Ford 2012 Annual Report Download - page 13

Ford Motor Company | 2012 Annual Report 11
Management's Discussion and Analysis of Financial Condition and Results of Operations
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As a result, we analyze the profit impact of certain cost changes holding constant present-year volume and mix
and currency exchange, in order to evaluate our cost trends absent the impact of varying production and currency
exchange levels. We analyze these cost changes in the following categories:
• Material excluding commodity costs - primarily reflecting the change in cost of purchased parts used in the
assembly of our vehicles.
• Commodity costs - reflecting the change in cost for raw materials (such as steel, aluminum, and resins) used in
the manufacture of our products.
• Structural costs - reflecting the change in costs that generally do not have a directly proportionate relationship
to our production volumes, such as labor costs, including pension and health care; other costs related to the
development and manufacture of our vehicles; depreciation and amortization; and advertising and sales
promotion costs.
• Warranty and other costs - reflecting the change in cost related to warranty coverage, including product recalls
and customer satisfaction actions, as well as the change in freight and other costs related to the distribution of
our vehicles and support for the sale and distribution of parts and accessories.
While material (including commodity), freight, and warranty costs generally vary directly in proportion to production
volume, elements within our structural costs category are impacted to differing degrees by changes in production
volume. We also have varying degrees of discretion when it comes to controlling the different elements within our
structural costs. For example, depreciation and amortization expense largely is associated with prior capital spending
decisions. On the other hand, while labor costs do not vary directly with production volume, manufacturing labor costs
may be impacted by changes in volume, for example when we increase overtime, add a production shift or add
personnel to support volume increases. Other structural costs, such as advertising or engineering costs, do not
necessarily have a directly proportionate relationship to production volume. Our structural costs generally are within
our discretion, although to varying degrees, and can be adjusted over time in response to external factors.
We consider certain structural costs to be a direct investment in future growth and revenue. For example,
increases in structural costs are necessary to grow our business and improve profitability as we expand around the
world, invest in new products and technologies, respond to increasing industry sales volume, and grow our market
share.
Automotive total costs and expenses for full-year 2012 was $121.6 billion. Material costs (including commodity
costs) make up the largest portion of our Automotive total costs and expenses, representing in 2012 about two-thirds of
the total amount. Of the remaining balance of our Automotive costs and expenses, the largest piece is structural costs.
Although material costs are our largest absolute cost, our margins can be affected significantly by changes in any
category of costs.
Key Economic Factors and Trends Affecting the Automotive Industry
Global Economic Conditions. During 2011, global economic growth slowed to about 2.5% from 4% in 2010, as the
worsening debt crisis in Europe, regime changes in North Africa, natural disasters in Japan and Thailand, and
moderating economic growth in several key newly-developed and emerging markets all contributed to slow growth.
Global growth in 2012 remained at the relatively low level of about 2.5% due to the European debt crisis, slowing of
Chinese economic growth, and moderate pace of recovery in the United States. During 2013, global economic growth
is expected to remain in the 2% - 3% range. The European debt crisis remains a key risk to economic growth. The
current economic performance in many European countries, particularly Greece, Ireland, Italy, Portugal and Spain, is
being hampered by excessive government debt levels and the resulting budget austerity measures that are
contributing to weak economic growth. The EU, the European Central Bank, and the International Monetary Fund
have provided important support for many of these countries undergoing structural changes. During 2013, economic
growth is likely to remain weak in these markets, even though financial markets have begun to stabilize. The U.K.
government has implemented budget cuts and tax increases that will depress growth, although the labor market has
stabilized in recent months.
Uncertainties associated with the European debt crisis, and policy responses to it, could impact global economic
performance in 2013. Although housing is stabilizing in some of the worst hit markets, such as the United States, the
prospect of a strong economic rebound is hampered by fiscal tightening.
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