Ford 2005 Annual Report Download - page 24

Managementʼs Discussion and Analysis of Financial
Condition and Results of Operations
OVERVIEW
Generation of Revenue, Income and Cash
Our Automotive sectorʼs revenue, income and cash are generated primarily from sales of vehicles to our dealers and distributors
(i.e., our customers). Vehicles we produce generally are subject to firm orders from our customers and generally are deemed sold
(with the proceeds from such sale recognized in revenue) immediately after they are produced and shipped to our customers. This is
not the case, however, with respect to vehicles produced for sale to daily rental car companies that are subject to a guaranteed
repurchase option or vehicles produced for use in our own fleet (including management evaluation vehicles). Vehicles sold to daily
rental car companies that are subject to a guaranteed repurchase option are accounted for as operating leases, with lease revenue and
profits recognized over the term of the lease. When we sell the vehicle at auction, we recognize a gain or loss on the difference, if
any, between actual auction value and the projected auction value. Therefore, except for the impact of the daily rental units sold
subject to a guaranteed repurchase option and those units placed into our own fleet, vehicle production is closely linked with unit sales
and revenue from such sales.
Most of the vehicles sold by us to our dealers and distributors are financed at wholesale by Ford Credit. Upon Ford Credit
originating the wholesale receivable related to a dealerʼs purchase of a vehicle, Ford Credit pays cash to the relevant legal entity in our
Automotive sector in payment of the dealerʼs obligation for the purchase price of the vehicle. The dealer then pays off the wholesale
finance receivable when it sells the vehicle to a retail customer.
Our Financial Services sectorʼs revenue is generated primarily from interest on finance receivables, net of certain deferred
origination costs that are included as a reduction of financing revenue, and such revenue is recognized over the term of the receivable
using the interest method. Also, revenue from operating leases, net of certain deferred origination costs, is recognized on a straight-
line basis over the term of the lease. Income is generated to the extent revenues exceed expenses, most of which are interest and
operating expenses.
Transactions between the Automotive and Financial Services sectors occur in the ordinary course of business. For example, Ford
Credit receives interest supplements and other support cost payments from the Automotive sector in connection with special vehicle
financing and leasing programs that it sponsors. Ford Credit records these payments as revenue, and the Automotive sector makes the
related cash payments, over the term of the related finance receivable or operating lease. The Automotive sector records the estimated
costs of marketing incentives, including dealer and retail customer cash payments (e.g., rebates) and costs of special financing and
leasing programs, as a reduction to revenue at the later of the date the related vehicle sales are recorded or at the date the incentive
program is both approved and communicated. See Note 1 of the Notes to Financial Statements for a more detailed discussion of
transactions and payments between the Automotive and Financial Services sectors.
Key Economic Factors and Trends Affecting the Automotive Industry
Excess Capacity. According to CSM Worldwide, an automotive research firm, in 2005 the estimated automotive industry global
production capacity for light vehicles (about 77 million units) significantly exceeded global production of cars and trucks (about
62 million units). In North America and Europe, the two regions where the majority of revenue and profits are earned in the industry,
excess capacity was an estimated 17% and 14%, respectively. According to production capacity data projected by CSM Worldwide,
excess capacity conditions in North America could continue for several more years, but would be mitigated by the capacity reductions
announced by us and General Motors Corporation when these planned reductions are completed.
Pricing Pressure. Excess capacity, coupled with a proliferation of new products being introduced in key segments by the industry,
will keep pressure on manufacturers' ability to increase prices on their products. In addition, the incremental new U.S. manufacturing
capacity of foreign manufacturers (so-called "transplants") in recent years has contributed, and is likely to continue to contribute, to
the severe pricing pressure in that market. For example, in 2006, Toyota Motor Corporation is expected to complete construction of
an assembly plant in Texas that reportedly will be capable of producing at least 200,000 full-size pick-up trucks per year. The
reduction of real prices for similarly contented vehicles in the United States has become more pronounced since the late 1990s, and we
expect that a challenging pricing environment will continue for some time to come. In Europe, the automotive industry also has
experienced intense pricing pressure for several years for the same reasons discussed above, exacerbated in recent years by the Block
Exemption Regulation.
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