Ford 2003 Annual Report Download - page 37

2003 ANNUAL REPORT 35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Although growth in vehicle unit sales (i.e., volume) will be greatest in emerging markets in the next decade, we expect that
the mature automotive markets (e.g., North America, Western Europe and Japan) will continue to be the source of a substantial
majority of global industry revenues over the next decade. We also expect that the North American market will continue as the
single largest source of revenue for the automotive industry in the world in the next decade.
Health Care Expenses — In the United States, the average annual percentage increase in health care prices we have
experienced in the last few years has been in the double digits. In 2003, our health care expenses for United States employees
and retirees were $3.2 billion, with about $2.2 billion attributable to retirees and the balance attributable to active employees.
Prescription drug costs is the fastest growing segment of our health care expenses and accounted for about one-third of our
total United States health care expenses in 2003.
Although we have taken measures to have employees and retirees bear a higher portion of the costs of their health care benefits,
we expect our health care costs to continue to increase. For 2004, our trend assumptions for U.S. health care expenses include
an initial trend rate of 9% and a steady state trend rate of 5% reached in 2010. These assumptions include the effect of actions
we are taking and expect to take to offset health care inflation, including further employee cost sharing, administrative
improvements and other efficiencies.
TRENDS AND STRATEGIES
Revenue Management — To address the pricing pressure that exists in the automotive industry, we have employed a
customer-focused revenue management strategy to maximize per unit revenue. This strategy is focused on a disciplined
approach to utilizing customer demand data — available from many sources, including internet hits, transaction data,
customer leads, and research — to help us develop and sell vehicles that more closely match customer desires.
We believe our revenue management strategy has contributed significantly to increases in our revenue per vehicle sold for our
Ford North America business unit of $724 and $284 for 2003 and 2002, respectively. (These amounts exclude the incremental
effect on revenue from the consolidation of certain dealerships in 2003 related to FIN 46, discussed in Note 13 of the Notes to
Financial Statements).
Cost Reduction — Given the difficult economic and operating environment described herein, we continue to focus on reducing
our cost structure. During 2003, we reduced our costs by over $3 billion (at constant volume, mix and exchange and excluding
special items). Cost reductions were realized in quality-related costs resulting from fewer warranty claims, recalls and customer
service actions, as well as reduced manufacturing, engineering and overhead costs. Lower product costs (which are comprised
of material and component costs for our vehicles) on carryover vehicles partially offset higher product costs for newly introduced
vehicles. Further cost efficiencies will be realized as we continue to implement our Revitalization Plan.
Shared Technologies — One of the strategies we are employing to realize efficiencies in manufacturing, engineering and
product costs for new vehicles is the sharing of vehicle platforms and components among various models and the re-use
of those platforms and components from one generation of a vehicle model to the next.
REVITALIZATION PLAN PROGRESS
In January 2002, we announced that through the implementation of our Revitalization Plan, we expected to improve our pre-tax
profit excluding special items to $7 billion by mid-decade, which we have defined as 2006. We do not expect a linear
progression to the target of $7 billion of pre-tax profit excluding special items.
In 2004, we expect that the rate of profit improvement will be less than what we have experienced over the past couple of years.
We are still about a year away from introducing new products that are designed in a manner such that the cost to produce them
is appropriate in the current pricing environment, and we are about two years away from having those products in significant
volume. In addition, as indicated above, rising health care costs remain a concern for us.
We expect, however, to make progress in 2004, as we will focus on significantly improving the performance of our Ford Europe
business unit, and filling our global product pipeline with new product introductions, particularly in the passenger car area.
Further, as indicated above, we are continuing our efforts to improve quality and our cost structure. Overall, while conditions may
slow our rate of improvement in 2004, we believe we are on track to achieve our goal of $7 billion in pre-tax profits, excluding
special items, by year-end 2006.
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