Ford 2005 Annual Report Download - page 25

Ford Motor Company Annual Report 2005 22 Ford Motor Company Annual Report 2005 23
Managementʼs Discussion and Analysis of Financial
Condition and Results of Operations
Consumer Spending Trends. We expect, however, that a decline in or the inability to increase vehicle prices could be offset by the
spending habits of consumers and their propensity to purchase over time higher-end, more expensive vehicles and/or vehicles with
more features. Over the next decade, in the United States and other mature markets, we expect that growth in spending on vehicle mix
and content will change generally in line with GDP. The benefits of this to revenue growth in the automotive industry are significant.
In the United States, for example, consumers in the highest income bracket are buying more often and are more frequently buying
upscale.
Although growth in vehicle unit sales (i.e., volume) will be greatest in emerging markets in the next decade, we expect that the
mature automotive markets (e.g., North America, Western Europe, and Japan) will continue to be the source of a majority of global
industry revenues. We also expect that the North American market will continue as the single largest source of revenue for the
automotive industry in the world.
Health Care Expenses. In 2005, our health care expenses for U.S. employees, retirees, and their dependents were $3.5 billion,
with about $2.4 billion for postretirement health care and the balance for active employee health care. In 2005, prescription drugs
continued to represent approximately one-third of our total health care expense.
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 continue to increase. For 2006, our trend assumptions for U.S. health care costs include an initial
trend rate of 7%, 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 programs, competitive sourcing, and appropriate employee cost sharing.
Commodity and Energy Price Increases. Commodity price increases, particularly for steel and resins (which are our two largest
commodity exposures and among the most difficult to hedge), have occurred recently and are continuing during a period of strong
global demand for these materials. In addition, energy prices increased significantly in 2005. In particular, gasoline prices in the
United States increased in volatility and rose to levels well over $2.00 per gallon in 2005, and have remained at levels significantly
higher than 2004. This has had an adverse effect on the demand for full- and medium-sized sport utility vehicles in the United States.
Currency Exchange Rate Volatility. The U.S. dollar has depreciated against most major currencies since 2002. 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, we experienced margin pressure. Although this pressure was offset partially
by gains on foreign exchange derivatives, this offset reduces over time due to the expiration of favorable hedges previously put in
place. We, like many other automotive manufacturers with sales in the United States, are not always able to price for depreciation of
the U.S. dollar due to the extremely competitive pricing environment in the United States.