| FORD MOTOR CO ITEM 1A Risk Factors We have listed below (not necessarily in order of importance or probability of occurrence) the most significant risk factors applicable to us: Continued decline in market share |
| Our market share in the United States has declined in each of the past five years, from 22dtta8prca in 2001 to 18dtta2prca in 2005 |
| Because a high proportion of our costs are fixed, these volume reductions have had an adverse impact on our results of operations |
| Our plant utilization rate in North America is approximately 75prca, which is not sustainable |
| While we are attempting to stabilize our market share and reduce our capacity over time through the steps described in the Way Forward plan, we cannot be certain that we will be successful |
| Continued declines in our market share could have a substantial adverse effect on our results of operations and financial condition |
| Continued or increased price competition resulting from industry overcapacity, currency fluctuations or other factors |
| The global automotive industry is intensely competitive, with overall manufacturing capacity far exceeding current demand |
| For example, the global automotive industry is estimated to have had excess capacity of approximately 15 million units in 2005 |
| Industry overcapacity has resulted in many of our principal competitors offering marketing incentives on vehicles in an attempt to maintain market share |
| These marketing incentives have included a combination of subsidized financing or leasing programs, price rebates and other incentives |
| As a result, we have not necessarily been able to increase prices sufficiently to offset higher costs of marketing incentives or other cost increases (eg, for commodities or health care) or the impact of adverse currency fluctuations in either the US or European markets |
| While we and General Motors have each announced plans to significantly reduce capacity, these reductions will take several years to complete and will only partially address the industryapstas overcapacity problems |
| A continuation or increase in these trends could have a substantial adverse effect on our results of operations and financial condition |
| A market shift (or an increase in or acceleration of market shift) away from sales of trucks or sport utility vehicles, or from sales of other more profitable vehicles in the United States |
| Trucks and sport utility vehicles have represented some of the most profitable vehicle segments in the United States |
| During the past year, there has been a general shift in consumer preferences away from medium- and large-sized sport utility vehicles, which has adversely affected our profitability |
| A continuation or acceleration of this general shift in consumer preferences away from sport utility vehicles, or a similar shift in consumer preferences away from truck sales or other more profitable vehicle sales, whether because of higher fuel prices or otherwise, could have an increasingly adverse effect on our results of operations and financial condition |
| A significant decline in industry sales, particularly in the United States or Europe, resulting from slowing economic growth, geo-political events or other factors |
| The worldwide automotive industry is affected significantly by general economic conditions (among other factors) over which automobile manufacturers have little control |
| This is especially so because vehicles are durable goods, which provide consumers latitude in determining whether and when to replace an existing vehicle |
| The decision whether and when to make a vehicle purchase may be affected significantly by slowing economic growth, geo-political events, and other factors |
| Consumer demand may vary substantially from year to year, and, in any given year, consumer demand may be affected significantly by general economic conditions, including the cost of purchasing and operating a vehicle and the availability and cost of credit and fuel |
| Moreover, like other manufacturers, we have a high proportion of costs that are fixed, so that relatively small changes in unit sales volumes may dramatically affect overall profitability |
| In recent years, industry demand has remained at high levels |
| Should industry demand soften because of slowing or negative economic growth in key markets or other factors, our results of operations and financial condition could be substantially adversely affected |
| For additional discussion of economic trends, see "e Item 7 |
| Lower-than-anticipated market acceptance of new or existing products |
| Offering highly desirable vehicles can mitigate the risks of increasing price competition and declining demand |
| Conversely, offering vehicles that are perceived to be less desirable (whether in terms of price, quality, styling, safety, overall value or otherwise) can exacerbate these risks |
| For example, if a new model were to experience quality issues at the time of launch, the vehicleapstas perceived quality could be affected even after the issues had been corrected, resulting in lower sales volumes, market share and profitability |
| Continued or increased high prices for or reduced availability of fuel |
| A continuation of or further increase in high prices for fuel or reduced availability of fuel, particularly in the United States, could result in weaker demand for relatively more profitable large and luxury car and truck models and increased demand for relatively less profitable small cars and trucks |
| An acceleration 17 _________________________________________________________________ ITEM 1A Risk Factors (continued) of such a trend, as demonstrated in the short-term with the recent spike in fuel prices following Hurricanes Katrina and Rita in the US Gulf Coast region, could have a substantial adverse effect on our results of operations and financial condition |
| Currency or commodity price fluctuations |
| As a resource-intensive manufacturing operation, we are exposed to a variety of market and asset risks, including the effects of changes in foreign currency exchange rates, commodity prices and interest rates |
| These risks affect our Automotive and Financial Services sectors |
| We monitor and manage these exposures as an integral part of our overall risk management program, which recognizes the unpredictability of markets and seeks to reduce the potentially adverse effects on our results |
| Nevertheless, changes in currency exchange rates, commodity prices and interest rates cannot always be predicted |
| In addition, because of intense price competition and our high level of fixed costs, we may not be able to address such changes even if they are foreseeable |
| Substantial changes in these rates and prices could have a substantial adverse effect on our results of operations and financial condition |
| For additional discussion of currency or commodity price risk, see "e Item 7A Quantitative and Qualitative Disclosures about Market Risk "e |
| Adverse effects from the bankruptcy or insolvency of a major competitor |
| We and certain of our major competitors have substantial "e legacy "e costs (principally related to employee benefits) that put each of us at a competitive disadvantage to other competitors |
| The bankruptcy or insolvency of a major competitor with substantial "e legacy "e costs could result in that competitor gaining a significant cost advantage (by eliminating or reducing contractual obligations to unions and other parties through bankruptcy proceedings) |
| In addition, the bankruptcy or insolvency of a major US auto manufacturer likely could lead to substantial disruptions in the automotive supply base, which could have a substantial adverse impact on our results of operations and financial condition |
| Economic distress of suppliers that has in the past and may in the future require us to provide financial support or take other measures to ensure supplies of components or materials |
| Automobile manufacturers continue to experience commodity cost pressures and the effects of industry overcapacity |
| These factors have also increased pressure on the industryapstas supply base, as suppliers cope with higher commodity costs, lower production volumes and other challenges |
| We have taken and may continue to take actions to provide financial assistance to certain suppliers to ensure an uninterrupted supply of materials and components |
| Most significantly, in 2005 we reacquired from Visteon twenty-three North American facilities in order to protect our supply of components |
| In connection with this transaction, we forgave dlra1dtta1 billion of Visteonapstas liability to us for employee-related costs, and incurred a pre-tax loss of dlra468 million |
| Work stoppages at Ford or supplier facilities or other interruptions of supplies |
| A work stoppage could occur at Ford or supplier facilities, most likely as a result of disputes under existing collective bargaining agreements with labor unions, or in connection with negotiations of new collective bargaining agreements |
| A dispute under an existing collective bargaining agreement could arise, for example, as a result of efforts to implement restructuring actions, such as those that are part of the Way Forward plan discussed under "e Item 7 |
| A work stoppage for this or other reasons at Ford or its suppliers, or an interruption or shortage of supplies for any reason (eg, financial distress, natural disaster or production difficulties affecting a supplier), if protracted, could substantially adversely affect our results of operations and financial condition |
| Single-source supply of components or materials |
| Some components used in our vehicles (eg, certain engines) are available from a single supplier and cannot be quickly or inexpensively re-sourced to another supplier due to long lead times and contractual commitments that might be required by another supplier in order to provide the component or materials |
| In addition to the risks described above regarding interruption of supplies, which are exacerbated in the case of single-source suppliers, the exclusive supplier of a key component potentially could exert significant bargaining power over price, quality, warranty claims or other terms relating to a component |
| Labor or other constraints on our ability to restructure our business |
| Substantially all of the hourly employees in our Automotive operations in the United States and Canada are represented by unions and covered by collective bargaining agreements |
| Our agreement with the United Automobile Workers (which expires in September 2007) and our agreement with the Canadian Automobile Workers (which expires in September 2008) provide for guaranteed wage and benefit levels throughout their terms and provide for significant employment security |
| As a practical matter, these agreements restrict our ability to eliminate product lines, close plants, and divest businesses during the terms of the agreements |
| These agreements may also limit our ability to change local work rules and practices to encourage flexible manufacturing and other efficiency-related improvements |
| Accordingly, these agreements may impede our ability to successfully implement and complete the Way Forward plan |
| 18 _________________________________________________________________ ITEM 1A Risk Factors (continued) Worse-than-assumed economic and demographic experience for our postretirement benefit plans (eg, discount rates, investment returns, health care cost trends) |
| We sponsor plans to provide postretirement pension, health care and life insurance benefits for our retired employees |
| The measurement of our obligations, costs and liabilities associated with these benefits requires that we estimate the present values of projected future payments to all participants |
| We use many assumptions in calculating these estimates, including discount rates, investment returns on designated plan assets, health care cost trends, and demographic experience (eg, mortality and retirement rates) |
| To the extent that actual results are less favorable than our assumptions there could be a substantial adverse impact on our results of operations and financial condition |
| For additional discussion of these assumptions, see "e Item 7 |
| The discovery of defects in vehicles resulting in delays in new model launches, recall campaigns or increased warranty costs |
| Meeting or exceeding many government-mandated safety standards is costly, especially where standards may conflict with the need to reduce vehicle weight in order to meet government-mandated emissions and fuel-economy standards |
| Government safety standards also require manufacturers to remedy defects related to motor vehicle safety through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that they do not comply with a safety standard |
| Should we or government safety regulators determine that a safety defect or a noncompliance exists with respect to certain of our vehicles, the cost of such recall campaigns could be substantial |
| Increased safety, emissions, fuel economy or other (eg, pension funding) regulation resulting in higher costs, cash expenditures, and/or sales restrictions |
| The worldwide automotive industry is governed by a substantial number of governmental regulations, which often differ by state, region and country |
| In the United States and Europe, for example, governmental regulation has arisen primarily out of concern for the environment, greater vehicle safety and a desire for improved fuel economy |
| Many governments regulate local product content and/or impose import requirements as a means of creating jobs, protecting domestic producers and influencing their balance of payments |
| The cost of complying with these requirements may be substantial |
| Our ability to comply with CAFE or greenhouse gas emissions standards depends heavily on the alignment of these standards with actual consumer demand |
| If consumers demand vehicles that are relatively large, have high performance, and/or are feature-laden while regulatory standards are skewed toward vehicles that are smaller and more economical, compliance becomes problematic |
| Moreover, if regulatory requirements call for rapid, substantial increases in fleet average fuel economy (or decreases in fleet average greenhouse gas emissions), the Company may not have adequate resources and time to make major product changes across most or all of its vehicle fleet |
| If significant increases in CAFE standards are imposed beyond those presently in effect or proposed, or if state greenhouse gas regulations are not overturned, we may be forced to take various costly actions that could have substantial adverse effects on our sales volume and profits |
| For example, we may have to curtail production of certain vehicles such as family-size, luxury, and high-performance cars and full-size light-trucks; restrict offerings of selected engines and popular options; and/or increase market support programs for our most fuel-efficient cars and light-trucks in order to maintain compliance |
| Governmental Standards "e for additional discussion |
| Unusual or significant litigation or governmental investigations arising out of alleged defects in our products or otherwise |
| However, compliance with governmental standards does not necessarily prevent individual or class action lawsuits, which can entail significant cost and risk |
| For example, the preemptive effect of the Federal Motor Vehicle Safety Standards is often a contested issue in litigation, and some courts have permitted liability findings even where our vehicles comply with federal law |
| Furthermore, simply responding to litigation or government investigations of our compliance with regulatory standards requires significant expenditures of time and other resources |
| A change in our requirements for parts or materials where we have entered into long-term supply arrangements that commit us to purchase minimum or fixed quantities of certain parts or materials, or to pay a minimum amount to the seller ( "e take-or-pay contracts "e ) |
| We have entered into a number of long-term supply contracts that require us to purchase a fixed quantity of parts to be used in the production of our vehicles |
| If our need for any of these parts were to lessen, we could still be required to purchase a specified quantity of the part or pay a minimum amount to the seller pursuant to the take-or-pay contract |
| We also have entered into a small number of long-term supply contracts for raw materials (for example, precious metals used in catalytic converters) that require us to purchase a fixed percentage of mine output |
| If our need for any of these raw materials were to lessen, or if a supplierapstas output of materials were to increase, we could be required to purchase more materials than we need |
| Inability to access debt or securitization markets around the world at competitive rates or in sufficient amounts due to additional credit rating downgrades or otherwise |
| Recent lowering of credit ratings for Ford and Ford Credit has increased borrowing costs and caused Ford Creditapstas access to the unsecured debt markets to become more restricted |
| In response, Ford Credit has increased its 19 _________________________________________________________________ ITEM 1A Risk Factors (continued) use of securitization and other sources of liquidity |
| Over time, and particularly in the event of any further credit rating downgrades or a significant decline in the demand for the types of securities it offers, Ford Credit may need to reduce the amount of receivables it purchases |
| A significant reduction in the amount of purchased receivables would significantly reduce ongoing profits and could adversely affect Ford Creditapstas ability to support the sale of Ford vehicles |
| For additional discussion, see "e Item 7 |
| Credit risk is the possibility of loss from a customerapstas or dealerapstas failure to make payments according to contract terms |
| Credit risk (which is heavily dependent upon economic factors including unemployment, consumer debt service burden, personal income growth, dealer profitability and used car prices) has a significant impact on Ford Creditapstas business |
| The level of credit losses Ford Credit may experience could exceed its expectations |
| For additional discussion regarding credit losses, see "e Item 7 |
| Increased competition from banks or other financial institutions seeking to increase their share of financing Ford vehicles |
| No single company is a dominant force in the automotive finance industry |
| Some of Ford Creditapstas bank competitors in the United States have developed credit aggregation systems that permit dealers to send, through a single standard system, retail credit applications to multiple finance sources to evaluate financing options offered by these finance sources |
| This process has resulted in greater competition based on financing rates |
| In addition, Ford Credit is facing increased competition from banks on wholesale financing for Ford dealers |
| Competition from such competitors may increase, which could adversely affect Ford Creditapstas profitability and the volume of its business |
| Ford Credit is exposed to interest rate risk, and the particular market to which it is most exposed is US dollar LIBOR Ford Creditapstas interest rate risk exposure results principally from "e re-pricing risk, &apos &apos or differences in the re-pricing characteristics of assets and liabilities |
| Any inability to adequately control this exposure could adversely affect its business |
| For additional discussion of interest rate risk, see "e Item 7A Quantitative and Qualitative Disclosures about Market Risk "e |
| Collection and servicing problems related to finance receivables and net investment in operating leases |
| After Ford Credit purchases retail installment sale contracts and leases from dealers and other customers, it manages or services the receivables |
| Any disruption of its servicing activity, due to inability to access or accurately maintain customer account records or otherwise, could have a significant negative impact on its ability to collect on those receivables and/or satisfy its customers |
| Lower-than-anticipated residual values or higher-than-expected return volumes for leased vehicles |
| Ford Credit projects expected residual values (including residual value support payments from Ford) of the vehicles it leases |
| Actual proceeds realized by Ford Credit upon the sale of returned leased vehicles at lease termination may be lower than the amount projected, which reduces the profitability of the lease transaction |
| Among the factors that can affect the value of returned lease vehicles are the volume of vehicles returned, economic conditions, and the quality or perceived quality, safety or reliability of the vehicles |
| All of these, alone or in combination, have the potential to adversely affect Ford Creditapstas profitability |
| For additional discussion regarding residual value, see "e Item 7 |
| New or increased credit, consumer or data protection or other regulations resulting in higher costs and/or additional financing restrictions |
| As a finance company, Ford Credit is highly regulated by governmental authorities in the locations where it operates |
| In the United States, its operations are subject to regulation, supervision and licensing under various federal, state and local laws and regulations, including the federal Truth-in-Lending Act, Equal Credit Opportunity Act and Fair Credit Reporting Act |
| In some countries outside the United States, Ford Creditapstas subsidiaries are regulated banking institutions and are required, among other things, to maintain minimum capital reserves |
| In many other locations, governmental authorities require companies to have licenses in order to conduct financing businesses |
| Efforts to comply with these laws and regulations impose significant costs on Ford Credit, and affect the conduct of its business |
| Additional regulation could add significant cost or operational constraints that might impair its profitability |
| Inability to implement the Way Forward plan |
| We believe that our ability to implement the Way Forward plan is very important to our future success |
| Any of the above or other factors that prevent us from executing the Way Forward plan ultimately could have a substantially adverse impact on our business |
| For additional discussion of the Way Forward plan, see "e Item 7 |