Progress

Current Business Environment

The recession is having serious impacts on the automotive industry and Ford's financial turnaround efforts. Both U.S. Gross Domestic Product (GDP) and consumer spending decreased significantly in the second half of 2008 and are predicted to decline further in 2009. Spending on new vehicles historically represents about 4 percent of GDP and therefore is closely tied to economic conditions. In addition, the financial crisis and credit freeze are significantly affecting consumers' ability to obtain credit for major purchases like vehicles and limiting the ability of businesses to obtain financing for operations and investments. All of these factors make this an extremely difficult economic environment for the automotive industry. Auto sales fell by record amounts across the industry in 2008, and sales forecasts for 2009 suggest further declines. In addition, the difficult financial conditions increase the risk of bankruptcies within the automotive industry. Because the industry is highly interdependent – auto companies share more than 80 percent of their supply base – the risks to suppliers and competitors have the potential to impact us as well. In fact, as we were preparing this report, Chrysler and General Motors – two of our biggest competitors – did declare bankruptcy. The consequences of those events continue to unfold.

Even in these difficult economic conditions, however, we are making significant progress on our restructuring plan.

Progress Since Last Report

Some of our major financial and product achievements in 2008 include the following.

• Ford was profitable in the first quarter of 2008, before the global economic and financial crisis rapidly and dramatically shrank demand for automobiles.
• Ford remains on track to meet or beat its target of having its overall and North American Automotive pre-tax results to be breakeven or better in 2011, excluding special items.
• Ford modified its collective bargaining agreement with the UAW,1 lowering annual U.S. labor costs by about $500 million.
• Ford also reached agreement in principle with the UAW, subject to court and other approvals, to allow Ford to settle up to half of its cash obligations to the Voluntary Employee Benefit Association Trust (VEBA) with Ford common stock.
• Ford executed actions to reduce its Automotive debt obligations by $10.1 billion and lower its annual cash interest payments by more than $500 million.
• Ford committed that, beginning with the 2010 model year, all new vehicles will be best in class or among the best in class for fuel economy in their segment. All 2010 model year vehicles released as of May 2009 and many 2009 model year vehicles meet this commitment.
• In early 2009, Ford began selling the new 2010 Ford Fusions and Mercury Milans. Both the gasoline and hybrid versions of these vehicles lead their segments in fuel economy.
• The new Ford Fiesta, which went on sale in Europe in 2008, was the bestselling vehicle in all of Europe in March 2009, and has been the bestselling vehicle in the UK since it launched. Ford also began production of the Fiesta in our Asia Pacific and Africa region.
• The initial quality of Ford, Lincoln and Mercury brand vehicles in the U.S. improved by 5 percent compared to last year, surpassing Honda and tying Toyota for the overall lead, according to the latest Global Quality Research System (GQRS) study.2
• In the 2008 GQRS durability report, which tests vehicles after three years in service, the top non-luxury brands were Toyota, Mercury, Honda and Ford, with a difference of only 0.7 problems per vehicle between Toyota and Ford.
• Ford launched the Ford Advantage Plan in the U.S., offering customers who lose their jobs payment protection for up to 12 months.