Ford 2003 Annual Report Download - page 36

34 FORD MOTOR COMPANY
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
GENERATION OF REVENUE, INCOME AND CASH
Our Automotive sector’s revenue, income and cash are generated primarily from sales of vehicles to our dealers and distributors
(i.e., our customers). Vehicles we produce generally are subject to firm orders from our customers and generally are deemed sold
(with the proceeds from such sale recognized in revenue) immediately after they are produced and shipped to our customers.
This is not the case, however, with respect to vehicles produced for sale to daily rental car companies that are subject to a
guaranteed repurchase option or vehicles produced for use in our own fleet (including management evaluation vehicles). Vehicles
sold to daily rental car companies that are subject to a guaranteed repurchase option are accounted for as operating leases, with
lease revenue and profits recognized over the term of the lease. When we sell the vehicle at auction, we recognize a gain or loss
on the difference, if any, between actual auction value and the projected auction value. Therefore, except for the impact of the
daily rental units sold subject to a guaranteed repurchase option and those units placed into our own fleet, vehicle production
is closely linked with unit sales and revenue from such sales.
Our Financial Services sector’s revenue is generated primarily from interest on finance receivables, including interest, net of
certain deferred loan origination costs that are included as a reduction of financing revenue, and such revenue is recognized
over the term of the receivable using the interest method. Also, revenue from operating leases, net of certain deferred origination
costs, is recognized on a straight-line basis over the term of the lease. Income is generated to the extent revenues exceed
expenses, most of which are interest and operating expenses.
Transactions between the Automotive and Financial Services sectors occur in the ordinary course of business. For example,
Ford Credit receives interest supplements and other support cost payments from the Automotive sector in connection with
special vehicle financing and leasing programs that it sponsors. Ford Credit records these payments as revenue over the term
of the related finance receivable or operating lease. The Automotive sector records the estimated costs of marketing incentives,
including dealer and retail customer cash payments (e.g., rebates) and costs of special financing and leasing programs, as a
reduction to revenue at the later of the date the related vehicle sales are recorded or at the date the incentive program is both
approved and communicated.
KEY ECONOMIC FACTORS AND TRENDS AFFECTING AUTOMOTIVE INDUSTRY
Excess Capacity — According to CSM Worldwide, an automotive research firm, in 2003, the automotive industry’s estimated
global production capacity for light vehicles (about 65 million units) significantly exceeded global production of cars and trucks
(about 53 million units). In North America and Europe, the two regions where the majority of revenue and profits are earned in
the industry, excess capacity was an estimated 14% and 17%, respectively, in 2003. We expect that this condition will continue
for many years.
Pricing Pressure — Excess capacity coupled with a proliferation of new products being introduced in key segments by the
industry will keep pressure on manufacturers’ ability to increase prices on their products. In addition, in recent years, Korean-
based manufacturers have been increasing the number of vehicles they export for sale in the United States and other key
markets, and this has contributed, and is expected to continue to contribute, to pricing pressure. In the United States, the
reduction of real prices for similarly contented vehicles accelerated in recent years, and we expect that a challenging pricing
environment will continue for some time to come. In Europe, the automotive industry has experienced intense pricing pressure
for several years; in 2003, net pricing declined more in Europe than in the United States. Net pricing is a measure of the
combined effect of changes in wholesale prices for vehicles sold and marketing incentives incurred on those vehicles, while
excluding the effects of changes in unit sales volume and foreign currency exchange rates.
Consumer Spending Trends — We expect, however, that a decline in, or the inability to increase, vehicle prices could be offset
by the spending habits of consumers and their propensity to purchase over time higher-end, more expensive vehicles and/or
vehicles with more features. Over the next decade, in the United States, we expect that growth in spending on vehicle mix and
content will generally track the increase in real GDP per capita. The benefits of this to revenue growth in the automotive industry
are significant. In the United States, for example, consumers in the highest income bracket are buying more often and more
frequently buying upscale. We believe the share of the premium brand segment in the U.S. automotive industry will approach
13% by the end of this decade, compared with about 10% to 11% presently. With our luxury brands (i.e., Lincoln, Volvo, Jaguar,
Land Rover and Aston Martin), we believe we are positioned well to take advantage of this trend.
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