Ford 2014 Annual Report Download - page 36

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
contented vehicles in the United States and contribute to a challenging pricing environment for the automotive industry. In
Europe, the excess capacity situation was exacerbated by weakening demand and the lack of reductions in existing
capacity, such that negative pricing pressure is expected to continue for the foreseeable future.
Commodity and Energy Price Changes. The price of oil fell sharply in the second half of 2014, to below $50 per
barrel, as demand was weaker than anticipated and global supply remained strong. Other commodity prices also have
declined recently, but over the longer term prices are likely to trend higher given expectations for global demand growth.
Vehicle Profitability. Our financial results depend on the profitability of the vehicles we sell, which may vary
significantly by vehicle line. In general, larger vehicles tend to command higher prices and be more profitable than
smaller vehicles, both across and within vehicle segments. For example, in North America, our larger, more profitable
vehicles had an average contribution margin that was about 140% of our total average contribution margin across all
vehicles, whereas our smaller vehicles had significantly lower contribution margins. Government regulations aimed at
reducing emissions and increasing fuel efficiency may increase the cost of vehicles by more than the perceived benefit to
the consumer. Given the backdrop of excess capacity, these regulations could dampen contribution margins. As we
execute our One Ford plan, we are working to create best-in-class vehicles on global platforms that contribute higher
margins, and offering a more balanced portfolio of vehicles with which we aim to be among the leaders in fuel efficiency in
every segment in which we compete.
Increasing Sales of Smaller Vehicles. Like other manufacturers, we are increasing our participation in newly-
developed and emerging markets, such as Brazil, Russia, India, and China, in which vehicle sales are expected to
increase at a faster rate than in most mature markets. The largest segments in these markets are small vehicles
(i.e., Sub-B, B, and C segments). To increase our participation in these fast-growing markets, we are significantly
increasing our production capacity, directly or through joint ventures. Although we expect positive contribution margins
from higher small vehicle sales, one result of increased production of small vehicles may be that, over time, our average
per unit margin decreases because small vehicles tend to have lower margins than medium and large vehicles.
Trade Policy. To the extent governments in various regions erect or intensify barriers to imports, or implement
currency policy that advantages local exporters selling into the global marketplace, there can be a significant negative
impact on manufacturers based in markets that promote free trade. While we believe the long-term trend is toward the
growth of free trade, we have noted with concern recent developments in a number of regions. In Asia Pacific Africa, for
example, the recent dramatic depreciation of the yen significantly reduces the cost of exports into the United States,
Europe, and other global markets by Japanese manufacturers. Over a period of time, the emerging weakness of the yen
can contribute to other countries pursuing weak currency policies by intervening in the exchange rate markets. This is
particularly likely in other Asian countries, such as South Korea. As another example, government actions in South
America to incentivize local production and balance trade are driving trade frictions between South American countries
and also with Mexico, resulting in business environment instability and new trade barriers. We will continue to monitor
and address developing issues around trade policy.
Other Economic Factors. During 2014, mature market government bond yields and inflation were lower than
expected, and there is a rising risk of persistent disinflation and, in some markets, even outright deflation. The lower
levels of inflation and interest rates were unexpected partially because they have occurred against a backdrop of loose
monetary policy and high levels of mature market deficits and debt. The eventual implications of higher government
deficits and debt, with potentially higher long-term interest rates, may still drive a higher cost of capital over our planning
period. Higher interest rates and/or taxes to address the higher deficits also may impede real growth in gross domestic
product and, therefore, vehicle sales over our planning period.
For additional information on our assessment of the business environment, refer to the “Outlook” section below.
30