Ford 2011 Annual Report Download - page 30

Management’s Discussion and Analysis of Financial Condition and Results of Operations
28 Ford Motor Company | 2011 Annual Report
Excess Capacity. According to IHS Automotive, an automotive research firm, the estimated automotive industry global
production capacity for light vehicles (which as of 2011 includes an expanded truck segment compared with previous
years) of about 96 million units exceeded global production by about 22 million units in 2011. In North America and
Europe, the two regions where the majority of industry revenue and profits are earned, excess capacity as a percent of
production is an estimated 26%. According to production capacity data projected by IHS Automotive, global excess
capacity conditions could continue for several years at an average of about 24 million units per year during the period
from 2012 to 2016.
Pricing Pressure. Excess capacity, coupled with a proliferation of new products being introduced in key segments, will
keep pressure on manufacturers' ability to increase prices. In North America, the industry restructuring of the past few
years has allowed manufacturers to better match production with demand, although Japanese and Korean manufacturers
also have capacity (located outside of the region) directed to North America. In the future, Chinese and Indian
manufacturers are expected to enter U.S. and European markets, further intensifying competition. Although there has
been some firming of pricing in the U.S. market, particularly in 2011, it seems likely that over the long term intense
competition and apparent excess capacity will continue to put downward pressure on inflation-adjusted prices for similarly-
contented vehicles in the United States and contribute to a challenging pricing environment for the automotive industry. In
Europe, the excess capacity situation was exacerbated by weakening demand and the lack of reductions in existing
capacity, such that negative pricing pressure is expected to continue for the foreseeable future.
Commodity and Energy Price Increases. Despite weak demand conditions, oil prices increased from an average of
$80 per barrel in 2010 to about $100 a barrel in late 2011. Commodity prices have declined recently, but over the longer
term prices are likely to trend higher given global demand growth.
Vehicle Profitability. Our financial results depend on the profitability of the vehicles we sell, which may vary
significantly by vehicle line. In general, larger vehicles tend to command higher prices and be more profitable than
smaller vehicles, both across and within vehicle segments. For example, in North America, our larger, more profitable
vehicles had an average contribution margin that was about 130% of our total average contribution margin across all
vehicles, compared with about 70% for our smaller vehicles. As we execute our One Ford plan, we are creating best-in-
class vehicles on global platforms that contribute higher margins, and offering a more balanced portfolio of vehicles with
which we aim to be among the leaders in fuel efficiency in every segment in which we compete.
Increasing Sales of Smaller Vehicles. Like other manufacturers, we are increasing our participation in newly-
developed and emerging markets, such as Brazil, Russia, India, and China, in which vehicle sales are expected to
increase at a faster rate than in most mature markets. The largest segments in these markets are small vehicles
(i.e., Sub-B, B, and C segments). To increase our participation in these fast-growing markets, we are significantly
increasing our production capacity, directly or through joint ventures. In addition, we expect that increased demand for
smaller, more fuel-efficient vehicles will continue in the mature markets of North America and Europe and, consequently,
we have seen and expect in the future strong demand in those markets for our small car offerings (including our new Ford
Fiesta and Focus models that are based on global platforms). Although we expect positive contribution margins from
higher small vehicle sales, one result of increased production of small vehicles may be that, over time, our average per
unit margin decreases because small vehicles tend to have lower margins than medium and large vehicles.
Currency Exchange Rate Volatility. The European debt crisis has contributed to recent financial market volatility.
Coupled with the ongoing policy actions taken by central banks to support the financial system, exchange rates have
remained volatile. Most recently, the euro currency value has fluctuated as progress toward a solution to the sovereign
debt crisis remains highly uncertain. The high inflation in newly-developed and emerging markets and capital flight to
perceived stable investments have started to erode the strength of some local currencies. In most markets, exchange
rates are market-determined, and all are impacted by many different macroeconomic and policy factors. As a result, it is
likely that exchange rates will remain volatile.
Other Economic Factors. The eventual implications of higher government deficits and debt, with potentially higher
long-term interest rates, could drive a higher cost of capital over our planning period. Higher interest rates and/or taxes to
address the higher deficits also may impede real growth in gross domestic product and, therefore, vehicle sales over our
planning period.