Ford 2004 Annual Report Download - page 25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Health Care Expenses. As a provider of health care coverage to our employees, retirees and their dependents, primarily in the
United States, we have experienced significant health care inflation in the last few years. In 2004, our health care expenses for
U.S. employees, retirees and their dependents were $3.1 billion, with about $2 billion attributable to retirees and the balance
attributable to active employees. Prescription drug cost continues as the fastest growing segment of our health care expenses
and accounted for about one-third of our total U.S. health care expenses in 2004.
Although we have taken measures to have employees and retirees bear a higher portion of the costs of their health care
benefits, we expect our health care costs to increase. For 2005, our trend assumptions for U.S. health care costs include an
initial trend rate of 9%, gradually declining to a steady state trend rate of 5% reached in 2011. These assumptions include the
effect of actions we are taking and expect to take to offset health care inflation, including eligibility management, employee
education and wellness, competitive sourcing and appropriate employee cost sharing.
Commodity Price Increases. Commodity price increases, particularly for steel and resins (which are used extensively in the
automotive industry), have occurred recently and are continuing during a period of strong global demand for these materials.
Manufacturers in China and other global steelmakers have responded through increases in capacity and production of steel.
We expect this, coupled with an easing in global demand pressures, to result in pricing trends beginning to moderate in the
intermediate term.
Currency Exchange Rate Volatility. The U.S. dollar depreciated against most major currencies in 2004. This created downward
margin pressure on auto manufacturers that have U.S. dollar revenue with foreign currency cost. Because we produce vehicles
in Europe (e.g., Jaguar, Land Rover and Volvo models) for sale in the United States and produce components in Europe (e.g.,
engines) for use in some of our North American vehicles, Ford experienced margin pressure, although this was partially offset
by gains on foreign exchange derivatives. Ford, like most other automotive manufacturers with sales in the United States, is not
always able to price for depreciation of the U.S. dollar due to the extremely competitive pricing environment in the United States.
Trends and Strategies
Revenue Management. To address the pricing pressure that exists in the automotive industry, we have employed a customer-
focused revenue management strategy to maximize per unit revenue. This strategy is focused on a disciplined approach to
utilizing customer demand data – available from many sources, including internet hits, transaction data, customer leads, and
research – to help us develop and sell vehicles that more closely match customer desires.
We believe our revenue management strategy has contributed significantly to increases in our average net revenue per vehicle
sold for our Ford North America business unit of $745 and $729 for 2004 and 2003, respectively. Since 2001, our average
net revenue per vehicle sold in North America has improved by over $1,700 on a cumulative basis. This improvement reflected
positive net pricing, as well as a more favorable product mix.
Market Share. An ongoing challenge in the current automotive industry is balancing market share with profitability. Due to
the excess industry capacity, most manufacturers engage in some amount of price discounting to increase, maintain or limit
decreases in their respective market shares. In the last few years, we have implemented a strategy of de-emphasizing less
profitable sales to daily rental car companies, which typically are associated with a large amount of discounting, and placing
greater emphasis on our share of the retail market (i.e., market share among end-use customers). This strategy benefits us by
reducing the overall amount of marketing incentives we incur and improving the auction and resale values of our products.
This latter benefit, in turn, has the added benefit of reducing depreciation expense for vehicles in Ford Credit’s vehicle lease
portfolio. The strategy to de-emphasize sales to daily rental car companies, while contributing to improved profits, also has
contributed to a loss of share in the United States.
Product Differentiation and Innovation. The fundamental requirement for success in the automotive business is having products
with great appeal, whether in terms of styling, quality, innovative features, breakthrough technology or a combination of those
characteristics. Our strategy for product creation includes a strong focus on new technology. This is not, however, limited
to developing and introducing breakthrough vehicle technologies, but also can be applied to the total vehicle package. For
example, our new Ford F-150 pick-up truck, first introduced as a 2004 model, utilizes more than 130 patented inventions
related to performance, utility and styling. This model helped establish a sales record for F-Series pick-up trucks in 2004 with
nearly one million units sold. Other differentiating technologies that we have introduced or are working to introduce for general
availability are:
• Hybrid powertrains, which use a combination of electric power, generated from onboard batteries that are recharged while
driving the vehicle, and a gasoline internal combustion engine. The Ford Escape Hybrid, introduced as a 2004 model, is an
example of this technology, and we plan to offer four additional vehicle models with this technology.
• Other alternative fuel vehicles, such as hydrogen-powered internal combustion engines, bio or clean diesel powered
vehicles and fuel cells. We believe we are the only automobile manufacturer doing significant development work on all these
alternative fuel technologies, as well as hybrid powertrain technologies.
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