Ford 2010 Annual Report Download - page 25

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Ford Motor Company | 2010 Annual Report 23
As a result, we analyze the profit impact of certain cost changes holding constant present-year volume and mix and
currency exchange, in order to evaluate our cost trends absent the impact of varying production and currency exchange
levels. We analyze these cost changes in the following categories:
• Material excluding commodity costs – primarily reflecting the change in cost of purchased parts used in the
assembly of our vehicles.
• Commodity costs – reflecting the change in cost for raw materials (such as steel, aluminum, and resins) used in
the manufacture of our products.
• Structural costs – reflecting the change in costs that generally do not have a directly proportionate relationship to
our production volumes, such as labor costs, including pension and health care; other costs related to the
development and manufacture of our vehicles; depreciation and amortization; and advertising and sales
promotion costs.
• Warranty and other costs – reflecting the change in cost related to warranty coverage, product recalls, and
customer satisfaction actions, as well as the change in freight and other costs related to the distribution of our
vehicles and support for the sale and distribution of parts and accessories.
While material (including commodity), freight and warranty costs generally vary directly in proportion to production
volume, elements within our structural costs category are impacted to differing degrees by changes in production
volume. We also have varying degrees of discretion when it comes to controlling the different elements within our
structural costs. For example, depreciation and amortization expense largely is associated with prior capital spending
decisions. On the other hand, while labor costs do not vary directly with production volume, manufacturing labor costs
may be impacted by changes in volume, for example when we increase overtime, add a production shift or add
personnel to support volume increases. Other structural costs, such as advertising or engineering costs, are not
necessarily impacted by production volume. Our structural costs generally are within our discretion, although to varying
degrees, and can be adjusted over time in response to external factors.
We consider certain structural costs to be a direct investment in future growth and revenue. For example, increases
in structural costs are necessary to grow our business and improve profitability as we expand around the world, invest in
new products and technologies, respond to increasing industry sales volume and grow our market share.
Automotive total costs and expenses for full-year 2010 was $113.5 billion (including about $8 billion related to Volvo).
Material costs (including commodity costs) make up the largest portion of our Automotive total costs and expenses,
representing in 2010 about two-thirds of the total amount. Of the remaining balance of our Automotive costs and
expenses, the largest piece is structural costs. Although material costs are our largest absolute cost, our margins can be
affected significantly by changes in any category of costs.
Key Economic Factors and Trends Affecting the Automotive Industry
Global Economic Recovery. By mid-2009, the global economy had begun to recover from the financial crisis and
economic recession that began in 2008 and was entering a period of improving economic activity, with some markets
advancing more quickly than others. In the United States, the economic recovery began in June 2009, as officially
designated by the National Bureau of Economic Research. In 2010, global economic growth advanced an estimated
3.8%, a significant improvement as compared to the weak conditions which prevailed in 2008 and the first half of 2009.
The current economic performance in many European countries, particularly Greece, Ireland, Portugal and Spain, is
being hampered by excessive government debt levels and the resulting budget austerity measures which are
contributing to weak economic growth. The European Union, the European Central Bank, and the International Monetary
Fund have provided important support for many of these countries undergoing structural changes. During 2011,
economic growth is likely to be weak in these markets. At the same time, economic growth in Germany is likely to
remain solid, attributable in part to its export growth to Asia, good manufacturing base, and better budgetary conditions.
The U.K. government has implemented budget cuts, while the housing market is still working off its slump. These factors
will continue to be a drag on economic conditions there.
While the economic outlook is improving, it is rebounding from a very low base and with a range of possible outcomes
due to the uncertain financial market environment and dependence upon ongoing policy responses. The consumer and
commercial sectors of the global economy appear to be improving, although recovery remains fragile due to continuing
tightness in the credit markets, weak labor markets in many countries, and uncertainty regarding fiscal and monetary
policy adjustments. Although the housing market is stabilizing in the worst hit markets, such as the United States, the
United Kingdom, and Spain, challenges remain associated with rising foreclosure rates and excess housing stocks.