Ford 2005 Annual Report Download - page 27

Ford Motor Company Annual Report 2005 24 Ford Motor Company Annual Report 2005 25
Managementʼs Discussion and Analysis of Financial
Condition and Results of Operations
Cost Savings
To improve our business and profitability, we plan to reduce our costs through material cost actions, health care cost reductions,
and capacity and personnel reductions.
Material Cost Actions. During 2005, we announced an initiative to enter into new long-term agreements with select strategic
suppliers globally in order to strengthen collaboration and develop a sustainable business model to drive mutual profitability and
technology development. This new Aligned Business Framework is expected to establish closer relationships with a smaller number
of suppliers, reducing by approximately 50 percent the number of suppliers to whom we source new business for 20 high-impact
component systems. These systems, including seats, wiring, restraint systems, and instrument and trim panels, represent about half of
our annual production purchases globally. In addition, we have established cross-functional component systems teams with common
objectives and processes to establish component systems business plans with the goal of further reducing material costs. With these
actions, we are targeting net material cost reductions excluding special items of at least $6 billion by 2010 at constant volume, mix and
exchange, net of new product content and regulatory changes.
As disclosed in our Current Report on Form 8-K dated October 1, 2005, we also finalized an agreement with Visteon Corporation
("Visteon"), our largest supplier, in which we assumed control of 17 plants and six other facilities in the United States and Mexico.
These assets were transferred to Automotive Components Holdings, LLC ("ACH"), a temporary business controlled and managed by
us, to protect the flow of critical parts and components in the near-term and, over time, to improve our sourcing flexibility and cost
competitiveness. ACH's mission is to prepare most of the acquired businesses for sale to companies with the capital and expertise to
supply us with high-quality components and systems at competitive prices. As we prepare these businesses for sale, we also are
taking actions to reduce hourly employment at ACH by approximately 5,000 positions, primarily through buyouts.
Health Care Cost Reductions. Effective January 1, 2007 for U.S. salaried employees hired before June 1, 2001, we established a
company contribution limit set at 2006 levels for retiree health care benefits (U.S. salaried employees hired on or after June 1, 2001
participate in a defined contribution retiree health care plan). In addition, for U.S. salaried employees hired before January 1, 2004
who retire on or after June 1, 2006, company-paid retiree life insurance benefits are limited to $50,000 (employees hired on or after
January 1, 2004 do not receive company-paid retiree life insurance benefits). These benefit changes resulted in a decrease in the year-
end 2005 other postretirement employee benefit ("OPEB") obligation of about $3 billion and a reduction in 2006 and ongoing expense
of about $400 million annually. The related cash savings will grow over time.
In December 2005, we reached an agreement with the UAW that would increase retiree health care cost sharing. As part of the
agreement, an independent defined contribution Voluntary Employee Benefit Association trust would be established for the purpose of
mitigating the financial impact of increased cost sharing to retirees. This trust would be funded primarily through (i) wage diversions
from active hourly employees, (ii) specified cash contributions aggregating $108 million to be made by us over several years, and
(iii) potential cash contributions to be made by us based on any price appreciation above $8.145 per share of a notional amount of
8,750,000 shares of Ford Common Stock. The agreement is subject to court approval of a proposed settlement of a purported class
action challenging our decision to modify the retiree health care plan; additional retirees have expressed their objection to the
agreement by moving to intervene in the pending lawsuit and filing a follow-on suit of their own. If the settlement of the purported
class action receives court approval, the agreement is expected to reduce our OPEB obligation by about $5 billion, with projected
average annual cost savings of about $650 million and reduced average annual cash outlays of about $200 million.
Capacity and Personnel Reductions. Our North American operations presently have the capacity to support a U.S. market share
significantly in excess of the 17% share our Ford, Lincoln, and Mercury brands achieved in 2005. As a result, our plant utilization
rate in North America has been about 75%, which is not sustainable. Given the continued proliferation of new model offerings by
current and potential participants in the U.S. automotive market, we recognize the need to match our North American production
capacity to realistic volume and market share expectations. Accordingly, we plan to idle and cease operations at 14 manufacturing
facilities in North America by 2012, including seven vehicle assembly plants. Associated with these plant idlings, we intend to reduce
our manufacturing employment by 25,000 to 30,000 people during the same period. These personnel reductions do not include
actions at ACH, and are in addition to the previously announced reduction of the equivalent of 4,000 salaried positions by the end of
the first quarter of 2006, as well as a reduction in our officer ranks by 12 percent by the end of the first quarter of 2006.