Ford Motor Company 10-K 2010
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Ford Motor Company
(Exact name of Registrant as specified in its charter)
(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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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. 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 30, 2009, Ford had outstanding 3,149,667,003 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 ($6.07 per share), the aggregate market value of such Common Stock was $19,118,478,708. 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 30, 2009 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 13, 2010 (our "Proxy Statement"), which is incorporated by reference under various Items of this Report as indicated below.
As of February 12, 2010, Ford had outstanding 3,297,413,605 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 ($11.12 per share), the aggregate market value of such Common Stock was $36,667,239,288.
DOCUMENTS INCORPORATED BY REFERENCE
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. 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, 2009 ("2009 Form 10-K Report" or "Report"), extensive information about our Company can be found 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, Code of Ethics for Senior Financial Personnel, Code of Ethics for Directors, Standards of Corporate Conduct for all employees, and the Charters for each of the Committees of our Board of Directors. In addition, any amendments to our Code of Ethics or waivers granted to our directors and executive officers will be posted in this area of our website. All of these documents may be accessed by logging onto our website and clicking on "Investors," then "Company Information," and then "Corporate Governance," or 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, 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 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. 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 also are made available free of charge through our website. We post each of these documents on our website as soon as reasonably practicable after it is electronically filed with the SEC.
To access our SEC reports or amendments or the Section 16 filings, log onto our website and click "Investors," then "Company Reports," and then "View SEC Filings," which links to a list of reports filed with the SEC.
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)
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, 2009 are described in the table below:
We provide financial information (such as revenue, income, and assets) for each business sector and reportable segment 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" ("Item 7"); and (3) Note 28 of the Notes to the Financial Statements located at the end of this Report. Financial information relating to certain geographic areas is included in Note 29 of the Notes to the Financial Statements.
ITEM 1. Business (continued)
We sell cars and trucks throughout the world. In 2009, our total ongoing Automotive operations (including unconsolidated affiliates in China) sold approximately 4,817,000 vehicles at wholesale throughout the world. See Item 7 for additional discussion of wholesale unit volumes.
As of December 31, 2009, our vehicle brands included Ford, Mercury, Lincoln, and Volvo, although Volvo is held for sale. Substantially all of our cars, trucks and parts are marketed through retail dealers in North America, and through distributors and dealers (collectively, "dealerships") outside of North America, the substantial majority of which are independently owned. At December 31, 2009, the approximate number of dealerships worldwide distributing our vehicle brands was as follows:
In addition to the products we sell to our dealerships for retail sale, we also sell cars and trucks to our dealerships for sale to fleet customers, including daily rental car companies, commercial fleet customers, leasing companies, and governments. 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.
Through our dealer network and other channels, we provide retail customers with a wide range of after-sale vehicle services and products, including 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 Custom AccessoriesTM, 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 to purchase a vehicle 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). As we recently have seen in the United States and Europe in particular, the number of cars and trucks sold may vary substantially from year to year. Further, the automotive industry is 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, fuel efficiency, functionality, and 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.
ITEM 1. Business (continued)
The profitability of our business is affected by many factors, including:
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 the "Overview" section in Item 7.
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., the dealership). See the "Overview" section in Item 7 for additional discussion of revenue recognition practices.
We manage our vehicle production schedule based on a number of factors, including retail sales (i.e., units sold by our dealerships to their customers at retail) and dealer stock levels (i.e., the number of units held in inventory by our dealerships for sale to retail and fleet customers). In the past, we have experienced some seasonal fluctuation in the business, with production in many markets tending to be higher in the first half of the year to meet demand in the spring and summer (typically the strongest sales months of the year). Third quarter production has tended to be the lowest. As a result, operating results for the third quarter typically have been less favorable than other quarters.
Raw Materials. We purchase a wide variety of raw materials from numerous suppliers around the world for use in production of our vehicles. 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. There are always risks and uncertainties, however, with respect to the supply of raw materials that could impact availability in sufficient quantities to meet our needs. See the "Overview" section of Item 7 for a discussion of commodity and energy price trends, and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" ("Item 7A") 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, and expect this portfolio to continue to grow as we actively pursue additional technological innovation. We currently have approximately 15,900 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. Although 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.
ITEM 1. Business (continued)
Warranty Coverage and Additional Service Actions. We currently 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 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 service action costs for each vehicle sold by us are accrued for at the time of sale. Accruals for estimated warranty and 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 "Critical Accounting Estimates" in Item 7, as well as Note 31 of the Notes to the Financial Statements.
Industry Sales Volume
The following chart shows industry sales volume for the United States, and for the markets we track in Europe, South America and Asia Pacific Africa for the last five years (in millions of units):
U.S. and European industry sales volume declined in 2009 compared with 2008, reflecting weak economic conditions in both markets. The decline in Europe was more modest because the impact of the economic slowdown was offset somewhat by substantial government-sponsored vehicle scrappage program incentives. Asia Pacific Africa industry sales increased in 2009 as compared to 2008, largely driven by growth in China.
Industry Sales Data. The following table shows U.S. industry sales of cars and trucks (in millions of units):
ITEM 1. Business (continued)
We classify cars by small, medium, large, and premium segments, and trucks by compact pickup, bus/van (including minivans), full-size pickup, crossover utility vehicles ("CUVs") and traditional sport utility vehicles ("SUVs"), and medium/heavy segments. We refer to CUVs, which are based on car platforms, and SUVs, which are based on truck platforms, collectively as "utilities" or "utility vehicles." In the tables, we have classified all of our luxury cars as "premium," regardless of size. Annually, we review various 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.
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 for Ford:
As the tables above indicate, the shift from cars to trucks that began in the 1980s started to reverse in 2005. Prior to 2005, the proportion of trucks sold in the industry and by Ford had been increasing, reflecting higher sales of SUVs and full-size pickups. In recent years, the percentage of cars sold in the overall market and by Ford has trended higher, primarily due to a shift in consumer preferences to smaller, more fuel-efficient vehicles. In 2009, overall changes in our U.S. vehicle mix generally followed the overall direction of U.S. industry trends. Our year-over-year growth in car mix, however, outpaced the industry, primarily fueled by the strength of our medium-car mix and sales led by our redesigned Ford Fusion, Fusion Hybrid, Mercury Milan and Milan Hybrid.
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 increase production capacity in North America. Our principal competitors in the United States include General Motors Company ("General Motors"), Chrysler Group LLC ("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 (Ford, Lincoln, and Mercury brand vehicles only) and for the other five leading vehicle manufacturers. The percentages in each of the following tables represent percentages of the combined car and truck industry:
ITEM 1. Business (continued)
Our improvement in overall market share primarily is the result of several factors, including favorable acceptance of our redesigned products, product focus on industry growth segments, and customers' increasing awareness and acceptance of our commitment to leadership in quality, fuel efficiency, safety, smart technologies and value.
In addition to the Ford, Lincoln, and Mercury vehicles we sell in the U.S. market, we also sell a significant number of Volvo vehicles. Our market share for Volvo vehicles in the United States (which is reflected in "All Other" in the tables above) was approximately 0.6% in 2009, up 0.1 percentage points from 2008. This increase in market share primarily reflected the introduction of the new XC60 and improved sales of the V50.
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.
ITEM 1. Business (continued)
The table below shows our fleet sales in the United States, and the amount of those combined sales as a percentage of our total U.S. car and truck sales for the last five years (in thousands):
Lower fleet sales in 2009 primarily reflected an overall industry decline in rental, commercial and government sectors. Although total fleet industry volume decreased for the year, we improved year-over-year fleet segment market share. We continue to maintain profitable government and commercial segment market share leadership over all brands.
Industry Sales Data
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 77% 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, 2009 market data are based on estimated registrations currently available; percentage change is measured from actual 2008 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 2009, vehicle manufacturers sold approximately 15.8 million cars and trucks in these 19 markets, down 4.8% from 2008. Ford-brand combined car and truck market share in Europe in 2009 was approximately 9.1% (up 0.5 percentage points from the previous year); Volvo market share in Europe was 1.3% (about the same as in 2008).
Britain and Germany are our highest-volume markets within Europe. Any change in the British or German market has a significant effect on the results of our Ford Europe segment. The global economic crisis caused 2009 industry sales in Britain to decline by 10.5% from 2008 levels (which were down considerably from 2007 levels, as the economic crisis hit Britain earlier than many other European countries). As a result of government stimulus in Germany, 2009 industry sales volume there actually increased by 18.2% compared with 2008. Our Ford-brand combined car and truck share in these markets in 2009 was 16.8% in Britain (up 0.4 percentage points from the previous year), and 7.6% in Germany (up 0.6 percentage points from the previous year).
Although not included in the 19 markets above, several additional markets in the region contribute to our Ford Europe segment results. In 2009, Ford's share of the Turkish market increased by 0.4 percentage points to 15.1%, the eighth year in a row that the Ford brand led the market in sales in Turkey. Industry sales volume in Russia decreased dramatically during 2009, shrinking by 1.6 million units or about half of its total volume as a result of the economic crisis. As a result, sales of Ford-brand vehicles decreased by nearly 56% from 2008 to about 82,000 units in 2009.
Motor Vehicle Distribution in Europe. In 2002, the Commission of the European Union ("Commission") adopted a new regulatory scheme that changed the way motor vehicles are sold and repaired ("Block Exemption Regulation"). Pursuant to this regulation, manufacturers must operate either 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.
ITEM 1. Business (continued)
We, like most other automotive manufacturers, elected to establish a "selective" distribution system, allowing us to restrict the dealer’s ability to sell our vehicles to unauthorized resellers. Under this "selective" system, we are entitled to determine the number of dealers we establish but, since October 2005, not their locations. Under either system permitted by the Block Exemption Regulation, the rules make it easier for a dealer to display and sell multiple brands in one store without the need to maintain separate facilities.
Under the Block Exemption Regulation, the Commission also adopted sweeping changes to the repair industry. Dealers no longer could be required by the manufacturer to perform repair work. Instead, dealers could subcontract repair work to independent repair shops that met reasonable criteria set by the manufacturer. These authorized repair facilities could perform warranty and recall work, in addition to other repair and maintenance work. While a manufacturer may continue to require the use of its parts in warranty and recall work, for all other repair work the repair facilities may use parts made by others that are of comparable quality. 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 Commission's Block Exemption Regulation continues to contribute to an increasingly competitive market for vehicles and parts, and to ongoing price convergence. This has contributed to an increase in marketing expenses, negatively affecting the profitability of Ford Europe and Volvo.
The current Block Exemption Regulation expires on May 31, 2010. In December 2009, the Commission launched a public review process for a revised Block Exemption Regulation and guidelines on motor vehicles sales and repair agreements. The Commission proposes to adopt a new block exemption for repair and maintenance services, in which area the Commission believes competition to be more limited. The Commission also proposes to adopt guidelines dealing with specific issues for both motor vehicle sales and repair. It is expected that the Commission will adopt final regulation in the spring of 2010.
Canada and Mexico. Canada and Mexico also are important markets for us. In Canada, industry sales volume for new cars and trucks in 2009 was approximately 1.48 million units, down 11% from 2008 levels; industry sales volume in Mexico for new cars and trucks in 2009 was approximately 770,000 units, down 28% from 2008. The decrease in industry sales volume in these markets reflected the impact of the global economic slowdown beginning in the fourth quarter of 2008. Our combined car and truck market share (including all of our brands sold in these markets) in 2009 was 15.2% for Canada (up 2.6 percentage points from a year ago), which represents our highest full-year share since 2001 and made Ford the number-one selling brand in Canada, and 11.8% in Mexico (down 0.3 percentage points from the previous year).
South America. Brazil, Argentina, and Venezuela are our principal markets in South America. Industry sales in 2009 were approximately 3.1 million units in Brazil (up 11.4% from 2008), 509,000 units in Argentina (down 15.3% from 2008), and 136,000 units in Venezuela (down 49.9% from 2008). Our combined car and truck share for Ford-brand vehicles in these markets was 10.3% in Brazil (up 0.3 percentage points from 2008), 13.3% in Argentina (up 0.9 percentage points from 2008), and 20.9% in Venezuela (up 5.2 percentage points from 2008). In Brazil, 2009 industry sales were strong in comparison to other markets in South America due to government stimulus actions taken in response to the global economic slowdown. We have announced plans for our largest-ever investment in Brazil operations in a five-year period, investing R$4 billion in 2011-2015 to accelerate delivery of more fuel-efficient, high-quality vehicles in Brazil.
Asia Pacific Africa. Australia, China, India, South Africa, and Taiwan are our principal markets in this region. Industry sales in 2009 were approximately 940,000 units in Australia (down 7.4% from 2008), 14.1 million units in China (up 42.1% from 2008), 2.3 million units in India (up 12.2% from 2008), 350,000 units in South Africa (down 27.6% from 2008), and 290,000 units in Taiwan (up 28.4% from 2008). Our combined car and truck share in these markets (including sales of Ford-brand vehicles, and market share for certain unconsolidated affiliates particularly in China) was 10.3% in Australia (about the same as 2008), 1.9% in China (about the same as 2008), 1.3% in India (down 0.1 percentage points from 2008), 7.6% in South Africa (up 0.7 percentage points from 2008) and 6.1% in Taiwan (up 0.6 percentage points from 2008). We anticipate that the ongoing relaxation of import restrictions (including duty reductions) will continue to intensify competition in the region.
ITEM 1. Business (continued)
China and India are the key emerging markets that will continue to drive economic growth in the region. Small cars account for 60% of Asia Pacific Africa industry sales volume, and are anticipated to continue to benefit from government fiscal policy. In line with these trends, our manufacturing capacity investments in both Thailand and India are nearing completion. At our joint venture assembly facility in Rayong, Thailand we have invested $500 million in an expansion for the production of small passenger cars. In India, we have invested $500 million to significantly increase our presence through expansion of our current manufacturing facility in Chennai to begin production of our new Ford Figo, and construction of a fully-integrated and flexible engine manufacturing plant. As previously announced in September 2009, we also have broken ground on a new plant in Chongqing, China to meet anticipated demand and grow Ford-brand market share.
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 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:
See Item 7 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 7A for a discussion of how Ford Credit manages its financial market risks.
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 for more information about these support payments.
On November 6, 2008, we and Ford Credit entered into an Amended and Restated Support Agreement (“Support Agreement”) (formerly known as the Amended and Restated Profit Maintenance Agreement). Pursuant to the Support Agreement, if Ford Credit’s managed leverage for a calendar quarter were to be higher than 11.5 to 1 (as reported in Ford Credit’s then-most recent Form 10-Q Report or Form 10-K Report), Ford Credit could require us to make or cause to be made a capital contribution to Ford Credit in an amount sufficient to have caused such managed leverage to have been 11.5 to 1. A copy of the Support Agreement was filed as Exhibit 10 to our Quarterly Report on Form 10-Q for the period ended September 30, 2008. No capital contributions have been made to Ford Credit pursuant to the Support Agreement. In addition, Ford Credit has an agreement to maintain FCE’s net worth in excess of $500 million. No payments have been made by Ford Credit to FCE pursuant to the agreement during the 2007 through 2009 periods.
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. The Tier 2 emissions standards also establish 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 difficult to utilize light-duty diesel technology, which in turn restricts one pathway for improving fuel economy for purposes of satisfying Corporate Average Fuel Economy ("CAFE") standards and upcoming federal greenhouse gas ("GHG") standards.
The EPA also has standards and requirements for EPA-defined "heavy-duty" vehicles and engines (generally, those vehicles with a gross vehicle weight rating of 8,500-14,000 pounds gross vehicle weight). These standards and requirements include stringent evaporative hydrocarbon standards for gasoline vehicles, and stringent exhaust emission standards for all vehicles. In order to meet the diesel standards, manufacturers must employ after-treatment technologies, such as diesel particulate filters or selective catalytic reduction ("SCR") systems, 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 has issued guidance regarding maintenance intervals and the warning systems that will be used to alert motorists to the need for maintenance of SCR systems, which are incorporated into some of our heavy-duty vehicles. One heavy-duty engine manufacturer that does not rely on SCR technology is challenging EPA's 2010 model year heavy-duty standards and related SCR guidance in federal court. Should the litigation lead to tightening of the EPA's SCR guidance, or a ruling that otherwise interferes with our ability to use SCR technology, it could have an adverse effect on our ability to produce and sell heavy-duty vehicles.
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 for motor vehicles; 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 low emission vehicle or "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.
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. Initially, the goal of the ZEV mandate was to require the production and sale of battery-electric vehicles, which were the only vehicles capable of meeting the zero-emission requirements and of being produced in significant volumes. Such vehicles have had narrow consumer appeal due to their limited range, reduced functionality, and relatively high cost.
Over time, the ZEV regulations have been modified several times to reflect the fact that the development of battery-electric technology progressed at a slower pace than anticipated by CARB. CARB has adopted amendments to the ZEV mandate that allow advanced-technology vehicles (e.g., hybrid electric vehicles or natural gas vehicles) with extremely low tailpipe emissions to qualify for ZEV credits. The rules also give some ZEV credits 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 response to a 2007 review of battery technology and other advanced vehicle technologies by a panel of independent experts, CARB finalized its most recent set of revisions to its ZEV regulations in February 2009, revising requirements for the 2012 model year and beyond. The current rules require increasing volumes of battery electric and other advanced technology vehicles with each passing model year. Ford plans to comply with the ZEV regulations through the sale of a variety of battery-electric vehicles, hybrid vehicles, plug-in hybrid vehicles, and PZEVs. Ford's compliance plan entails significant costs, and has a variety of inherent risks such as uncertain consumer demand for the vehicles and potential component shortages that may make it difficult to produce vehicles in sufficient quantities.
In 2004, CARB enacted standards limiting emissions of GHGs (e.g., carbon dioxide) from all new motor vehicles. CARB asserts that its vehicle emissions regulations provide authority for it to adopt such standards. Because GHG emission standards are functionally equivalent to fuel economy standards, issues associated with motor vehicle GHG regulation are discussed more fully in the "Motor Vehicle Fuel Economy" section below.
The Clean Air Act permits other states that do not meet National Ambient Air Quality Standards ("NAAQS") to adopt California's motor vehicle emissions standards no later than two years before the affected model year. In addition to California, thirteen states, primarily located in the Northeast and Northwest, have adopted the California standards (and eleven of these states also have adopted the ZEV requirements). These thirteen states, together with California, account for more than 30% of Ford's current light-duty vehicle sales volume in the United States. Other states are considering adoption of the California standards. The adoption of California standards by other states presents challenges for manufacturers, including the following: 1) managing fleet average emissions standards and ZEV mandate requirements on a state-by-state basis presents difficulties from the standpoint of planning and distribution; 2) market acceptance of some vehicles required by the ZEV program 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.
CARB has indicated that it is planning a complete overhaul of its LEV, ZEV, and GHG regulations; these changes would begin to take effect in the 2014-2015 model year time frame. CARB is expected to propose "LEV III" regulations in the spring of 2010 and finalize those rules by the spring of 2011. We anticipate that the LEV III rules will contain a host of new and more stringent requirements for tailpipe emissions, evaporative emissions, and component durability. Also in 2010, CARB is expected to propose modifications to its ZEV regulations that would integrate them with its GHG regulations to some extent. The ZEV program is expected to focus on requirements to produce ever-increasing numbers of vehicles using battery-electric, fuel cell, plug-in hybrid, and hydrogen internal combustion engine technologies. Under the new regulatory approach, manufacturers that produce higher numbers of vehicles specified as ZEVs may be allowed to meet less stringent fleet average GHG levels. The revised ZEV regulations would likely take effect beginning with the 2015 model year, replacing the existing rules for that model year and beyond.
In general, compliance with the revised regulations is likely to require costly actions that could have a substantial adverse effect on our sales volume and profits, depending on such factors as the specific emission levels required in the LEV III program and the volumes of advanced-technology vehicles required by the ZEV mandate. We are not able to assess the impact of these pending regulatory changes until specific proposals have been released.
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.
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 require substantial engineering resources to create compliant systems. CARB's OBD rules for vehicles under 14,000 pounds gross vehicle weight include a variety of requirements that phased 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 EPA has adopted light-duty and heavy-duty OBD requirements that generally align with CARB's; the EPA also accepts certification to CARB's OBD requirements.
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 contemplate this difficulty, and, in certain instances, permit manufacturers to comply by paying per-vehicle penalties in lieu of meeting the full array of OBD monitoring requirements. In other cases, CARB regulations provide for automatic recalls of vehicles that fail to comply with specified core OBD requirements. Many states have implemented OBD tests as part of inspection and maintenance programs. Failure of in-service compliance tests could lead to vehicle recalls with substantial costs for related inspections or repairs. CARB is in the process of finalizing amendments to the OBD regulations for 2010-2017 model years; these rules will relax or defer some requirements in the earlier model years, while phasing in some additional requirements in the later model years. CARB also is required to undertake a biennial review of its OBD regulations for light-duty vehicles, and this will occur in 2010. Automobile manufacturers will make suggestions for streamlining and improving the regulations, but it also is possible that CARB may alter the rules in ways that make it more difficult for manufacturers to comply.
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 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 100,000 kilometers of vehicle life. Failure of in-service compliance tests could lead to vehicle recalls with substantial costs for related inspections or repairs.
In 2007, the Commission published a proposed law for Stage V/VI emissions that further restricted the amount of particulate and nitrogen oxide emissions from diesel engines, and tightened some regulations for gasoline engines. Stage V emissions requirements began in September 2009 for vehicle registrations starting in January 2011. Stage VI requirements will apply from September 2014. Stage V particulate standards drove the deployment of particulate filters across diesels. Stage VI further reduces the standard for oxides of nitrogen. This will drive the need for additional diesel exhaust aftertreatment which will add cost and potentially impact the diesel CO2 advantage. These technology requirements add cost and further erode the fuel economy cost/benefit advantage of diesel vehicles.
Vehicles equipped with SCR systems require a driver inducement and warning system to prevent the vehicle being operated for a significant period of time if the reductant (urea) dosing tank is empty. The Stage V/VI emission legislation also mandated the internet provision of all repair information (not just emissions-related); information also must be provided to diagnostic tool manufacturers. Some aspects of this regulatory scheme are still being finalized in an amendment package due for member state voting in early 2010.
ITEM 1. Business (continued)
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 ("UN-ECE") 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 plans to adopt the most recent European standards to be implemented starting from 2012 in large cities. 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 implemented more stringent standards beginning 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.
In South America, Brazil, Argentina and Chile also are introducing more stringent emissions standards. Brazil approved Euro V emissions standards for heavy trucks starting in 2012, and is developing more stringent light vehicle limits starting in 2013. Argentina approved Euro IV emissions standards starting in 2009, and Euro V in 2012. Chile is proposing a new decontamination plan for its metropolitan region with more stringent emission requirements based on U.S. or EU regulations.
Fuel Quality and Content
U.S. Requirements. Currently, EPA regulations allow conventional gasoline to contain up to 10% ethanol ("E10"). We and other manufacturers design gasoline-powered vehicles to be able to run on E10 fuel for the full useful life of the vehicle. In 2008 and 2009, a coalition of ethanol producers filed a petition with the EPA seeking approval for an increase in the amount of allowable ethanol content in gasoline to 15% ("E15"). Under the Clean Air Act, the EPA may approve changes to gasoline only if it determines that the change will not cause or contribute to the failure of emission control devices or systems. The EPA has indicated that it is considering seriously this petition and may approve E15 fuel for use in automobiles manufactured as far back as the 2001 model year. It is not entirely clear how the EPA would implement and enforce such a decision. The automobile industry has concerns about the approval of E15 fuel for use in gasoline-powered vehicles, especially with respect to past model-year vehicles. Ethanol is more corrosive than pure gasoline, and fuel containing more than 10% ethanol may detrimentally affect vehicle durability if the vehicle's fuel system has not been designed to accommodate it. The addition of more ethanol to fuel has the potential to result in increased customer dissatisfaction and/or warranty claims for fuel system failures, OBD system warnings, and other problems. Older vehicles are likely to be more susceptible to such problems. We and others in the automobile industry have commented on the E15 petition, and we will continue to track this issue and provide relevant information to the EPA.
Biomass-based diesel fuel, known as "biodiesel," also is becoming more common in the United States. Biodiesel typically is a combination of petroleum-based diesel fuel and fuel derived from "biomass" (biological material from plant or animal sources). Biodiesel is approved by the EPA as well as a number of U.S. state agencies for use in motor vehicles. While diesel fuel containing 5% biomass-based fuel is now common, higher-concentration blends are becoming more common as well. The content and quality of biodiesel fuels varies considerably. Diesel fuel that contains higher concentrations of biomass-based fuels, and/or that contains lower-quality ingredients, can have adverse effects on the durability and performance of diesel engines and on the exhaust emissions from such engines.
European Requirements. In general, the use of automotive fuel derived from biomass is increasing in the EU, primarily driven by the desire to reduce carbon emissions. Fuel content requirements have been amended to allow "B5" diesel (including up to 5% biomass-based fuel) and "E5" gasoline (including up to 5% ethanol). France is moving forward with the introduction of "E10" gasoline (including up to 10% ethanol), and considering "B8" diesel (including up to 8% biomass-based fuel). In parallel, a renewable energy directive sets out long-term (i.e., 2020) targets for renewable energy. Currently, the automotive industry and the oil industry are engaged in establishing a set of potential fuel scenarios and assessing most likely routes to success. In many other countries, fuel may contain biomass from locally-produced crops, with varying quality and stability; high-quality fuels are essential to support clean vehicles throughout their lifetime.
ITEM 1. Business (continued)
Stationary Source Emissions Control
U.S. Requirements. The Clean Air Act requires the EPA to periodically review and update its 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 increasing the stringency of the NAAQS standard for fine particulate matter (particles 2.5 micrometers in diameter or less), while maintaining the existing standard for coarse particulate matter (particles between 2.5 and 10 micrometers in diameter). The EPA now is in the process of developing new NAAQS for fine particulate matter and ozone. The EPA estimates that the new standard will put approximately 124 counties into non-attainment status for fine particulate matter. Various parties have filed petitions for review of the final particulate matter rules in the U.S. Court of Appeals for the District of Columbia Circuit, in most cases seeking more stringent standards for both fine and coarse particulate matter. In February 2009, the Court ordered the EPA to reconsider the fine particulate standards. The EPA plans to issue a new proposed fine particulate NAAQS standard by July 2010, and a final rule by April 2011. We expect the revised standards to be more stringent than the 2006 standard.
In March 2008, the EPA promulgated rules setting a new ozone NAAQS at a level more stringent than the previous standard. The EPA estimates that as a result of the new standard, the number of counties out of attainment for the ozone NAAQS could triple. A number of states and environmental groups filed suit seeking to compel the EPA to issue an even more stringent ozone standard. The EPA agreed to reconsider the rule and issued a new proposed rule in January 2010. In the new proposal, the EPA is considering a primary NAAQS standard of 0.060 – 0.070 parts per million measured over eight hours (by comparison, the 2008 rule was set at 0.075 parts per million). Depending upon the standard that is ultimately chosen, approximately 76% to 96% of all areas would be in non-attainment. A final rule is expected later this year.
After issuance of the final ozone and particulate matter NAAQS and designation of non-attainment areas, areas that do not meet the standards 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 existence of additional non-attainment areas can lead to increased pressure for more stringent mobile source emissions standards as well. The cost of complying with the requirements necessary to help bring non-attainment areas into compliance with the revised NAAQS could be substantial.
The EPA proposed a new hourly NAAQS for oxides of nitrogen (as measured by ambient concentrations of nitrogen dioxide ("NO2")) in 2009, and adopted a final NAAQS in January 2010. The new rule will result in a substantial number of new non-attainment areas for oxides of nitrogen. The NAAQS also incorporated a plan for monitoring NO2 concentrations using a newly-developed roadside monitoring network. The roadside monitoring plan may tend to impose additional scrutiny on mobile sources of NO2 relative to other sources that contribute to overall ambient levels. The revised NAAQS for oxides of nitrogen may lead to additional NO2 standards for both stationary and mobile sources that could be costly and technologically challenging.
The EPA also issued a final rule on September 22, 2009 establishing a national GHG reporting system. Facilities with production processes that fall into certain industrial source categories, or that contain boilers and process heaters and emit 25,000 or more metric tons per year of GHGs, will be required to submit annual GHG emission reports to the EPA. Facilities subject to the rule were required to begin collecting data as of January 1, 2010, and submit an annual report for calendar year 2010 by March 31, 2011. Many of our facilities in the United States will be required to submit reports. Under the rule, we also will be required to report emissions of certain GHGs from heavy-duty engines and vehicles; these requirements phase in beginning with the 2011 model year.
On September 30, 2009, the EPA issued a proposed rule (the "PSD Tailoring Rule") that would define the circumstances under which certain GHGs would be regulated under the Clean Air Act's New Source Review - Prevention of Significant Deterioration ("PSD") rules and Title V operating permits program. The proposed PSD Tailoring Rule was issued due to concerns that, once the EPA begins regulating GHGs from motor vehicles, GHGs will become regulated air pollutants under PSD and Title V, triggering permit requirements for many small sources not currently regulated under those programs. The PSD Tailoring Rule proposes to address this by setting a 25,000 ton per year GHG emission level as the threshold for inclusion in the PSD and Title V permit programs. The proposal does not specify what the best-available control technology would be for controlling GHG emissions, but indicates that the agency would evaluate this and other applicability issues during the first five years after issuance of the final rule. After this five-year period, the EPA would consider lowering the applicability threshold.
ITEM 1. Business (continued)
Depending upon the scope of the final PSD Tailoring Rule, a large percentage of our facilities could be required to obtain PSD and Title V permits for GHG emissions. These requirements could lead to the installation of additional pollution control equipment, potential delay in the issuance of permits due to changes at a facility, and increased operating costs.
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 and Ford Otomotiv Sanayi Anonim Sirketi ("Ford Otosan") in Turkey. 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.
The European Emission Trading Scheme requires large emitters of carbon dioxide within the EU to monitor and annually report CO2 emissions, and each is obliged every year to return an amount of emission allowances to the government that is equivalent to its CO2 emissions in that year. The impact of this regulation on Ford Europe primarily involves our on-site combustion plants, and we expect that compliance with this regulation may be costly as the system foresees stringent CO2 emission reductions in progressive stages. 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 February 12, 2010, there were pending before NHTSA six investigations relating to alleged safety defects or potential compliance issues in our vehicles.
The Safe, Accountable, Flexible, and Efficient Transportation Equity Act: A Legacy for Users was signed into law in 2005; the Cameron Gulbransen Kids Transportation Safety Act of 2007 mandates that NHTSA enact regulations related to rearward visibility and brake-to-shift interlock, and mandates that NHTSA consider regulations related to automatic reversal functions on power windows. Both Acts establish substantive, safety-related rulemaking mandates for NHTSA that already have resulted in or will result in new regulations and product content requirements. In 2009, NHTSA published a final rule related to roof strength that increased the load requirements, added new performance requirements, and extended the rule's application to a wider range of vehicles. Also in 2009, NHTSA issued Notices of Proposed Rulemaking concerning ejection mitigation, automatic reversal function on power windows, and rear visibility (advance notice provided, with the final notice expected in the spring of 2010). In addition, the Department of Transportation has identified driver distraction as its top priority in 2010, and new regulatory activity in this area is anticipated. Each of these regulatory actions may add substantial cost to the design and development of new products, depending on the final rules adopted.
Foreign Requirements. Canada, the EU, and countries in South America, the Middle East, and Asia Pacific Africa markets also have safety standards and regulations applicable to motor vehicles, and are likely to adopt additional or more stringent requirements in the future. Recent examples of such legislation for the EU include the adoption and mandatory fitment requirement for the new UN-ECE regulation for tire-pressure monitoring systems ("TPMS"); this regulation differs from the North American regulation in that it addresses both safety and environmental aspects of TPMS. In addition, the European General Safety Regulation was introduced that replaces existing European Directives with UN-ECE regulations. These UN-ECE regulations will be required for the European Type Approval process. Some implementing measures are still under development and expected to be finalized by mid-2010; this includes new definitions for masses and dimensions, and for vehicle categories. EU regulators also are expected to focus on active safety features such as lane departure warning systems, electronic stability control, and automatic brake assist. Globally, governments generally have been adopting EU-based regulations with minor variations to address local concerns. The difference between North American and EU-based regulations adds complexity and costs to the development of global platform vehicles; we continue to support efforts to harmonize regulations to reduce vehicle design complexity while providing a common level of safety performance.
ITEM 1. Business (continued)
Global Technical Regulations ("GTRs") developed under the auspices of the United Nations ("UN") continue to have increasing impact on automotive safety activities. The most recently adopted GTRs on Electronic Stability Control, Head Restraints, and Pedestrian Protection by the UN "World Forum for the Harmonisation of Vehicle Regulations" are now in different stages of national implementation. While global harmonization is fundamentally supported by the auto industry in order to reduce complexity, national implementation yet may introduce subtle differences into the system.
In the Asia Pacific Africa region, China is expected to focus on parts-marking and anti-theft requirements. Countries within this region continue to adopt European requirements, with possible local modifications. Among other measures, Japanese regulators are pursuing accident avoidance measures for vulnerable road users.
South American countries are implementing requirements for features such as airbags, safety belts, and anti-lock braking systems ("ABS") consistent with U.S. and European requirements. Examples of more stringent safety requirements in South America include the approval in Brazil of more severe impact requirements, the mandatory use of front airbags and ABS, and the introduction of mandatory vehicle tracking and blocking systems. In Argentina, regulations will address mandatory front airbags and ABS.
Canadian safety legislation and regulations are similar to those in the United States, and the differences that do exist generally have not prevented the production of common product for both markets. Recent amendments to Canadian standards have incorporated UN-ECE standards as a compliance option, where equivalency exists.
For each of these markets, the possibility of more stringent or different requirements exists, and the cost to comply with new standards may be substantial.
Motor Vehicle Fuel Economy
There are ever-increasing demands from regulators, public interest groups, and consumers for improvements in motor vehicle fuel economy, for a variety of reasons. These include concerns over U.S. energy security, concerns over GHG emissions, and consumer preferences for more fuel-efficient vehicles. In recent years, we have made significant changes to our product cycle plan to improve the overall fuel economy of vehicles we produce in upcoming model years. These cycle plan changes involve both the deployment of various fuel-saving technologies, some of which have been announced publicly, and changes to the overall fleet mix of vehicles we offer, in response to a recent increase in demand for smaller vehicles. There are limits on our ability to achieve fuel economy improvements over a given time frame, however, primarily related to the cost and effectiveness of available technologies, consumer acceptance of new technologies and changes in vehicle mix, 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, engineering and financial resources necessary to deploy new technologies across a wide range of products and powertrains in a short time.
Our ability to comply with a given set of fuel economy standards (including GHG emissions standards, which are functionally equivalent to fuel economy standards), depends on a variety of factors, including: 1) prevailing economic conditions, including fluctuations in fuel prices; 2) the alignment of the standards with actual consumer demand for vehicles; and 3) adequate lead time to make the necessary product changes. Consumer demand for vehicles tends to fluctuate based on a variety of external factors. Consumers are more likely to pay for vehicles with fuel-efficient technologies (such as hybrid-electric vehicles) when the economy is robust and fuel prices are relatively high. When the economy is in recession and/or fuel prices are relatively low, many consumers may put off new vehicle purchases altogether, and among those who do purchase new vehicles, demand for higher-cost technologies is not likely to be strong. If consumers 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 GHG 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).
ITEM 1. Business (continued)
U.S. Requirements – Federal Standards. Federal law requires that light-duty 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; light truck standards are set by NHTSA under a rulemaking process. 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 increasingly stringent with each new model year. Through 2010, manufacturers have the option of complying with the "reformed" program or an alternative set of "unreformed" standards promulgated by NHTSA. Beginning with the 2011 model year, all manufacturers must comply under the reformed program. Also 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).
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 United States achieves a 35 mile per gallon industry 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 2008, NHTSA issued a Notice of Proposed Rulemaking to establish CAFE standards for the 2011-2015 model years, but the Bush Administration decided not to promulgate a final rule, and it was left to the incoming Obama Administration to establish CAFE standards for these model years. In March 2009, NHTSA published a final rule setting CAFE standards for the 2011 model year, and indicated that it would address 2012-2016 model year CAFE standards in a separate rulemaking.
Pressure to increase CAFE standards stems in part from concerns about the impact of carbon dioxide and other GHG 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, because the amount of carbon dioxide emitted by a vehicle is directly proportional to the amount of fuel consumed. The EPA denied the petition on the grounds that the Clean Air Act does not authorize the EPA to regulate GHG emissions because they did not constitute "air pollutants," 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.
The matter was eventually brought before the U.S. Supreme Court, which ruled that GHGs did constitute "air pollutants" subject to regulation by the EPA pursuant to the Clean Air Act. Upon taking office, the Obama Administration indicated its intention to promulgate rules to control mobile source GHG emissions. Under the Clean Air Act, EPA must issue a determination that GHGs endanger the public health and welfare in order for EPA to finalize GHG regulations for both mobile and stationary sources. In December 2009, EPA issued its endangerment finding for GHGs. In early 2010, several industry groups filed a petition for review of the endangerment finding; nevertheless, EPA is proceeding with rulemaking activity to regulate GHGs.
As described more fully below, the Obama Administration has brokered an agreement in principle for a national program of mobile source CAFE and GHG regulation for light-duty vehicles for the 2012-2016 model years. Before describing this program, it is necessary to discuss the GHG standards for light-duty vehicles promulgated by California and other states.
To date, fuel economy regulations have applied primarily to light-duty vehicles. Energy legislation enacted in 2007 directed the National Academy of Sciences ("NAS") to undertake a study of the fuel efficiency of heavy-duty vehicles (vehicles with a gross vehicle weight rating over 8,500 pounds). Once the NAS study is completed, the law directs NHTSA to develop fuel efficiency regulations for these vehicles. Such regulations are unlikely to take effect before the 2016 model year. Separately, the EPA has begun work on the development of GHG standards for heavy-duty vehicles. The EPA has indicated that it will release a set of proposed rules in 2010, and the GHG standards for heavy-duty vehicles may take effect as early as the 2014 model year.
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 GHG standards for light-duty vehicles beginning with model year 2009. In September 2004, CARB adopted California GHG 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 imposed standards 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.
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. After California's request for a waiver of its AB 1493 standards was initially denied in 2008, the Obama Administration granted the waiver in 2009. The grant of the waiver is being challenged in federal court by the National Automobile Dealers Association and the U.S. Chamber of Commerce. Under the Clean Air Act, other states may adopt and enforce emissions regulations for which California receives a waiver. The following states have adopted CARB's GHG standards: New York, Massachusetts, Maine, Vermont, Rhode Island, Connecticut, New Jersey, Pennsylvania, Oregon, Washington, Maryland, New Mexico, and Arizona. Several other states are known to be considering the adoption of such rules.
The prospect of state-by-state regulation of motor vehicle GHG emissions and fuel economy is very troubling to the automobile industry, which has significant concerns about an unwieldy patchwork of regulations and the likely need to implement product restrictions in some states in order to comply. Concerns about product restrictions were driven in part by the fact that the AB 1493 standards became increasingly more stringent as time passed, with especially steep increases in some model years. In 2004, the Alliance and other plaintiffs filed suit in federal district court in California, seeking to overturn the AB 1493 standards on the grounds that they are preempted by the federal CAFE law. Similar suits were filed in Vermont and Rhode Island challenging those states' adoption of California's AB 1493 rules. District Courts in California and Vermont ruled that the state GHG rules were not preempted; those decisions were appealed by the auto industry. The District Court in Rhode Island has not yet issued a ruling.
U.S. Requirements – "One National Standard" for Model Years 2012-2016. By early 2009, it had become apparent that the United States was headed toward a series of overlapping regulations aimed at motor vehicle fuel economy and GHGs. NHTSA was already setting federal CAFE standards, EPA was planning to regulate motor vehicle GHG emissions at the federal level, and California and other states were getting set to regulate motor vehicle emissions at the state level if and when a Clean Air Act waiver was granted. In order to avoid this confusing patchwork of regulations, President Obama announced in May 2009 an agreement in principle among the automobile industry, the federal government, and the state of California concerning motor vehicle GHG emissions and fuel economy regulations. Under the agreement in principle, California would enforce its GHG standards for the 2009-2011 model years, and defer to a set of federal standards for the 2012-2016 model years. With respect to the 2009-2011 model years, California agreed to modify its regulations so that: 1) manufacturers would be able to use federal test procedures to determine compliance with California's standards, and 2) compliance would be determined based on the fleet average emissions across all states that have adopted the California standards. With respect to the 2012-2016 model years, EPA and NHTSA agreed to conduct joint rulemaking to establish GHG standards and fuel economy standards that align with each other. California agreed to modify its regulations to provide that compliance with the 2012-2016 federal requirements will constitute compliance with the California regulations for California and any states that have adopted California requirements. Manufacturers also agreed to seek an immediate stay of pending litigation challenging EPA's waiver decision and the right of states to issue motor vehicle GHG standards. Assuming California and the federal government carry out their obligations under the agreement in principle, manufacturers agreed to dismiss the pending litigation.
Since the May 2009 announcement, various steps have been taken to implement the agreement in principle. The automobile industry sought and obtained a stay of the federal court litigation in California, Vermont, and Rhode Island, pending the issuance of final rules consistent with the agreement in principle. The EPA has issued a revised decision granting a Clean Air Act waiver for California's GHG regulations. The automotive industry has refrained from challenging that decision, although the waiver decision has been challenged by the National Automobile Dealers Association and the U.S. Chamber of Commerce. CARB has adopted some of the modifications to its regulations that will be required to implement the agreement in principle, with additional modifications expected in 2010. The EPA and NHTSA have promulgated a joint Notice of Proposed Rulemaking setting forth their proposal for harmonizing GHG and fuel economy standards for the 2012-2016 model years, and interested members of the public, including Ford and the Alliance, have filed comments on the proposed rules. The rules are expected to be finalized on or before April 1, 2010.
ITEM 1. Business (continued)
The agreement in principle would result in federal GHG and fuel economy standards that are very challenging. The proposed rules would require new light-duty vehicles to achieve an industry average fuel economy of approximately 35.5 miles per gallon by the 2016 model year. Assuming the agreement in principle is implemented as envisioned, we believe that we will be able to comply with the California GHG standards for the 2009-2011 period, and the harmonized federal CAFE/GHG standards for the 2012-2016 period, as a result of aggressive actions to improve fuel economy built into our cycle plan. In contrast, we were projecting that we would be unable to comply with the state GHG standards throughout the 2012-2016 period without undertaking costly product restrictions in some states. Key differences that enable us to project compliance with the national program include: 1) the national program standards, although very stringent, do not increase as steeply as the state standards they are replacing; and 2) the national program allows us to determine compliance based on nationwide sales rather than state-by-state sales. The ability to average across the nation eliminates state-to-state sales variability and is a critical element for Ford and the auto industry.
The agreement in principle does not address what will happen in the 2017 model year and beyond. California has already indicated that it will promulgate a new set of state-level GHG standards that will take effect beginning with the 2017 model year; we expect that a proposed rule will be issued in 2010. Moreover, there is no commitment that NHTSA and the EPA will continue to harmonize the federal CAFE and GHG standards in 2017 and beyond. Thus, it is possible that there will be a return to three different and conflicting regimes for regulating fuel economy and GHG emissions in 2017. Compliance with all three, or even two, of these regimes would at best add enormous complexity to our planning processes, and at worst be virtually impossible. If any of one these regulatory regimes, or a combination of them, impose and enforce extreme fuel economy or GHG standards, we likely would be forced to take various actions that could have substantial adverse effects on our sales volume and profits. Such actions likely would include restricting offerings of selected engines and popular options; increasing market support programs for our most fuel-efficient cars and light trucks; and ultimately curtailing the production and sale of certain vehicles such as family-size, luxury, and high-performance cars, utilities, and full-size light trucks, in order to maintain compliance. These actions might need to occur on a state-by-state basis, in response to the rules adopted by California and other states, or they may need to be taken at the national level if either the CAFE standards or the EPA GHG standards are excessively stringent. Therefore, we believe that for 2017 and beyond, it is essential to maintain a single national program that regulates motor vehicle GHGs and fuel economy in a harmonized and workable fashion. We will work toward legislative and regulatory solutions that would establish such a national program on a permanent basis.
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 GHG emissions be capped at 1990 levels by the year 2020, which would represent a significant reduction from current levels. It also requires the monitoring and annual reporting of GHG emissions by all "significant" sources, and delegates authority to CARB to develop and implement GHG 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 GHG emissions to achieve equivalent or greater reductions than mandated by AB 1493. Although the full ramifications of AB 32 are not known, CARB has issued proposed rules under AB 32 that would require so-called "cool glazing" for automotive glass. The glazing requirements are intended to promote lower interior temperatures in vehicles, thereby reducing the air conditioning load and leading to fewer GHG emissions. The current proposal would require significant expenditures of resources to meet standards that would take effect beginning in the 2012 model year, and increase in stringency for the 2016 model year. We are evaluating our ability to comply with the proposed standards, and will comment on the proposal along with the rest of the automobile industry. CARB is expected to finalize its regulations in 2010.
European Requirements. In December 2008, the EU approved a regulation of passenger car carbon dioxide beginning in 2012 which limits the industry fleet average to a maximum of 130 g/km, using a sliding scale based on vehicle weight. This regulation provides different targets for each manufacturer based on its respective fleet of vehicles according to vehicle weight and carbon dioxide output. Limited credits are available for CO2 off-cycle actions ("eco-innovations"), certain alternative fuels, and vehicles with CO2 emissions below 50 g/km. For manufacturers failing to meet targets, a penalty system will apply with fees ranging from €3 to €95 per each g/km shortfall in the years 2012-18, and €95 for each g/km shortfall for 2019. Manufacturers would be permitted to use a pooling agreement between wholly-owned brands to share the burden. Further pooling agreements between different manufacturers are also possible, although it is not clear that they will be of much practical benefit under the regulations. For 2020, an industry target of 95 g/km has been set. This target will be further detailed in a review in 2013.
ITEM 1. Business (continued)
In separate legislation, so-called "complementary measures" are expected. These may include, for example, tire-related requirements and requirements related to gearshift indicators, fuel economy indicators, and more-efficient low-CO2 mobile air conditioning systems. These proposals are likely to be finalized in 2010. The Commission has proposed a target for commercial light duty vehicles to be at an industry average of 175 g/km (with phase-in 2014 – 2016), and potentially more stringent long-term targets (proposed to be at 135 g/km in 2020); several EU Members have raised concerns about these targets. The EU proposal also includes a penalty system, "super-credits" for vehicles below 50 g/km, and limited credits for CO2 off-cycle actions (“eco-innovations”).
Some European countries have implemented or are still considering other initiatives for reducing carbon dioxide emissions from motor vehicles, including fiscal measures. For example, the United Kingdom, France, Germany, Spain, Portugal, and the Netherlands among others have introduced taxation based on carbon dioxide emissions. The EU CO2 requirements are likely to trigger further measures.
Other National Requirements. Some Asian countries (such as China, Japan, India, South Korea, and Taiwan) also have adopted fuel efficiency or labeling targets. For example, Japan has fuel efficiency targets for 2015 which are even more stringent than the 2010 targets, with incentives for early adoption. China implemented second-stage fuel economy targets from 2008, and is working on the third stage for 2012 phase-in. All of these fuel efficiency targets will impact the cost of technology of our models in the future.
The Canadian federal government announced that vehicle GHG emissions will be regulated under the Canadian Environmental Protection Act, beginning with the 2011 model year. The standards will track the new U.S. CAFE standards for the 2011 model year and U.S. EPA GHG regulations for 2012 through 2016 model years. Several provinces, including British Columbia and Nova Scotia, have publicly announced an intention to impose GHG standards at the provincial level, likely modeled after California's AB 1493 approach. In December 2009, Quebec enacted province-specific regulations setting fleet average GHG standards for the 2010-2016 model years effective January 14, 2010. Although the announcement indicated that Quebec's standards are based on the California AB 1493 rules, there are a number of key differences. The Quebec program appears to define vehicle fleets differently than either the U.S. federal government or California, does not apply attribute-based standards, does not allow for alternative means of compliance (e.g., industry credit for new and advanced technologies), and does not take into account the fact that California has entered into an agreement in principle supporting "One National Program" in the United States for the 2012-2016 model years. If a manufacturer fails to meet the required fleet average standard, the provincial government has established a formula to determine the level of non-compliance within the fleet and impose a fee. We are analyzing the new regulations, and anticipate that some level of fees may be imposed under the regulations as written. Quebec recently indicated, however, that it will publish interpretation guidelines designed to clarify that the definition of vehicle fleets is intended to match California's, which would reduce significantly the potential for incurring fees under the new regulation. In addition, the provincial government has indicated that it will reevaluate the situation when the Canadian federal regulation is in place and, if the federal requirements are satisfactory, accept federal compliance as compliance with the Quebec requirements.
Chemical Regulation and Substance Restrictions
U.S. Requirements. Several states are considering moving beyond a substance-by-substance approach to managing substances of concern, and are moving towards adopting green chemistry legislation that give state governments broad regulatory authority to determine, prioritize, and manage toxic substances. In 2008, California became the first state to enact a broad Green Chemistry Program, which will commence regulations in 2011. This new law may impose new vehicle end-of-life responsibilities on vehicle manufacturers, and restrict, ban, or require labeling of certain substances. This broad authority to regulate substances could require changes in product chemistry, and greater complication of fleet mix. Other states, such as Maine, are considering so-called "product stewardship" bills that would require sellers of products to establish elaborate plans, approved by the state agency, to address life-cycle impacts of each product. These programs would impose extensive reporting and auditing requirements, along with penalties for non-compliance. If enacted, compliance with such legislation would be costly and resource-intensive.
ITEM 1. Business (continued)
European Requirements. The Commission has implemented its regulatory framework 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 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-driven" to "REACH-driven" activities. We and our suppliers have registered those chemicals that were identified to fall within this requirement. The regulation also will 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 strategy together with the global automotive industry.
The European End-of-Life Vehicle directive and EU Battery directive prohibit the use of the heavy metals lead, cadmium, hexavalent chromium, and mercury with limited exceptions that are regularly scrutinized. These regulations also include broad manufacturer responsibility for disposing of vehicle parts and substances, including taking vehicles back without charge for disposal and recycling requirements. This legislation has triggered similar regulatory actions around the globe, including, for example, in China, Korea, and possibly India in the near future. Other European regulatory developments will ban the use of refrigerants with a "global warming potential" higher than 150 on the European scale (which would include the refrigerant commonly in use) beginning in 2011 in new vehicle models and in 2017 for all new vehicles, which some other governments, such as Japan, have been closely monitoring and are likely to adopt in some form. This European restriction is expected to lead to a general change in refrigerants for future vehicles worldwide.
Regulations requiring a globally-harmonized system of classification and labeling of chemicals also took effect in January 2009. This regulation is the implementation of the UN regulation UN-GHS, and should harmonize the classification and labeling of chemicals worldwide with impact of existing storage facilities and labeling.
Pollution Control Costs
During the period 2010 through 2014, we expect to spend approximately $170 million on our North American and European facilities to comply with stationary source air and water pollution and hazardous waste control standards that are now in effect or are scheduled to come into effect during this period. Of this total, we currently estimate spending approximately $29 million in 2010 and $35 million in 2011. These amounts exclude projections for Volvo, which is held for sale. Specific environmental expenses are difficult to isolate because expenditures may be made for more than one purpose, making precise classification difficult.
The approximate number of individuals employed by us and entities that we consolidated (including entities that we did not control) as of December 31, 2009 and 2008 was as follows (in thousands):
The year-over-year decrease in employment levels primarily reflects our implementation of global personnel-reduction programs.
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 Auto 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.
ITEM 1. Business (continued)
We have entered into collective bargaining agreements with the UAW, and the National Automobile, Aerospace, Transportation and General Workers Union of Canada ("CAW"). In 2007, we negotiated with the UAW a transformational agreement, enabling us to improve our competitiveness and establishing a Voluntary Employee Benefit Association ("VEBA") trust ("UAW VEBA Trust") to fund our retiree health care obligations.
In March 2009, Ford-UAW membership ratified modifications to the existing collective bargaining agreement that significantly improved our competitiveness, saving us up to $500 million annually and bringing us near to competitive parity with the U.S. operations of foreign-owned automakers. The operational changes affected wage and benefit provisions, productivity, job security programs, and capacity actions, allowing us to increase manufacturing efficiency and flexibility. In addition, modifications to the UAW VEBA Trust allowed for smoothing of payment obligations and provided us the option to satisfy up to approximately 50% of our future payment obligations to the UAW VEBA Trust in Ford Common Stock; see "Liquidity and Capital Resources" in Item 7 and Note 18 of the Notes to the Financial Statements for additional discussion of the UAW VEBA Trust.
On November 1, 2009, the CAW announced that a majority of its members employed by Ford Canada had voted to ratify modifications to the terms of the existing collective bargaining agreement between Ford Canada and the CAW. The modifications are patterned off of the modifications agreed to by the CAW for its agreements with the Canadian operations of General Motors Company and Chrysler LLC and are expected to result in annual cost savings. The agreement also confirms the end of production at the St. Thomas Assembly Plant in 2011.
On November 2, 2009, the UAW announced that a majority of its members employed by Ford had voted against ratification of a tentative agreement that would have further modified the terms of the existing collective bargaining agreement between Ford and the UAW. These latest modifications were designed to closely match the modified collective bargaining agreements between the UAW and our domestic competitors, General Motors and Chrysler. Among the proposed modifications was a provision that would have precluded any strike action relating to improvements in wages and benefits during the negotiation of a new collective bargaining agreement upon expiration of the current agreement, and would have subjected disputes regarding improvements in wages and benefits to binding arbitration, to determine competitiveness based on wages and benefits paid by other automotive manufacturers operating in the United States.
Even with recent modifications, our agreements with the UAW and CAW provide for guaranteed wage and benefit levels for the term of the respective agreements, and a degree of 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. Our collective bargaining agreement with the UAW expires on September 14, 2011; our collective bargaining agreement with the CAW expires on September 14, 2012.
In 2009, we negotiated new collective bargaining agreements with labor unions in Argentina, Australia, Belgium, Brazil, Britain, France, Germany, Mexico, New Zealand, Russia, Spain and Taiwan. We began negotiations in Thailand in the fourth quarter of 2009 and expect to complete the negotiations in 2010.
Additionally, in 2010 we are or will be negotiating new collective bargaining agreements with labor unions in Australia, Brazil, France, Germany, Mexico, New Zealand, Russia, South Africa, Spain, Taiwan, Thailand and Venezuela.
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, England; Gothenburg, Sweden (part of our held-for-sale Volvo operations); 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.
We recorded $4.9 billion, $7.3 billion, and $7.5 billion of engineering, research, and development costs that we sponsored during 2009, 2008, and 2007 respectively. The decreased costs in 2009 compared with 2008 primarily reflect efficiencies in our global product development, manufacturing, and related processes, favorable currency exchange, and the non-recurrence of costs related to our former Jaguar Land Rover operations. Research and development costs sponsored by third parties during 2009 were 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:
Further declines in industry sales volume, particularly in the United States or Europe, due to financial crisis, deepening recession, geo-political events, or other factors.> The global automotive industry is estimated to have shrunk to 64.3 million units in 2009, a year-over-year decline of about 4 million units. Beginning in the fall of 2008, the global economy entered a financial crisis and severe recession, putting significant pressure on Ford and the automotive industry generally. These economic conditions dramatically reduced industry sales volume in the United States and Europe, in particular, and began to slow growth in other markets around the world. In the United States, industry sales volume declined from 16.5 million units in 2007, to 13.5 million units in 2008, to 10.6 million units in 2009. For the 19 markets we track in Europe, industry sales volume declined from 18 million units in 2007, to 16.6 million units in 2008, to 15.8 million units in 2009. In the United States and especially in Europe, 2009 industry sales volume benefited from government incentive programs that have expired or are expiring, and could lower demand temporarily. Our current planning assumptions for 2010 industry sales volume in the United States and for the 19 markets we track in Europe (which take into account our estimate of the impact of the 2009 government incentive programs) are a range of 11.5 million units to 12.5 million units in the United States and 13.5 million units to 14.5 million units in Europe.
Because we, like other manufacturers, have a high proportion of fixed costs, relatively small changes in industry sales volume can have a substantial effect on our cash flow and profitability. If industry vehicle sales were to decline to levels significantly below our planning assumptions, particularly in the United States or Europe, due to financial crisis, deepening recession, geo-political events, or other factors, our financial condition and results of operations would be substantially adversely affected. For discussion of economic trends, see the "Overview" section of Item 7.
Decline in market share. >Between 1995 and 2008, our full-year U.S. market share declined each year. Recently, our full-year U.S. market share declined from 18% in 2004 to 14.2% in 2008. Market share declines and resulting volume reductions in any of our major markets would have an adverse impact on our financial condition and results of operations. We are working through our One Ford plan to stabilize market share and reduce capacity over time, and increased full-year U.S. market share during 2009 to 15.3%, but we cannot guarantee that our efforts will be successful in the long term. Decline in our market share could have a substantial adverse effect on our financial condition and results of operations.
Lower-than-anticipated market acceptance of new or existing products. >Although we conduct extensive market research before launching new or refreshed vehicles, many factors both within and outside of our control affect the success of new or existing products in the marketplace. Offering highly desirable vehicles that customers want and value can mitigate the risks of increasing price competition and declining demand, but vehicles that are perceived to be less desirable (whether in terms of price, quality, styling, safety, overall value, fuel efficiency, or other attributes) can exacerbate these risks. For example, if a new model were to experience quality issues at the time of launch, the vehicle's perceived quality could be affected even after the issues had been corrected, resulting in lower sales volumes, market share, and profitability.
An increase in or acceleration of market shift beyond our current planning assumptions from sales of trucks, medium- and large-sized utilities, or other more profitable vehicles, particularly in the United States. >Trucks and medium- and large-sized utilities historically have represented some of our most profitable vehicle segments, and the segments in which we have had our highest market share. In recent years, the general shift in consumer preferences away from medium- and large-sized utilities and trucks adversely affected our overall market share and profitability. A continuation or acceleration of this general shift in consumer preferences – or a similar shift in consumer preferences away from other more profitable vehicle sales – that is greater than our current planning assumption, whether because of fuel prices, declines in the construction industry, governmental actions or incentives, or other reasons, could have a substantial adverse effect on our financial condition and results of operations.
ITEM 1A. Risk Factors (continued)
A return to elevated gasoline prices, as well as the potential for volatile prices or reduced availability>. A return to elevated gas prices, as well as the potential for volatility in gas prices 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, as well as volatility in demand for these segments, could have a substantial adverse effect on our financial condition and results of operations.
Continued or increased price competition resulting from industry overcapacity, currency fluctuations, or other factors. The global automotive industry is intensely competitive, with manufacturing capacity far exceeding current demand. According to CSM Worldwide's January 2010 report, the global automotive industry is estimated to have had excess capacity of 29 million units in 2009. Industry overcapacity has resulted in many manufacturers offering marketing incentives on vehicles in an attempt to maintain and grow market share; these incentives historically have included a combination of subsidized financing or leasing programs, price rebates, and other incentives. As a result, we are not necessarily able to set our prices to offset higher costs of marketing incentives or other cost increases, or the impact of adverse currency fluctuations in either the U.S. or European markets. While we and our domestic competitors have initiated plans to reduce capacity significantly, successful reductions may require further cooperation of organized labor, take several years to complete, or only partially address the industry's overcapacity problems, particularly in light of recent, dramatic decreases in industry sales volume. A continuation or increase in excess capacity could have a substantial adverse effect on our financial condition and results of operations.
Adverse effects from the bankruptcy, insolvency, or government-funded restructuring of, change in ownership or control of, or alliances entered into by a major competitor. >Prior to the government-funded bankruptcy of our domestic competitors General Motors and Chrysler, each of the domestic automakers had substantial "legacy" costs (principally related to employee benefits), as well as a substantial amount of debt. These conditions historically had put each of us at a competitive disadvantage to foreign competitors who began manufacturing in the United States more recently. The government-funded bankruptcy of our domestic competitors has allowed them to eliminate or substantially reduce contractual obligations, including significant amounts of debt, and avoid liabilities. The elimination or reduction of these obligations (including restructuring brands and dealer networks), combined with access to low-cost government funding, could have an adverse effect on our competitive position and results of operations.
A prolonged disruption of the debt and securitization markets>. Government-sponsored securitization funding programs (e.g., the U.S. Federal Reserve's Commercial Paper Funding Facility and Term Asset-Backed Securities Loan Facility) intended to improve conditions in the credit markets are scheduled to expire in 2010. If, due to the expiration of such programs or otherwise, there is a prolonged disruption of the debt and securitization markets, Ford Credit would consider further reducing the amount of receivables it purchases or originates. A significant reduction in the amount of receivables Ford Credit purchases or originates would significantly reduce its ongoing profits, and could adversely affect its ability to support the sale of Ford vehicles. To the extent Ford Credit's ability to provide wholesale financing to our dealers or retail financing to those dealers' customers is limited, Ford's ability to sell vehicles would be adversely affected.
Fluctuations in foreign currency exchange rates, commodity prices, and interest rates. >As a resource-intensive manufacturing operation, we are exposed to a variety of market and asset risks, including the effects of changes in foreign currency exchange rates, commodity prices, and interest rates. These risks affect our Automotive and Financial Services sectors. We monitor and manage these exposures as an integral part of our overall risk management program, which recognizes the unpredictability of markets and seeks to reduce the potentially adverse effects on our business. Nevertheless, changes in currency exchange rates, commodity prices, and interest rates cannot always be predicted or hedged. In addition, because of intense price competition and our high level of fixed costs, we may not be able to address such changes even if they are foreseeable. Further, our ability to obtain derivatives to manage financial market risk continues to be constrained. As a result, substantial unfavorable changes in foreign currency exchange rates, commodity prices or interest rates could have a substantial adverse effect on our financial condition and results of operations. See Item 7A for additional discussion of currency, commodity price and interest rate risks.
Economic distress of suppliers that may require us to provide substantial financial support or take other measures to ensure supplies of components or materials and could increase our costs, affect our liquidity, or cause production disruptions. Our industry is highly interdependent, with broad overlap of supplier and dealer networks among manufacturers, such that the uncontrolled bankruptcy or insolvency of a major competitor or major suppliers could threaten our supplier or dealer network and thus pose a threat to us as well. Even in the absence of such an event, our supply base has experienced increased economic distress due to the sudden and substantial drop in industry sales volumes that has affected all manufacturers. Dramatically lower industry sales volume made existing debt obligations and fixed cost levels difficult for many suppliers to manage.
ITEM 1A. Risk Factors (continued)
These factors have increased pressure on the supply base, and, as a result, suppliers not only have been less willing to reduce prices, but some have requested direct or indirect price increases, as well as new and shorter payment terms. Suppliers also are exiting certain lines of business or closing facilities, which results in additional costs associated with transitioning to new suppliers and which may cause supply disruptions that could interfere with our production during any such transitional period. In addition, in the past we have taken and may continue to take actions to provide financial assistance to certain suppliers to ensure an uninterrupted supply of materials and components.
Single-source supply of components or materials.> Many components used in our vehicles are available only from a single supplier and cannot be quickly or inexpensively re-sourced to another supplier due to long lead times and new contractual commitments that may be required by another supplier in order to provide the components or materials. In addition to the risks described above regarding interruption of supplies, which are exacerbated in the case of single-source suppliers, the exclusive supplier of a key component potentially could exert significant bargaining power over price, quality, warranty claims, or other terms relating to a component.
Labor or other constraints on our ability to restructure our business. >Substantially all of the hourly employees in our Automotive operations in the United States and Canada are represented by unions and covered by collective bargaining agreements. We negotiated a new agreement with the UAW in 2007 and with the CAW in 2008, which expire in September 2011 and September 2012, respectively. Although these transformational agreements were amended during 2009 to bring us much of the way to parity with our competitors, the agreements still provide for guaranteed wage and benefit levels throughout their terms and a degree of employment security, subject to certain conditions. As a practical matter, these agreements restrict our ability to close plants and divest businesses during the terms of the agreements. These and other provisions within the UAW and CAW agreements may impede our ability to restructure our business successfully to compete more effectively in today's global marketplace. Additionally, the rejection by Ford-UAW membership of further modifications to the agreement in late 2009 may put us at a disadvantage to our domestic competitors during the next round of labor negotiations; see "Employment Data" in "Item 1. Business" ("Item 1") for additional discussion.
Work stoppages at Ford or supplier facilities or other interruptions of production.> A work stoppage or other interruption of production could occur at Ford or supplier facilities as a result of disputes under existing collective bargaining agreements with labor unions or in connection with negotiations of new collective bargaining agreements, as a result of supplier financial distress, or for other reasons. For example, many suppliers are experiencing financial distress due to decreasing production volume and increasing prices for raw materials, jeopardizing their ability to produce parts for us. A work stoppage or interruption of production at Ford or supplier facilities due to labor disputes, shortages of supplies, or any other reason (including but not limited to tight credit markets or other financial distress, natural or man-made disasters, or production difficulties) could substantially adversely affect our financial condition and results of operations.
Substantial pension and postretirement health care and life insurance liabilities impairing our liquidity or financial condition. >We have two principal qualified defined benefit retirement plans in the United States. The Ford-UAW Retirement Plan covers hourly employees represented by the UAW, and the General Retirement Plan covers substantially all other Ford employees in the United States hired on or before December 31, 2003. The hourly plan provides noncontributory benefits related to employee service. The salaried plan provides similar noncontributory benefits and contributory benefits related to pay and service. In addition, we and certain of our subsidiaries sponsor plans to provide other postretirement benefits for retired employees, primarily health care and life insurance benefits. See Note 18 of the Notes to the Financial Statements for more information about these plans, including funded status. These benefit plans impose significant liabilities on us which are not fully funded and will require additional cash contributions by us, which could impair our liquidity.
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 such circumstance 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 would terminate any of our plans, in the event that our U.S. pension plans were 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 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 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.
Worse-than-assumed economic and demographic experience for our postretirement benefit plans (e.g., discount rates or investment returns). >The measurement of our obligations, costs, and liabilities associated with benefits pursuant to our postretirement benefit plans requires that we estimate the present values of projected future payments to all participants. We use many assumptions in calculating these estimates, including assumptions related to discount rates, investment returns on designated plan assets, and demographic experience (e.g., mortality and retirement rates). To the extent actual results are less favorable than our assumptions, there could be a substantial adverse impact on our financial condition and results of operations. For additional discussion of our assumptions, see the "Critical Accounting Estimates" discussion in Item 7, and Note 18 of the Notes to Financial Statements.
Restriction on use of tax attributes from tax law "ownership change." >Section 382 of the U.S. Internal Revenue Code restricts the ability of a corporation that undergoes an ownership change to use its tax attributes, including net operating losses and tax credits ("Tax Attributes"). At December 31, 2009, we had Tax Attributes that would offset $17 billion of taxable income (representing about $6 billion of our $17.5 billion in deferred tax assets subject to valuation allowance). An ownership change occurs if 5 percent shareholders of an issuer's outstanding common stock, collectively, increase their ownership percentage by more than 50 percentage points over a rolling three-year period. Restructuring actions we took in 2009, including our exchange of Ford stock for convertible debt and our public issuance of additional Ford stock, contributed significantly to the collective increase in ownership by 5 percent shareholders. At present, 5 percent shareholders may have collectively increased their ownership in Ford by more than 30 percentage points. In September 2009, we implemented a tax benefit preservation plan (the "Plan") to reduce the risk of an ownership change under Section 382. Under the Plan, shares held by any person who acquires, without the approval of our Board of Directors, beneficial ownership of 4.99% or more of Ford's outstanding Common Stock could be subject to significant dilution.
The discovery of defects in vehicles resulting in delays in new model launches, recall campaigns, or increased warranty costs. >Meeting or exceeding many government-mandated safety standards is costly and often technologically challenging, especially where standards may conflict with the need to reduce vehicle weight in order to meet government-mandated emissions and fuel-economy standards. Government safety standards also require manufacturers to remedy defects related to motor vehicle safety through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that they do not comply with a safety standard. Should we or government safety regulators determine that a safety or other defect or a noncompliance exists with respect to certain of our vehicles prior to the start of production, the launch of such vehicle could be delayed until such defect is remedied. The costs associated with any protracted delay in new model launches necessary to remedy such defect, or the cost of recall campaigns to remedy such defects in vehicles that have been sold, could be substantial.
Increased safety, emissions, fuel economy, or other regulation resulting in higher costs, cash expenditures, and/or sales restrictions.> The worldwide automotive industry is governed by a substantial amount of governmental regulation, which often differs by state, region, and country. Governmental regulation has arisen, and proposals for additional regulation are advanced, primarily out of concern for the environment (including concerns about the possibility of global climate change and its impact), vehicle safety, and energy independence. In addition, many governments regulate local product content and/or impose import requirements as a means of creating jobs, protecting domestic producers, and influencing their balance of payments. In recent years, we have made significant changes to our product cycle plan to improve the overall fuel economy of vehicles we produce, thereby reducing their GHG emissions. There are limits on our ability to achieve fuel economy improvements over a given time frame, however, primarily relating to the cost and effectiveness of available technologies, consumer acceptance of new technologies and changes in vehicle mix, 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, engineering and financial resources necessary to deploy new technologies across a wide range of products and powertrains in a short time. The cost to comply with existing governmental regulations is substantial, and future, additional regulations (already enacted, adopted or proposed) could have a substantial adverse impact on our financial condition and results of operations. For more discussion of the impact of such standards on our global business, see the "Governmental Standards" discussion in Item 1 above.
ITEM 1A. Risk Factors (continued)
Unusual or significant litigation or governmental investigations arising out of alleged defects in our products, perceived environmental impacts, or otherwise.> We spend substantial resources ensuring compliance with governmental safety regulations, mobile and stationary source emissions regulations, and other standards. Compliance with governmental standards, however, does not necessarily prevent individual or class action lawsuits, which can entail significant cost and risk. For example, the preemptive effect of the Federal Motor Vehicle Safety Standards is often a contested issue in litigation, and some courts have permitted liability findings even where our vehicles comply with federal law and/or other applicable law. Furthermore, simply responding to actual or threatened litigation or government investigations of our compliance with regulatory standards may require significant expenditures of time and other resources, and may cause significant reputational harm.
A change in our requirements for parts or materials where we have long-term supply arrangements that commit us to purchase minimum or fixed quantities of certain parts or materials, or to pay a minimum amount to the seller ("take-or-pay" contracts). >We have entered into a number of long-term supply contracts that require us to purchase a fixed quantity of parts to be used in the production of our vehicles. If our need for any of these parts were to lessen, we could still be required to purchase a specified quantity of the part or pay a minimum amount to the seller pursuant to the take-or-pay contract. We also have entered into a small number of long-term supply contracts for raw materials (for example, precious metals used in catalytic converters) that require us to purchase a fixed percentage of mine output. If our need for any of these raw materials were to lessen, or if a supplier's output of materials were to increase, we could be required to purchase more materials than we need.
Adverse effects on our results from a decrease in or cessation of government incentives related to capital investments. >We receive economic benefits from national, state, and local governments related to investments we make around the world. These benefits generally take the form of tax incentives, property tax abatements, infrastructure development, subsidized training programs, and/or other operational grants and incentives, and the amounts may be significant. A decrease in, expiration without renewal of, or other cessation of such benefits could have a substantial adverse impact on our financial condition and results of operations, as well as our ability to fund new investments.
Adverse effects on our operations resulting from certain geo-political or other events.> We conduct a significant portion of our business in countries outside of the United States, and are pursuing growth opportunities in a number of emerging markets. These activities expose us to, among other things, risks associated with geo-political events, such as: governmental takeover (i.e., nationalization) of our manufacturing facilities; disruption of operations in a particular country as a result of political or economic instability, outbreak of war or expansion of hostilities; or acts of terrorism. Such events could have a substantial adverse effect on our financial condition and results of operations.
Substantial levels of Automotive indebtedness adversely affecting our financial condition or preventing us from fulfilling our debt obligations (which may grow because we are able to incur substantially more debt, including additional secured debt). >As a result of our 2006 and 2009 financing actions and our other debt, we are a highly leveraged company. Our significant Automotive debt service obligations could have important consequences, including the following: our high level of indebtedness could make it difficult for us to satisfy our obligations with respect to our outstanding indebtedness; our ability to obtain additional financing for working capital, capital expenditures, acquisitions, if any, or general corporate purposes may be impaired; we must use a substantial portion of our cash flow from operations to pay interest on our indebtedness, which may reduce the funds available to us for operations and other purposes below the levels of our competitors that have lower interest costs; and our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business. In addition, if we are unable to meet certain covenants of our secured credit facility established in December 2006 ("Credit Agreement") (e.g., if the borrowing base value of assets pledged does not exceed outstanding borrowings), we may be required to repay borrowings under the facility prior to their maturity.
ITEM 1A. Risk Factors (continued)
If our cash flow is worse than expected due to worsening of the economic recession, work stoppages, supply base disruptions, increased pension contributions, or other reasons, or if we are unable to find additional liquidity sources 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 some 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, including our Credit Agreement, see the discussion in Item 7 under the captions "Liquidity and Capital Resources" and "Overview," and in Note 19 of the Notes to the Financial Statements.
Failure of financial institutions to fulfill commitments under committed credit facilities. >As discussed in "Liquidity and Capital Resources" within Item 7, when we drew the full amount of the revolving credit facility under our Credit Agreement in February 2009, the $890 million commitment of Lehman Commercial Paper Inc. ("LCPI") was not fully funded as a result of LCPI having filed for protection under Chapter 11 of the U.S. Bankruptcy Code in October 2008. As permitted under our Credit Agreement, to the extent we repay amounts under our revolving credit facility, we can re-borrow those amounts until the facility terminates. If the financial institutions that provide these or other committed credit facilities were to default on their obligation to fund the commitments, these facilities would not be available to us, which could substantially adversely affect our liquidity and financial condition. For discussion of our Credit Agreement, see "Liquidity and Capital Resources" in Item 7 and Note 19 of the Notes to the Financial Statements.
Inability of Ford Credit to obtain competitive funding. Other institutions that provide automotive financing to certain of our competitors have access to relatively low-cost government-insured or other funding. For example, financial institutions with bank holding company status may have access to other lower cost sources of funding. Access by our competitors' dealers and customers to financing provided by financial institutions with relatively low-cost funding that is not available to Ford Credit could adversely affect Ford Credit's ability to support the sale of Ford vehicles at competitive cost and rates. This in turn would adversely affect the marketability of Ford vehicles in comparison to certain competitive brands.
Inability of Ford Credit to access debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts due to credit rating downgrades, market volatility, market disruption, or other factors>. The lower credit ratings assigned to Ford Credit over the past several years have increased its unsecured borrowing costs and have caused its access to the unsecured debt markets to be more restricted. In response, Ford Credit has increased its use of securitization and other sources of liquidity. Ford Credit’s ability to obtain funding under its committed asset-backed liquidity programs and certain other asset-backed securitization transactions is subject to having a sufficient amount of assets eligible for these programs as well as Ford Credit’s ability to obtain appropriate credit ratings and, for certain committed programs, derivatives to manage the interest rate risk. Over time, and particularly in the event of any credit rating downgrades, market volatility, market disruption, or other factors, Ford Credit may need to reduce the amount of receivables it purchases or originates. In addition, Ford Credit would need to reduce the amount of receivables it purchases or originates if there were a significant decline in the demand for the types of securities it offers or Ford Credit was unable to obtain derivatives to manage the interest rate risk associated with its securitization transactions. A significant reduction in the amount of receivables Ford Credit purchases or originates would significantly reduce its ongoing profits and could adversely affect its ability to support the sale of Ford vehicles.
Higher-than-expected credit losses.> Credit risk is the possibility of loss from a customer's or dealer's failure to make payments according to contract terms. Credit risk (which is heavily dependent upon economic factors including unemployment, consumer debt service burden, personal income growth, dealer profitability, and used car prices) has a significant impact on Ford Credit's business. The level of credit losses Ford Credit may experience could exceed its expectations and adversely affect its financial condition and results of operations. For additional discussion regarding credit losses, see the "Critical Accounting Estimates" disclosures in Item 7.
ITEM 1A. Risk Factors (continued)
Increased competition from banks or other financial institutions seeking to increase their share of financing Ford vehicles.> No single company is a dominant force in the automotive finance industry. Most of Ford Credit's bank competitors in the United States use credit aggregation systems that permit dealers to send, through standardized systems, retail credit applications to multiple finance sources to evaluate financing options offered by these finance sources. This process has resulted in greater competition based on financing rates. In addition, Ford Credit may face increased competition on wholesale financing for Ford dealers. Competition from such competitors with lower borrowing costs may increase, which could adversely affect Ford Credit's profitability and the volume of its business.
Collection and servicing problems related to finance receivables and net investment in operating leases.> After Ford Credit purchases retail installment sale contracts and leases from dealers and other customers, it manages or services the receivables. Any disruption of its servicing activity, due to inability to access or accurately maintain customer account records or otherwise, could have a significant negative impact on its ability to collect on those receivables and/or satisfy its customers.
Lower-than-anticipated residual values or higher-than-expected return volumes for leased vehicles.> Ford Credit projects expected residual values (including residual value support payments from Ford) and return volumes of the vehicles it leases. Actual proceeds realized by Ford Credit upon the sale of returned leased vehicles at lease termination may be lower than the amount projected, which reduces the profitability of the lease transaction. Among the factors that can affect the value of returned lease vehicles are the volume of vehicles returned, economic conditions, and the quality or perceived quality, safety, fuel efficiency, or reliability of the vehicles. Actual return volumes may be higher than expected and can be influenced by contractual lease end values relative to auction values, marketing programs for new vehicles, and general economic conditions. All of these factors, alone or in combination, have the potential to adversely affect Ford Credit's profitability. For additional discussion of residual values, see the "Critical Accounting Estimates" disclosures in Item 7.
New or increased credit, consumer, or data protection or other regulations resulting in higher costs and/or additional financing restrictions.> As a finance company, Ford Credit is highly regulated by governmental authorities in the locations where it operates. In the United States, its operations are subject to regulation, supervision and licensing under various federal, state and local laws and regulations, including the federal Truth-in-Lending Act, Equal Credit Opportunity Act, and Fair Credit Reporting Act. In some countries outside the United States, Ford Credit's subsidiaries are regulated banking institutions and are required, among other things, to maintain minimum capital reserves. In many other locations, governmental authorities require companies to have licenses in order to conduct financing businesses. Efforts to comply with these laws and regulations impose significant costs on Ford Credit, and affect the conduct of its business. Additional regulation could add significant cost or operational constraints that might impair its profitability.
Inability to implement our One Ford plan. >As discussed in the "Overview" section in Item 7, we are taking actions to execute the four priorities of our One Ford plan and address the impact of current economic conditions, including the deteriorated credit market and automotive sales. To the extent that we are unable to implement necessary actions to execute our plan, our financial condition and results of operations would be substantially adversely affected.
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 or other obligations. 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. About half of our distribution centers are leased (we own approximately 53% of the total square footage and lease the balance). 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. Many of the facilities, as well as most of the machinery and equipment, that we own and operate in the United States have been pledged to secure our obligations under the Credit Agreement. For discussion of the Credit Agreement, see "Liquidity and Capital Resources" in Item 7 and Note 19 of the Notes to the Financial Statements.
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 as of December 31, 2009 are shown in the table below:
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. The new accounting standard related to the consolidation of variable interest entities is effective for us as of January 1, 2010, and will result in the deconsolidation of many of our consolidated joint ventures. As of December 31, 2009, the significant consolidated joint ventures and the number of plants they own are as follows:
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 unconsolidated joint ventures of which we are a partner. These 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.
ITEM 3. Legal Proceedings
Various legal actions, governmental investigations, 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 or other matters; government incentives related to capital investments; tax matters; financial services; employment-related matters; dealer, supplier, and other contractual relationships; intellectual property rights; product warranties; environmental matters; shareholder or investor matters; and financial reporting matters. Certain of the pending legal actions are, or purport to be, class actions. Some of the foregoing matters involve or 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, loss of government incentives, assessments, or other relief that, if granted, would require very large expenditures. We regularly evaluate the expected outcome of product liability litigation and other legal proceedings. 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 also have accrued expenses for other legal proceedings 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 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, are a defendant in various actions for injuries claimed to have resulted from alleged exposure to 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. We believe that we are being more aggressively targeted in asbestos suits because many previously targeted companies have filed for bankruptcy.
Most of the asbestos litigation we face involves individuals who claim to have worked on the brakes of our vehicles over the years. We are prepared to defend these cases, and believe that the scientific evidence confirms our long-standing position that there is no 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 often are unable to tell from the pleadings which plaintiffs are making claims against us (as opposed to other defendants). Annual payout and defense costs may become substantial in the future.
General. We have received notices under various federal and state environmental laws that we (along with others) are or 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 significant. The contingent losses that we expect to incur in connection with many of these sites have been accrued and those accruals are reflected in our financial statements. 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 significant.
ITEM 3. Legal Proceedings (continued)
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. We have substantially completed the work at a number of locations, and Edgewood is completing the investigation and remediation at several locations that it owns. We resolved the matter with DEP through an administrative consent order ("Order"), pursuant to which we paid approximately $460,000 for oversight costs, penalties, and environmental education projects and donated emissions reduction credits to the State of New Jersey. After reviewing comments submitted by Edgewood, the DEP finalized the Order in February 2009. Edgewood has appealed the issuance of the Order to the Appellate Division of the New Jersey Superior Court. The New Jersey Attorney General's office has closed its investigation of us.
Sterling Axle Plant. The Michigan Department of Environmental Quality ("MDEQ") issued four Letters of Violation to the Sterling Axle Plant between April 17, 2008 and October 7, 2008 related to our self-report of several potential violations of air permits at this location. We promptly took steps to correct and prevent recurrence of the potential violations. We agreed with the MDEQ in 2009 to resolve the enforcement proceeding through a civil administrative settlement, which included a $129,920 penalty. In 2009, we learned that the U.S. Environmental Protection Agency and the U.S. Department of Justice had opened a criminal investigation into the potential violations. We are cooperating fully in the investigation, including disclosing additional potential violations that were discovered since the initial enforcement action.
Dearborn Research and Engineering Center. In August 2009, our Dearborn Research and Engineering Center ("R&E Center") received a notice of violation from the MDEQ alleging that the R&E Center exceeded fuel usage limitations at its engine test facility, and did not properly certify compliance with its air permit. MDEQ has commenced an administrative enforcement proceeding. We are working with MDEQ to resolve this matter, and have taken appropriate actions to address any violations.
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.
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 us. The federal and state complaints allege, among other things, that vehicle manufacturers, aided by 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 were consolidated for coordinated pretrial proceedings in the U.S. District Court for the District of Maine and have been dismissed. Cases remain pending in state courts in Arizona, California, Florida, Minnesota, New Mexico, Tennessee and Wisconsin. A statewide class has been certified in the California case; proceedings in the other state cases had been stayed pending resolution of the consolidated federal court action.
ITEM 3. Legal Proceedings (continued)
ERISA Fiduciary Litigation. A purported class action lawsuit is pending in the U.S. 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 the Employee Retirement Income Security Act (“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.
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 were one of several companies to receive requests for information as part of this inquiry. We completed submission of all information requested to date as of April 2007.
Apartheid Litigation. Along with several other prominent multinational companies, we are a defendant in purported class action lawsuits seeking unspecified damages on behalf of South African citizens who suffered violence and oppression under South Africa's apartheid regime. The lawsuits allege that, by doing business in South Africa, the defendant companies aided and abetted the apartheid regime and its human rights violations. These cases, collectively referred to as In re South African Apartheid Litigation, were initially filed in 2002 and 2003, and are being handled together as coordinated "multidistrict litigation" in the U.S. District Court for the Southern District of New York. The District Court dismissed these cases in 2004, but in 2007 the U.S. Court of Appeals for the Second Circuit reversed and remanded the cases to the District Court for further proceedings. Amended complaints were filed during 2008; motions to dismiss have been granted in part and denied in part, and the defendants’ appeal to the U.S. Court of Appeals is pending.
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 4A. Executive Officers of Ford
Our executive officers and their positions and ages at February 1, 2010 are as follows:
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.
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 2008 and 2009:
As of February 12, 2010, stockholders of record of Ford included 165,026 holders of Common Stock (which number does not include 270 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 86 holders of Class B Stock.
During the fourth quarter of 2009, we purchased shares of our Common Stock as follows: