada, industry sales of new cars and trucks in 2007 were
approximately 1.69 million units, up 1.5% from 2006 levels. Industry
sales of new cars and trucks in Mexico for 2007 were approximately 1.1 million
units, down 2.8% from 2006. Our combined car and truck market share
(including all of our brands sold in these markets) in 2007 was 14.0% in Canada
(down 0.6 percentage points from the previous year), and 13.7% in Mexico (down
2.2 percentage points from the previous year).
South
America. Brazil, Argentina and Venezuela are our principal
markets in South America. Industry sales in 2007 were approximately
2.5 million units in Brazil (up 27.8% from 2006), approximately 557,000 units in
Argentina (up 26.8% from 2006), and approximately 492,000 units in Venezuela (up
46.6% from 2006). Our combined car and truck share in these markets
was 10.8% in Brazil (down 0.6 percentage points from 2006), 13.7% in Argentina
(down 0.9 percentage points from 2006), and 15.2% in Venezuela (down 3.2
percentage points from 2006).
Asia
Pacific. Australia, China, India, South Africa, and Taiwan are
our principal markets in this region. Industry sales in 2007 were
approximately 1.1 million units in Australia (up 9% from 2006), approximately
9.1 million units in China (up 24% from 2006), approximately 2 million units in
India (up 13% from 2006), approximately 600,000 units in South Africa (down 5%
from 2006), and approximately 300,000 units in Taiwan (down 11% from
2006). Our combined car and truck share in these markets (including
sales of all of our brands, and market share for certain unconsolidated
affiliates particularly in China) was 11.2% in Australia (down 1.6 percentage
points from 2006), 2.4% in China (up 0.1 percentage points from 2006), 1.9% in
India (down 0.5 percentage points from 2006), 12.4% in South Africa (down 0.4
percentage points from 2006) and 15.3% in Taiwan (down 1.8 percentage points
from 2006). Our principal competition in the Asia Pacific region has
been the Japanese manufacturers. We anticipate that the ongoing
relaxation of import restrictions (including duty reductions) will continue to
intensify competition in the region. We have an ownership interest in
Mazda Motor Corporation ("Mazda") of approximately 33.4%, and account for Mazda
on an equity basis.
We are in
the process of significantly increasing our presence in China, with more
investment in manufacturing capacity, introduction of new products and expansion
of distribution channels. Our joint venture, Changan Ford Mazda
Automobile Corporation, Ltd.
("CFMA"), located in Chongqing, began producing Ford vehicles in
2003. CFMA's Chongqing plant has production capacity of about 250,000
units per year. We opened a second assembly plant and a new engine
plant located in Nanjing in 2007, with initial capacity of about 160,000 units
annually, boosting our total annual passenger car production capacity in China
to more than 410,000 vehicles. In addition, our Jiangling Motors
Corporation, Ltd. joint venture has operations in Nanchang and assembles
light commercial vehicles for distribution in China. We continue to
operate a purchasing office in China to procure components for operations
outside of China. For additional discussion of our joint ventures,
see "Item 2. Properties." 9
ITEM
1. Business
(Continued)
FINANCIAL
SERVICES SECTOR
Ford
Motor Credit Company LLC
Ford
Motor Credit Company LLC ("Ford Credit") offers a wide variety of automotive
financing products to and through automotive dealers throughout the
world. The predominant share of Ford Credit’s business consists of
financing our vehicles and supporting our dealers. Ford Credit’s
primary financing products fall into the following three
categories:
Ford
Credit also services the finance receivables and leases that it originates and
purchases, makes loans to our affiliates, purchases certain receivables from us
and our subsidiaries, and provides insurance services related to its financing
programs. Ford Credit’s revenues are earned primarily from payments
made under retail installment sale contracts and retail leases (including
interest supplements and other support payments it receives from us on special
rate financing programs), and from payments made under wholesale and other
dealer loan financing programs.
Ford
Credit does business in all states in the United States and in all provinces in
Canada through automotive dealer financing branches and regional business
centers. Outside of the United States, FCE Bank plc ("FCE")
is Ford Credit’s largest operation. FCE's primary business is to
support the sale of our vehicles in Europe through our dealer
network. FCE offers a variety of retail, leasing and wholesale
finance plans in most countries in which it operates; FCE does business in the
United Kingdom, Germany and most other European countries. Ford
Credit, through its subsidiaries, also operates in the Asia Pacific and Latin
American regions. In addition, FCE, through its Worldwide Trade
Financing division, provides financing to dealers in countries where typically
we have no established local presence.
Ford
Credit's share of retail financing for new Ford, Lincoln and Mercury brand
vehicles sold by dealers in the United States and new Ford brand vehicles sold
by dealers in Europe, as well as Ford Credit's share of wholesale financing for
new Ford, Lincoln and Mercury brand vehicles acquired by dealers in the United
States (excluding fleet) and of new Ford brand vehicles acquired by dealers in
Europe, were as follows during the last three years:
The
decrease in Ford Credit's retail financing share in the United States in 2007
compared with 2006 primarily reflected changes in our marketing programs that
resulted in a reduced use of special-rate financing through Ford
Credit. For a detailed discussion of Ford Credit's receivables,
credit losses, allowance for credit losses, loss-to-receivables ratios, funding
sources and funding strategies, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." For a
discussion of how Ford Credit manages its financial market risks, see "Item 7A.
Quantitative and Qualitative Disclosures about Market Risk." 10
ITEM
1. Business
(Continued)
We
routinely sponsor special-rate financing programs available only through Ford
Credit. Pursuant to these programs, we make interest supplement or
other support payments to Ford Credit. These programs increase Ford
Credit's financing volume and share of financing sales of our
vehicles. See Note 1 of the Notes to the Financial Statements
and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations – Overview" for more information about these support
payments.
We have
in place a profit maintenance agreement with Ford Credit that requires us to
maintain consolidated income before income taxes and net income at specified
minimum levels. In addition, Ford Credit has an agreement to maintain
a minimum control interest in FCE and to maintain FCE’s net worth above a
minimum level. No payments were made pursuant to either of these
agreements during the 2005 through 2007 periods.
GOVERNMENTAL
STANDARDS
Many
governmental standards and regulations relating to safety, fuel economy,
emissions control, noise control, vehicle recycling, substances of concern,
vehicle damage, and theft prevention are applicable to new motor vehicles,
engines, and equipment manufactured for sale in the United States, Europe and
elsewhere. In addition, manufacturing and other automotive assembly
facilities in the United States, Europe and elsewhere are subject to stringent
standards regulating air emissions, water discharges, and the handling and
disposal of hazardous substances.
Mobile
Source Emissions Control
U.S. Requirements – Federal
Emissions Standards. The federal Clean Air Act imposes
stringent limits on the amount of regulated pollutants that lawfully may be
emitted by new motor vehicles and engines produced for sale in the United
States. The current ("Tier 2") emissions regulations promulgated by
the U.S. Environmental Protection Agency ("EPA") set standards for cars and
light trucks that grow increasingly more stringent through the 2009 model
year. The Tier 2 emissions standards also extend durability
requirements for emissions components to 120,000 or 150,000 miles (depending on
the specific standards to which the vehicle is certified). These
standards present compliance challenges and make it more costly and difficult to
utilize light-duty diesel technology, which in turn restricts our ability to
improve fuel economy for purposes of satisfying Corporate Average Fuel Economy
("CAFE") standards.
The EPA
also has promulgated new standards and requirements for EPA-defined "heavy-duty"
vehicles and engines (those vehicles with 8,500-14,000 pounds gross vehicle
weight) that went into effect for the 2007 model year for diesel engines and the
2008 model year for gasoline engines. These standards and
requirements include more stringent evaporative hydrocarbon standards for
gasoline vehicles, and more stringent exhaust emission standards for all
vehicles. In order to meet the new diesel standards, manufacturers
must employ new after-treatment technologies, such as diesel particulate
filters, which require periodic customer maintenance. These
technologies add significant cost to the emissions control system, and present
potential issues associated with consumer acceptance. The EPA and
manufacturers are engaged in discussions over the vehicle technologies for
maintenance and emissions control and the warning systems that will be used to
alert motorists to the need for maintenance to these systems.
U.S. Requirements – California and
Other State Emissions Standards. Pursuant to the Clean Air
Act, California may seek a waiver from the EPA to establish unique emissions
control standards; each new or modified proposal requires a new waiver of
preemption from the EPA. California has received a waiver from the
EPA to establish its own unique emissions control standards for certain
regulated pollutants. New vehicles and engines sold in California
must be certified by the California Air Resources Board
("CARB"). CARB's current "LEV II" emissions standards treat most
light-duty trucks the same as passenger cars, and require both types of vehicles
to meet stringent new emissions requirements. Like the EPA's Tier 2
emissions standards, CARB's LEV II vehicle emissions standards also present a
difficult engineering challenge, and impose even greater barriers to the use of
light-duty diesel technology. CARB is expected to promulgate
increasingly more stringent standards in the next several years.
In 2004,
CARB enacted standards limiting emissions of "greenhouse" gases (e.g., carbon
dioxide) from new motor vehicles. CARB asserts that its vehicle
emissions regulations provide authority for it to adopt such
standards. Vehicle manufacturers are seeking through federal
litigation to invalidate these regulations on the grounds that greenhouse gas
standards are functionally equivalent to fuel economy standards and thus
preempted by the federal fuel economy law and/or the federal Clean Air
Act. Issues associated with greenhouse gas regulation are discussed
more fully in the "Motor Vehicle Fuel Economy" section below. 11
ITEM
1. Business
(Continued)
Since
1990, the California program has included requirements for manufacturers to
produce and deliver for sale zero-emission vehicles ("ZEVs"), which emit no
regulated pollutants. Typically, the only vehicles capable of meeting
these requirements are battery-powered vehicles, which have had narrow consumer
appeal due to their limited range, reduced functionality, and high
cost.
The ZEV
mandate initially required that a specified percentage of each manufacturer's
vehicles produced for sale in California be ZEVs. Over time, the
regulations were modified to reflect the fact that the development of
battery-electric technology progressed at a slower pace than anticipated by
CARB. In 2003, CARB adopted amendments to the ZEV mandate that
shifted the near-term focus of the regulation away from battery-electric
vehicles to advanced-technology vehicles (e.g., hybrid electric vehicles or
natural gas vehicles) with extremely low tailpipe emissions. The
rules also give some credit for so-called "partial zero-emission vehicles"
("PZEVs"), which can be internal combustion engine vehicles certified to very
low tailpipe emissions and zero evaporative emissions. In addition,
the rules provide a compliance path pursuant to which the auto industry would
need to produce specified numbers of zero-emission fuel cell
vehicles. In the aggregate, the rules call for production by the
industry of 250 zero-emission fuel cell vehicles by the 2008 model year, 2,500
more in the 2009-2011 model-year period, and 25,000 more in the 2012-2014
model-year period.
Although
the 2003 amendments appear to reflect a recognition by CARB that
battery-electric vehicles do not currently have the potential to achieve
widespread consumer acceptance, the rules still require manufacturers to produce
a substantial number of either battery-electric or fuel cell vehicles in the
2012 model year and beyond. There are substantial questions about the
feasibility of producing the required number of zero-emission fuel cell
vehicles, due to the substantial engineering challenges and high costs
associated with this technology. It is also doubtful whether the
market will support the number of required ZEVs. Due to the
engineering challenges, the high cost of the technology, infrastructure needs,
and other issues, it does not appear that mass production of fuel cell vehicles
will be commercially feasible for years to come.
In
accordance with CARB's ZEV regulations, a panel of independent experts undertook
a review of the feasibility of the ZEV requirements and issued its findings in
2007. The panel found that both battery-electric and fuel cell
vehicles will be in a pre-commercial stage through 2015, and that they are not
likely to be produced in large volumes in that time frame due to issues of
technology and cost. In response to the panel's findings, CARB has
issued a new set of proposed amendments to the ZEV mandate. The
proposal is complex, but it would have the effect of reducing the number of
battery-electric or fuel cell vehicles necessary for compliance, while putting a
new emphasis on plug-in hybrids (i.e., hybrid vehicles capable of short
trips on battery-electric power alone) and hydrogen internal combustion engine
vehicles. CARB currently plans to hold a hearing in March 2008 to
finalize revisions to the ZEV mandate. Compliance with the ZEV
mandate may eventually require costly actions that would have a substantial
adverse effect on our sales volume and profits. For example, we could
be required to curtail the sale of non-ZEVs or offer to sell ZEVs,
advanced-technology vehicles, and PZEVs well below cost in order to
comply.
The Clean
Air Act permits other states that do not meet national ambient air quality
standards to adopt California's motor vehicle emissions standards no later than
two years before the affected model year. In addition to California,
twelve states, primarily located in the Northeast and Northwest, have adopted
the California standards (including California's greenhouse gas
provisions). Ten of these states also adopted the ZEV
requirements. These twelve states, together with California, account
for more than 30% of Ford's current light-duty vehicle sales volume in the
United States. More states are in the process of adopting or
considering adoption of the California standards. Unfortunately,
there are problems inherent in transferring California standards to other
states, including the following: 1) managing fleet average
emissions standards and ZEV mandate requirements on a state-by-state basis
presents a major challenge to automobile company distribution systems;
2) market acceptance of some ZEVs varies from state to state, depending on
weather and other factors; and 3) the states adopting the California
program have not adopted California's clean fuel regulations, which may impair
the ability of vehicles in other states to meet California's in-use
standards.
U.S. Requirements – Warranty,
Recall, and On-Board Diagnostics. The Clean Air Act permits
the EPA and CARB to require manufacturers to recall and repair non-conforming
vehicles (which may be identified by testing or analysis done by the
manufacturer, the EPA or CARB), and we may voluntarily stop shipment of or
recall non-conforming vehicles. The costs of related repairs or
inspections associated with such recalls, or a stop-shipment order, could be
substantial. In December 2007 CARB finalized a new set of regulations
governing warranty reporting and field actions. The new rules provide
for mandatory remedial action (typically either recall or an extended warranty)
if warranty claims and failure rates on emissions-related components reach
specified thresholds, even if the vehicles in the field continue to comply with
all applicable emissions standards. CARB's decision to disconnect
field action decisions from the emissions performance of
12
the
vehicles is unprecedented, and is likely to lead to an increase in the number
and cost of field actions relating to emissions-related
components. Various industry entities submitted comments during the
rulemaking process questioning the statutory authority for these new
rules. In January 2008, an aftermarket trade association initiated
litigation seeking to overturn certain aspects of the new
regulations. It is possible that other challenges will
follow. ITEM
1. Business
(Continued)
Both CARB
and the EPA also have adopted on-board diagnostic ("OBD") regulations, which
require a vehicle to monitor its emissions control system and notify the vehicle
operator (via the "check engine" light) of any malfunction. These
regulations have become extremely complicated, and creation of a compliant
system requires substantial engineering resources. CARB's OBD rules
for vehicles under 14,000 pounds gross vehicle weight include a variety of
requirements that phase in between the 2006 and 2010 model
years. CARB also has adopted engine manufacturer diagnostic
requirements for heavy-duty gasoline and diesel engines that apply to the 2007
to 2009 model years, and additional OBD requirements for vehicles over 14,000
pounds gross vehicle weight in model years 2010 and beyond. The EPA's
OBD rules are generally less stringent than CARB's, so manufacturers typically
design for compliance with CARB's requirements in order to avoid designing two
systems. The complexity of the OBD requirements and the difficulties
of meeting all of the monitoring conditions and thresholds make OBD approval one
of the most challenging aspects of certifying vehicles for emissions
compliance. CARB regulations provide for automatic recalls of
vehicles that fail to comply with specified OBD requirements. In
addition, many other states have implemented OBD tests as part of their
inspection and maintenance programs. Failure of in-service compliance
tests could lead to vehicle recalls with substantial costs for related
inspections or repairs.
European
Requirements. European Union ("EU") directives and related
legislation limit the amount of regulated pollutants that may be emitted by new
motor vehicles and engines sold in the EU. Stringent new emissions
standards ("Stage IV Standards") were applied to new passenger car
certifications beginning January 1, 2005, and to new passenger car
registrations beginning January 1, 2006. The comparable
light commercial truck Stage III Standards and Stage IV Standards went into
effect for new certifications beginning January 1, 2006, and for new
registrations beginning January 1, 2007. This directive on
emissions also introduced OBD requirements, more stringent evaporative emissions
requirements, and in-service compliance testing and recall provisions for
emissions-related defects that occur in the first five years or
80,000 kilometers of vehicle life (extended to 100,000 kilometers in
2005). Failure of in-service compliance tests could lead to vehicle
recalls with substantial costs for related inspections or
repairs. The Stage IV Standards for diesel engines have proven
technologically difficult and precluded manufacturers from offering some
products in time to be eligible for certain government incentive
programs.
The EU
commenced a program in 2004 to determine the specifics for further changes to
vehicle emissions standards, and in 2007 the European Commission published a
proposed law for Stage V/VI emissions. The law would further restrict
the amount of particulate and nitrogen oxide emissions allowed from diesel
engines, and tighten some regulations for gasoline engines. Stage V
emissions requirements will be introduced beginning in September 2009,
and Stage VI requirements will apply beginning in September
2014. Both Stages V and VI will require the deployment of particulate
trap technology, and Stage VI will require additional after-treatment for
nitrogen oxides. These technology requirements will add cost and
further erode the fuel economy cost/benefit advantage of diesel
vehicles.
Other National
Requirements. Many countries, in an effort to address air
quality concerns, are adopting previous versions of European or United Nations
Economic Commission for Europe mobile source emissions
regulations. Some countries have adopted more advanced regulations
based on the most recent version of European or U.S. regulations; for example,
China has adopted the most recent European standards to be implemented in the
2008-2010 timeframe. Korea and Taiwan have adopted very stringent
U.S.-based standards for gasoline vehicles, and European-based standards for
diesel vehicles. Because fleet average requirements do not apply,
some vehicle emissions control systems may have to be redesigned to meet the
requirements in these markets. Furthermore, not all of these
countries have adopted appropriate fuel quality standards to accompany the
stringent emissions standards adopted. This could lead to compliance
problems, particularly if OBD or in-use surveillance requirements are
implemented. Japan has unique standards and test procedures, and is
considering more stringent standards for implementation in 2009. This
may require unique emissions control systems be designed for the Japanese
market. Canadian criteria emissions regulations are aligned with U.S.
federal Tier 2 requirements. 13
ITEM
1. Business
(Continued)
Stationary
Source Emissions Control
U.S.
Requirements. In the United States, the federal Clean Air Act
also requires the EPA to identify "hazardous air pollutants" from various
industries and promulgate rules restricting their emission. The EPA
has issued final rules for a variety of industrial categories, several of which
would further regulate emissions from our U.S. operations, including engine
testing, automobile surface coating, and iron casting. These
technology-based standards require some of our facilities to reduce their air
emissions significantly. Additional programs under the Clean Air Act,
including Compliance Assurance Monitoring and periodic monitoring, could require
our facilities to install additional emission monitoring
equipment. The cost of complying with these requirements could be
substantial.
The Clean
Air Act also requires the EPA to periodically review and update its National
Ambient Air Quality Standards ("NAAQS"), and to designate whether counties or
other local areas are in compliance with the new standards. If an
area or county does not meet the new standards ("non-attainment areas"), the
state must revise its implementation plans to achieve attainment. In
2006, the EPA issued a final rule revising the NAAQS for particulate
matter. For fine particulate matter (i.e., particles
2.5 micrometers in diameter or less), the EPA has issued a new standard
that is considerably more stringent than its predecessor. The EPA
estimates that the new standard will put approximately 124 counties into
non-attainment status for fine particulate matter. With respect to
coarse particulate matter (i.e., particles between 2.5 and 10 micrometers
in diameter), the EPA has retained the existing standard after considering an
alternative program that would have focused on urban and industrial
sources.
Various
parties have filed petitions for review of the final particulate-matter rules in
the United States Court of Appeals for the District of Columbia Circuit, in most
cases seeking more stringent standards that would create even more new
non-attainment areas. The Alliance of Automobile Manufacturers (an
industry trade group made up of nine leading automotive manufacturers including
BMW Group, Chrysler, Ford, General Motors, Mazda, Mitsubishi Motors, Porsche,
Toyota and Volkswagen (the "Alliance")) has intervened to oppose further changes
to the EPA's final rule. Even under the final rule as issued, the new
non-attainment areas will need to revise their implementation plans to require
additional emissions control equipment and impose more stringent permit
requirements on facilities in those areas. The cost of complying with
these requirements could be substantial. The EPA is currently in the
process of considering revisions to the ozone NAAQS that could have significant
implications for both stationary and mobile emissions sources.
European
Requirements. In Europe, environmental legislation is driven
by EU law, in most cases in the form of EU directives that must be converted
into national legislation. All of our European plants are located in
the EU region, with the exception of one in St. Petersburg,
Russia. One of the core EU directives is the Directive on Integrated
Pollution Prevention Control ("IPPC"). The IPPC regulates the permit
process for facilities, and thus the allowed emissions from these
facilities. As in the United States, engine testing, surface coating,
casting operations, and boiler houses all fall under this regime. The
Solvent Emission Directive which came into effect in October 2007
primarily affects vehicle manufacturing plants, which must upgrade their paint
shops to meet the new requirements. The cost of complying with these
requirements could be substantial.
Periodic
emission reporting also is required of EU Member States, in most cases defined
in the permits of the facility. The Release and Transfer Register
requires more reporting regarding emissions into air, water and soil than its
precursor. The information required by these reporting systems is
publicly available on the Internet.
Motor
Vehicle Safety
U.S.
Requirements. The National Traffic and Motor Vehicle Safety
Act of 1966 (the "Safety Act") regulates motor vehicles and motor vehicle
equipment in the United States in two primary ways. First, the Safety
Act prohibits the sale in the United States of any new vehicle or equipment that
does not conform to applicable motor vehicle safety standards established by the
National Highway Traffic Safety Administration ("NHTSA"). Meeting or
exceeding many safety standards is costly, in part because the standards tend to
conflict with the need to reduce vehicle weight in order to meet emissions and
fuel economy standards. Second, the Safety Act requires that defects
related to motor vehicle safety be remedied through safety recall
campaigns. A manufacturer is obligated to recall vehicles if it
determines that the vehicles do not comply with a safety
standard. Should we or NHTSA determine that either a safety defect or
a noncompliance exists with respect to any of our vehicles, the cost of such
recall campaigns could be substantial. As of January 22, 2008, there
were pending before NHTSA four investigations relating to alleged safety defects
or potential compliance issues in our vehicles. 14
ITEM
1. Business
(Continued)
The Safe,
Accountable, Flexible, and Efficient Transportation Equity Act: A Legacy for
Users ("SAFETEA-LU") was signed into law in 2005. SAFETEA-LU
establishes a number of substantive, safety-related rulemaking mandates for
NHTSA that can be expected to result in new regulations and product content
requirements.
The
Transportation Recall Enhancement, Accountability, and Documentation Act (the
"TREAD Act") was signed into law in November 2000. The TREAD Act
required NHTSA to establish several regulations, including reporting
requirements for motor vehicle manufacturers on foreign recalls and certain
information received by the manufacturer that may assist the agency in the early
identification of safety defects. Various groups have challenged the
categorical determination by NHTSA that certain areas of data, including
warranty claim information, field reports, and consumer complaint information,
were granted a presumption of confidentiality under the TREAD Act early warning
reporting requirements. Since that time, the United States District
Court for the District of Columbia has ruled that, while NHTSA had the authority
to make these categorical determinations, it did not provide adequate public
notice and opportunity to comment in so doing. NHTSA addressed this
issue in a final rule published on October 18, 2007 that re-established class
distinctions. However, the pending litigation may yet result in the
eventual publication of information (such as death and injury accident
information) that manufacturers have been submitting to NHTSA under the TREAD
Act's early warning reporting rules.
Foreign
Requirements. Canada, the EU, individual member countries
within the EU, and other countries in Europe, South America and the Asia Pacific
markets also have safety standards applicable to motor vehicles, and are likely
to adopt additional or more stringent standards in the future. Recent
examples of such legislation include an increase in the scope of existing
pedestrian protection legislation, and the introduction of a requirement that
all vehicles include mandatory dedicated daytime running lamps. As
previously reported, the European Automobile Manufacturers Association (also
known in Europe as "ACEA"), of which Ford is a member, made voluntary
commitments in 2001 and 2006 to introduce a range of safety measures
to improve pedestrian protection, and to increase the deployment of seatbelt
reminder systems and electronic stability control systems.
Motor
Vehicle Fuel Economy
Ford's
ability to comply with CAFE or greenhouse gas emissions standards depends
heavily on the alignment of those standards with actual consumer demand, as well
as adequate lead time to make the necessary product changes. Ford has
plans to increase the fuel economy of its vehicles through the deployment of
various fuel-saving technologies, some of which have been announced publicly,
and through a shift in its fleet mix toward smaller and lighter
vehicles. Even given these plans, there are limits on Ford's ability
to achieve required fuel economy increases in its vehicles in a given time
frame. These limits relate to the costs and effectiveness of the
available technologies; consumer acceptance of the new technologies and of
changes in fleet mix; the willingness of consumers to absorb the additional
costs of new technologies; the appropriateness (or lack thereof) of certain
technologies for use in particular vehicles; and the human and engineering
resources necessary to deploy new technologies across a wide range of products
and powertrains in a short time. If consumers continue to demand
vehicles that are relatively large, have high performance, and/or are
feature-laden, while regulatory standards require the production of vehicles
that are smaller and more economical, the mismatch of supply and demand would
have an adverse effect on both regulatory compliance and our
profitability. Moreover, if regulatory requirements call for rapid,
substantial increases in fleet average fuel economy (or decreases in fleet
average greenhouse gas emissions), we may not have adequate resources and time
to make major product changes across most or all of our vehicle fleet (assuming
the necessary technology can be developed).
U.S. Requirements – Federal
Standards. Federal law requires that vehicles meet minimum
corporate average fuel economy standards set by NHTSA. A manufacturer
is subject to potentially substantial civil penalties if it fails to meet the
CAFE standard in any model year, after taking into account all available credits
for the preceding three model years and expected credits for the three
succeeding model years.
Federal
law established a passenger car CAFE standard of 27.5 miles per gallon for 1985
and later model years. By rule, NHTSA has set light-truck CAFE
standards of 21.6 miles per gallon for model year 2006, and 22.2 miles per
gallon for model year 2007. In 2006, NHTSA issued a final rule
changing the structure of the light-truck fuel economy standards for model year
2008 and beyond. The final rule employs a new "reformed" approach to
fuel economy standards in which each manufacturer's CAFE obligation is based on
the specific mix of vehicles it sells. A manufacturer's light truck
CAFE is now calculated on a basis that relates fuel economy targets to vehicle
size. These fuel economy targets become
15
increasingly
stringent with each new model year. In model year 2011 and beyond,
the truck CAFE standards will apply for the first time to certain classes of
heavier passenger vehicles (SUVs and passenger vans with a gross vehicle weight
between 8,500 and 10,000 pounds, or with a gross vehicle weight below 8,500
pounds and a curb weight above 6,000 pounds). ITEM
1. Business
(Continued)
A number
of groups filed petitions seeking judicial review of the 2006 light truck
rule. These petitions for review were consolidated into one case in
the United States Court of Appeals for the Ninth Circuit. In November
2007, the Ninth Circuit found some aspects of EPA’s light truck CAFE rules to be
arbitrary and capricious and remanded the rules back to NHTSA for expedited
rulemaking. Among the defects in NHTSA's rulemaking, according to the
Court, were NHTSA's failure to prepare an environmental impact statement;
NHTSA's decision to exclude certain trucks from CAFE standards; NHTSA's
inclusion of certain vehicles in the truck fleet rather than the car fleet; and
NHTSA's methodology for conducting its cost-benefit analysis of the
standards. The remand may lead to revisions that increase the
effective stringency of the rules, probably beginning with the 2011 model
year. However, NHTSA's new CAFE rules will also be affected by the
CAFE provisions of the new energy legislation discussed below, which may
supersede some parts of the Ninth Circuit decision.
In
December 2007, Congress enacted new energy legislation restructuring the CAFE
program and requiring NHTSA to set new CAFE standards beginning with the 2011
model year. The key features of the bill are as
follows: 1) it maintains the current distinction between cars and
trucks; 2) it requires NHTSA to set "reformed" CAFE standards for cars along the
lines of the reformed truck standards described above; 3) it calls for NHTSA to
set car and truck standards such that the combined fleet of cars and trucks in
the U.S. achieves a 35 mile per gallon fleet average by model year 2020; 4) it
allows manufacturers to trade credits among their CAFE fleets; and 5) it retains
CAFE credits for the manufacture of flexible-fuel vehicles, but phases them out
by model year 2020. Domestic passenger cars also are subject to a
minimum fleet average of the greater of 27.5 miles per gallon or 92% of NHTSA's
projected fleet average fuel economy for domestic and imported passenger cars
for that model year. In early 2008, NHTSA is expected to issue a
proposed rule setting light truck CAFE standards for model year 2012 and beyond,
based on the provisions of the new law. A proposed rule setting new
car CAFE standards is expected to follow.
Pressure
to increase CAFE standards stems in part from concerns about the impact of
carbon dioxide and other greenhouse gas emissions on the global
climate. In 1999, a petition was filed with the EPA requesting that
it regulate carbon dioxide emissions from motor vehicles under the Clean Air
Act. This is functionally equivalent to imposing fuel economy
standards, since the amount of carbon dioxide emitted by a vehicle is directly
proportional to the amount of fuel consumed. The petitioners later
filed suit in an effort to compel a formal response from the EPA. In
August 2003, the EPA denied the petition on the grounds that the Clean Air Act
does not authorize the EPA to regulate greenhouse gas emissions, and only NHTSA
is authorized to regulate fuel economy under the CAFE law. A number
of states, cities, and environmental groups filed for review of the EPA's
decision in the U.S. Court of Appeals for the District of Columbia
Circuit. A coalition of states and industry trade groups, including
the Alliance, intervened in support of the EPA's decision. In July 2005, the
Court held that the EPA had exercised reasonable discretion in determining not
to regulate carbon dioxide as a pollutant.
The
matter was appealed, and in April 2007 the U.S. Supreme Court ruled that
greenhouse gases constitute "air pollutants" subject to regulation pursuant to
the Clean Air Act. The ruling did not specifically require the EPA to
regulate greenhouse gases; rather, it directed the EPA to either issue an
"endangerment" finding pursuant to the Clean Air Act (that greenhouse gases
endanger public health or welfare), or explain why it could not or would not do
so. In the wake of this ruling, the Bush Administration announced its
intention to promulgate new federal rules regulating greenhouse gas emissions
from motor vehicles. President Bush signed an Executive Order
directing the Department of Transportation, the Department of Energy, and the
EPA to cooperate in this effort. This may lead to a new federal
program for regulating greenhouse gases from new motor vehicles in addition to
the existing CAFE program, which already constrains vehicle greenhouse gases
emissions by setting standards for fleet average fuel economy. The
stringency of such a program may depend, at least in part, on the specific
conclusions reached by the EPA in its endangerment analysis. If
such a new federal program were adopted, its impact on us would depend upon the
structure of the program and the nature of the
standards. Potentially, such a program could have effects similar to
a significant increase in CAFE standards. The EPA is reportedly
reevaluating its plans for federal greenhouse gas rules in light of the passage
of the new energy legislation described above. 16
ITEM
1. Business
(Continued)
U.S. Requirements – California and
Other State Standards. In July 2002, California enacted
Assembly Bill 1493 ("AB 1493"), a law mandating that CARB promulgate greenhouse
gas standards for light-duty vehicles beginning with model year
2009. In September 2004, CARB adopted California greenhouse gas
emissions regulations applicable to 2009-2016 model-year cars and trucks,
effectively imposing more stringent fuel economy standards than those set by
NHTSA. These regulations impose standards that are equivalent to a
CAFE standard of more than 43 miles per gallon for passenger cars and small
trucks, and approximately 27 miles per gallon for large light trucks and
medium-duty passenger vehicles by model year 2016. The Alliance and
individual companies (including Ford) submitted comments opposing the rules and
addressing errors in CARB's underlying economic and technical
analyses.
Whenever
California adopts new or modified vehicle emissions standards, the state must
apply to the EPA for a waiver of preemption of the new or modified standards
under Section 209 of the Clean Air Act. Since the AB 1493 rules were
adopted by California as "emissions" rules under the Clean Air Act, they require
this waiver of federal preemption. In December 2007, EPA announced
its intention to deny California's request for a waiver of
preemption. In January 2008, California and various other states that
had adopted the California standards filed a petition for review of the EPA's
decision in the U.S. Court of Appeals for the Ninth Circuit, before the EPA had
even released a formal decision document. It is anticipated that
litigation over the waiver decision will take place throughout
2008. If the EPA waiver decision is overturned via judicial review,
it is possible that EPA could grant the waiver, potentially allowing California
and other states to enforce the AB 1493 rules against automobile
manufacturers. In addition, because the EPA waiver decision is an
administrative decision, it is possible that a new federal administration could
reverse the EPA’s decision following the 2008 elections. Several of
the major presidential candidates have indicated their intent to do so, although
any such decision itself would be subject to judicial review.
In
addition to the question of Clean Air Act preemption, which is being addressed
through the EPA's waiver decision and the ensuing litigation, there is also the
question of preemption of the AB 1493 standards by the federal CAFE
law. The CAFE law prohibits states from enacting or enforcing
regulations "related to" fuel economy when federal standards are in
effect. In December 2004, the Alliance and other plaintiffs (several
automobile dealers, two individual automobile manufacturers, and another
automotive trade association) filed suit in federal district court in
California, seeking to overturn the AB 1493 standards. The suit
challenges the regulation on several bases, including preemption under the
federal CAFE law. In December 2007, the U.S. District Court ruled
that the federal CAFE law does not preempt the AB 1493
rules. The Court, however, also issued an injunction against the
enforcement of the AB 1493 rules pending the issuance of an EPA waiver, which
was denied as described above. Further proceedings in this case,
including a possible appeal of the CAFE preemption ruling, may depend on the
progress and outcome of the litigation over the EPA's waiver
decision.
Other
states have adopted, or are in the process of adopting, CARB's greenhouse gas
standards. These states include New York, Massachusetts, Maine,
Vermont, Rhode Island, Connecticut, New Jersey, Pennsylvania, Oregon,
Washington, Maryland, New Mexico, Florida, and Arizona. Several other
states are known to be considering the adoption of such rules.
The
Alliance, along with other plaintiffs, filed suit in federal court in Vermont
and Rhode Island challenging those states' adoption of the California AB 1493
rules. The Vermont case went to trial in April 2007. In
September 2007, the U.S. District Court for the District of Vermont upheld
Vermont's greenhouse gas rules, finding that they were not preempted by federal
fuel economy law. Specifically, the court held that the state
greenhouse gas rules were insulated from a preemption challenge because they
were subject to a waiver process under the federal Clean Air Act. The
court also held that, even if questions of federal preemption were applicable,
the greenhouse gas rules should be upheld because some portions of the
regulations give credit for vehicle modifications that do not relate
specifically to improving fleet average fuel economy. The Alliance is
appealing the District Court's decision to the U.S. Court of Appeals for the
Second Circuit. In the Rhode Island case, the District Court recently
held that the case is ripe for review, and the parties will likely proceed with
briefings on dispositive motions.
In
September 2006, California also enacted the Global Warming Solutions Act of 2006
(also known as Assembly Bill 32 ("AB 32")). This law mandates that
statewide greenhouse gas emissions be capped at 1990 levels by the year 2020,
which would represent a significant reduction from current greenhouse gas
levels. It also requires the monitoring and annual reporting of
greenhouse gas emissions by all "significant" sources, and delegates authority to
CARB to develop and implement greenhouse gas emissions reduction
measures. AB 32 also provides that, if the AB 1493 standards do not
take effect, CARB must implement alternative regulations to control mobile
sources of greenhouse gas emissions to achieve equivalent or greater reductions
than mandated by AB 1493. It is not clear at this time how this bill
would be implemented. 17
ITEM
1. Business
(Continued)
The
recent changes to the light truck CAFE standards, and the anticipated new CAFE
standards that will result from the passage of the energy legislation by
Congress, pose very significant challenges for us. If NHTSA builds
upon its history of setting tough but reasonable CAFE standards based on a
consideration of technological feasibility and economic practicability, we
believe it is likely that these federal standards can be workable, albeit
costly, within our business limitations. In contrast, the
state-promulgated AB 1493 rules impose fuel economy standards whose rapid rate
of increase and extreme stringency are unprecedented in the history of fuel
economy regulation, and which are not workable within our business
limitations. If extreme standards of this nature are imposed, we
likely would be forced to take various actions that could have substantial
adverse effects on our sales volume and profits. Such actions would
likely include restricting offerings of selected engines and popular options;
increasing market support programs for our most fuel-efficient cars and light
trucks in order to maintain compliance; and ultimately curtailing the production
and sale of certain vehicles such as family-size, luxury, and high-performance
cars, SUVs and "crossover" vehicles, and full-size light trucks, in order to
maintain compliance.
See "Item
3. Legal Proceedings" for a discussion of the public nuisance litigation filed
by the state of California against automobile manufacturers for alleged global
warming damages. Though that suit has been dismissed by the trial
court, California's Attorney General has filed notice of intent to
appeal. If California were to prevail in this litigation, it could
encourage similar suits in other states and municipalities. A
judgment against defendants also could result in the imposition of
judicially-mandated standards for greenhouse gas emissions that could arguably
supersede or augment existing fuel economy requirements; such a result could
compel us to implement product restrictions and/or other costly actions as
outlined above.
European
Requirements. The EU is a party to the Kyoto Protocol to the
United Nations Framework Convention on Climate Change, and has agreed to reduce
greenhouse gas emissions by eight percent below 1990 levels during the 2008-2012
period. In 1998, the EU agreed to support an environmental agreement
with ACEA (of which Ford is a member) on carbon dioxide emission reductions from
new passenger cars (the "ACEA Agreement"). The ACEA Agreement
established an emissions target of 140 grams of carbon dioxide per kilometer
("g/km") for the average of new cars sold in the EU by the ACEA's members in
2008. This corresponds to a 25% reduction in average carbon dioxide
emissions compared to 1995. To date, the industry has made good
progress, meeting an interim target for 2003 (165 – 170 grams of carbon dioxide
per kilometer); however, it is now apparent that the industry will not achieve
the 140 grams per kilometer target for the 2008 model year due to a number of
factors, including consumer demand and the challenges associated with
implementing various fuel-saving technologies.
In 2005,
ACEA and the European Commission reviewed the potential for additional carbon
dioxide reductions, with the goal of achieving the EU's objective of 120 g/km by
2012. The discussions have advanced using the concept of an
integrated approach to further reductions, involving the oil industry and other
sectors. In 2007, the discussions suggested a 120 g/km overall
target, with a vehicle target of 130 g/km and complementary measures making up
the other 10 g/km in emissions reductions. In December 2007, the
European Commission issued a proposal to regulate vehicle carbon dioxide from
2012 at a fleet average of 130 g/km, using a sliding scale based on vehicle
weight. This provides different targets for each manufacturer based
on their respective fleets of vehicles, weight and carbon dioxide
output. For manufacturers failing to meet their targets, a penalty
system is proposed of €20 per each g/km shortfall in 2012, rising to €95 in
2015. Manufacturers would be permitted to use a pooling agreement
between owned brands to share or minimize the burden. Further pooling
agreements between different manufacturers would also be allowed, although such
agreements could not be exclusive and would have to be open to all automobile
manufacturers. This proposal is likely to be finalized by the
European Parliament in 2008 or 2009. Some European countries are
considering other initiatives for reducing carbon dioxide emissions from motor
vehicles, including fiscal measures. For example, the U.K. introduced
a vehicle excise duty and company car taxation based on carbon dioxide emissions
in 2001, and other member states such as France and Portugal have announced
their intention to adopt carbon dioxide-based taxes for passenger
cars. The 2007 European Commission announcement is likely to trigger
further fiscal measures.
Other National
Requirements. Some Asian countries (such as China, Japan,
South Korea, and Taiwan) have also adopted fuel efficiency
targets. For example, Japan has fuel efficiency targets for 2010
passenger car and commercial trucks with incentives for early
adoption. China has adopted targets for 2005 and 2008, and is
expected to continue setting new targets to address energy security
issues. 18
ITEM
1. Business
(Continued)
Following
considerable discussion, the Canadian automobile industry signed a Memorandum of
Understanding ("MOU") dated April 5, 2005, with the Canadian government in which
the industry voluntarily committed to reduce the growth in greenhouse gas
emissions from the Canadian vehicle fleet by 5.3 megatons ("Mt") by 2010 (which
slightly exceeds the government's 5.2 Mt target under its Kyoto Protocol Climate
Change Action Plan). The MOU contains the following interim targets
for the entire Canadian automobile industry: 2.4 Mt reduction by
2007, total reduction of 3.0 Mt in 2008, total reduction of 3.9 Mt in 2009 and
the full 5.3 Mt reduction in 2010. Pursuant to the MOU, a committee
of industry and government representatives has been established to monitor the
industry's overall compliance with the annual MOU targets.
The
Canadian federal government recently proclaimed its Motor Vehicle Fuel
Consumption Standards Act. Regulations are expected to align Canadian
requirements with dominant US standards and are to be in place by model year
2011.
European
Chemicals Policy
The
European Commission finalized its regulatory framework in December 2006 for a
single system to register, evaluate, and authorize the use of chemicals with a
production volume above one ton per year ("REACH"). The rules took
effect on June 1, 2007, with a preparatory period through
June 1, 2008 followed by a six-month pre-registration
phase. Compliance with the legislation is likely to be
administratively burdensome for all entities in the supply chain, and research
and development resources may be redirected from "market-drive" to
"REACH-driven" activities. The regulation also may accelerate
restriction or banning of certain chemicals and materials, which could increase
the costs of certain products and processes used to manufacture vehicles and
parts. We are implementing and ensuring compliance within Ford and
our suppliers through a common implementing strategy together with the global
automotive industry.
Pollution
Control Costs
During
the period 2008 through 2012, we expect to spend approximately $249 million
on our North American and European facilities to comply with stationary source
air and water pollution and hazardous waste control standards which are now in
effect or are scheduled to come into effect during this period. Of
this total, we currently estimate spending approximately $54 million in
2008 and $49 million in 2009. These amounts exclude projections
for the Jaguar and Land Rover business units, which were held for sale as of the
fourth quarter of 2007. Specific environmental expenses are difficult
to isolate because expenditures may be made for more than one purpose, making
precise classification difficult. 19
ITEM
1. Business
(Continued)
EMPLOYMENT
DATA
The
approximate number of individuals employed by us and our consolidated entities
(including entities we do not control) at December 31, 2007 and 2006
was as follows (in thousands):
The
decrease in employment levels primarily reflects implementation of our
personnel-reduction programs in North America.
Substantially
all of the hourly employees in our Automotive operations are represented by
unions and covered by collective bargaining agreements. In the United
States, approximately 99% of these unionized hourly employees in our Automotive
sector are represented by the International Union, United Automobile, Aerospace
and Agricultural Implement Workers of America ("UAW" or "United Automobile
Workers"). Approximately two percent of our U.S. salaried employees
are represented by unions. Most hourly employees and many
non-management salaried employees of our subsidiaries outside of the United
States also are represented by unions.
We have
entered into collective bargaining agreements with the UAW, and the National
Automobile, Aerospace, Transportation and General Workers Union of Canada ("CAW"
or "Canadian Automobile Workers"). Among other things, our agreements
with the UAW and CAW provide for guaranteed wage and benefit levels throughout
the term of the respective agreements, and provide for significant employment
security, subject to certain conditions. As a practical matter, these
agreements may restrict our ability to close plants and divest businesses during
the terms of the agreements. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation –
Overview" for discussion of our recently-negotiated UAW
agreement. This agreement with the UAW expires on
September 14, 2011. Our agreement with the CAW expires on
September 16, 2008. Historically, negotiation of new
collective bargaining agreements with the UAW and CAW typically resulted in
increases in wages and benefits, including retirement benefits.
In 2007,
we negotiated new Ford collective bargaining agreements with labor unions in
Belgium, Brazil, France, Mexico, New Zealand, Russia, Southern Africa, Taiwan,
Thailand, United States (hourly and salaried), Venezuela and
Vietnam. We also negotiated collective bargaining agreements at our
Land Rover (Britain) and Volvo (Sweden) affiliates.
In 2008,
we are or will be negotiating new collective bargaining agreements with labor
unions in Argentina, Brazil, Britain, Canada, France, Germany, Mexico, New
Zealand, Romania, Russia, Taiwan, and Thailand, as well as our Volvo (U.S.)
affiliate. 20
ITEM
1. Business
(Continued)
ENGINEERING,
RESEARCH AND DEVELOPMENT
We engage
in engineering, research and development primarily to improve the performance
(including fuel efficiency), safety, and customer satisfaction of our products,
and to develop new products. We also have staffs of scientists who
engage in basic research. We maintain extensive engineering, research
and design centers for these purposes, including large centers in Dearborn,
Michigan; Dunton, Gaydon and Whitley, England; Gothenburg, Sweden; and Aachen
and Merkenich, Germany. Most of our engineering research and
development relates to our Automotive sector. In general, our
engineering activities that do not involve basic research or product
development, such as manufacturing engineering, are excluded from our
engineering, research and development charges discussed below.
During
the last three years, we recorded charges to our consolidated income for
engineering, research and development we sponsored in the following
amounts: $7.5 billion (2007), $7.2 billion (2006), and
$8 billion (2005) . Any customer-sponsored research and
development activities that we conduct are not material.
ITEM
1A. Risk
Factors
We have
listed below (not necessarily in order of importance or probability of
occurrence) the most significant risk factors applicable to us:
Continued decline
in market share. Our market share has declined in many regions
of the world over the last year. Our overall market share in the
United States, including PAG-brand vehicles, has declined in each of the past
five years, from 20.5% in 2003 to 15.6% in 2007. Because a high
proportion of our costs are fixed, these share declines and resulting volume
reductions have had an adverse impact on our results of
operations. While we are attempting to stabilize our market share and
reduce our capacity over time through the restructuring actions described in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations – Overview" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations – Outlook," we cannot be certain
that we will be successful. Continued declines in our market share
could have a substantial adverse effect on our results of operations and
financial condition.
Continued or
increased price competition resulting from industry overcapacity, currency
fluctuations or other factors. The global automotive industry
is intensely competitive, with overall manufacturing capacity far exceeding
current demand. For example, according to CSM Worldwide, the global
automotive industry is estimated to have had excess capacity of
16.8 million units in 2007. Industry overcapacity has resulted
in many of our principal competitors offering marketing incentives on vehicles
in an attempt to maintain and grow market share. These marketing
incentives have included a combination of subsidized financing or leasing
programs, price rebates and other incentives. As a result, we have
not necessarily been able to increase prices sufficiently to offset higher costs
of marketing incentives or other cost increases (e.g., for commodities or health
care) or the impact of adverse currency fluctuations in either the U.S. or
European markets. While we, General Motors and Chrysler have each
announced plans to reduce capacity significantly, these reductions will take
several years to complete and will only partially address the industry's
overcapacity problems. A continuation or increase in these trends
could have a substantial adverse effect on our results of operations and
financial condition.
21
ITEM 1A.
Risk Factors
(continued)
Moreover, like other manufacturers, we
have a high proportion of costs that are fixed, so relatively small changes in
wholesale unit volumes may dramatically affect overall
profitability. In recent years, industry demand has remained at
relatively high levels. For 2008, we expect industry demand in the
United States will soften to about 16 million units, compared with
16.5 million units in 2007. Should industry demand soften beyond
our expectations because of slowing or negative economic growth in key markets
or other factors, our results of operations and financial condition could be
substantially adversely affected. For additional discussion of
economic trends, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations – Overview."
Continued or
increased high prices for or reduced availability of
fuel. Continued or increased high prices for fuel or reduced
availability of fuel, particularly in the United States, could result in further
weakening of demand for relatively more profitable large and luxury car and
truck models, and could increase demand for relatively less profitable small
cars and trucks. Continuation or acceleration of such a trend could
have a substantial adverse effect on our financial condition and results of
operations.
22
ITEM 1A.
Risk Factors
(continued)
23
ITEM 1A.
Risk Factors
(continued)
Our U.S.
defined benefit pension plans are subject to Title IV of the Employee Retirement
Income Security Act of 1974 ("ERISA"). Under Title IV of ERISA, the
Pension Benefit Guaranty Corporation ("PBGC") has the authority under certain
circumstances or upon the occurrence of certain events to terminate an
underfunded pension plan. One of those circumstances is the
occurrence of an event that unreasonably increases the risk of unreasonably
large losses to the PBGC. Although we believe that it is not likely
that the PBGC will terminate any of our plans, in the event that our U.S.
pension plans were to be terminated at a time when the liabilities of the plans
exceeded the assets of the plans, we would incur a liability to the PBGC that
could be equal to the entire amount of the underfunding.
If our
cash flows and capital resources were to be insufficient to fund our pension or
postretirement health care and life insurance obligations, we could be forced to
reduce or delay investments and capital expenditures, seek additional capital,
or restructure or refinance our indebtedness. In addition, if our
operating results and available cash were to be insufficient to meet our pension
or postretirement health care and life insurance obligations, we could face
substantial liquidity problems and might be required to dispose of material
assets or operations to meet our pension or postretirement health care and life
insurance obligations. We might not be able to consummate those
dispositions or to obtain the proceeds that we could realize from them, and
these proceeds might not be adequate to meet any pension and postretirement
health care or life insurance obligations then due.
24
ITEM 1A.
Risk Factors
(continued)
Substantial
negative Automotive operating-related cash flows for the near- to medium-term
affecting our ability to meet our obligations, invest in our business or
refinance our debt.
During the next few years, we expect substantial negative
operating-related cash outflows. Future borrowings may not be
available to us under our credit facilities or otherwise in amounts sufficient
to enable us to pay our indebtedness and to fund our other liquidity
needs. For example, if we are unable to meet certain covenants of our
$11.5 billion secured credit facility established in December 2006
(e.g., if the value of assets pledged do not exceed outstanding borrowings), we
will not be able to borrow under the facility. If our cash flow is
worse than expected due to an economic recession, work stoppages, increased
pension contributions or otherwise, or if we are unable to borrow under our
credit facilities or otherwise for these purposes, we may need to refinance or
restructure all or a portion of our indebtedness on or before maturity, reduce
or delay capital investments, or seek to raise additional capital. We
may not be able to implement one or more of these alternatives on terms
acceptable to us, or at all. The terms of our existing or future debt
agreements may restrict us from pursuing any of these
alternatives. Should our cash flow be worse than anticipated or we
fail to achieve any of these alternatives, this could materially adversely
affect our ability to repay our indebtedness and otherwise have a substantial
adverse effect on our financial condition and results of
operations. For further information on our liquidity and capital
resources, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations – Liquidity and Capital Resources," "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations – Outlook," and Note 16 of the Notes to the Financial
Statements. 25
ITEM 1A.
Risk Factors
(continued)
26
ITEM 1A.
Risk Factors
(continued)
ITEM
1B. Unresolved
Staff Comments
None to
report.
ITEM
2. Properties
Our
principal properties include manufacturing and assembly facilities, distribution
centers, warehouses, sales or administrative offices and engineering
centers.
We own
substantially all of our U.S. manufacturing and assembly facilities, although
many of these properties have been pledged to secure
indebtedness. Our facilities are situated in various sections of the
country and include assembly plants, engine plants, casting plants, metal
stamping plants, transmission plants, and other component
plants. Most of our distribution centers are leased (we own
approximately 41% of the total square footage). A substantial amount
of our warehousing is provided by third-party providers under service
contracts. Because the facilities provided pursuant to third-party
service contracts need not be dedicated exclusively or even primarily to our
use, these spaces are not included in the number of distribution
centers/warehouses listed in the table below. All of the warehouses
that we operate are leased, although many of our manufacturing and assembly
facilities contain some warehousing space. Substantially all of our
sales offices are leased space. Approximately 98% of the total square
footage of our engineering centers and our supplementary research and
development space is owned by us.
In
addition, we maintain and operate manufacturing plants, assembly facilities,
parts distribution centers, and engineering centers outside of the United
States. We own substantially all of our non-U.S. manufacturing
plants, assembly facilities, and engineering centers. The majority of
our parts distribution centers outside of the United States are either leased or
provided by vendors under service contracts. As in the United States,
space provided by vendors under service contracts need not be dedicated
exclusively or even primarily to our use, and is not included in the number of
distribution centers/warehouses listed in the table below.
The total
number of plants, distribution centers/warehouses, engineering and research and
development sites, and sales offices used by our Automotive segments are shown
in the table below:
27
ITEM 2.
Properties
(Continued)
Included
in the number of plants shown above are several plants that are not operated
directly by us, but rather by consolidated joint ventures that operate plants
that support our Automotive sector. Following are the most
significant of these consolidated joint ventures and the number of plants they
own:
28
ITEM 2.
Properties
(Continued)
In
addition to the plants that we operate directly or that are operated by
consolidated joint ventures, additional plants that support our Automotive
sector are operated by other, unconsolidated joint ventures of which we are a
partner. These additional plants are not included in the number of
plants shown in the table above. The most significant of these joint
ventures are:
The
facilities owned or leased by us or our subsidiaries and joint ventures
described above are, in the opinion of management, suitable and more than
adequate for the manufacture and assembly of our products.
The
furniture, equipment and other physical property owned by our Financial Services
operations are not material in relation to their total assets. 29
ITEM
3. Legal
Proceedings
OVERVIEW
Various
legal actions, governmental investigations and proceedings and claims are
pending or may be instituted or asserted in the future against us and our
subsidiaries, including, but not limited to, those arising out
of: alleged defects in our products; governmental regulations
covering safety, emissions and fuel economy; financial services;
employment-related matters; dealer, supplier, and other contractual
relationships; intellectual property rights; product warranties; environmental
matters; shareholder and investor matters; and financial reporting
matters. Some of the pending legal actions are, or purport to be,
class actions. Some of these matters may involve claims for
compensatory, punitive, or antitrust or other multiplied damage claims in very
large amounts, or demands for recall campaigns, environmental remediation
programs, sanctions or other relief that, if granted, would require very large
expenditures. We regularly evaluate the expected outcome of product
liability litigation and other litigation matters. We have accrued
expenses for probable losses on product liability matters, in the aggregate,
based on an analysis of historical litigation payouts and trends. We
have also accrued expenses for other litigation where losses are deemed probable
and reasonably estimable. These accruals are reflected in our
financial statements.
Following
is a discussion of our significant pending legal proceedings:
ASBESTOS
MATTERS
Asbestos
was used in brakes, clutches, and other automotive components from the early
1900s. Along with other vehicle manufacturers, we have been the
target of asbestos litigation and, as a result, we are a defendant in various
actions for injuries claimed to have resulted from alleged contact with Ford
parts and other products containing asbestos. Plaintiffs in these
personal injury cases allege various health problems as a result of asbestos
exposure, either from component parts found in older vehicles, insulation or
other asbestos products in our facilities, or asbestos aboard our former
maritime fleet.
Most of
the asbestos litigation we face involves mechanics or other individuals who have
worked on the brakes of our vehicles over the years. We believe we
are being more aggressively targeted in asbestos suits because many previously
targeted companies have filed for bankruptcy. We are prepared to
defend these cases and, with respect to the cases alleging exposure from our
brakes, believe that the scientific evidence confirms our long-standing position
that mechanics and others are not at an increased risk of asbestos-related
disease as a result of exposure to the type of asbestos formerly used in the
brakes on our vehicles.
The
extent of our financial exposure to asbestos litigation remains very difficult
to estimate. The majority of our asbestos cases do not specify a
dollar amount for damages, and in many of the other cases the dollar amount
specified is the jurisdictional minimum. The vast majority of these
cases involve multiple defendants, with the number in some cases exceeding one
hundred. Many of these cases also involve multiple plaintiffs, and we
are often unable to tell from the pleadings which of the plaintiffs are making
claims against us (as opposed to other defendants). With some
variation from year to year, our annual payout and related defense costs in
asbestos cases has generally been decreasing since 2003. These costs
may, however, become substantial in the future. 30
ITEM
3. Legal Proceedings
(Continued)
ENVIRONMENTAL
MATTERS
General. We have
received notices under various federal and state environmental laws that we
(along with others) may be a potentially responsible party for the costs
associated with remediating numerous hazardous substance storage, recycling, or
disposal sites in many states and, in some instances, for natural resource
damages. We also may have been a generator of hazardous substances at
a number of other sites. The amount of any such costs or damages for
which we may be held responsible could be substantial. The contingent
losses that we expect to incur in connection with many of these sites have been
accrued and those losses are reflected in our financial statements in accordance
with generally accepted accounting principles. For many sites,
however, the remediation costs and other damages for which we ultimately may be
responsible are not reasonably estimable because of uncertainties with respect
to factors such as our connection to the site or to materials there, the
involvement of other potentially responsible parties, the application of laws
and other standards or regulations, site conditions, and the nature and scope of
investigations, studies, and remediation to be undertaken (including the
technologies to be required and the extent, duration, and success of
remediation). As a result, we are unable to determine or reasonably estimate the
amount of costs or other damages for which we are potentially responsible in
connection with these sites, although that total could be
substantial.
Edison Assembly Plant Concrete
Disposal. During demolition of our Edison Assembly Plant, we
discovered very low levels of contaminants in the concrete slab. The
concrete was crushed and reused by several developers as fill material at ten
different off-site locations. The New Jersey Department of
Environmental Protection ("DEP") asserts that some of these locations may not
have been authorized to receive the waste. In March 2006, the DEP
ordered Ford, its supplier MIG-Alberici, Inc., and the developer Edgewood
Properties, Inc., to investigate, and, if appropriate, remove contaminated
materials. Ford has substantially completed the work at a number of
locations, and Edgewood is completing the investigation and remediation at
several locations that it owns. In December 2007, we entered into an
Administrative Consent Order with the DEP that terminated the March 2006 orders
and resolved civil issues with the DEP surrounding the concrete
reuse. Pursuant to the Administrative Consent Order, we will pay
approximately $460,000 for oversight costs, penalties, and environmental
education projects, and we will donate emissions reduction credits to the State
of New Jersey. As previously reported, the New Jersey Attorney
General's office also issued a grand jury subpoena and civil information request
in March 2006. We are fully cooperating with the Attorney General's
office to resolve this matter.
California Environmental
Action. In September 2006, the California Attorney General
filed a complaint in the United States District Court for the Northern District
of California against Ford, General Motors, Toyota, Honda, Chrysler and Nissan,
seeking monetary damages on a joint and several basis for economic and
environmental harm to California caused by global warming. The
complaint alleged that cars and trucks sold in the United States constitute an
environmental public nuisance under federal and California state common
law. In September 2007, the U.S. District Court for the Northern
District of California dismissed the case, ruling that the federal claims
constituted nonjusticiable political questions. The Court did not
address the state claims, and indicated that California could refile those
claims in state court if desired. The California Attorney General has
filed a notice of appeal with the U.S. Court of Appeals for the Ninth
Circuit.
CLASS
ACTIONS
In light
of the fact that very few of the purported class actions filed against us in the
past have ever been certified by the courts as class actions, the actions listed
below are those (i) that have been certified as a class action by a court of
competent jurisdiction (and any additional purported class actions that raise
allegations substantially similar to a certified case), and (ii) that, if
resolved unfavorably to the Company, would likely involve a significant
cost.
Blue Oval Certified Program Class
Action. On January 31, 2007, the United States District Court
for the District of New Jersey certified a nationwide class of dealers who were
franchisees of Ford Motor Company's Ford Division at any time during the period
mid-2000 through March 2005. Plaintiffs allege that Ford's Blue Oval
Certified Program, which was designed to reward dealers who obtained high
customer satisfaction ratings, violated the Robinson-Patman Act, the Automobile
Dealer's Day in Court Act, and various state laws. The complaint
seeks injunctive and declaratory relief, and unspecified damages (including
compensatory, statutory, treble, and punitive damages). The U. S.
Court of Appeals for the Third Circuit has granted our petition for leave to
appeal the class certification order, and our appeal is
pending. 31
ITEM
3. Legal Proceedings
(Continued)
Canadian Export Antitrust Class
Actions. Eighty-three purported class actions on behalf of all
purchasers of new motor vehicles in the United States since January 1, 2001 have
been filed in various state and federal courts against numerous defendants,
including Ford, General Motors, Chrysler, Toyota, Honda, Nissan, BMW Group, the
National Automobile Dealers Association, and the Canadian Automobile Dealers
Association. The federal and state complaints allege, among other
things, that the manufacturers, aided by the dealer associations, conspired to
prevent the sale to U.S. citizens of vehicles produced for the Canadian market
and sold by dealers in Canada at lower prices than vehicles sold in the United
States. The complaints seek injunctive relief under federal antitrust
law and treble damages under federal and state antitrust laws.
The
federal court actions have been consolidated for coordinated pretrial
proceedings in the U.S. District Court for the District of Maine. In
early 2007, the U.S. District Court certified classes of all purchasers of new
vehicles in 20 states between January 1, 2001 and
April 30, 2003 for damages under various state law
theories. Our appeal of the class certification order is
pending.
OTHER
MATTERS
ERISA Fiduciary
Litigation. A purported class action lawsuit is pending in the
United States District Court for the Eastern District of Michigan naming as
defendants Ford Motor Company and several of our current or former employees and
officers (Nowak, et al. v.
Ford Motor Company, et al., along with three consolidated
cases). The lawsuit alleges that the defendants violated ERISA by
failing to prudently and loyally manage funds held in employee savings plans
sponsored by Ford. Specifically, the plaintiffs allege (among other
claims) that the defendants violated fiduciary duties owed to plan participants
by continuing to offer Ford Common Stock as an investment option in the savings
plans. The defendants deny the plaintiffs' allegations, and intend to
defend this matter vigorously. Our motion to dismiss currently is
pending before the court.
SEC Pension and Post-Employment
Benefit Accounting Inquiry. On October 14, 2004, the Division
of Enforcement of the Securities and Exchange Commission ("SEC") notified us
that it was conducting an inquiry into the methodology used to account for
pensions and other post-employment benefits. We are one of several
companies to have received request for information as part of this
inquiry. We have completed submission of requested
information.
Diesel Engine
Litigation. In January 2007, we filed suit against the
single-source supplier of diesel engines for our F-Series Super Duty and
Econoline vehicles. Among other things, we sought reimbursement for
warranty and related costs involving prior model-year diesel engines supplied by
International Truck and Engine Corporation ("International") (a subsidiary of
Navistar International Transportation Corporation). International
countersued, asserting damages in excess of $2 billion and alleging, among
other things, that we materially breached provisions of the supply agreement
with regard to warranty, pricing, and exclusivity. International also filed its
own suit in Cook County, Illinois, alleging breach of our diesel engine
pre-development contract. We believe that International's claims are
without merit, and we intend vigorously to prosecute our claims against
International and defend against this countersuit. As part of the
pending litigation, the court has issued an order requiring International to
ship engines to us, and permitting us to pay a disputed price under protest,
while reserving our right to pursue recovery of the disputed
amount.
ITEM
4. Submission of Matters to a
Vote of Security Holders
Not
required. 32
ITEM
4A. Executive Officers of
Ford
Our
executive officers and their positions and ages at February 1, 2008 are as
follows:
__________
33
ITEM
4A. Executive Officers of Ford
(Continued)
All of
the above officers, except those noted below, have been employed by Ford or its
subsidiaries in one or more capacities during the past five
years. Described below are the recent positions (other than those
with Ford or its subsidiaries) held by those officers who have not yet been with
Ford or its subsidiaries for five years:
Under our
By-Laws, the executive officers are elected by the Board of Directors at the
Annual Meeting of the Board of Directors held for this purpose. Each
officer is elected to hold office until his or her successor is chosen or as
otherwise provided in the By-Laws. 34
PART
II
ITEM
5. Market for Ford's Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our
Common Stock is listed on the New York Stock Exchange in the United States and
on certain stock exchanges in Belgium, France, Switzerland and the United
Kingdom.
The table
below shows the high and low sales prices for our Common Stock and the dividends
we paid per share of Common and Class B Stock for each quarterly period in 2006
and 2007:
__________
As of
February 11, 2008, stockholders of record of Ford included 163,689 holders of
Common Stock (which number does not include 1,395 former holders of old Ford
Common Stock who have not yet tendered their shares pursuant to our
recapitalization, known as the Value Enhancement Plan, which became effective on
August 9, 2000) and 93 holders of Class B Stock.
On
December 7, 2007, we issued an aggregate of 62,000,761 shares of Ford
Common Stock, par value $0.01 per share, in exchange for $441,991,000 principal
amount of our 6⅜% Debentures due February 1, 2029 and $124,943,000
principal amount of our 6⅝% Debentures due October 1, 2028,
beneficially owned by an institutional holder of the Debentures. We
did not receive any cash proceeds as a result of the exchange of Ford Common
Stock for the Debentures, which Debentures have been retired and
cancelled. The shares of Ford Common Stock were issued pursuant to
the exemption from the registration requirements of the Securities Act of 1933,
as amended, contained in Section 3(a)(9) of such act on the basis that the offer
constituted an exchange with an existing holder of our securities and no
commission or other remuneration was paid to any party for soliciting such
exchange.
During
the fourth quarter of 2007, we purchased shares of our Common Stock as
follows:
________
35
ITEM
6. Selected Financial
Data
The
following table sets forth selected financial data for each of the last five
years (dollar amounts in millions, except per share amounts).
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