MATERIAL ISSUES

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Climate Change Risks and Opportunities

Over the past decade, concerns about climate change, the price of fuel and energy security – along with the global recession – have dramatically reshaped the automotive business. This creates substantial risks for automakers but also opportunities to grow and expand. Below we discuss the general trends driving change in our markets and take a closer look at several key markets. We also discuss the physical and supply chain risks to our business posed by climate change.

Our Markets

During 2009, the global economic recession took its toll on the market for new automobiles, with sales down significantly in the United States, and South America. In Europe, passenger car sales held steady, spurred by government incentives, while commercial vehicle sales declined. In China, sales continued to grow. By the end of the year, China had surpassed the United States as the world's largest market for new automobiles. Other factors influencing our markets included the following:

The policy landscape is becoming more complex and interconnected with other market forces. The Public Policy section of this report discusses regulatory developments in detail, but in brief, all of our major markets are increasingly shaped by government actions to regulate fuel economy and CO₂ emissions and provide incentives to shift consumer and business behavior. Many governments are also actively involved in promoting research and development into new vehicle and battery technologies.
Although the cost of gasoline and diesel fuels moderated during 2009, concern about the potential for rising fuel prices and price volatility continues to drive a long-term trend toward smaller and more fuel-efficient vehicles.
In many markets, governments and consumers are seeking to rely as much as possible on domestic sources of transportation fuel and reduce imports of petroleum products.
Investors are showing greater concern about climate change as a material risk for many companies. A variety of voluntary public registries and information services (like the Carbon Disclosure Project) are providing information on greenhouse gas emissions to investors, while in some countries companies are required to disclose information about their climate risks. Most recently, the U.S. Securities and Exchange Commission (SEC) issued guidance to help publicly traded companies assess whether climate-related impacts on their businesses will require disclosure to the SEC. Thus, providing climate-change-relevant information to investors and shaping our business strategy with climate change in mind are important elements of maintaining access to capital.

These market shifts are very significant to our Company. Everywhere we operate, the financial health of our Company depends on our ability to predict market shifts of all kinds and to be ready with the products and services our customers demand. Our actions to improve the fuel economy of our vehicles, along with their quality, performance and features, have helped us take advantage of these changes and gain market share in North America, Europe and South America. However, continued uncertainty about the GHG regulatory framework, particularly in the United States, and the possibility that fuel prices could decline mean that there is also a risk that consumer preferences will shift back toward less fuel-efficient vehicles.

Our product globalization strategy is designed to help us respond to changing markets and regional preferences. We are leveraging our best technology from around the world to create global platforms that offer superior fuel economy, safety, driving dynamics and customer features. We then tailor each global platform to national or regional preferences and requirements. New technology is also cutting the time required to bring new vehicles to market, which helps us respond more effectively to the ever-increasing pace of change in our markets.

Please see the Economy section for further discussion of our changing markets and how we are responding to them, and the Our Strategy: Blueprint for Sustainability section for discussion of Ford's strategic response to the risks and opportunities posed by the climate change issue.

Regional Market Trends

North America

New regulations (discussed in the Climate Change Policy and Partnerships section) and concerns about fuel prices, energy security and the impacts of climate change are encouraging the sales of more fuel-efficient vehicles. Between 2005 and 2009, the car share of the U.S. market increased from 45.4 percent to 52.5 percent, while truck sales declined from 54.6 percent to 47.5 percent of the market. Sales of small cars increased from 17.1 percent to 23.7 percent of all sales. Hybrid electric vehicles made up about 3 percent of the market in 2009.

Europe

In Europe, the long-term trend of high-priced fuel and more fuel-efficient vehicles has continued the market shift toward diesel-powered vehicles, which now make up more than half of all new vehicle sales. This trend is reinforced by sales incentives in some European countries designed to encourage new vehicle sales, with the aim of reducing carbon dioxide emissions from older, less-efficient vehicles. Some of these incentives are bound to upper limits of CO₂ emissions of 160 g/km and less, which has boosted sales of small cars. Other schemes are linked to regulatory emissions standards (e.g., Euro 4). In addition, tough new CO₂ emission regulations have come into effect, which will continue to drive fuel-economy improvements in new automobiles. Automakers, including Ford, have begun to introduce and announce plans for hybrid electric, battery electric and plug-in hybrid electric vehicles for the European market.

Asia

As auto sales slumped in North America during 2009, the Asian auto market continued to grow, and China surpassed the United States to become the largest single automobile market in the world. Rising incomes are fueling growth in all segments of the market.

The Chinese government is promoting hybrids and electrics and supporting research in those areas, based on an interest in growth balanced with a desire for energy security and a cleaner environment. The government currently provides limited incentives to fleet purchasers of "new energy vehicles" (mostly electric) under local government control through a pilot program in 13 cities. Both domestic and global automakers are considering the introduction of electric vehicles, and some hybrids are currently available.

South America

In Brazil, our largest market in South America, the use of biofuels is widespread as a result of national policy and consumer preference. All gasoline in Brazil is blended with 20 to 25 percent ethanol, and pure ethanol is also widely used. Most new vehicles offered are flexible fuel. While fuel economy and CO₂ emissions are not currently regulated in Brazil, a voluntary fuel-economy labeling program is already in place, along with a star ranking program for light vehicles that favors low-emission, low-CO₂, ethanol, flexible-fuel and hybrid vehicles. Consumers tend to choose vehicles with small engines, and 90 percent of new vehicles purchased have flexible-fuel capabilities. Several hybrid vehicles are currently offered or are planned for introduction to Brazil.

Physical Risks

Global climate change raises the potential for shifting patterns of extreme weather and other risks to our facilities. For insurance purposes, we assess the risks each of our facilities faces (with input from third-party engineers) at least annually. This risk assessment is updated based on new data and takes into account the risk of exposure to hurricanes, tornadoes, other storms, flooding and earthquakes. As a result of this process, we believe we have a good understanding of the physical risks faced by our facilities and how those risks are changing over time.

Extreme weather has the potential to disrupt the production of natural gas, a fuel necessary for the manufacture of vehicles. Supply disruptions raise market rates and jeopardize the consistency of vehicle production. To minimize the risk of production interruptions, Ford has established firm delivery contracts with natural gas suppliers and installed propane tank farms at key manufacturing facilities as a source of backup fuel. Higher utility rates have prompted Ford to revisit and implement energy-efficiency actions that previously did not meet our internal rate of return.

Climate change also has the potential to affect the availability and quality of water. We are examining this issue as part of the development of our water strategy.

Supply Chain Risks

Our suppliers, which are located in more than 60 countries, are subject to market, regulatory and physical risks as a result of GHG regulation and the impacts of climate change. These risks could affect their competitiveness or ability to operate, creating the potential for disruptions to the flow of supplies to Ford. For example, suppliers may be subject to reporting requirements, fees or taxes, depending on where their operations are located. See the Progress and Performance section for a discussion of actions we are taking to better understand the climate risks of our suppliers and promote a competitive supply chain.