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 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 smaller and 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.

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 on greenhouse gas emissions to investors, 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 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 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 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 sale of more fuel-efficient vehicles. Between 2005 and 2010, the car share of the U.S. market increased from 47.2 percent to 49.6 percent, while the truck share declined from 52.8 percent to 50.4 percent. Sales of small cars increased from 19 percent to 21.9 percent of all sales. Sales of hybrid electric vehicles declined in 2010 but began to rise again in early 2011 as the cost of fuel rose significantly.

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 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 and Euro 5). 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 government currently provides limited incentives to fleet purchasers of “new energy vehicles” (predominately plug-in electric) under local government control through a pilot program in 20 cities that applies to vehicles made by Chinese automakers. Both domestic and global automakers are considering the introduction of electric vehicles, and a range of micro, medium and full 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 85 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 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 Supply Chain section for a discussion of actions we are taking to better understand the climate risks of our suppliers and promote a competitive supply chain.