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Industry Sales Volume

Industry sales volume is an internal estimate based on publicly-available data collected from various government, private, and public sources around the globe.  The following chart shows industry sales volume for the last five years for certain key markets in each region, and for the total we track within each of our Ford North America, Ford South America, Ford Europe, and Ford Asia Pacific Africa regions (in millions of units):

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Ford North America

The following tables show our wholesales and market share by market in North America:

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(a) Throughout this Report, wholesale unit volumes include all Ford-badged units (whether produced by Ford or by an unconsolidated affiliate), units manufactured by Ford that are sold to other manufacturers and units distributed for other manufacturers, and JMC-brand vehicles. Revenue from certain vehicles in wholesale unit volumes (specifically, Ford-badged vehicles produced and distributed by our unconsolidated affiliates, and JMC-brand vehicles) are not included in our revenue. Vehicles sold to daily rental car companies that are subject to a guaranteed repurchase option, as well as other sales of finished vehicles for which the recognition of revenue is deferred (e.g., consignments), are included in wholesale unit volumes.

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Within the 19 markets we track, Britain and Germany are our highest-volume markets. Any change in the British or German market has a significant effect on the results of Ford Europe. The following tables show our wholesales and market share for Britain and Germany (which are included within the 19 markets data above):

China and India are burgeoning markets that are expected to continue to experience rapid and substantial growth in the next ten years, driving new economic growth in the Asia Pacific Africa region. Accordingly, we have increased and are planning to increase further our dealer networks and manufacturing capacity in the region. We are building seven new plants - four in China, two in India, and one in Thailand - as part of our plan to have production capacity of 2.3 million vehicles in the region by mid-decade. These new state-of-the-art highly-flexible manufacturing facilities will help us reach the goal of increasing worldwide sales to about 8 million vehicles per year by mid-decade.

In China, we also are significantly expanding our research and engineering center in Nanjing as part of our plan to accelerate our growth in China and in the Asia Pacific Region.

FINANCIAL SERVICES SECTOR

Ford Motor Credit Company LLC

Our wholly-owned subsidiary Ford Motor Credit Company LLC ("Ford Credit") offers a wide variety of automotive financing products to and through automotive dealers throughout the world.  The predominant share of Ford Credit’s business consists of financing our vehicles and supporting our dealers.  Ford Credit earns its revenue primarily from:

As a result of these financing activities, Ford Credit has a large portfolio of finance receivables and leases which it classifies into two segments – "consumer" and "non-consumer."  Finance receivables and leases in the consumer segment relate to products offered to individuals and to businesses that finance the acquisition of vehicles from dealers for personal and commercial use.  The financing products include retail installment sale contracts for new and used vehicles, and leases for new vehicles to retail customers, government entities, daily rental car companies, and fleet customers. Finance receivables in the non-consumer segment relate primarily to products offered to automotive dealers, including loans to finance the purchase of vehicle inventory (i.e., wholesale financing), for improvements to dealership facilities, for working capital, and for purchase of dealership real estate.  Ford Credit also purchases receivables generated by us and our subsidiaries, primarily in connection with the sale of parts and accessories.

 Ford Credit does business in the United States and Canada through regional business centers. Outside of the United States, FCE Bank plc ("FCE") is Ford Credit's largest operation; Europe is FCE's largest market. Within Europe, FCE's largest and most profitable markets are Germany and the United Kingdom. About 70% of FCE's finance and lease receivables are from FCE's customers and Ford dealers in Germany, the United Kingdom, and France; about 17% are from FCE's customers and Ford dealers in Italy and Spain; and about 2% are from FCE's customers and Ford dealers in Greece, Ireland, and Portugal. FCE, through its Worldwide Trade Financing division, also provides financing to dealers in countries where typically we have no established local presence.

Ford Credit's share of retail financing for new Ford and Lincoln vehicles sold by dealers in the United States and new Ford vehicles sold by dealers in Europe, as well as its share of wholesale financing for new Ford and Lincoln vehicles acquired by dealers in the United States (excluding fleet) and new Ford vehicles acquired by dealers in Europe were:

See Item 7 and Notes 7, 8, and 9 of the Notes to the Financial Statements for a detailed discussion of Ford Credit's receivables, credit losses, allowance for credit losses, loss-to-receivables ratios, funding sources, and funding strategies. See Item 7A for a discussion of how Ford Credit manages its financial market risks.

We routinely sponsor special retail and lease incentives to dealers' customers who choose to finance or lease our vehicles from Ford Credit.  In order to compensate Ford Credit for the lower interest or lease rates offered to the retail customer, we pay the discounted value of the incentive directly to Ford Credit when it originates the retail finance or lease contract.  These programs increase Ford Credit's financing volume and share of financing sales of our vehicles.  See Note 2 of the Notes to the Financial Statements for information about our accounting for these programs.

In November 2008, we entered into an Amended and Restated Support Agreement with Ford Credit, pursuant to which, if its managed leverage for a calendar quarter were to be higher than 11.5 to 1 (as reported in its most recent periodic report), Ford Credit could require us to make or cause to be made a capital contribution to it in an amount sufficient to have caused such managed leverage to have been 11.5 to 1.  No capital contributions have been made pursuant to this agreement.  In addition, Ford Credit has an agreement to maintain FCE's net worth in excess of $500 million; no payments have been made pursuant to that agreement in 2001 - 2011.

GOVERNMENTAL STANDARDS

Many governmental standards and regulations relating to safety, fuel economy, emissions control, noise control, vehicle recycling, substances of concern, vehicle damage, and theft prevention are applicable to new motor vehicles, engines, and equipment manufactured for sale in the United States, Europe, and elsewhere.  In addition, manufacturing and other automotive assembly facilities in the United States, Europe, and elsewhere are subject to stringent standards regulating air emissions, water discharges, and the handling and disposal of hazardous substances. The most significant of the standards and regulations affecting us are discussed below:

Mobile Source Emissions Control

U.S. Requirements - Federal Emissions Standards.   The federal Clean Air Act imposes stringent limits on the amount of regulated pollutants that lawfully may be emitted by new vehicles and engines produced for sale in the United States. The current ("Tier 2") emissions regulations promulgated by the U.S. Environmental Protection Agency ("EPA") set standards for cars and light trucks. Tier 2 emissions standards also establish durability requirements for emissions components to 120,000 miles or 150,000 miles (depending on the specific standards to which the vehicle is certified).  

EPA also has stringent emissions standards and requirements for EPA-defined "heavy-duty" vehicles and engines (generally, those vehicles with a gross vehicle weight rating of 8,500 pounds to 14,000 pounds gross vehicle weight). In order to meet the standards for heavy-duty diesel trucks, Ford and most other manufacturers use selective catalytic reduction ("SCR") systems, which require periodic customer maintenance. EPA has issued guidance regarding maintenance intervals and warning systems that must be used to alert motorists to the need for maintenance of SCR systems. One heavy-duty engine manufacturer that does not rely on SCR technology has filed two lawsuits in federal court challenging: 1) EPA's decision to certify vehicles with SCR systems, and 2) the appropriateness of EPA's certification test procedures for heavy-duty vehicles. The former suit was dismissed at the district court level but may be appealed; no ruling has been issued yet in the latter suit. The same manufacturer also has filed suit in California state court challenging the certification of SCR-equipped vehicles by the California Air Resources Board ("CARB"). The Engine Manufacturers Association, a trade association to which we belong, has intervened in that litigation on the side of CARB; the suit currently is in the discovery phase. If the courts direct EPA or CARB to reconsider certification of vehicles with SCR systems, or if agencies impose additional restrictions on our ability to use SCR technology, it could have an adverse effect on our ability to produce and sell heavy-duty diesel vehicles.

U.S. Requirements - California and Other State Emissions Standards.   Pursuant to the Clean Air Act, California may seek a waiver from EPA to establish unique vehicle emissions control standards; each new or modified proposal requires a new waiver of preemption from EPA.  California has received a waiver from EPA to establish its own unique emissions control standards for certain regulated pollutants.  New vehicles and engines sold in California must be certified by CARB; CARB's current low-emission vehicle ("LEV II") emissions standards treat most light-duty trucks the same as passenger cars, and require both types of vehicles to meet stringent new emissions requirements. Like EPA's Tier 2 emissions standards, CARB's LEV II emissions standards present a difficult engineering challenge. The California program includes requirements for manufacturers to produce and deliver for sale zero-emission vehicles ("ZEVs") that emit no regulated pollutants. The current ZEV regulations allow certain advanced-technology vehicles (e.g., hybrid electric vehicles or natural gas vehicles) with extremely low tailpipe emissions to qualify for ZEV credits. The rules also give some ZEV credits for so-called "partial zero-emission vehicles" ("PZEVs"), which can be internal combustion engine vehicles certified to very low tailpipe emissions and zero evaporative emissions. The current rules require increasing volumes of battery-electric and other advanced technology vehicles with each passing model year. We plan to comply with the ZEV regulations through the sale of a variety of battery-electric vehicles, hybrid vehicles, plug-in hybrid vehicles, and PZEVs. Our compliance plan entails significant costs, and has a variety of inherent risks, including potential component shortages that may make it difficult to produce vehicles in sufficient quantities.

The Clean Air Act also permits other states that do not meet National Ambient Air Quality Standards to adopt California's motor vehicle emissions standards no later than two years before the affected model year.  In addition to California, fourteen states, primarily located in the Northeast and Northwest, have adopted the California standards for current and/or future model years (and eleven of these states also have adopted the ZEV requirements).  These states, together with California, account for more than 30% of our current U.S. light-duty vehicle sales volume. It is possible that additional states may adopt the California standards in the future.  The adoption of California standards by other states presents challenges for manufacturers, including:  1) managing fleet average emissions standards and ZEV mandate requirements on a state-by-state basis, which presents difficulties from the standpoint of planning and distribution; 2) market acceptance of some vehicles required by the ZEV program varies from state to state, depending on weather and other factors; and 3) states adopting the California program have not adopted California's clean fuel regulations, which may impair the ability of vehicles in other states to meet California's in-use standards.

CARB is in the process of revising its LEV and ZEV regulations. In December 2011, CARB issued its proposed "LEV III" rules, setting standards for emissions of smog-forming pollutants (as well as greenhouse gases ("GHGs"), which are discussed in the "Motor Vehicle Fuel Economy" section below). The proposed new standards would begin phasing in with the 2015 model year and extend through the 2025 model year. The major elements of the LEV III program are new, more stringent tailpipe and evaporative emissions standards for light- and medium-duty vehicles; extended durability requirements; and changes to the certification test procedures, requiring manufacturers to certify vehicles on fuel containing 10% ethanol. CARB also issued proposed new ZEV regulations covering model years 2015 - 2025. The amendments for model years 2015 - 2017 represent relatively modest changes to existing requirements. For model years 2018 - 2025, CARB is proposing to require substantial annual increases in the production and sale of battery-electric, fuel cell, and plug-in hybrid vehicles. By the 2025 model year, approximately 15% of a manufacturer's total California sales volume will need to be made up of such vehicles.

Compliance with the revised LEV III and ZEV regulations likely will require costly actions that could have a substantial adverse effect on our sales volume and profits. The LEV III proposal presents a significant engineering challenge for manufacturers, who will need to design new emissions after-treatment systems in order to comply. The proposed ZEV rules pose an even greater obstacle, requiring intensive planning efforts and large capital investments in order to deliver the required number of advanced-technology vehicles. We are concerned that the market and infrastructure in California may not support the large volumes of advanced-technology vehicles that manufacturers will be required to produce, particularly in the 2018 - 2025 model years. We also are concerned about potential enforcement of the proposed ZEV mandate in other states that have adopted California's ZEV program, where the existence of a market for such vehicles is even less certain. We are working with CARB directly and through the Alliance of Automobile Manufacturers ("Alliance") in an effort to promote regulations that are reasonable and technologically feasible, and we have submitted comments on the proposed LEV III and ZEV rules. The industry also is negotiating with states that have adopted California's ZEV rules in an effort to reach agreement on an alternative ZEV program for those states.

European Requirements.   European Union ("EU") directives and related legislation limit the amount of regulated pollutants that may be emitted by new motor vehicles and engines sold in the EU.  Stringent new emissions standards ("Stage IV Standards") were applied to new passenger car certifications beginning in 2005, and to new registrations beginning in 2006.  The comparable light commercial truck Stage IV Standards went into effect for new certifications beginning in 2006, and for new registrations beginning in 2007.  This directive on emissions also introduced on-board diagnostic requirements, more stringent evaporative emissions requirements, and in-service compliance testing and recall provisions for emissions-related defects that occur in the first five years or 100,000 kilometers of vehicle life.  Failure of in-service compliance tests could lead to vehicle recalls with substantial costs for related inspections or repairs.

Stage V emissions requirements began for vehicle registrations starting in January 2011; Stage VI requirements will apply from September 2014.  Stage V particulate standards drove the deployment of particulate filters across diesels, and Stage VI further tightens the standard for oxides of nitrogen.  This will drive the need for additional diesel exhaust after-treatment which will add cost and potentially impact the diesel CO ₂ advantage.  These technology requirements add cost and further erode the fuel economy cost/benefit advantage of diesel vehicles.

Vehicles equipped with SCR systems require a driver inducement and warning system for maintenance or repair.  The Stage V/VI emission legislation also mandated internet provision of all repair information (not just emissions-related), and provision of information to diagnostic tool manufacturers.

Other National Requirements.   Many countries, in an effort to address air quality concerns, are adopting previous versions of European or United Nations Economic Commission for Europe ("UN-ECE") mobile source emissions regulations. Some countries have adopted more advanced regulations based on the most recent version of European or U.S. regulations; for example, China plans to adopt the most recent European standards to be implemented starting from 2012 in large cities. Korea and Taiwan have adopted very stringent U.S.-based standards for gasoline vehicles, and European-based standards for diesel vehicles.  Because fleet average requirements do not apply, some vehicle emissions control systems may have to be redesigned to meet the requirements in these markets.  Furthermore, not all of these countries have adopted appropriate fuel quality standards to accompany the stringent emissions standards adopted.  This could lead to compliance problems, particularly if on-board diagnostic or in-use surveillance requirements are implemented. Japan has unique standards and test procedures, and implemented more stringent standards beginning in 2009.  This may require unique emissions control systems be designed for the Japanese market.  Canadian criteria emissions regulations are aligned with U.S. federal Tier 2 requirements.

In South America, Brazil, Argentina and Chile are introducing more stringent emissions standards.  Brazil approved Euro V emissions and on-board diagnostic standards for heavy trucks starting in 2012; more stringent light vehicle limits come into effect in 2012.  Argentina has approved Euro V standards for 2012.  Chile approved a new decontamination plan for its metropolitan region with more stringent emission requirements based on U.S. or EU regulations.

Motor Vehicle Fuel Economy

There are ever-increasing demands from regulators, public interest groups, and consumers for improvements in motor vehicle fuel economy, for a variety of reasons including energy security and reduced GHG emissions. Our ability to comply with a given set of fuel economy standards (including GHG emissions standards, which are functionally equivalent to fuel economy standards) depends on a variety of factors, including:  1) prevailing economic conditions, including fluctuations in fuel prices; 2) alignment of standards with actual consumer demand for vehicles; and 3) adequate lead time to make necessary product changes.  Consumer demand for vehicles tends to fluctuate based on a variety of external factors.  Consumers are more likely to pay for vehicles with fuel-efficient technologies (such as hybrid-electric vehicles) when the economy is robust, and when fuel prices are relatively high.  When the economy is in recession and/or fuel prices are relatively low, many consumers may put off new vehicle purchases altogether, and among those who do purchase vehicles, demand for higher-cost fuel technologies is not likely to be strong. If consumers demand vehicles that are relatively large, high-performance, and/or feature-laden, while regulatory standards require production of vehicles that are smaller and more economical, the mismatch of supply and demand would have an adverse effect on both regulatory compliance and our profitability.  Moreover, if regulatory requirements call for rapid, substantial increases in fleet average fuel economy (or decreases in fleet average GHG emissions), we may not have adequate resources and time to make major product changes across most or all of our vehicle fleet (assuming the necessary technology can be developed).

U.S. Requirements - Light Duty Vehicles .  Federal law requires that light-duty vehicles meet minimum corporate average fuel economy ("CAFE") standards set by the National Highway Traffic Safety Administration ("NHTSA").  A manufacturer is subject to potentially substantial civil penalties if it fails to meet the CAFE standard in any model year, after taking into account all available credits for the preceding three model years and expected credits for the five succeeding model years. The law requires NHTSA to promulgate and enforce separate CAFE standards applicable to each manufacturer's fleet of domestic passenger cars, imported passenger cars, and light trucks, respectively.

California also has asserted the right to regulate motor vehicle GHG emissions, and a 2007 U.S. Supreme Court decision paved the way for EPA to regulate motor vehicle GHG emissions under the Clean Air Act. The potential for three sets of overlapping and conflicting regulations led to the establishment of the federal "One National Program," pursuant to which EPA and NHTSA have promulgated regulations establishing a harmonized national program of CAFE and GHG regulations for light-duty vehicles for the 2012 - 2016 model years. California has amended its regulations to provide that manufacturers who comply with "One National Program" regulations will be deemed to comply with the California GHG regulations. The 2012 - 2016 federal GHG and fuel economy standards are very challenging.  They require new light-duty vehicles to ramp up to an industry average fuel economy of approximately 35.5 mpg by the 2016 model year, which amounts to the steepest rate of increase in fuel economy standards since the inception of the CAFE program.  CARB has adopted modifications to its GHG regulations consistent with these standards.

We believe that we will be able to comply with the harmonized federal CAFE/GHG standards for the 2012 - 2016 model years, as a result of aggressive actions to improve fuel economy that we built into our cycle plan, and through a variety of flexible compliance mechanisms.  In contrast, we had projected that we would be unable to comply with the state GHG standards that had been in place for the 2012 - 2016 period without undertaking costly product restrictions in some states.  Key differences that enable us to project compliance with the national program include:  1) One National Program standards, although very stringent, do not ramp up as steeply as the state standards they are replacing; and 2) One National Program allows us to determine compliance based on nationwide sales rather than state-by-state sales. The ability to average across the nation eliminates state-to-state sales variability and is a critical element for us and for the automotive industry. The 2012-2016 model year One National Program rules currently are being challenged in federal court by entities concerned about the ramifications of these rules on stationary source regulation. The automotive industry has intervened in the litigation in support of maintaining the existing One National Program rules.

In November 2011, EPA and NHTSA jointly issued proposed rules to extend the One National Program framework through the 2025 model year. The proposed rules would require manufacturers to achieve, across the industry, a light-duty fleet average fuel economy of approximately 45 miles per gallon ("mpg") by the 2021 model year, and approximately 54.5 mpg by the 2025 model year, assuming all of the CO ₂ emissions reductions are achieved through the deployment of fuel economy technology. This represents a reduction of roughly 5% per year in CO ₂ emissions from passenger cars for the 2017 - 2025 model years. For light trucks, the proposed standards represent a reduction in CO ₂ emissions of about 3.5% per year for model years 2017 - 2021, and about 5% per year for model years 2022 - 2025. Each manufacturer's

specific task would depend on the mix of vehicles it sells. The proposed rules include the opportunity for manufacturers to earn credits for technologies that achieve real-world CO ₂ reductions, and fuel economy improvements that are not captured by EPA fuel economy test procedures. Manufacturers also can earn credits for GHG reductions not specifically tied to fuel economy, such as improvements in air conditioning systems. The proposal includes a mid-term evaluation process under which EPA and NHTSA will re-evaluate their standards for model year 2022 - 2025 by 2018 in order to ensure that those standards are feasible and optimal in light of intervening events. Ford and the Alliance have filed extensive comments on the proposal. EPA and NHTSA are expected to issue final rules in 2012, and shortly thereafter CARB is expected to modify its regulations to provide that compliance with the federal program satisfies compliance with California's requirements for the 2017 - 2025 model years.

While the proposed rules are challenging, we believe they are feasible in light of our product plans and projected market conditions. It is important that the final rules retain the key elements of the proposal, such as the compliance flexibilities and the mid-term review evaluation process. Provided the final rules are acceptable, we believe it is in our interest to continue with One National Program rather than re-engage in disputes with California (and other states that use the California standards) over the right to enforce state-specific GHG standards.

If the final rules promulgated by EPA and NHTSA deviate materially from the proposed rules, or if the agencies are forced to modify the rules as a result of litigation, it still is possible that the One National Program framework may not continue in the 2017 - 2025 model years. Under this scenario, there likely would be a return to conflicting state and federal regimes for regulating fuel economy and GHG emissions beginning with the 2017 model year. Compliance with both regimes would at best add enormous complexity to our planning processes, and at worst could be virtually impossible. If either of these regulatory regimes impose and enforce extreme fuel economy or GHG standards, we likely would be forced to take various actions that could have substantial adverse effects on our sales volume and profits. Such actions likely would include restricting offerings of selected engines and popular options; increasing market support programs for our most fuel-efficient cars and light trucks; and ultimately curtailing the production and sale of certain vehicles such as high-performance cars, utilities, and/or full-size light trucks, in order to maintain compliance. These actions might need to occur on a state-by-state basis, in response to the rules adopted by California and other states, or at the national level if the federal standards are excessively stringent.

U.S. Requirements - Heavy-Duty Vehicles. In 2011, EPA and NHTSA promulgated final regulations imposing, for the first time, GHG and fuel economy standards on heavy-duty vehicles (generally, vehicles over 8,500 pounds gross vehicle weight rating). In our case, the standards primarily affect our heavy-duty pickup trucks and vans, plus vocational vehicles such as shuttle buses and delivery trucks. These standards will be challenging, but we believe we will be able to comply. EPA and NHTSA are expected to issue a new round of standards for these vehicles covering the 2019 model year and beyond; as the standards increase in stringency, it may become more difficult to comply while continuing to offer a full lineup of heavy-duty trucks. The 2014 - 2018 heavy-duty GHG rules are being challenged in federal court by entities other than truck and engine manufacturers. Remand or rejection by the court could have a substantial adverse impact on our future production and sale of heavy-duty vehicles, depending on the court's specific order and agencies' response.

European Requirements. In December 2008, the EU approved regulation of passenger car CO ₂ emissions beginning in 2012 which limits the industry fleet average to a maximum of 130 g/km, using a sliding scale based on vehicle weight. This regulation provides different targets for each manufacturer based on its respective average vehicle weight for its fleet of vehicles. Limited credits are available for CO ₂ off-cycle actions ("eco-innovations"), certain alternative fuels, and vehicles with CO ₂ emissions below 50 g/km. A penalty system will apply for manufacturers failing to meet targets, with fees ranging from €5 to €95 per vehicle per g/km shortfall in the years 2012 - 2018, and €95 per g/km shortfall beginning in 2019. Manufacturers will be permitted to use a pooling agreement between wholly-owned brands to share the burden. Further pooling agreements between different manufacturers also are possible, although it is not clear that these will be of much practical benefit under the regulations. For 2020, an industry target of 95 g/km has been set. This target will be further detailed in a review in 2013. Other non-EU European countries are likely to follow with similar regulations. For example, Switzerland is introducing similar rules, phasing-in beginning in July 2012 with the same targets, although the industry average emission target is significantly higher. We face the risk of advance premium payment requirements based on past performance beginning in the second half of 2012.

In separate legislation, so-called "complementary measures" have been mandated (for example, tire-related and gearshift indicator requirements), and more mandates are expected.  These include requirements related to fuel economy indicators, and more-efficient low-CO ₂ mobile air conditioning systems.  The EU Commission, Council and Parliament are close to formally approving a target for commercial light-duty vehicles to be at an industry average of 175 g/km (with phase-in from 2014 - 2017), and 147 g/km in 2020.  This regulation also would provide different targets for each manufacturer based on its respective average vehicle weight in its fleet of vehicles.  The final mass and CO ₂ requirements for so-called "multi-stage vehicles" (e.g., our Transit chassis cabs) are fully allocated to the base manufacturer (e.g., Ford)

so that the base manufacturer is fully responsible for the CO ₂ performance of the final up-fitted vehicles.  The EU proposal also includes a penalty system, "super-credits" for vehicles below 50 g/km, and limited credits for CO ₂ off-cycle actions ("eco-innovations"), pooling, etc., similar to the passenger car CO ₂ regulation.

Some European countries have implemented or are considering other initiatives for reducing CO ₂ vehicle emissions, including fiscal measures and CO ₂ labeling.  For example, the United Kingdom, France, Germany, Spain, Portugal, and the Netherlands, among others, have introduced taxation based on CO ₂ emissions.  The EU CO ₂ requirements are likely to trigger further measures.

Other National Requirements.   The Canadian federal government has regulated vehicle GHG emissions under the Canadian Environmental Protection Act, beginning with the 2011 model year.  The standards track the new U.S. CAFE standards for the 2011 model year and U.S. EPA GHG regulations for the 2012 - 2016 model years.  The Canadian federal government now has published a notice of intent to maintain alignment with U.S. EPA vehicle GHG standards for the 2017 - 2025 model years. In December 2009, Quebec also enacted province-specific regulations setting fleet average GHG standards for the 2010 - 2016 model years effective January 2010.  Now that the Canadian federal regulation is in place, the Quebec government has amended the Quebec regulation to recognize equivalency with the federal standards; reporting of Quebec fleet performance still is required.

Some Asian countries (such as China, Japan, India, South Korea, and Taiwan) also have adopted fuel efficiency or labeling targets.  For example, Japan has fuel efficiency targets for 2015 that are more stringent than the 2010 targets, with incentives for early adoption.  China implemented second-stage fuel economy targets from 2008, and is working on the third stage for 2012 phase-in.  All of these fuel efficiency targets will impact the cost of vehicle technology in the future.

In South America, Brazil introduced a voluntary vehicle energy-efficiency labeling program, indicating fuel consumption rates for light vehicles with spark ignition engine. Chile also will adopt a fuel-consumption and emissions-labeling system. In general, fuel efficiency targets may impact the cost of technology of our models in the future.

Motor Vehicle Safety

U.S. Requirements. The National Traffic and Motor Vehicle Safety Act of 1966 (the "Safety Act") regulates vehicles and vehicle equipment in two primary ways. First, the Safety Act prohibits the sale in the United States of any new vehicle or equipment that does not conform to applicable vehicle safety standards established by NHTSA. Meeting or exceeding many safety standards is costly, in part because the standards tend to conflict with the need to reduce vehicle weight in order to meet emissions and fuel economy standards. Second, the Safety Act requires that defects related to motor vehicle safety be remedied through safety recall campaigns. A manufacturer is obligated to recall vehicles if it determines the vehicles do not comply with a safety standard. Should we or NHTSA determine that either a safety defect or noncompliance exists with respect to any of our vehicles, the cost of such recall campaigns could be substantial.

Foreign Requirements.   The EU and many countries around the world have established vehicle safety standards and regulations, and are likely to adopt additional or more stringent requirements in the future.  The European General Safety Regulation introduced UN-ECE regulations, which will be will be required for the European Type Approval process.  EU regulators also are focusing on active safety features such as lane departure warning systems, electronic stability control, and automatic brake assist.  These technologies have been implemented in Europe with final regulation and implementing measures having become available in late 2011. Globally, governments generally have been adopting EU-based regulations with minor variations to address local concerns.  The difference between North American and EU-based regulations adds complexity and costs to the development of global platform vehicles; we continue to support efforts to harmonize regulations to reduce vehicle design complexity while providing a common level of safety performance. New recall requirements in Asia Pacific Africa also may add substantial costs and complexity to our global recall practice.

Pollution Control Costs

During the period 2012 through 2016, we expect to spend about $160 million on our facilities in the Americas and Europe to comply with stationary source air and water pollution and hazardous waste control standards that are now in effect or are scheduled to come into effect during this period.  Of this total, we currently estimate we will spend between $30 million and $35 million in each of 2012 and 2013, respectively.  Specific environmental expenses are difficult to isolate because expenditures may be made for more than one purpose, making precise classification difficult.

While our overall employment remained steady, Ford Europe experienced reductions related largely to the transfer of Russian operations to our FordSollers unconsolidated joint venture, offset partially by increases in emerging markets to support increased production.

Substantially all of the hourly employees in our Automotive operations are represented by unions and covered by collective bargaining agreements.  In the United States, approximately 99% of these unionized hourly employees in our Automotive sector are represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW" or "United Auto Workers").  Approximately two percent of our U.S. salaried employees are represented by unions.  Most hourly employees and many non-management salaried employees of our subsidiaries outside of the United States also are represented by unions.

In 2011, we entered into a new four-year collective bargaining agreement with the UAW. The agreement covers approximately 41,000 employees, and maintains our progress on improving competitiveness in the United States. Excluding profit-sharing, compensation-related terms - including lump-sum payments (in lieu of general wage increases and cost of living increases) and continuation of an entry-level wage structure - are expected to increase U.S. hourly labor costs by less than 1% annually over the four-year contract period. We also expect this increase will be more than offset by more flexible work rules that will allow us to increase manufacturing utilization and efficiency.

In 2011, we also negotiated new collective bargaining agreements with labor unions in Argentina, Brazil, France, Mexico, New Zealand, Russia, Taiwan, and Thailand.

In 2012, we will negotiate a new agreement in Canada with the National Automobile, Aerospace, Transportation and General Workers Union of Canada ("CAW"), as well as labor unions in Argentina, Australia, Brazil, Britain, France, Germany, Mexico, Romania, Taiwan and Turkey.

ENGINEERING, RESEARCH, AND DEVELOPMENT

We engage in engineering, research, and development primarily to improve the performance (including fuel efficiency), safety, and customer satisfaction of our products, and to develop new products.  We maintain extensive engineering, research, and design centers for these purposes, including large centers in Dearborn, Michigan; Dunton, England; and Aachen and Merkenich, Germany.  Most of our engineering, research, and development relates to our Automotive sector.

Engineering, research, and development expenses for 2011, 2010, and 2009 were $5.3 billion, $5 billion, and $4.7 billion, respectively (2009 data adjusted to reflect the impact of the accounting standard on consolidation of variable interest entities ("VIEs")).