Letter from Alan Mulally

In 2008, companies in the automotive sector and virtually every other industry were hit by a worldwide economic slowdown of historic proportions.

A lot has changed since our last report, but our blueprint for sustainability and our commitment to pursuing it have not changed. Our vision is to provide sustainable transportation that is affordable in every sense of the word: socially, environmentally and economically.

Fortunately, under our "One Ford" plan, we began aggressively restructuring and securing additional credit before this crisis began. Although economic conditions are challenging, under our current planning assumptions we have sufficient liquidity to make it through this downturn while investing in our global product plans. That is critically important, because we believe our new products deliver exactly what our customers and our society need – quality, safety, value and, importantly, fuel efficiency.

We are making significant progress on our priority sustainability issues despite the difficult conditions. In last year's report we described our plan to reduce by 30 percent the carbon dioxide (CO2) emissions of our new U.S. and European vehicles, relative to the 2006 model year. We are on track to exceed that goal. We articulated our commitment to deliver new vehicles that are best in class or among the best in class in their segment. For example, we introduced the Ford Fiesta ECOnetic model, which at 98g/km has the lowest CO2 emissions of any family car sold in Europe. (See below for more on how we are delivering on our CO2 commitment.) In addition, during 2008 we:

• Continued to improve our product development, manufacturing and management processes to boost vehicle quality, putting Ford on par with the best in the business according to several global third-party assessments.
• Improved the energy efficiency of our North American facilities by 4.5 percent1, resulting in savings of approximately $16 million. Since 2000, we have cut energy use at our global facilities by 34 percent and CO2 emissions by 45 percent. For the fourth year in a row, the U.S. Environmental Protection Agency recognized Ford's leadership and commitment to protecting the environment through energy efficiency with an Energy Star Partner of the Year Award in the category of Sustained Excellence.
• Received the most Top Safety Picks from the U.S.-based Insurance Institute for Highway Safety of any automaker and introduced a range of safety innovations to our vehicles globally. In the most recent EuroNCAP assessments, the Ford Kuga, Fiesta, European Focus, Mondeo, S-MAX and Galaxy received best-in-class, five-star adult protection and four-star child protection ratings.

These and other accomplishments and challenges are detailed in this report.

Improving Fuel Economy and Cutting Vehicle Greenhouse Gas Emissions

The fuel economy of our 2009 U.S. light-duty fleet will improve by an average of 14 percent compared to the 2005 model year; that percentage will grow to 36 percent for 2015 models.

This progress is the result of an unrelenting focus by the entire Ford team on efficiency improvements in all vehicle systems and attributes – from steering to aerodynamics to the power draw of the vehicle's electrical system. Our commitment is to provide affordable fuel economy for millions of customers.

To fulfill that commitment, we will begin introducing EcoBoost™ engine technology into our product lineup in 2009. EcoBoost uses a combination of turbocharging and direct injection to deliver up to 20 percent better fuel economy without sacrificing performance. Within three years we will deliver 750,000 EcoBoost-equipped vehicles annually worldwide, making a meaningful difference in fuel economy and the reduction of CO2 emissions. Our plan is to make EcoBoost available across the full range of our product portfolio, from small cars to large trucks. By 2013, EcoBoost will be available on 90 percent of our product nameplates.

In addition, in 2009 we are doubling the number of hybrid vehicle product offerings and volume that we offer in the United States. The Ford Escape Hybrid, the world's first hybrid SUV, is now in its fifth year of production. Our new Ford Fusion and Mercury Milan Hybrids deliver 41 miles per gallon, making them the most fuel-efficient midsize sedans in America.

To fulfill a key strategic element of our One Ford plan, we are developing vehicles based on global platforms. A good example is the new Ford Fiesta, an award-winning, stylish small car that offers excellent fuel economy. It was introduced in Europe and sold more than 100,000 units in its first six months of availability. It was then introduced in China in early 2009, with a version tailored to that market. By 2010 it will be produced at plants in Germany, Spain, Mexico, Thailand and China for sale in markets around the world.

This global approach to product development is also helping us accelerate our plans to move beyond conventional powertrain technologies. It means quite simply that we can take one platform and, depending on the markets and regional customer demands, design a vehicle with an internal-combustion engine, a diesel engine, a hybrid, a plug-in hybrid or a battery electric vehicle (BEV). This is, in essence, a "plug-and-play" approach that allows us to use different, appropriate technologies in high-volume global platforms for economies of scale.

Accelerating Electric Vehicles

In 2009, we are launching an aggressive plan to bring pure battery electric vehicles, next-generation hybrids and plug-in hybrids to market quickly and affordably. Our plan begins with the introduction of at least four new vehicles in the next four years that will use the most advanced forms of battery technology to achieve the performance and efficiency that our customers want.

In 2010, we will deliver a commercial battery electric vehicle for fleet customers. This BEV, developed in collaboration with Smith Electric Vehicles, Europe's leading battery electric commercial vehicle upfitter, will be based on our new Ford Transit Connect and will use lithium-ion battery packs to maximize range. It will provide a unique opportunity for small business owners in the U.S. to use zero-emission vehicles in their daily rounds.

In 2011, we will deliver a battery electric passenger vehicle in partnership with Magna International. This small car will be offered to retail and fleet customers in the U.S. It will be based on our new global Focus platform. We are aiming for a driving range of 100 miles on a single charge of its lithium-ion battery.

In 2012, we will deliver our next-generation hybrid vehicles, including a plug-in version. The next-generation system, already under development, will be even more efficient and cost-effective than today's and will use lithium-ion cells.

We are employing a comprehensive and collaborative approach to electrification that will tackle barriers to commercialization, such as batteries, standards and infrastructure. Our strategic partnerships in this effort include Southern California Edison, the Electric Power Research Institute and six additional electric utility companies from New York, Atlanta, Detroit and Raleigh.

Our global electrification strategy is a vital element of our business plan going forward. It is built on our core strengths and proven products, as well as our commitment to making Ford a leader in sustainable transportation.

Looking Ahead

Organizations like Ford do not turn on a dime. The improvements we are making reflect several years of strategic focus on improving the fuel economy and reducing the greenhouse gas emissions of our products, as documented in these reports. The huge increase in fuel prices during 2008 added urgency to the transformation, but the sudden collapse of those prices does not diminish it. We know that action on climate change remains as vital as ever, and that fuel prices will remain volatile in the short term and higher in the long term as we pay the true cost of energy. We are committed to collaborating productively with diverse stakeholders to support effective climate change policies in the United States and around the world.

We anticipate low sales volumes across all markets in 2009 due to the continuing global economic crisis. We will continue to take the decisive actions necessary to match production to demand and reduce costs. This will allow us to significantly reduce negative operating cash flow and position Ford for growth when the economy rebounds. Importantly, it also will allow us to continue launching an unprecedented number of new environmentally friendly vehicles.

We remain on track for our overall pre-tax results to be at breakeven or better in 2011, excluding special items. By remaining economically viable, we can continue to make positive contributions to society and reduce the environmental impact of our products.

These are uncertain times. We do not know exactly when or how much auto sales will recover. We do not know the fate of our U.S. competitors or the precise impact it will have on our Company.

But there are some certainties. The world's economies and people are more interconnected than ever. Issues like climate change and water availability demonstrate environmental and social interconnectedness. Economic conditions will be one of the predominant concerns of the public and politicians for the foreseeable future. However, sustainability is now solidly established as a top priority for citizens and governments around the world. At Ford, we believe this is a positive development, because only when we, the people of the world, come together to discuss these issues will real progress be made. We also believe strongly that our sustainability strategy will be a key component of our business going forward, and we look forward to the exciting challenges ahead.

Alan Mulally
President and Chief Executive Officer