Ford 2010 Annual Report Download - page 26

Management’s Discussion and Analysis of Financial Condition and Results of Operations
24 Ford Motor Company | 2010 Annual Report
In 2010, global industry vehicle sales volume (including medium and heavy truck) is estimated to have increased to
73.9 million units, up 8.7 million units or 13% from 2009 levels.
Excess Capacity. According to IHS Automotive, an automotive research firm, in 2010 the estimated automotive
industry global production capacity for light vehicles (about 89 million units) exceeded global production of light vehicles
by about 17 million units. In North America and Europe, the two regions where the majority of revenue and profits are
earned in the industry, excess capacity as a percent of production was an estimated 34% and 18%, respectively.
According to production capacity data projected by IHS Automotive, global excess capacity conditions could continue for
several years at an average of about 20 million units per year during the 2011-2015 period.
Pricing Pressure. Excess capacity, coupled with a proliferation of new products being introduced in key segments, will
keep pressure on manufacturers' ability to increase prices. In addition to incremental new manufacturing capacity being
added in the United States and Europe, Japanese and Korean manufacturers also have capacity (located outside of the
regions) directed to these markets. This has contributed and likely will continue to contribute to pricing pressure in these
markets. In the future, Chinese manufacturers also are expected to enter the U.S. and European markets, further
intensifying competition. Although there has been some firming of pricing in the U.S. market, particularly in 2010, it seems
likely that over the longer term intense competition and apparent excess capacity will continue the industry trend of
reduction of inflation-adjusted prices for similarly-contented vehicles in the United States and contribute to a challenging
pricing environment.
Commodity and Energy Price Increases. Commodity prices have resumed upward movement since early 2009.
Despite weak demand conditions, oil prices increased from an average of $62 per barrel in 2009 to a range exceeding
$90 per barrel in February 2011. With the global economic outlook improving and financial investment returning to
commodity and oil markets, we expect commodity and oil prices to continue trending upward with potentially higher
volatility. Higher fuel prices, combined with efforts to achieve environmental policy objectives, are likely to continue to
generate demand for more fuel-efficient vehicles.
Consumer Spending and Credit. Limited ability to increase vehicle prices has been offset in recent years, at least in part,
by the long-term trend toward purchase of higher-end, more expensive vehicles and/or vehicles with more features. Over the
long term, spending on new vehicles is expected to resume correlation with growth in per capita incomes. Emerging markets
also will contribute an increasing share of global industry sales volume and revenue, as growth in wholesales (i.e., volume)
will be greatest in emerging markets in the next decade. We believe, however, the mature automotive markets (e.g., North
America, Western Europe, and Japan) will retain the largest share of global revenue over the coming decade.
Increasing Sales of Smaller Vehicles. Like other manufacturers, we are increasing our participation in newly-
developed and emerging markets, such as Brazil, Russia, India and China, in which vehicle sales are expected to
increase at a faster rate than in most mature markets. The largest segments in these markets are small vehicles
(i.e., Sub-B, B and C segments). To increase our participation in these fast-growing markets, we are increasing
significantly our production capacity, directly or through joint ventures. In addition, we expect that increased demand for
smaller, more fuel-efficient vehicles will continue in the mature markets of North America and Europe and, consequently,
we have seen and expect in the future strong demand in those markets for our small car offerings (including the new
Ford Fiesta and Focus models that are based on our global platforms). Although we expect positive contribution margins
from higher small vehicle sales, one result of increased production of small vehicles may be that, over time, our average
per unit margin decreases because small vehicles tend to have lower margins than medium and large vehicles.
Currency Exchange Rate Volatility. Ongoing deleveraging in financial markets has generated significant volatility in
currencies. The sovereign debt crisis and banking sector weakness in Europe is contributing to euro exchange rate
volatility. At the same time, concerns for U.S. monetary policy (e.g., quantitative easing programs) and deficits (i.e., current
account and fiscal deficits) have put downward pressure on the U.S. dollar. Some emerging market currencies have
strengthened beyond their fair value in light of substantial capital inflows. Central banks in some of these markets are
attempting to temper the effect of these inflows and stabilize their currencies so they are not overvalued. The latest rising
inflation in emerging markets has started to erode the strength of some local currencies, reducing the need for government
intervention. To varying degrees, exchange rates are market determined, and all are impacted by many different
macroeconomic and policy factors. In the current business environment, it is likely exchange rates will remain volatile.
Other Economic Factors. The eventual implications of higher government deficits and debt, with potentially higher
long-term interest rates, could drive a higher cost of capital over our planning period. Higher interest rates and/or taxes
to address the higher deficits also may impede real growth in gross domestic product and, therefore, vehicle sales over
our planning period.