ITEM 1. Business.

Ford Motor Company was incorporated in Delaware in 1919.  We acquired the business of a Michigan company, also known as Ford Motor Company, which had been incorporated in 1903 to produce and sell automobiles designed and engineered by Henry Ford. We are a global automotive industry leader based in Dearborn, Michigan. We manufacture or distribute automobiles across six continents. With about 181,000 employees and 65 plants worldwide, our automotive brands include Ford and Lincoln. We provide financial services through Ford Motor Credit Company.

In addition to the information about Ford and our subsidiaries contained in this Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K Report” or “Report”), extensive information about our Company can be found at http://corporate.ford.com , including information about our management team, our brands and products, and our corporate governance principles.

The corporate governance information on our website includes our Corporate Governance Principles, Code of Ethics for Senior Financial Personnel, Code of Ethics for the Board of Directors, Code of Corporate Conduct for all employees, and the Charters for each of the Committees of our Board of Directors.  In addition, any amendments to our Code of Ethics or waivers granted to our directors and executive officers will be posted in this area of our website.  All of these documents may be accessed by going to our corporate website and clicking on “Our Company,” then “Corporate Governance,” and then “Corporate Governance Policies,” or may be obtained free of charge by writing to our Shareholder Relations Department, Ford Motor Company, One American Road, P.O. Box 1899, Dearborn, Michigan 48126-1899.

In addition, all of our recent periodic report filings with the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through our website.  This includes recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those Reports.  Recent Section 16 filings made with the SEC by the Company or any of our executive officers or directors with respect to our Common Stock also are made available free of charge through our website.  We post each of these documents on our website as soon as reasonably practicable after it is electronically filed with the SEC.

To access our SEC reports or amendments or the Section 16 filings, go to our corporate website and click “Our Company,” then “Investor Relations,” then “Reports and SEC Filings,” and then “SEC Filings,” which links to a list of reports filed with the SEC.  Our reports filed with the SEC also may be found on the SEC’s website at www.sec.gov .

The foregoing information regarding our website and its content is for convenience only and not deemed to be incorporated by reference into this Report nor filed with the SEC.

OVERVIEW

Segments.   We review and present our business results in two sectors:  Automotive and Financial Services.  Within these sectors, our business is divided into reportable segments (referred to herein as “segments,” “business units,” or “regions”) based on the organizational structure that we use to evaluate performance and make decisions on resource allocation, as well as availability and materiality of separate financial results consistent with that structure.

The reportable segments within our Automotive and Financial Services sectors at December 31, 2013 were as described in the table below:

In the first quarter of 2014, we plan to begin reporting as a separate segment our newly created Middle East and Africa business unit.

AUTOMOTIVE SECTOR

General

Our vehicle brands are Ford and Lincoln.  In 2013, we sold approximately 6,330,000 vehicles at wholesale throughout the world.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“Item 7”) for discussion of our calculation of wholesale unit volumes.

Substantially all of our vehicles, parts, and accessories are marketed through distributors and dealers (collectively, “dealerships”), the substantial majority of which are independently owned.  At December 31, 2013, the approximate number of dealerships worldwide distributing our vehicle brands was as follows:

We do not depend on any single customer or small group of customers to the extent that the loss of such customer or group of customers would have a material adverse effect on our business.

In addition to the products we sell to our dealerships for retail sale, we also sell vehicles to our dealerships for sale to fleet customers, including commercial fleet customers, daily rental car companies, and governments.  We also sell parts and accessories, primarily to our dealerships (which in turn sell these products to retail customers) and to authorized parts distributors (which in turn primarily sell these products to retailers). Through our dealerships, we also offer extended service contracts to retail customers.

The worldwide automotive industry is affected significantly by general economic conditions, among other factors, over which we have little control.  This is especially so because vehicles are durable goods, which provide consumers latitude in determining whether and when to replace an existing vehicle.  The decision whether to purchase a vehicle may be affected significantly by slowing economic growth, geopolitical events, and other factors (including the cost of purchasing and operating cars and trucks and the availability and cost of financing and fuel).  As we recently have seen in the United States and Europe, in particular, the number of cars and trucks sold may vary substantially from year to year.  Further, the automotive industry is a highly competitive business that has a wide and growing variety of product offerings from a growing number of manufacturers.

Our wholesale unit volumes vary with the level of total industry demand and our share of that industry demand.  In the short term, our wholesale unit volumes also are influenced by the level of dealer inventory.  Our share is influenced by how our products are perceived in comparison to those offered by other manufacturers based on many factors, including price, quality, styling, reliability, safety, fuel efficiency, functionality, and reputation.  Our share also is affected by the timing and frequency of new model introductions.  Our ability to satisfy changing consumer preferences with respect to type or size of vehicle, as well as design and performance characteristics, affects our sales and earnings significantly.

As with other manufacturers, the profitability of our business is affected by many factors, including:

Our industry has a very competitive pricing environment, driven in part by industry excess capacity, particularly in mature markets such as North America and Europe.  The decline in the value of the yen during the past two years also has contributed significantly to competitive pressures in many of our markets. For the past several decades, manufacturers typically have given price discounts and other marketing incentives to maintain market share and production levels.  A discussion of our strategies to compete in this pricing environment is set forth in the “Overview” section in Item 7.

Competitive Position.   The worldwide automotive industry consists of many producers, with no single dominant producer. Certain manufacturers, however, account for the major percentage of total sales within particular countries, especially their countries of origin.  Key competitors with global presence include Fiat Chrysler Automobiles, General Motors Company, Honda Motor Company, Hyundai-Kia Automotive Group, PSA Peugeot Citroen, Renault-Nissan B.V., Suzuki Motor Corporation, Toyota Motor Corporation, and Volkswagen AG Group.

Seasonality.   We generally record the sale of a vehicle (and recognize revenue) when it is produced and shipped or delivered to our customer (i.e., the dealership).  See the “Overview” section in Item 7 for additional discussion of revenue recognition practices.

We manage our vehicle production schedule based on a number of factors, including retail sales (i.e., units sold by our dealerships to their customers at retail) and dealer stock levels (i.e., the number of units held in inventory by our dealerships for sale to their customers). Historically, we have experienced some seasonal fluctuation in the business, with production in many markets tending to be higher in the first half of the year to meet demand in the spring and summer (typically the strongest sales months of the year).  

Raw Materials.   We purchase a wide variety of raw materials from numerous suppliers around the world for use in production of our vehicles.  These materials include base metals (e.g., steel, iron castings, and aluminum), precious metals (e.g., palladium), energy (e.g., natural gas), and plastics/resins (e.g., polypropylene).  We believe we have adequate supplies or sources of availability of raw materials necessary to meet our needs.  There always are risks and uncertainties with respect to the supply of raw materials, however, which could impact availability in sufficient quantities to meet our needs.  See the “Overview” section of Item 7 for a discussion of commodity and energy price trends, and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” (“Item 7A”) for a discussion of commodity price risks.

Backlog Orders.   We generally produce and ship our products on average within approximately 20 days after an order is deemed to become firm.  Therefore, no significant amount of backlog orders accumulates during any period.

Intellectual Property.   We own or hold licenses to use numerous patents, copyrights, and trademarks on a global basis. Our policy is to protect our competitive position by, among other methods, filing U.S. and international patent applications to protect technology and improvements that we consider important to the development of our business.  We have generated a large number of patents, and expect this portfolio to continue to grow as we actively pursue additional technological innovation.  We currently have approximately 24,400 active patents and pending patent applications globally, with an average age for patents in our active patent portfolio of just under five and a half years.  In addition to this intellectual property, we also rely on our proprietary knowledge and ongoing technological innovation to develop and maintain our competitive position.  Although we believe these patents, patent applications, and know-how, in the aggregate, are important to the conduct of our business, and we obtain licenses to use certain intellectual property owned by others, none is individually considered material to our business.  We also own numerous trademarks and service marks that contribute to the identity and recognition of our Company and its products and services globally.  Certain of these marks are integral to the conduct of our business, a loss of any of which could have a material adverse effect on our business.

Warranty Coverage and Additional Service Actions.   We currently provide warranties on vehicles we sell.  Warranties are offered for specific periods of time and/or mileage, and vary depending upon the type of product and the geographic location of its sale.  In compliance with regulatory requirements, we also provide emissions-defects and emissions-performance warranty coverage.  Pursuant to these warranties, we will repair, replace, or adjust all parts on a vehicle that are defective in factory-supplied materials or workmanship during the specified warranty period.  In addition to the costs associated with this warranty coverage provided on our vehicles, we also incur costs as a result of additional service actions, including product recalls and customer satisfaction actions.

For additional information regarding warranty and related costs, see “Critical Accounting Estimates” in Item 7 and Note 29 of the Notes to the Financial Statements.

(a) Throughout this Report, market share represents reported retail sales of our brands as a percent of total industry sales volume in the relevant market or region (as opposed to wholesale unit volumes reflecting sales directly by us to our customers, generally our dealers).

United States. The competitive environment in the United States remains intense. In 2013, our market share was up 0.5 percentage points to 15.7% of the industry. Many of the import brand automakers have plans to increase production capacity in North America in the near-term, as competitive pressures mount.

The small car segment has increased its share from 14% in 2004 to approximately 20% in 2013. We expect small cars to plateau, with a slower rate of growth going forward. Overall, small cars were up 5% in 2013, relative to an industry that was up 7%.

The mid-size car segment grew at just 1% in 2013, relative to an industry that was up 7%. The mid-size car segment represented about 16% of the overall industry. The segment has been stable over the past decade, with the segment ranging from a low of 14% to a high of 17% of the industry. The all-new Fusion was a success for us in 2013 as we sold 295,280 vehicles, with sales increasing 22% compared with 2012.

The small car-based utility segment grew 16% in 2013, more than twice the rate of the overall industry. The small utility segment now represents 14% of the U.S. auto industry, its highest percent of industry ever. We expect the small utility segment will continue to grow and out-pace the overall industry for a number of years. This is due to the appeal of the segment with the growing number of baby-boomers crossing into empty nester status. Our Escape small utility produced another record sales year in 2013, with 295,993 vehicles sold—a 13 percent increase over 2012. In 2013, Ford was the number-one selling brand of utilities in America for the third straight year.

The full-size pickup segment represented 12% of the overall industry in 2013, an increase from 11.5% in 2012. Given continued improvements in new home construction and the overall average age of the truck fleet of approximately 11 years, we believe the segment can continue to support growth in the short to medium-term. Our F-Series sales totaled 763,402 vehicles in 2013. This represents an 18% increase over 2012 and our 37 ^th year as America’s best-selling pickup and our 32 ^nd straight year as America’s best-selling vehicle (car, truck, or utility). F-Series market share was 40% of the full-size pickup segment in 2013, which represented our best share of the segment since 2000.

Our strong U.S. vehicle sales in 2013 reflected our balanced portfolio of fuel-efficient vehicles, as our passenger cars, utilities, and trucks each reported gains last year. Cars were up 10%, utilities posted a 9% gain, and trucks expanded 13%. Retail sales across the country were up 14% in 2013. Our strongest retail sales growth is coming from areas where historically our sales have been lower relative to our traditionally strong Great Lakes and Central regions of the country.

We posted our strongest retail sales growth of 21% year-over-year in the West, and had retail sales growth of 17% in the South East.

Fleet sales include sales to commercial fleet customers, daily rental car companies, and governments. In 2013, fleet sales were 28% of our total sales, compared with 30% in 2012. The majority of the fleet sales were with commercial and government customers, which are more profitable than daily rentals. In 2013, our daily rental sales were 11% of total sales, down from 12% in 2012.

Canada. Industry sales volume in Canada grew 4% in 2013.  Within that total, car sales decreased by 1.7 percentage points to 44% of overall industry sales volume, utilities increased by 1.3 percentage points to 35% of overall industry sales volume, and truck sales increased by 0.4 percentage points to 21% of industry sales volume.  Our sales performance in the market earned Ford the sales leadership title in Canada for the fourth year in a row.  In 2013, Ford earned segment leadership with Fusion, Mustang, Escape, Explorer, F-150, and Super Duty.  F-Series maintained truck leadership for the 48 ^th straight year, achieving record sales of more than 122,000 units. 

Mexico. Industry sales volume in Mexico grew 7% during 2013. The favorable sales performance of our Ikon and Fiesta in the B-car segment, along with favorable performance of the EcoSport and Escape, impacted our market share. The main contributors to market share decline were the discontinuation of Courier and delays in the introduction of the Ranger.

The competition in Brazil continues to intensify, as a number of automotive manufacturers bring substantial capacity increases to the market. The intensifying competitive environment is putting pressure on industry net pricing. In 2013, we continued to leverage our One Ford plan by introducing global products (e.g., Focus), with additional global products to come that will continue to benefit us in this market. The competitive environment and a volatile economic outlook with new trade barriers and currency risks across the region, especially in Venezuela and Argentina, may limit our growth in certain countries.

Europe

The automotive industry in Europe is intensely competitive, and expected to intensify further as Japanese and Korean manufacturers increase production capacity in the region and manufacturers of premium brands (e.g., BMW, Mercedes-Benz and Audi) continue to broaden product offerings. The nearly two percent decline in industry sales volume for the traditional 19 markets we tracked in Europe in 2013 compared with 2012 largely reflects the impact of the Eurozone crisis, which largely affected the first half of 2013 and showed recovery in the second half of the year.

(a) Includes wholesales in Turkey and Russia from our unconsolidated affiliates Ford Otosan and FordSollers.

In 2013, Ford was again the second best-selling car brand in the traditional 19 markets we tracked in Europe. Our continued market strength reflects the strong momentum of our new or refreshed vehicles, including the B-MAX, Fiesta, Kuga, Tourneo Custom, and Transit Custom.

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

Britain. Industry in Britain began to decline in 2008 with the global financial crisis, and between 2009 and 2012 remained in the 2.2 million–2.3 million unit range (compared with 2.8 million units in 2007). In 2013, industry sales volume, at 2.6 million, increased 11% compared with 2012, reflecting a higher demand from private customers. The retail channel industry increased 16% in 2013 compared with 2012. Our market share decreased slightly in 2013 compared with 2012, reflecting our reduced participation in low-margin business such as daily rental and demonstration vehicles. We continued to be the market share leader in Britain for total, passenger, and commercial vehicles.

Germany. With 3.3 million new vehicle registrations in 2013, Germany’s industry sales volume declined 4% compared with the prior year, reflecting declines in both retail and fleet industry—retail industry decreased 5% and fleet 6%. Germany remains the largest vehicle market in the European Union. Despite our reduced participation in low-margin business such as daily rental and demonstration vehicles, our market share in 2013 increased compared with 2012, driven by a strong share of the retail segment and growth in commercial vehicles.

The following tables show our wholesales and market share for Turkey and Russia:

Turkey. Industry growth slowed in 2008 as a result of the global financial crisis. Beginning in 2009, industry vehicle sales accelerated due to government incentives put in place, with significant continuous increase in 2010 and 2011. In 2012, industry decreased by about 10% compared with the prior year, driven by increased taxes. Industry in 2013, at 0.9 million units, increased 9% compared with the prior year reflecting the availability of favorable automotive financing and a competitive pricing environment that more than offset the Euro/Turkish Lira exchange increase. Our market share declined compared with prior year reflecting competitive market pressures and a segment shift from commercial vehicles to cars, although Ford remains the leading automotive company for the 12 ^th consecutive year.

Russia. Following a 50% contraction in 2009 as a result of the impact of the global financial crisis reaching Russia, industry sales volume has returned almost to pre-crisis levels, with industry sales volume of 2.8 million units in 2013. Russia is the second-largest market for vehicle sales in Europe, and is expected to become the largest over the next several years. Our market share decline was largely driven by industry growth in SUV segments, where we are not yet fully participating and capacity constraints that prevented us from following the growth.

Asia Pacific Africa

 

Asia Pacific Africa industry sales and market share data reflect our 11 major markets in the region. Of the markets we track in this region, ASEAN, Australia, China, India, and South Africa are our principal markets.

Small cars account for 57% of Asia Pacific Africa industry sales volume, and are anticipated to continue to benefit from government policy. We anticipate that the ongoing relaxation of import restrictions (including duty reductions) will continue to intensify competition in the region, particularly around small, ultra-affordable passenger cars. The highly successful launches of our all-new Kuga and EcoSport small utilities in 2013 once again demonstrate our ability to successfully compete in key growth segments in the region. The following tables show our wholesales and market share for key markets and in total:

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(a) Market share data include Ford and local-brand vehicles produced by our unconsolidated affiliates, including our Chinese joint venture JMC.

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 region. Accordingly, we have increased and are planning to increase further our dealer networks and manufacturing capacity in the region. We and our unconsolidated joint venture affiliates opened two new plants in the region in 2013, and currently are building six additional plants in the region—four in China and two in India—all as part of our plan to reach production capacity of 2.7 million vehicles 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.

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 portfolios— “consumer” and “non-consumer.”  Finance receivables and leases in the consumer portfolio 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 portfolio 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, for the purchase of dealership real estate, and for other dealer vehicle program financing.  Ford Credit also purchases receivables generated by us and our subsidiaries, primarily related to the sale of parts and accessories to dealers, receivables from Ford related loans, and certain used vehicles from daily rental fleet companies.

Ford Credit does business in the United States and Canada through business centers. Outside of the United States, Europe is Ford Credit’s largest operation. Ford Credit’s European operation is managed through its United Kingdom-based subsidiary, FCE Bank plc (“FCE”). Within Europe, FCE’s largest markets are the United Kingdom and Germany. Approximately 65% of FCE’s finance receivables and operating leases are from FCE’s customers and Ford dealers in the United Kingdom and Germany; approximately 18% are from FCE’s customers and Ford dealers in Italy, France, and Spain; and approximately 1% are from FCE’s customers and Ford dealers in Greece, Ireland, and Portugal. FCE also provides financing to dealerships in countries where typically we have no established local presence.

Ford Credit’s financing shares of 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 wholesale financing shares of 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 6, 7, and 8 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 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.

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:

Vehicle 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). In   2013, the EPA proposed new “Tier 3” regulations that contain more stringent motor vehicle emissions standards for future model years, as well as more stringent fuel quality standards. The Tier 3 regulations are expected to be finalized in 2014. There is some concern that EPA may promulgate the Tier 3 vehicle emissions standards without finalizing the accompanying fuel quality standards. This would impose additional compliance risks on the auto industry, since high-quality fuels are necessary to enable automobiles to meet increasingly stringent emissions standards.

In 2011, EPA issued waivers under the Clean Air Act allowing the distribution and sale of gasoline containing 15%   ethanol (“E15” fuel) for use in 2001 model year and later gasoline-powered vehicles. Virtually all of the vehicles affected by the waivers were designed to accommodate gasoline containing a maximum ethanol content of 10%. There are concerns that extensive use of E15 in these past model-year vehicles may lead to fuel system problems and other issues. Various petitioners, including the automotive industry, sought judicial review of the EPA waivers, but the federal courts have allowed the waivers to stand. As a result, Ford and other automotive manufacturers may face increased warranty claims and customer complaints, as well as the possibility of consumer litigation, due to the introduction of E15 into the market.

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 to CARB’s low-emission vehicle (“LEV II”) emissions standards. CARB’s new “LEV III” program takes effect with the 2015 model year and includes more stringent tailpipe and evaporative emissions requirements for light and medium duty vehicles 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 . In addition to California, thirteen states, primarily located in the Northeast and Northwest, have adopted the California standards for current and/or future model years. The adoption of California standards by other states presents planning and distribution challenges for manufacturers, because of the need to manage fleet average emissions standards on a state-by-state basis.

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 mandate substantial annual increases in the production and sale of battery-electric, fuel cell, and plug-in hybrid vehicles, particularly for the 2018 - 2025 model years. 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 2018 - 2025 model year ZEV rules could have a substantial adverse effect on our sales volumes and profits. 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 . We also are concerned about enforcement of the 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. CARB conducts periodic reviews of its upcoming ZEV requirements, taking into account factors such as technology developments and market acceptance. Ford and the industry will be active participants in such reviews, with the goal of ensuring that ZEV requirements are feasible and not excessively burdensome.

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 “Stage V” emissions standards took effect for vehicle registrations starting in January 2011; Stage   VI requirements will apply from September   2014, with a second phase beginning in September 2017.    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. The additional requirements for the second phase of Stage VI will further increase stringency of particle emissions for direct injection gasoline vehicles, and apply more demanding on-board diagnostic thresholds for all vehicles. There are some additional test procedures still in development for application as part of the second phase of Stage VI.

Vehicles equipped with selective catalytic reduction (“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   2013   in large cities. Korea and Taiwan have adopted very stringent U.S.-based standards for gasoline vehicles, and European-based standards for diesel vehicles.    Although these countries have adopted regulations based UN-ECE or U.S. standards, there may be some unique testing provisions that require emission-control systems to be redesigned for these markets.    Canadian criteria emissions regulations are aligned with U.S. Tier 2 requirements discussed above; a new examination of mobile source emissions has commenced, and it is expected that any new regulation will align standards with the current U.S. regulations.

Furthermore, not all 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, which may require unique emissions control systems be designed for the Japanese market.   

In South America, Brazil, Argentina, and Chile have introduced more stringent emissions standards.    Brazil approved European Stage V emissions and on-board diagnostic standards for heavy trucks starting in 2012;   more stringent light vehicle limits come into effect starting in 2012.    Argentina also will apply Stage V standards beginning in 2015 (for new vehicle homologations) and 2017 (for new vehicle registrations). Chile approved a plan to introduce more stringent emission standards (i.e.,   European Stage IV and V or corresponding U.S.   emissions standards) nationwide for light and medium duty vehicles, and progressive alignment with the Metropolitan Region (i.e., the capital city Santiago and surrounding area) by September 2014. Heavy duty vehicles will be required to meet Stage V (or corresponding U.S.   emissions standards) by October   2014.

Vehicle Fuel Economy

In addition to our own push for class-leading fuel efficiency for our vehicle lines, we also face ever-increasing expectations 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), and the impact of such standards on our financial results, 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.    If consumers demand vehicles that are relatively large and/or high-performance, while regulatory standards require production of vehicles that are smaller and/or 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.

A 2007 U.S. Supreme Court decision paved the way for EPA to regulate motor vehicle GHG emissions under the Clean Air Act. In 2010, EPA and NHTSA jointly promulgated regulations establishing the “One National Program” of CAFE and GHG regulations for light duty vehicles for the 2012–2016 model years. The 2012–2016 federal GHG and fuel economy standards require new light duty vehicles to ramp up to an industry average fuel economy of approximately 35.5 miles per gallon (“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.    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.    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 with the goal of preventing adverse changes to the existing One National Program regulations.

In 2012, EPA and NHTSA jointly promulgated regulations extending the One National Program framework through the 2025 model year. The new rules require manufacturers to achieve, across the industry, a light duty fleet average fuel economy of approximately 45 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. The 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.

 

EPA’s 2022 - 2025 GHG standards are final rules; in contrast, NHTSA’s 2022–2025 CAFE standards are conditional because, by statute, NHTSA may only set CAFE standards for up to five model years at a time. Each manufacturer’s specific task depends on the mix of vehicles it sells. The rules provide for a midterm evaluation process under which, by 2018, EPA will re-evaluate its standards for model years 2022–2025 in order to ensure that those standards are feasible and optimal in light of intervening events. In parallel, NHTSA will undertake a process to promulgate final CAFE standards for those model years. As with the 2012–2016 rules, the 2017–2025 rules have been challenged in federal court by entities whose primary concern appears to be the ramifications of the vehicle rules on stationary source regulation. The automotive industry has intervened in the litigation with the goal of avoiding adverse changes to the One National Program rules.

The One National Program standards will be difficult to meet if fuel prices remain relatively low and market conditions do not drive consumers to demand highly fuel-efficient vehicles in large numbers. We are particularly concerned about the feasibility of the 2022–2025 model year GHG and CAFE standards. Ford’s ability to comply with the 2022–2025 model year standards remains unclear because of the many unknowns regarding technology development, market conditions, and other factors so far into the future. We intend to be an active participant in the midterm evaluation process for these standards. If the agencies seek to impose and enforce extreme fuel economy or GHG standards in spite of unfavorable market conditions or inadequate technology development, 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.

Certain states in the United States have asserted the right to regulate motor vehicle GHG emissions. In 2004, California promulgated state-specific motor vehicle GHG standards, and a number of other states later adopted California’s rules. With the adoption of the federal One National Program standards discussed above, California and the other states modified their rules to provide that compliance with the federal program satisfies compliance with the state requirements for the 2012–2025 model years. This enabled the auto industry to avoid a patchwork of potentially conflicting federal and state GHG standards. Should California and other states ever renew their efforts to enforce state-specific motor vehicle GHG rules, this would impose significant costs on automotive manufacturers. Among other concerns, compliance with state-specific motor vehicle GHG regulations would add significant complexity to our production and distribution processes because of the need to micromanage the mix of vehicles sold in individual states. In contrast, the One National Program regulations allow us to determine compliance based on nationwide sales, eliminating the need to account for state-to-state sales variability .

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 grams per kilometer (“g/km”), using a sliding scale based on vehicle weight. This regulation provides different targets for each manufacturer based on the 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. Starting in 2020, an industry target of 95 g/km has been set. Other non-EU European countries are likely to follow with similar regulations. For example, Switzerland has introduced similar rules, which began phasing-in starting in July 2012 with the same targets (which likely also will include a 2020 target of 95 g/km), although the industry average emission target is significantly higher. We face the risk of advance premium payment requirements if, for example, unexpected market fluctuation within a quarter negatively impact our average fleet performance.

In separate legislation, “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 have approved 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;   it is likely that other European countries, like Switzerland, will implement similar rules but under even more difficult conditions. This regulation also provides 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 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. To limit GHG emissions, the EU directive on mobile air conditioning currently requires the replacement of the current refrigerant with a lower “global warming potential” refrigerant for new vehicle types, and for all newly registered vehicles starting in January 2017. A refrigerant change adds considerable costs along the whole value chain.

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 draft regulation for light duty vehicles which maintains alignment with U.S. EPA vehicle GHG standards for the 2017–2025 model years. The final regulation for 2014–2018 heavy duty vehicles was published in February 2013. 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.

Mexico also is in the process of adopting fuel economy/CO ₂ standards based on the U.S. One National Program framework, to take effect in 2014.

Many Asia Pacific countries (such as Australia, China, Japan, India, South Korea, Taiwan, and Vietnam) are also developing or enforcing fuel efficiency or labeling targets. For example, Japan has fuel efficiency targets for 2015 and is preparing to promulgate more stringent 2020 targets, with incentives for early adoption. China has been developing Stage III and Stage IV fuel economy targets for implementation for 2012–2015 and 2016–2020, respectively. 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 duty vehicles with a spark ignition engine. Brazil also published a new automotive regime which requires participation in the fuel economy labeling program. It establishes a minimum absolute CAFE value as a function of Fleet Corporate Average Mass for 2017 light duty vehicles with a spark ignition engine in order to qualify for industrialized products tax reduction for customers. Additional tax reductions are available if further fuel efficiency improvements are achieved. A severe penalty system will apply to qualified manufacturers failing to meet fuel efficiency requirement for the 2013–2017 sales period. Chile introduced requirements for fuel consumption and CO ₂ emissions levels of light duty vehicles to be posted at sales locations and in owner manuals beginning in February 2013. In general, fuel efficiency targets may impact the cost of technology of our models in the future.

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.

Other National 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 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 UN-ECE based regulations with minor variations to address local concerns.    Any difference between North American and UN-ECE based regulations can add complexity and costs to the development of global platform vehicles, and we continue to support efforts to harmonize regulations to reduce vehicle design complexity while providing a common level of safety performance; several recently launched bilateral negotiations on free trade can potentially contribute to this goal. New recall requirements in Asia Pacific Africa also may add substantial costs and complexity to our global recall practice. In South America, stringent safety requirements are being introduced or proposed in Ecuador and Uruguay, influenced by Latin NCAP, which may be a driver for similar actions in other countries. 

The year-over-year increase in employment primarily reflects consolidation of Ford Romania in Europe, hiring in North America, Asia Pacific Africa, and South America to support product-led growth initiatives, and hiring in North America and South America to support increased vehicle 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 1.5% of our U.S. salaried employees are represented by unions.  Most hourly employees and many non-management salaried employees at our operations outside of the United States also are represented by unions.

In 2011, we entered into a four-year collective bargaining agreement with the UAW. The agreement covers approximately 46,000 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 (based on a constant employment level). This increase has been offset by more flexible work rules that have increased manufacturing utilization and efficiency.

In 2012, we negotiated collective bargaining agreements with labor unions in Argentina, Australia, Brazil, Britain, Canada, France, Germany, Mexico, Romania, Taiwan, and Turkey.

In 2013, we negotiated collective bargaining agreements (covering wages, benefits and/or other employment provisions) with labor unions in Argentina, Brazil, France, Germany, Mexico, New Zealand, Russia, South Africa, Spain, Taiwan, Thailand, United Kingdom, and Venezuela.

In 2014, we will negotiate collective bargaining agreements (covering wages, benefits and/or other employment provisions) with labor unions in Argentina, Brazil, France, Germany, Italy, Mexico, and Thailand.

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.  Engineering, research, and development expenses for 2013, 2012, and 2011 were $6.4 billion, $5.5 billion, and $5.3 billion, respectively.