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 changed the automotive business. This creates substantial risks for automakers but also opportunities for innovation that enable growth and expansion. 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

There is little doubt that the climate change issue has fundamentally reshaped automotive markets around the world. The policy landscape is becoming more complex and interconnected with other market forces. The Climate Change Policy and Partnerships 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 carbon dioxide (CO₂) emissions, introduce low-carbon fuels and provide incentives to shift consumer and business behavior. Many governments are also actively involved in promoting the research, development and purchase of new vehicle and battery technologies.

Concerns about fuel prices and price volatility continue to drive a long-term trend toward consumer interest in more fuel-efficient vehicles. In many markets, energy security concerns are also a driver of fuel economy regulation and alternative fuel development, as governments and consumers seek to rely as much as possible on domestic sources of transportation fuel and reduce imports of petroleum products. Recent developments in natural gas shale, domestic oil discoveries and increased renewable fuel are the initial steps for the U.S. to become energy independent in the future.

Investors are showing greater concern about climate change as a material risk for many companies. A variety of voluntary public registries and information services (such as the Carbon Disclosure Project) are providing information to investors about greenhouse gas emissions, while in some countries companies are required to disclose information about their climate risks. 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 product globalization strategy is designed to help us respond to changing markets and regional preferences and the risks and opportunities presented by the climate change issue. We have created global vehicle platforms that offer superior fuel economy, safety, quality and customer features. We then tailor each global platform to national or regional preferences and requirements. Our pledge that all our vehicles will offer the best or among the best fuel economy in their segment, coupled with a technology migration plan that is based on the science of climate change, positions us to keep pace with or get ahead of regulatory 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.

This approach has helped us take advantage of the market demand for more fuel-efficient vehicles and gain market share. However, the possibility that fuel prices could decline means there is also a risk that consumer preferences will shift back toward less fuel-efficient vehicles.

Please see the Financial Health section for further discussion of our changing markets and how we are responding to them, and the Ford’s Climate Change Strategy section for discussion of our 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 sale of more fuel-efficient vehicles. National surveys in the U.S. continue to show that fuel economy is a key consideration in customers’ vehicle purchase decisions. This is echoed by our own customer research and feedback. And, the trend is influencing buyer behavior. Between 2006 and 2012, the U.S. Environmental Protection Agency (EPA) projects that the car share of the U.S. market increased from 57.9 percent to 63.9 percent, while the truck share declined from 42.1 percent to 36.1 percent. The EPA also projects that sales of small cars increased from 21.2 percent of sales in 2006 to 25.1 percent in 2012. And they project that sales of hybrid electric vehicles increased from 2.2 percent in 2011 to 3.7 percent in 2012.

In addition, over the past decade the use of ethanol in the U.S. gasoline market has shifted from approximately 10 percent of the available gasoline containing 10 percent ethanol (E10) in 2002, to the widespread availability of E10 in nearly all gasoline as of the end of 2012. With the implementation of the Energy Security and Independence Act of 2007, the trend of increasing renewable fuel use in both gasoline and diesel is likely to continue and will be limited only by the capability and compatibility of the retail refueling infrastructure to deliver such fuels to the customer, as well as the capability of future vehicles to handle the increased renewable fuel content.

Europe

In Europe, the long-term trend of high-priced fuel and increasing fuel efficiency 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 CO₂ emissions from older, less-efficient vehicles. Several European countries have CO₂-based taxation with aggressive tax break points, which has boosted sales of smaller, more fuel-efficient cars. 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

The Chinese government is actively promoting vehicle electrification and supporting research in this area, based on its desire to support growth and development, balanced with the need for energy security and a cleaner environment. The Chinese central government currently provides limited incentives to fleet purchasers of “new energy vehicles” (defined as battery electric and plug-in electric vehicles) through a pilot program in 25 cities that applies to vehicles manufactured in China. However, sales of the new energy vehicles have been consistently under the target set by the central government. The majority of domestic and global automakers are launching or considering launching a range of hybrid electric vehicle technologies in China, including automatic stop-start (micro-hybrid) and full hybrid electric vehicles. Some of these technologies are already available in the Chinese market. The majority of new energy vehicles currently available in China are offered by domestic Chinese manufacturers under national Chinese brands.

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 18 to 25 percent ethanol, and pure ethanol is also widely used. A new regulation, the Automotive Regime, issued in 2012 requires that manufacturers selling vehicles in Brazil meet a minimum 12 percent improvement in industry-wide fuel efficiency by October 2017. A voluntary fuel-economy labeling program is also 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 approximately 85 percent of new vehicles purchased have flexible-fuel capabilities. Since 2010, Ford has offered the Fusion Hybrid in Brazil. Porsche, Mercedes and Toyota also offer hybrid vehicles in 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 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 greenhouse gas 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 Supply Chain section for a discussion of actions we are taking to better understand the climate risks of our suppliers and to promote a competitive supply chain.