Responding to Consumer Demands

Hybrids

Ford introduced the world's first hybrid SUV in 2004, the Ford Escape Hybrid. We followed up with the Mercury Mariner, a sibling to the Escape, in 2005. Both of these vehicles are full hybrids, meaning they can run exclusively on battery power, exclusively on gas power, or on a combination of both. Since their launch we have sold nearly 47,000 Escape and Mercury Mariner Hybrids in North America. This represents approximately 10 percent of Escape and Mariner sales. In 2007, Mazda will launch a hybrid version of the Tribute compact SUV, a sibling to the Escape and Mariner. The 2008 MY 2.3L Escape Hybrid has 89 percent better fuel economy in City driving when compared to the 3.0L V6 gasoline model which has similar engine performance. When compared to the 2.3L Escape I4 gasoline, the hybrid powertrain still offers a fuel economy improvement in City driving of 70 percent while offering superior power. Even with the launch of competitors' hybrid SUVs, the Escape, Mariner and Tribute hybrids remain the most fuel-efficient SUVs currently available.

In 2006, Volvo announced the establishment of a new hybrid development center in Gothenburg, Sweden, complementing the expertise developed through the launch of Ford's North American hybrid vehicles.

We plan to launch hybrid versions of the popular Ford Fusion and Mercury Milan sedans in 2008 in North America. In addition, we are developing next-generation battery and hybrid powertrain technologies for future vehicles. For example, we showcased a drivable, plug-in, hydrogen fuel cell hybrid concept called the Ford Edge HySeries™ at the Washington, D.C. auto show in February 2007.

We treated lawmakers to a test drive of this concept vehicle, which has improved battery storage and can be charged by plugging into a standard electrical socket. HySeries drive allows a vehicle to run significantly longer on battery power alone, dramatically increasing fuel economy and decreasing tailpipe emissions. The Ford Edge HySeries concept can be driven approximately 25 miles on pure battery power before switching over to hydrogen-assisted power. The HySeries Drive powertrain delivers a combined city/highway gasoline equivalent fuel economy rating of 41 mpg.

Plug-in hybrid technology is an exciting opportunity; however, significant challenges remain. Perhaps the most difficult is overcoming limitations in battery technology. The current Hyseries system uses lithium ion batteries. This technology is preferable to the nickel metal hydride (NMH) batteries used in the majority of today's production hybrids. NMH batteries have limited power and energy density and, as volumes increase, they become cost-prohibitive due to their high nickel content. Lithium ion batteries are the preferred replacement technology; however, they will require significant advancement before plug-in hybrids can become a reality for most consumers. Lithium ion batteries are currently cost-prohibitive for widespread use, and they have technical issues with over-charging and internal shorting that currently require expensive external monitoring and control systems. Ford is working to develop more cost-effective, lighter and more durable lithium ion batteries. We are also working to develop batteries that can be recycled and/or reused at the end of a vehicle's life.

Advanced Clean Diesel

Diesel-powered vehicles account for almost 50 percent of new vehicle sales in Europe, and diesels make up approximately 50 percent of the total vehicle fleet on the road. In North American markets, however, diesel use all but disappeared in the passenger vehicle market years ago because, compared to gasoline engines, the diesels available at that time were dirty, smelly and noisy. Diesel use has been challenging in the United States because of stringent emissions regulations. With the phasing-in of cleaner diesel fuels in 2007 and advances in clean diesel technology, however, there is new opportunity for the expanded use of diesel technologies in North America.

Modern diesels offer some significant advantages over traditional gasoline engines. They are up to 30 percent more fuel efficient, and they emit up to 20 percent less CO2. In addition, direct-injection diesel engines provide more power and torque, resulting in better driving performance and towing capabilities. Ford engineers are developing next-generation diesel technologies that will maintain these advantages and minimize emissions to meet strict U.S. air pollution standards. These technologies include catalytic particulate filters and NOx reduction catalysts that will significantly reduce the higher particulate matter and NOx emissions associated with diesel systems. These advances will provide another route to more fuel-efficient and cleaner mobility.

With the 2008 Ford F-Series Super Duty lineup of pickup trucks, Ford will introduce a new generation of cleaner, quieter diesel engines. The new 6.4-liter Power Stroke® diesel is Ford's cleanest, quietest pickup diesel ever, with particulate (soot) emissions equivalent to a gasoline engine. It is the first pickup engine in North America to use a high-precision, common-rail fuel injection system featuring piezo-electric injectors. Ford will also be launching a diesel version of the Ford F-150. And Ford is launching the PowerShift dual clutch system on diesel engine models of the Volvo V50 and S40 in Europe in 2007.

Renewable/Biofueled Vehicles

Ford has a long history of developing vehicles that run on renewable biofuels. We have been selling Flexifuel vehicles (FFVs) capable of running on E85 ethanol fuel since 1997, and we have more than 5 million FFVs on the road today, including 2 million in North America and 3 million in Brazil. In 2006 alone, we produced approximately 250,000 FFVs. We currently offer 14 models in the United States, Europe and South America that can run on E85, including the Ford Crown Victoria, Mercury Grand Marquis, Lincoln Town Car and Ford F-150 in North America; the Volvo XC-60, Ford Mondeo, S-MAX, C-MAX, Focus and Galaxy in Europe; and the Fiesta, EcoSport and Focus in Brazil.

We are continuing to support the development of the next generation of biofuel vehicles and develop vehicles capable of running on advanced biofuels. Our current research focuses on two primary fuel types: bio-ethanol and biodiesel. Bio-ethanol is a gasoline alternative made from plant material. Most bio-ethanol in the United States is made from corn. In other parts of the world, it is made from other locally available crops, including sugar cane in Brazil and sugar beet in Europe. All modern gasoline vehicles can run on a gasoline/bio-ethanol mixture of up to 10 percent bio-ethanol, called E10. Ford's FFVs run on a mixture of 85 percent ethanol mixed with gasoline (E85).

Biodiesel is a diesel alternative made from oil seeds, such as soy, canola or palm. In the United States, most biodiesel is currently made from soybeans. Any recent-model Ford truck with a diesel engine can run on a mixture including up to 5 percent biodiesel (B5), but higher amounts are not recommended using the biodiesel that is available today. Ford is working with Michigan State University researchers and other partners to develop a biodiesel fuel that will allow utilization of at least 20 percent biodiesel (B20) in future diesel vehicles.

Bio-ethanol, biodiesel and other renewable fuels have significant advantages. They can be made with locally available raw materials, reducing the need for foreign-supplied oil and increasing energy independence, and they produce fewer lifetime CO2 emissions. However, important issues remain about biofuels' energy density, the best way to use them to reduce greenhouse gas emissions, and their ability to meet our fuel needs without diminishing our food supplies.

Ford is working to support and promote the next generation of biofuels, including cellulosic biofuels. These are fuels that can be made from plant cellulose – stalks, leaves and woody matter – instead of from plant starch or oil seeds. Cellulosic biofuels have many advantages. They minimize possible competition between food and fuel. They allow more efficient use of seed crops, such as corn and soybeans, by using more of the plant. In addition, cellulosic biofuels can be made from crops that require less energy-intensive farming, such as switchgrass and bamboo. This would further reduce the total CO2 footprint of vehicles running on biofuels.

Ford is also very interested in the recently announced partnership between BP – a long-time partner of Ford – and DuPont, to develop bio-butanol as a vehicle fuel. Bio-butanol is a bio-based fuel, similar to ethanol, made from corn starch, sugar or eventually cellulose just like bio-ethanol. If bio-butanol can be produced as efficiently as bio-ethanol, it will have several advantages. First, it has similar properties to gasoline and can be distributed through the existing fueling infrastructure. In addition, it has higher energy content than ethanol and so achieves higher mileage per gallon. Ford is closely watching the developments of this partnership and is ready to work on the vehicle development required to make bio-butanol fuel a reality, if it proves to be a cost-effective solution.

To make an impact on greenhouse gas emissions and energy security, biofuels must become more widely available. In North America, Ford is working with VeraSun to develop the Midwest E85 ethanol corridor, which will increase the number of ethanol fueling stations in Missouri and Illinois by more than one-third and make it possible for the driver of a Flexifuel vehicle to travel from St. Louis to Chicago fueled entirely by E85. Also, we recently joined DaimlerChrysler, General Motors and 70 other companies in support of the 25x'25 campaign, an effort to increase the use of renewable fuels in the United States to 25 percent of our fuel needs by 2025. In addition, Ford has committed to doubling the number of FFVs in its lineup by 2010, and, if the market dictates, we will commit to expanding our FFV output to 50 percent of our total vehicle production by 2012.

Ford is also working in Europe and other parts of the world to promote the use of biofuels. In Europe, we have two biofuel projects. The first is BioEthanol for Sustainable Transport, or BEST, which focuses on ethanol. Pilot projects are planned or underway in the UK, Spain, Italy and the Netherlands. The second, PROCURA, looks at ethanol, biodiesel and natural gas, and is establishing test programs in Italy, Portugal, Poland, Spain and the Netherlands.

In Thailand, Ford introduced a version of its popular Focus model that runs on a specific bio-ethanol/gas blend offered in that market. In Brazil, where ethanol technology is well established and FFVs are the dominant vehicle technology, Ford has produced nearly 3 million vehicles with the ability to run on bio-ethanol.

Are bio-fuels better for the environment and energy independence?

Much of the interest in biofuels results from their potential to improve the environmental impacts of vehicles and contribute to energy independence. Biofuels are made from domestic and renewable resources, and they help to reduce climate-change-causing greenhouse gas emissions because the plants from which they are made absorb CO2 while they are growing. Are biofuels the solution to our growing fuel-related environmental, economic and political problems? The issues are complex. We believe that biofuels are an important part of the equation for addressing climate change and energy security. We recognize, however, that major advances need to be made in production processes, source materials and fuel types in order to achieve the full promise of biofuels.

Some of the issues with today's biofuels include:

• Energy density: Ethanol has a lower energy density than gasoline. This means that there is less energy in a gallon of ethanol than in a gallon of gasoline. As a result, drivers using blends with a high amount of ethanol will have to refuel more frequently.
• Life cycle greenhouse gas (GHG) emissions: The plants used to produce biofuels capture as much carbon dioxide during their growth as they release when burned. However, current farming and production processes utilize fossil fuels in the production of bio-ethanol, so the use of bio-ethanol in vehicles still results in a net release of GHG emissions than fossil fuel. We agree with studies that suggest current E85 ethanol from corn produces approximately 20 to 30 percent less life cycle GHG emissions. We also believe that developing ligno-cellulose or biomass-based biofuels with next-generation processes will significantly decrease GHG emissions, perhaps up to 90 percent1.
• Competition with food supply: Another issue with current corn- and soybean-based biofuels is the concern that they will compete with food supplies and drive up food prices. If next-generation biofuels can efficiently utilize biomass such as plant stalks, woodchips or grasses and be grown on marginal land with little irrigation, then competition with food crops should not be a significant issue.

At Ford, we are following the debates over biofuels closely. We agree with the general consensus among scholars and industry experts that the current generation of biofuels, which are primarily corn-based ethanol and soybean-based biodiesel, have some environmental benefits. And, they are a first step toward cleaner vehicles and energy independence. However, we are actively investigating next-generation biofuels that have even greater environmental and economic benefits. We believe that advances in the efficiency of farming technologies and biomass processes, and the development of alternative biofuels, such as bio-butanol, will significantly increase the benefits and long-term sustainability of biofuels. Even with these improvements, however, solving our climate change and energy security problems will require a multifaceted set of solutions, including new fuels, dramatic improvements in vehicle fuel economy and changes in consumer driving patterns and practices.

Hydrogen Internal-Combustion Engines

Ford was the first automaker to develop commercially available hydrogen-powered internal-combustion engines (H2ICEs), which use the same basic technology as gasoline-powered engines but run on hydrogen fuel. We view this as an important bridge technology to hydrogen-powered fuel cells. We currently have a fleet of eight E-450 H2ICE shuttle buses on the road in Florida as part of that state's Hydrogen Highway initiative. The 12-passenger shuttle buses use a 6.8-liter supercharged Triton V10 engine with a hydrogen storage system equivalent to 29 gallons of gasoline. In addition to the Florida fleet, we will place up to 10 H2ICE shuttles with the Canadian government in support of their vision for a hydrogen-based economy. In 2006, we had a total of 30 H2ICE shuttle buses on the road. Ford is continuing discussions with other potential partners that could culminate in more demonstration projects in 2007.

Hydrogen Fuel Cells

We are continuing to prove out, develop and demonstrate hydrogen fuel cell technology with our Focus FCV. The Focus FCV uses our third-generation technology and is one of the industry's first hybridized fuel cell vehicles, meaning it has a battery as well as a fuel cell. A test fleet of 30 of our FCVs is currently in operation in cities throughout North America and Europe. In 2005, we placed Focus FCVs in Orlando, Sacramento, Southeast Michigan and Vancouver, British Columbia. In 2006, 10 more FCVs were placed in Berlin and Aachen, Germany. Before being placed with commercial test fleets, these vehicles underwent an extensive and accelerated testing protocol to ensure they could last 4.5 years and 65,000 miles without incident. While on the road, the vehicles are providing important information about the performance of hydrogen fuel cell vehicles in a wide range of driving and climate conditions. The knowledge gained from this test fleet will feed directly into Ford's next-generation hydrogen fuel cell program. We are also using the tools of nanotechnology to develop more efficient fuel cells and hydrogen storage methods.

Even with the advances we have made in hydrogen technology over the past few years, we still have many challenges to overcome before hydrogen-fueled vehicles can replace current vehicle technology. For example, storing hydrogen fuel in vehicles without losing an unacceptable amount of passenger and cargo space remains a significant challenge. The driving range of current hydrogen vehicles between refueling is another challenge. Consumers expect to be able to drive 300 or more miles before stopping to refuel, which current hydrogen vehicles cannot achieve. Hydrogen vehicles are also not yet cost-competitive with traditional vehicles. Producing and distributing hydrogen fuel is another significant hurdle. As there is no widespread hydrogen fueling system, new infrastructure must be put in place.

Working alone, Ford will not be able to overcome all of these challenges. That is why Ford is collaborating with a wide range of partners on the development of hydrogen vehicles, fuels and fueling systems. These partners include:

• The Freedom CAR and Fuel Partnership, a partnership between Ford, GM, DaimlerChrysler, five energy providers and the U.S. Department of Energy to develop vehicles and fuels that will provide freedom from imported oil and freedom from carbon-based fuel emissions
• The Clean Energy Partnership, a consortium of 10 corporate partners and the German government working to demonstrate the reliability of hydrogen as a mobile fuel
• The Hydrogen and Fuel Cells Canada Partnership, which is working to raise awareness of the economic, environmental and social benefits of hydrogen and fuel cell technologies