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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-6368
FORD MOTOR CREDIT COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(State of incorporation)
THE AMERICAN ROAD, DEARBORN, MICHIGAN
(Address of principal executive offices)
38-1612444
(I.R.S. employer identification no.)
48121
(Zip code)
Registrant's telephone number, including area code (313) 322-3000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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6 3/8% Notes due November 5, 2008 New York Stock Exchange
8 3/4% Senior Notes due December 1, 2001 The American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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As of February 28, 1999, the registrant had outstanding 250,000 shares of
Common Stock. No voting stock of the registrant is held by non-affiliates of the
registrant.
THE REGISTRANT MEETS THE CONDITION SET FORTH IN GENERAL INSTRUCTION I(1)(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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PART I
ITEM 1. BUSINESS
The registrant, Ford Motor Credit Company, was incorporated in Delaware in
1959 and is an indirect wholly owned subsidiary of Ford Motor Company ("Ford").
As used herein "Ford Credit" refers to Ford Motor Credit Company and its
subsidiaries unless the context otherwise requires.
Ford Credit and its subsidiaries provide wholesale financing and capital
loans to Ford Motor Company retail dealerships and associated non-Ford
dealerships throughout the world, most of which are privately owned and
financed, and purchase retail installment sale contracts and retail leases from
them. Ford Credit also makes loans to vehicle leasing companies, the majority of
which are affiliated with such dealerships. In addition, subsidiaries of Ford
Credit provide these financing services in the United States, Europe, Canada,
Australia, Indonesia and India to non-Ford dealerships. A substantial majority
of all new vehicles financed by Ford Credit are manufactured by Ford and its
affiliates. Ford Credit also provides retail financing for used vehicles built
by Ford and other manufacturers. In addition to vehicle financing, Ford Credit
makes loans to affiliates of Ford and finances certain receivables of Ford and
its subsidiaries.
In 1998 and 1997, United States operations, conducted in all 50 states and
the District of Columbia, accounted for 75% and 80%, respectively, of Ford
Credit's total revenue. European operations, conducted by FCE Bank plc (formerly
Ford Credit Europe plc) ("Ford Credit Europe"), accounted for 12% and 11%,
respectively, of Ford Credit's total revenue in these periods. The balance was
in Canada, Brazil, Mexico, Australia, Argentina, Taiwan, Puerto Rico, New
Zealand, Japan, Indonesia, Thailand and India. In addition, Ford Credit manages
the vehicle financing operations of Ford in other foreign countries which are
conducted through other subsidiaries of Ford.
Outside the United States, Ford Credit Europe is Ford Credit's largest
operation. Ford Credit Europe, which was originally incorporated in 1963 in
England as a private limited company, is owned by Ford Credit (80.4%) and Ford
Werke AG (19.6%). Ford Credit Europe's primary business is to support the sale
of Ford vehicles in Europe through the Ford dealer network. A variety of retail,
leasing and wholesale finance plans is provided in most countries in which it
operates. Retail financing is provided by means of a number of title retention
plans, including conditional sale and hire purchase agreements, and personal
loans. Operating and finance leases are provided to individual, corporate and
other institutional customers, covering individual vehicles and large and small
fleets. Wholesale financing is provided to Ford dealers for the stocking of new
and used vehicles. In addition, Ford Credit Europe provides loans to dealers for
working capital and property acquisitions and for a variety of finance plans.
Ford Credit also conducts insurance operations through The American Road
Insurance Company ("American Road") and its subsidiaries in the United States
and Canada. American Road's business primarily consists of extended service plan
contracts for new and used vehicles manufactured by affiliated and nonaffiliated
companies, primarily originating from Ford dealers, physical damage insurance
covering vehicles and equipment financed at wholesale by Ford Credit, and the
reinsurance of credit life and credit disability insurance for retail purchasers
of vehicles and equipment.
The business of Ford Credit is substantially dependent upon Ford Motor
Company. See "Vehicle Financing" and "Borrowings and Other Sources of Funds"
under the caption "Business of Ford Credit". Also see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations". Any
protracted reduction or suspension of Ford's production or sale of vehicles,
resulting from a decline in demand, a work stoppage, governmental action,
adverse publicity, or other event, could have a substantial adverse effect on
Ford Credit. For additional information concerning Ford's results of operations,
see Ford Motor Company's Annual Report on Form 10-K for the year ended December
31, 1998 filed with the Securities and Exchange Commission.
The mailing address of Ford Credit's executive offices is The American
Road, Dearborn, Michigan 48121. The telephone number of such offices is (313)
322-3000.
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SEGMENT INFORMATION
Segment information called for by Item 1 is set forth in Note 17 of Notes
to Financial Statements and is incorporated herein by reference.
BUSINESS OF FORD CREDIT
Ford Credit accounts for its financing business in three categories --
retail (which consists of vehicle installment sale financing and vehicle lease
financing), wholesale and other. Total net finance receivables and net
investment in operating leases outstanding in these three categories and
geographic regions were as follows at the end of the years indicated:
1998 1997 1996 1995
---- ---- ---- ----
(IN MILLIONS)
Retail
Installment sale/finance lease.............. $ 66,567.8 $ 54,545.3 $ 52,352.1 $ 47,087.0
Operating lease............................. 34,566.5 34,746.0 30,645.2 25,680.2
Wholesale..................................... 22,561.2 21,519.7 22,621.9 22,043.8
Other......................................... 6,812.6 5,247.6 5,874.0 7,245.9
---------- ---------- ---------- ----------
Total.................................... $130,508.1 $116,058.6 $111,493.2 $102,056.9
========== ========== ========== ==========
United States................................. $ 94,945.4 $ 87,721.2 $ 82,225.0 $ 78,652.3
Europe........................................ 21,588.7 17,148.1 18,100.0 16,202.3
Other international........................... 13,974.0 11,189.3 11,168.2 7,202.3
---------- ---------- ---------- ----------
Total.................................... $130,508.1 $116,058.6 $111,493.2 $102,056.9
========== ========== ========== ==========
The increase in installment sale/finance lease receivables in 1998 compared
with 1997 primarily reflects an increased level of Ford-sponsored special
financing programs available exclusively through Ford Credit.
VEHICLE FINANCING
Retail. Retail financing consists primarily of installment sale financing
and retail lease financing of new and used vehicles and loans to vehicle leasing
companies, most of which are affiliated with franchised Ford Motor Company
dealerships. The number of installment sale and lease vehicles financed by Ford
Credit in the categories and geographic regions shown below was as follows
during the years indicated:
1998 1997 1996 1995
---- ---- ---- ----
(IN THOUSANDS)
Installment sale/finance lease.............................. 3,030 2,389 2,436 2,557
Operating lease............................................. 1,138 1,206 1,160 965
----- ----- ----- -----
Total retail........................................... 4,168 3,595 3,596 3,522
===== ===== ===== =====
United States............................................... 2,794 2,549 2,652 2,499
Europe...................................................... 800 727 717 723
Other international......................................... 574 319 227 300
----- ----- ----- -----
Total retail........................................... 4,168 3,595 3,596 3,522
===== ===== ===== =====
The levels of Ford Credit's retail financing volumes and outstanding
finance receivables and net investment in operating leases are dependent on
several factors, including new and used vehicle sales and leases, Ford Credit's
share of those vehicle sales and leases and the average cost of vehicles
financed. See "Competition in Vehicle Financing". In addition, receivables
levels may vary depending on sales of receivables.
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The increase in the volume of installment sale/finance lease transactions
in 1998 compared with 1997 primarily reflects an increased level of
Ford-sponsored special financing programs available exclusively through Ford
Credit.
Installment sale and retail lease financing consist principally of
purchasing and servicing installment sale contracts and leases covering the sale
or lease of new and used vehicles by vehicle dealers to retail customers. The
amount paid by Ford Credit to the dealer for an installment sale contract or
lease generally represents a negotiated amount agreed to between the dealer and
the customer, less any trade-in or downpayment. In addition, a portion of the
finance charge is paid or credited to the dealer. Ford Credit requires a retail
purchaser or lessee to carry fire, theft and collision insurance on the vehicle.
In addition, retail lessees are required to carry liability insurance.
Installment sales contract terms range up to 72 months. In the U.S., the
average repayment obligation for new vehicles covered by installment sale
contracts purchased by Ford Credit in 1998 was $18,600. The corresponding
average monthly payment was $418 and the average original term was 53 months.
For retail leases, the monthly lease payment equals the amount paid to the
dealer for the vehicle and lease (the "acquisition cost") less the residual
value of the vehicle established by Ford Credit, amortized over the lease term,
plus the lease charge. The acquisition cost to Ford Credit of the vehicle, less
the residual value, is depreciated on a straight line basis over the life of the
lease. Residual value, the estimated value of the vehicle at lease end, is
determined by Ford Credit after analyzing published residual values and Ford
Credit's own historical experience in the used vehicle market. In addition,
joint marketing programs with Ford's sales divisions can affect established
residual values. At lease termination, Ford Credit either sells the vehicle to
the dealer for the established residual value or sells the vehicle at auction
for the market price.
Retail lease terms range from 12 to 48 months. In the U.S., the average
monthly payment of retail lease contracts purchased by Ford Credit in 1998 was
$405 and the average original term was 30 months.
Ford Credit extends financing to leasing companies and daily rental
companies. Financing charges in connection with such lease financing either are
fixed or floating based on short-term interest rates in effect at the time
financing is extended. These rates may be supplemented by payments from Ford
whenever the rate payable is less than the specified minimum rate agreed between
Ford Credit and Ford.
Wholesale. Wholesale financing consists of loans, under approved lines of
credit, to dealers to assist them in carrying inventories of new and used
vehicles. Ford Credit generally finances 100% of the wholesale price. Vehicles
are insured against fire, theft and other risks under policies issued to Ford
Credit. Ford Credit's United States car and truck wholesale receivables that
liquidated were outstanding an average of about 65 days and 68 days in 1998 and
1997, respectively.
The levels of Ford Credit's wholesale financing volume and outstanding
wholesale receivables are dependent on several factors, including sales by Ford
to dealers, the level of dealer inventories, Ford Credit's share of Ford's sales
to dealers, vehicle prices and sales of wholesale receivables.
Competition In Vehicle Financing. The vehicle financing business is highly
competitive. Ford Credit's principal competitors are banks, credit unions and
leasing companies.
Ford Credit financed the following percentages of new Ford cars and trucks
sold or leased at retail and sold at wholesale in the United States and Europe
during each of the years indicated:
1998 1997 1996 1995
---- ---- ---- ----
United States
Retail*......................................... 42.3% 37.5% 37.6% 36.9%
Wholesale....................................... 82.5 79.8 79.5 79.7
Europe
Retail*......................................... 32.5 29.1 29.3 30.2
Wholesale....................................... 95.4 95.0 90.8 89.2
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* As a percentage of total sales and leases, including cash sales
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The increase in the percentage of Ford Credit retail financing in the
United States and Europe in 1998 compared with 1997 primarily reflects an
increased level of Ford-sponsored special financing programs available
exclusively through Ford Credit.
OTHER FINANCING ACTIVITIES
Ford Credit makes capital loans to vehicle dealers for facilities expansion
and working capital and to enable them to purchase dealership real estate. Such
loans totaled $2,506.6 million at December 31, 1998. From time to time, Ford
Credit purchases accounts receivable of certain divisions and affiliates of
Ford. At December 31, 1998, such receivables totaled $3,887.4 million.
CREDIT LOSS EXPERIENCE
The following table sets forth information concerning Ford Credit's credit
loss experience with respect to the various categories and geographic regions of
financing during the years indicated:
1998 1997 1996 1995
---- ---- ---- ----
(DOLLAR AMOUNTS IN MILLIONS)
Net credit losses/(recoveries)
Retail*.................................... $1,030.8 $1,004.4 $803.6 $466.7
Wholesale.................................. 9.3 (1.1) 18.6 9.9
Other...................................... (0.7) 3.8 7.8 9.3
-------- -------- ------ ------
Total................................... $1,039.4 $1,007.1 $830.0 $485.9
======== ======== ====== ======
United States.............................. $ 916.2 $ 900.4 $707.0 $371.6
Europe..................................... 57.1 66.5 95.5 92.0
Other international........................ 66.1 40.2 27.5 22.3
-------- -------- ------ ------
Total................................... $1,039.4 $1,007.1 $830.0 $485.9
======== ======== ====== ======
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* Includes net credit losses on operating leases
Net losses as a percent of average net
receivables*
Retail..................................... 1.10% 1.17% 1.03% 0.68%
Total finance receivables.................. 0.86 0.89 0.78 0.51
Provision for credit losses.................. $1,179.5 $1,338.2 $ 993.3 $ 480.4
Allowance for credit losses.................. 1,548.2 1,471.4 1,217.6 1,054.9
As percent of net receivables*............. 1.19% 1.27% 1.09% 1.03%
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* Includes net investment in operating leases
Allowances for estimated credit losses are established as required based on
historical experience. Other factors that affect collectibility also are
evaluated and additional allowances may be provided. The provision for credit
losses generally varies with changes in the amount of loss exposure and the
absolute level of financing. Ford Credit's retail loss experience is dependent
upon the number of repossessions, the unpaid balance outstanding at the time of
repossession, and the net resale value of repossessed vehicles. Wholesale losses
generally reflect the financial condition of dealers. For additional information
regarding credit losses, see Notes 1 and 6 of Notes to Financial Statements and
see Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SECURITY
Ford Credit generally either holds security interests in or is the title
owner of the vehicles which it finances or leases and generally is able to
repossess a vehicle in the event of a default. The right to repossess under a
security interest securing wholesale obligations generally is ineffectual, as a
matter of law, against a retail buyer of a vehicle from a dealer. Under the
wholesale installment sale plan, dealers are permitted to delay payment of up to
10% of a vehicle's financed balance for up to 60 days after the dealer sells the
vehicle.
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A portion of such delayed payments may, under certain circumstances, be
unsecured. Obligations arising from lease financing extended to leasing
companies are collateralized to the extent practicable by assignments of rentals
under the related leases and, in almost all instances, by perfected liens on the
vehicles.
BORROWINGS AND OTHER SOURCES OF FUNDS
Ford Credit relies heavily on its ability to raise substantial amounts of
funds. These funds are obtained primarily by the sale of commercial paper, the
issuance of term debt and, in the case of Ford Credit Europe, the issuance of
certificates of deposit. Funds also are provided by retained earnings and sales
of receivables. The level of funds can be affected by certain transactions with
Ford, such as capital contributions, interest supplements and other support
costs from Ford for vehicles financed and leased by Ford Credit under Ford-
sponsored special financing and leasing programs, and dividend payments, and the
timing of payments for the financing of dealers' wholesale inventories and for
income taxes. Ford Credit's ability to obtain funds is affected by its debt
ratings, which are closely related to the outlook for, and financial condition
of, Ford, and the nature and availability of support facilities. The long-term
senior debt of Ford, Ford Credit and Ford Credit Europe are rated "A1" and "A"
and the commercial paper of Ford Credit and Ford Credit Europe are rated
"Prime-1" and "A-1" by Moody's Investors Service and Standard & Poor's Ratings
Group, respectively. For additional information regarding Ford Credit's
association with Ford, see "Certain Transactions with Ford and Affiliates".
Ford Credit's outstanding debt at the end of each of the last four years
was as follows:
1998 1997 1996 1995
---- ---- ---- ----
(IN MILLIONS)
Commercial paper and STBAs(a)......................... $ 48,636 $ 42,311 $38,774 $40,419
Other short-term debt(b).............................. 4,997 3,897 4,243 1,781
Long-term debt (including current portion)(c)......... 61,334 54,517 55,007 49,980
-------- -------- ------- -------
Total debt.......................................... $114,967 $100,725 $98,024 $92,180
======== ======== ======= =======
United States......................................... $ 85,394 $ 78,443 $76,635 $73,178
Europe................................................ 16,653 12,491 14,028 13,013
Other international................................... 12,920 9,791 7,361 5,989
-------- -------- ------- -------
Total debt.......................................... $114,967 $100,725 $98,024 $92,180
======== ======== ======= =======
Memo:
Total support facilities (billions) as of December 31:
Ford Credit(d)................................... $ 26.9 $ 26.6 $ 27.2 $ 27.4
Ford Credit Europe............................... 5.3 5.2 5.7 4.7
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(a) Short-term borrowing agreements with bank trust departments
(b) Includes $989 million, $831 million, $2,478 million and $176 million with
affiliated companies at December 31, 1998, December 31, 1997, December 31,
1996 and December 31, 1995, respectively
(c) Includes $2,878 million, $3,547 million, $4,237 million and $1,174 million
with affiliated companies at December 31, 1998, December 31, 1997, December
31, 1996 and December 31, 1995, respectively
(d) Excludes support of Ford Credit's asset-backed commercial paper program
Outstanding commercial paper totaled $46.2 billion at December 31, 1998, up
$5.3 billion from a year earlier. In 1998, long-term debt placements were $18.2
billion compared with maturities and early redemptions of $12.9 billion.
Long-term debt placements in 1997 were $11.8 billion. In 1998, Ford Credit also
received $8.0 billion from sales of receivables compared with $4.0 billion in
1997.
Support facilities represent additional sources of funds, if required. At
December 31, 1998, Ford Credit had approximately $19.2 billion of contractually
committed facilities. In addition, approximately $7.7 billion of Ford lines of
credit may be used by Ford Credit at Ford's option. These credit lines have
various maturity dates through June 30, 2003 and may be used, at Ford Credit's
option, by any of its direct or indirect
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majority-owned subsidiaries. Any such borrowings will be guaranteed by Ford
Credit. Banks also provide $1.5 billion of contractually committed liquidity
facilities to support Ford Credit's asset backed commercial paper program.
Additionally, at December 31, 1998, there was approximately $4.7 billion of
contractually committed facilities available for Ford Credit Europe's use. In
addition, $615 million of Ford credit lines may be used by Ford Credit Europe at
Ford's option. The lines have various maturity dates through June 30, 2003 and
may be used, at Ford Credit Europe's option, by any of its direct or indirect
majority-owned subsidiaries. Any such borrowing will be guaranteed by Ford
Credit Europe.
FORD CREDIT EMPLOYEE RELATIONS
At December 31, 1998, Ford Credit and its subsidiaries had 16,265
employees. All such employees are salaried, and none is represented by a union.
Ford Credit considers its employee relations to be satisfactory.
FORD CREDIT GOVERNMENTAL REGULATIONS
Certain aspects of Ford Credit's U.S. financing operations are regulated in
the various jurisdictions in which it operates. Many jurisdictions require
licenses to conduct financing of retail sale and lease transactions. Interest
rates, particularly those with respect to consumer financing, generally are
limited by law. In periods of high interest rates, these rate limitations can
have a substantial adverse effect on operations in certain jurisdictions if Ford
Credit is unable to pass on its increased costs of funds to customers.
During the past several years, legislative, judicial, and administrative
authorities have evidenced a growing concern for the protection of consumers,
especially in connection with consumer financing transactions. As a result,
significant changes have been made in the methods by which Ford Credit and
others in the financing industry are required to conduct business. Many
additional proposals have been made which if adopted would require further
changes. None of the changes to date has had a substantial adverse effect on the
operations of Ford Credit.
CERTAIN TRANSACTIONS WITH FORD AND AFFILIATES
For information concerning transactions between Ford Credit and Ford or
affiliates, see Note 13 of Notes to Financial Statements, "Business of Ford
Credit -- Other Financing Activities", "Business of Ford Credit -- Borrowings
and Other Sources of Funds" and Item 6 -- "Selected Financial Data -- Selected
Income Statement Data." The profit maintenance agreement referred to in the
first paragraph of Note 13 of Notes to Financial Statements, under which Ford
has agreed to maintain the income of Ford Credit at certain minimum levels,
expires at the end of 2001. In addition, Ford has agreed to maintain a minimum
ownership interest in Ford Credit Europe and has agreed to maintain or cause
Ford Credit to maintain Ford Credit Europe's net worth at a minimum level.
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BUSINESS OF FORD
Ford Motor Company was incorporated in Delaware in 1919. Ford acquired the
business of a Michigan company, also known as Ford Motor Company, incorporated
in 1903 to produce and sell automobiles designed and engineered by Henry Ford.
Ford is the world's largest producer of trucks and the second-largest producer
of cars and trucks combined. Ford and its subsidiaries also engage in other
businesses, such as manufacturing automotive components and systems and
financing and renting vehicles and equipment.
OVERVIEW
Ford's business is divided into two business sectors, and it manages these
sectors as four primary operating segments. These business sectors and operating
segments are described below.
BUSINESS SECTORS OPERATING SEGMENT DESCRIPTION
---------------- ----------------- -----------
Automotive: Automotive design, manufacture, sale and service of
cars and trucks
Visteon Automotive Systems design, manufacture, sale and service of
automotive components and systems
Financial Services: Ford Credit vehicle-related financing, leasing and
insurance
The Hertz Corporation rental of cars, trucks and industrial and
construction equipment, and other
activities
AUTOMOTIVE SECTOR
Ford sells cars and trucks and automotive components and systems throughout
the world. In 1998 Ford sold globally 6.8 million vehicles. Ford's automotive
vehicle brands include Ford, Mercury, Lincoln, Jaguar and Aston Martin. In
addition, Ford owns 33.4% of Mazda Motor Corporation. Also, on March 1, 1999,
Ford entered into a definitive agreement with AB Volvo to buy Volvo's worldwide
passenger car business. The transaction will close following receipt of
regulatory approvals.
The worldwide automotive industry, Ford included, is affected significantly
by a number of factors over which Ford has little control, including general
economic conditions. In the United States, the automotive industry is a
highly-competitive, cyclical business that has a wide variety of product
offerings. Most of the cars and trucks sold in the United States are produced by
Ford or by two other manufacturers. The number of cars and trucks sold to retail
buyers (commonly referred to as "industry demand") can vary substantially from
year to year. In any year, industry demand depends largely on general economic
conditions, the cost of purchasing and operating cars and trucks and the
availability and cost of credit and fuel. Industry demand also reflects the fact
that cars and trucks are durable items that people can wait to replace.
The automotive industry outside of the United States 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. Most of the factors that affect the U.S.
automotive industry and its sales volumes and profitability are equally relevant
outside the United States.
The worldwide automotive industry also is affected significantly by a
substantial amount of costly government regulation. In the United States and
Europe, for example, government regulation has arisen primarily out of concern
for the environment, for greater vehicle safety and for improved fuel economy.
Many governments also regulate local content and/or impose import requirements
as a means of creating jobs, protecting domestic producers or influencing their
balance of payments.
Ford's unit sales vary with the level of total industry demand and Ford's
share of that industry demand. Ford's share is influenced by how its products
compare with those offered by other manufacturers based on many factors,
including design, driveability, price, quality, reliability, safety and utility.
Ford's share is also affected by its timing of new model introductions and
manufacturing capacity limitations. Ford's ability to
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satisfy changing consumer preferences with respect to type or size of vehicle
and its design and performance characteristics can impact Ford's sales and
earnings significantly.
The profitability of vehicle sales is affected by many factors, including
the following:
- unit sales volume
- the mix of vehicles and options sold
- the margin of profit on each vehicle sold
- the level of "incentives" (price discounts) and other marketing costs
- the costs for customer warranty claims and other customer satisfaction
actions
- the costs for government-mandated safety, emission and fuel economy
technology and equipment
- the ability to manage costs
- the ability to recover cost increases through higher prices
Further, because the automotive industry is capital intensive, it operates with
a relatively high percentage of fixed costs, which can result in large changes
in earnings from relatively small changes in unit volume.
Following is a discussion of the automotive industry in the principal
markets where Ford competes, as well as a discussion of Ford's Visteon operating
segment:
United States
Sales Data. The following table shows U.S. industry retail deliveries of
cars and trucks for the years indicated:
U. S. INDUSTRY RETAIL DELIVERIES
------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(MILLIONS OF UNITS)
Cars............................................ 8.2 8.3 8.6 8.6 9.0
Trucks.......................................... 7.8 7.2 6.9 6.5 6.4
---- ---- ---- ---- ----
Total...................................... 16.0 15.5 15.5 15.1 15.4
==== ==== ==== ==== ====
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Ford classifies cars by small, middle, large and luxury segments and trucks
by compact pickup, compact bus/van/utility, full-size pickup, full-size
bus/van/utility and medium/heavy segments. The large and luxury car segments and
the compact bus/van/utility, full-size pickup and full-size bus/van/utility
truck segments include the industry's most profitable vehicle lines. The term
"bus" as used in this discussion refers to vans designed to carry passengers.
The following tables show the proportion of U.S. retail car and truck unit sales
by segment for the industry (including Japanese and other foreign-based
manufacturers) and Ford for the years indicated:
U.S. INDUSTRY VEHICLE SALES BY SEGMENT
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
CARS
Small............................................... 16.9% 18.1% 19.1% 19.6% 20.1%
Middle.............................................. 23.6 24.7 25.6 26.4 26.8
Large............................................... 3.4 3.9 3.9 4.3 4.8
Luxury.............................................. 7.1 6.7 6.7 6.8 6.6
----- ----- ----- ----- -----
Total U.S. Industry Car Sales.................. 51.0 53.4 55.3 57.1 58.3
----- ----- ----- ----- -----
TRUCKS
Compact Pickup...................................... 6.7 6.4 6.2 6.8 7.7
Compact Bus/Van/Utility............................. 21.1 20.0 19.0 18.0 16.9
Full-Size Pickup.................................... 12.4 12.0 12.6 11.5 11.0
Full-Size Bus/Van/Utility........................... 6.5 6.1 5.0 4.4 4.1
Medium/Heavy........................................ 2.3 2.1 1.9 2.2 2.0
----- ----- ----- ----- -----
Total U.S. Industry Truck Sales................ 49.0 46.6 44.7 42.9 41.7
----- ----- ----- ----- -----
Total U.S. Industry Vehicle Sales......... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
FORD VEHICLE SALES BY SEGMENT IN U.S.
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
CARS
Small............................................... 13.1% 12.7% 13.4% 15.1% 17.5%
Middle.............................................. 16.7 19.6 22.1 22.3 22.7
Large............................................... 5.7 5.6 5.3 4.9 5.2
Luxury.............................................. 4.2 4.1 4.1 4.4 4.7
----- ----- ----- ----- -----
Total Ford U.S. Car Sales...................... 39.7 42.0 44.9 46.7 50.1
----- ----- ----- ----- -----
TRUCKS
Compact Pickup...................................... 8.4 7.7 7.4 8.0 8.9
Compact Bus/Van/Utility............................. 18.1 18.9 20.0 20.1 16.7
Full-Size Pickup.................................... 21.3 19.3 20.0 17.9 16.7
Full-Size Bus/Van/Utility........................... 12.1 11.0 6.6 5.9 6.2
Medium/Heavy*....................................... 0.4 1.1 1.1 1.4 1.4
----- ----- ----- ----- -----
Total Ford U.S. Truck Sales.................... 60.3 58.0 55.1 53.3 49.9
----- ----- ----- ----- -----
Total Ford U.S. Vehicle Sales............. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
- -------------------------
* In 1997 Ford sold its heavy truck businesses in North America and Australia to
Freightliner Corporation. Ford ceased production of heavy trucks in North
America in December 1997. The transfer of the North American and Australian
heavy truck businesses was completed in 1998.
As shown in the tables above, since 1994 there has been a steady shift from
cars to trucks for both industry sales and Ford sales.
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Market Share Data. The following tables show changes in car and truck
market shares of U.S. and foreign-based manufacturers for the years indicated:
U.S. CAR MARKET SHARES*
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford............................................. 19.2% 19.7% 20.6% 20.9% 21.8%
General Motors................................... 29.8 32.2 32.3 33.9 34.0
Chrysler**....................................... 9.1 8.9 9.8 9.1 9.0
----- ----- ----- ----- -----
Total U.S. Manufacturers.................... 58.1 60.8 62.7 63.9 64.8
Foreign-Based Manufacturers***
Japanese......................................... 31.8 30.9 30.0 29.7 29.6
All Other........................................ 10.1 8.3 7.3 6.4 5.6
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers........... 41.9 39.2 37.3 36.1 35.2
----- ----- ----- ----- -----
Total U.S. Car Retail Deliveries............ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
U.S. TRUCK MARKET SHARES*
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford............................................. 30.2% 31.1% 31.1% 31.9% 30.1%
General Motors................................... 27.5 28.8 29.0 29.9 30.9
Chrysler**....................................... 22.6 21.7 23.4 21.3 21.7
Navistar International........................... 1.3 1.3 1.3 1.4 1.3
All Other........................................ 2.3 1.9 1.8 2.0 1.8
----- ----- ----- ----- -----
Total U.S. Manufacturers.................... 83.9 84.8 86.6 86.5 85.8
Foreign-Based Manufacturers***
Japanese......................................... 14.5 14.1 12.7 12.7 13.5
All Other........................................ 1.6 1.1 0.7 0.8 0.7
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers........... 16.1 15.2 13.4 13.5 14.2
----- ----- ----- ----- -----
Total U.S. Truck Retail Deliveries.......... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
U.S. COMBINED CAR AND TRUCK MARKET SHARES*
-------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
U.S. Manufacturers (Including Imports)
Ford............................................. 24.6% 25.0% 25.2% 25.6% 25.2%
General Motors................................... 28.7 30.6 30.8 32.2 32.7
Chrysler**....................................... 15.7 14.8 15.9 14.3 14.3
Navistar International........................... 0.7 0.6 0.6 0.6 0.5
All Other........................................ 1.1 0.9 0.7 0.9 0.8
----- ----- ----- ----- -----
Total U.S. Manufacturers.................... 70.8 71.9 73.2 73.6 73.5
Foreign-Based Manufacturers***
Japanese......................................... 23.3 23.2 22.4 22.6 22.9
All Other........................................ 5.9 4.9 4.4 3.8 3.6
----- ----- ----- ----- -----
Total Foreign-Based Manufacturers........... 29.2 28.1 26.8 26.4 26.5
----- ----- ----- ----- -----
Total U.S. Car and Truck Retail
Deliveries............................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
- -------------------------
* All U.S. retail sales data are based on publicly available information from
the American Automobile Manufacturers Association, the media and trade
publications.
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** Chrysler and Daimler-Benz merged in late 1998, however, they continued to
report separate sales in the United States for their brands for the
remainder of 1998. As such, the figures shown here for 1998 are based on
separate sales figures for the full year.
*** Share data include cars and trucks assembled and sold in the U.S. by
Japanese-based manufacturers selling through their own dealers as well as
vehicles imported by them into the U.S. "All Other" includes primarily
companies based in various European countries and in Korea.
Marketing Incentives and Fleet Sales. Automotive manufacturers that sell
vehicles in the United States frequently give purchasers price discounts or
other marketing incentives. These incentives are the result of intense
competition from new product offerings by both domestic and foreign
manufacturers and the desire to maintain economic production levels and market
shares. Manufacturers provide these incentives to both retail and fleet
customers (fleet customers include daily rental companies, commercial fleet
customers, leasing companies and governments). Marketing incentives generally
are higher during periods of economic downturns, when excess capacity in the
industry tends to increase.
Ford's marketing costs in the United States as a percentage of gross sales
revenue were as follows for the following three years: 10.4% (1998), 8.7% (1997)
and 8.0% (1996). These "marketing costs" include primarily (i) marketing
incentives on vehicles, such as, retail rebates and costs for special financing
and lease programs, (ii) reserves for costs and/or losses associated with Ford's
required repurchase of certain vehicles sold to daily rental companies and (iii)
costs for advertising and sales promotions for vehicles.
Fleet sales generally are less profitable than retail sales, and sales to
daily rental companies generally are less profitable than sales to other fleet
purchasers. The mix between sales to daily rental companies and other fleet
customers has been about evenly split in recent years. The table below shows
Ford's fleet sales in the United States, and the amount of those sales as a
percentage of Ford's total U.S. car and truck sales, for the last five years.
FORD FLEET SALES
---------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Units sold..................................... 878,000 923,000 936,000 971,000 924,000
Percent of Ford's total U.S. car and truck
sales........................................ 22% 24% 24% 25% 24%
Warranty Coverage. Ford presently provides warranty coverage for defects in
factory-supplied materials and workmanship on all vehicles (other than medium
trucks) sold by it in the United States. This warranty coverage extends for at
least 36 months or 36,000 miles (whichever occurs first) and covers all
components of the vehicle, other than tires which are warranted by the tire
manufacturers. In general, different warranty coverage is provided on
medium/heavy trucks and on vehicles sold outside the United States. In addition,
as discussed below under "Governmental Standards -- Mobile Source Emissions
Control", the Federal Clean Air Act (the "Clean Air Act") requires a useful life
of 10 years or 100,000 miles (whichever occurs first) for emissions equipment on
most light duty vehicles sold in the United States. As a result of the coverage
of these warranties and the increased concern for customer satisfaction, costs
for warranty repairs, emissions equipment repairs and customer satisfaction
actions ("warranty costs") can be substantial. Estimated warranty costs for each
vehicle sold by Ford are accrued at the time of sale. Such accruals, however,
are subject to adjustment from time to time depending on actual experience.
Europe
Outside of the United States, Europe is Ford's largest market for the sale
of cars and trucks. The automotive industry in Europe is intensely competitive.
Over the past year, nine new or freshened vehicles were introduced in the
European market by various manufacturers. For the past 12 years, the top six
manufacturers have each achieved a car market share in about the 10% to 17%
range. (Manufacturers' shares, however, vary considerably by country.) This
competitive environment is expected to intensify further as Japanese
manufacturers, which together had a European car market share of 11.5% for 1998,
increase their production capacity in Europe and import restrictions on Japanese
built-up vehicles are removed in total by
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December 31, 1999. Ford estimates that in 1998 the European automotive industry
had excess capacity of approximately 6.2 million units (based on a comparison of
European domestic demand and capacity).
In 1998, vehicle manufacturers sold 16.1 million cars and trucks in Europe,
up 7% from 1997 levels. Ford's combined car and truck market share in Europe in
1998 was 10.3%, down 1.1 percentage points from 1997.
For Ford, Great Britain and Germany are the most important markets within
Europe, although the Southern European countries are becoming increasingly
significant. Any adverse change in the British or German market has a
significant effect on Ford's total automotive profits. For 1998 compared with
1997, total industry sales were up 4% in Great Britain and up 7% in Germany.
Other Foreign Markets
Mexico and Canada. Mexico and Canada also are important markets for Ford.
In 1998, industry sales of new cars and trucks in Mexico were 665,000 units, up
34% from 1997 levels. In Canada, industry volume in 1998 was 1.4 million units,
equal to 1997 levels. Ford's combined car and truck market shares in these
markets in 1998 was 16.6% (Mexico) and 19% (Canada).
South America. Brazil and Argentina are Ford's principal markets in South
America. The economic environment in those countries has been volatile in recent
years, leading to large variations in profitability. Results also have been
influenced by government actions to reduce inflation and public deficits, and
improve the balance of payments. Industry sales in 1998 were 1.6 million units
in Brazil, down 19% from 1997, and 455,000 units in Argentina, up 7% from 1997.
Brazilian government austerity measures in 1998 adversely impacted industry
vehicle sales in that country and are expected to continue to adversely affect
industry sales in 1999. Ford's combined car and truck market shares in these
markets in 1998 was 13.1% (Brazil) and 16.4% (Argentina).
Asia Pacific. In the Asia Pacific region, Australia, Taiwan and Japan are
Ford's principal markets. Industry volumes in 1998 in this region were as
follows: 808,000 units in Australia (up 12% from 1997), 474,000 units in Taiwan
(down 2% from 1997) and 5.9 million units in Japan (down 13% from 1997). In
1998, Ford's combined car and truck market share in Australia was 15.9%. In
Taiwan (where sales of built-up vehicles manufactured in Japan are prohibited),
Ford had a combined car and truck market share in 1998 of 15.4%. Ford's combined
car and truck market share in Japan has never exceeded 1%. Ford's principal
competition in the Asia Pacific region has been the Japanese manufacturers. Ford
anticipates that the continuing relaxation of import restrictions (including
duty reductions) in Australia and Taiwan will intensify competition in those
markets.
The financial crisis that began in Thailand in mid-year 1997, and spread to
the neighboring Southeast Asian nations, particularly Indonesia, has resulted in
a significant reduction of vehicle sales for the region. These markets had been
expanding, but economic growth is now expected to remain subdued during a period
of restructuring. Taiwan and South Africa have also been affected by the crisis.
Ford is positioning itself to participate actively in these markets in
recognition of their long-term growth opportunities.
Africa. Ford operates in the South African market through South African
Motor Corporation (Pty.) Limited ("SAMCOR") in which Ford has a 45% equity
interest. SAMCOR is an assembler and distributor of Ford, Mazda and Mitsubishi
vehicles in South Africa. In 1998, industry volume in South Africa was 314,000
units, down 17% from 1997 levels. SAMCOR's combined car and truck market share
in 1998 was 15.9% (Ford's share was 7.4%).
Industry Consolidation and Global Competition
The worldwide automotive industry is trending toward further consolidation,
such as the recent DaimlerChrysler merger. Such consolidation could be good for
the industry to the extent it reduces excess capacity. Consolidation could also
result in there being fewer but stronger competitors in the industry. Ford
believes that it is well-positioned and does not need to participate in the
consolidation trend to compete globally. However, as with Ford's pending
transaction with Volvo, it considers opportunities with other
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manufacturers when Ford believes they would be beneficial to its business.
Presently, Ford's major competitors on a global basis are DaimlerChrysler,
General Motors, Honda, Toyota and Volkswagen.
Visteon Automotive Systems
Visteon is an enterprise of Ford and consists of certain subsidiaries and
divisions of Ford. Visteon is a global provider of integrated systems and
components to automotive manufacturers and other automotive suppliers. Visteon
ranks as the second-largest automotive supplier in the world. Its seven
divisions are:
- Chassis Systems
- Climate Control Systems
- Electronic Systems
- Exterior Systems
- Glass Systems
- Interior Systems
- Powertrain Control Systems
Currently, most of Visteon's business is with Ford. In 1998 Visteon's mix
of business was 92% Ford and 8% non-Ford (including sales by unconsolidated
joint ventures, the figures are 91% Ford and 9% non-Ford). In addition, in 1998
most of Visteon's business was in North America (81%) as compared with outside
North America (19%). Visteon's goal, however, is to continue to obtain new
business from companies other than Ford and to further expand its business
beyond North America. In 1998, 46% of Visteon's new business was from non-Ford
customers and 33% was from outside North America.
Below are some financial highlights for Visteon (in millions):
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
---- ----
Revenue................................................ $17,762 $17,220
Pre-Tax Income......................................... 1,129 825
Net Income............................................. 712 518
After-Tax Return on Sales.............................. 4.0% 3.0%
FINANCIAL SERVICES SECTOR
Ford Motor Credit Company
For information regarding the business of Ford Credit, see "Business of
Ford Credit."
The Hertz Corporation
Hertz and its affiliates and independent licensees operate what Hertz
believes is the largest car rental business in the world based upon revenues and
volume of rental transactions. They also operate what they believe to be one of
the largest industrial and construction equipment rental business in the United
States based upon revenues. Hertz and its affiliates, associates and independent
licensees, do the following:
- rent and lease cars and trucks
- rent industrial and construction equipment
- sell their used cars and equipment
- provide third-party claim management services
- provide telecommunications services
These businesses are operated from over 5,000 locations throughout the
United States and in approximately 140 foreign countries and jurisdictions. In
April 1997, Hertz completed an initial public offering of common stock
representing a 19.1% economic interest in Hertz.
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Below are some financial highlights for Hertz (in millions):
YEARS ENDED
DECEMBER 31,
----------------
1998 1997
---- ----
Revenue..................................................... $4,250 $3,905
Pre-Tax Income.............................................. 465 343
Net Income.................................................. 277 202
GOVERNMENTAL STANDARDS
A number of governmental standards and regulations relating to safety,
corporate average fuel economy ("CAFE"), emissions control, noise control,
damageability 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 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. Such facilities in the United States also are subject to a
comprehensive federal-state permit program relating to air emissions.
Mobile Source Emissions Control -- U.S. Requirements. The Clean Air Act
imposes stringent limits on the amount of regulated pollutants that lawfully may
be emitted by new motor vehicles and engines produced for sale in the United
States. Concurrently, most light duty vehicles sold in the United States must
comply with these standards for 10 years or 100,000 miles, whichever first
occurs. The EPA has filed a report with Congress indicating that more stringent
emissions standards will be required for the 2004 model year and beyond. It is
anticipated that the EPA will begin the rulemaking process in 1999 to propose
post-2004 model year standards that are more stringent than the default
standards contained in the Clean Air Act. The EPA is expected to propose
regulations which would require most light duty trucks to meet the same
emissions standards as passenger cars. The proposed standards are likely to
limit severely the use of diesel technology. If the standards are too stringent,
it will impact Ford's ability to produce and offer a broad range of products
with the characteristics and functionality that customers demand.
Pursuant to the Clean Air Act, California has received a waiver from the
EPA to establish its own unique emissions control standards. New vehicles and
engines sold in California must be certified by the California Air Resources
Board ("CARB"). CARB's emissions requirements (the "California program") for
model years 1994 through 2003 require manufacturers to meet a non-methane
organic gasses fleet average requirement that are significantly more stringent
than those prescribed by the Clean Air Act for the corresponding periods of
time. The California program initially required that a specified percentage of
each manufacturer's vehicles produced for sale in California, beginning at 2% in
1998 and increasing to 10% in 2003, must be zero-emission vehicles ("ZEVs"),
which produce no emissions of regulated pollutants. In 1996, however, CARB
eliminated the ZEV mandate until the 2003 model year. Around the same time,
vehicle manufacturers voluntarily entered into an agreement with CARB to provide
air quality benefits for California equivalent to a 49 state program (i.e.,
equivalent to providing vehicles certified to the California low emission
vehicle standard nationwide beginning with the 2001 model year), to continue
research and development of ZEV technology and to provide specific numbers of
advanced technology battery vehicles through demonstration programs in
California.
Electric vehicles are the only presently known type of zero-emission
vehicles. However, despite intensive research activities, technologies have not
been identified that would allow manufacturers to produce an electric vehicle
that either meets most customers' expectations or is commercially viable.
Compliance with the ZEV mandate may require manufacturers to curtail the sale of
non-electric vehicles or to offer substantial discounts on electric vehicles,
selling them well below cost, while increasing the price on non-electric
vehicles. The California program and ZEV mandates present significant
technological challenges to manufacturers and compliance may require costly
actions that would have a substantial adverse effect on Ford's sales volume and
profits.
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At a November 1998 hearing, CARB adopted stringent new vehicle emissions
standards that must be phased in beginning in the 2004 model year. These new
standards treat most light duty trucks the same as passenger cars and require
both types of vehicles to meet new stringent emissions requirements. It is also
expected that these new standards will essentially eliminate the use of diesel
technology. CARB's new standards present a difficult engineering and
technological challenge, and may impact Ford's ability to produce and offer a
broad range of products with the characteristics and functionality that
customers demand.
The Clean Air Act also permits other states which do not meet national
ambient air quality standards to adopt the California program no later than two
years before the affected model year. Under the Act, twelve northeastern states
and the District of Columbia formed a group known as the Ozone Transport
Commission (the "OTC"). Based on an OTC recommendation, the EPA required each
OTC jurisdiction to adopt the California program. The OTC jurisdictions also may
adopt California's ZEV mandates, if any, but the EPA does not require them to do
so. In March 1997, the Circuit Court of Appeals for the District of Columbia
vacated the EPA's rule requiring the OTC jurisdictions to adopt the California
program; however, that decision did not affect California programs, including
ZEV mandates, already adopted by individual states. There are major problems
with transferring California standards to the Northeast -- many dealers sell
vehicles in neighboring states and the driving range of present ZEVs is greatly
diminished (by more than 50 percent) in cold weather. Also, the Northeast states
have refused to adopt the California reformulated gasoline requirement, which
makes the task of meeting standards even more difficult.
The California program was adopted in New York and Massachusetts and is
currently in effect for model years 1996 and beyond. In addition, these two
states adopted ZEV mandates beginning with model year 1998. In August 1998, as a
result of a legal challenge from the automotive industry, New York's pre-2003
model year ZEV requirements were declared invalid by the U.S. Court of Appeals
for the Second Circuit. Massachusetts has attempted to adopt as a standard ZEV
obligations mirroring a voluntary agreement in California between auto
manufacturers and CARB. A federal district court invalidated these regulations,
but Massachusetts has appealed the decision to the U.S. Court of Appeals for the
First Circuit. Connecticut adopted the California program beginning with model
year 1998. Rhode Island and Vermont adopted the California program beginning
with model year 1999 (with a ZEV mandate to be required in Vermont after certain
determinations with respect to the advancement of ZEV technology have been
made). Maine has adopted the California program beginning with the 2001 model
year. Maryland and New Jersey have laws requiring adoption of the California
program and ZEV mandates after certain conditions, relating to actions which may
be taken by other OTC jurisdictions, have been met.
In response to OTC actions, the automotive industry proposed a National Low
Emissions Vehicle (NLEV) program, which the EPA promulgated as a rule and which
has been agreed to by all manufacturers and all OTC jurisdictions except Maine,
Massachusetts, New York and Vermont. This NLEV program requires manufacturers to
sell low emission vehicles in the participating OTC jurisdictions beginning with
the 1999 model year, and throughout the remainder of the country beginning with
the 2001 model year. The OTC jurisdictions which have agreed to the NLEV program
will for its duration substitute the NLEV program for any of their other
emissions programs for passenger cars and light duty gasoline trucks. California
and the non-participating OTC jurisdictions will retain their California-based
programs. A petition seeking judicial review of the EPA's rule establishing NLEV
has been filed by a coalition of environmental groups. The petition alleges that
the rule violates the Clean Air Act.
Under the Clean Air Act, the EPA and CARB can require manufacturers to
recall and repair non-conforming vehicles. The EPA, through its testing of
production vehicles, can also halt the shipment of non-conforming vehicles. Ford
may be required to recall, or may voluntarily recall, vehicles for such purposes
in the future. The costs of related repairs or inspections associated with such
recalls can be substantial.
The Clean Air Act generally prohibits the introduction of new fuel
additives unless a waiver is granted by the EPA. In 1995, the EPA was ordered by
a federal court to grant such a waiver to Ethyl Corporation for the additive
MMT. Ford and other manufacturers believe that the use of MMT will impair the
performance of current emissions systems and onboard diagnostics systems.
Widespread use of MMT could increase Ford's future warranty costs and
necessitate changes in Ford's warranties for emission control devices.
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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. In 1998, the EU adopted a new
directive on emissions from passenger cars and light commercial trucks. More
stringent emissions standards will apply to new car certifications beginning
January 1, 2000 and to new car registrations beginning January 1, 2001 ("Stage
III Standards"). A second level of even more stringent emission standards will
apply to new car certifications beginning January 1, 2005 and to new car
registrations beginning January 1, 2006 ("Stage IV Standards"). The comparable
light commercial truck Stage III Standards and Stage IV Standards would come
into effect one year later than the passenger car requirements. The directive
includes a framework that permits EU member states to introduce fiscal
incentives to promote early compliance with the Stage III and Stage IV
Standards. The directive also introduces on-board diagnostic requirements, more
stringent evaporative emission requirements, and in-service compliance testing
and recall provisions for emissions-related defects that occur in the first five
years or 80,000 kilometers of vehicle life (extended to 100,000 kilometers in
2005). The Stage IV Standards for diesel engines are not yet technically
feasible and may impact Ford's ability to produce and offer a broad range of
products with the characteristics and functionality that customers want. A
related EU directive was adopted at the same time which establishes standards
for cleaner fuels beginning in 2000 and even cleaner fuels in 2005. The EU is
setting up a program to assess the need for further changes to vehicle emission
and fuel standards after 2005.
Certain European countries are conducting in-use emissions testing to
ascertain compliance of motor vehicles with applicable emissions standards.
These actions could lead to recalls of vehicles; the future costs of related
inspection or repairs could be substantial.
Motor Vehicle Safety -- The National Traffic and Motor Vehicle Safety Act
of 1966 (the "Safety Act") regulates motor vehicles and motor 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 motor
vehicle safety standards established by the National Highway Traffic Safety
Administration (the "Safety Administration"). Meeting or exceeding many safety
standards is costly 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. There currently are pending before the
Safety Administration a number of investigations relating to alleged safety
defects in Ford vehicles. A manufacturer is also obligated to recall vehicles if
it determines they do not comply with a safety standard. Should Ford or the
Safety Administration determine that either a safety defect or a noncompliance
exists with respect to certain of Ford's vehicles, the costs of such recall
campaigns could be substantial.
In September 1998, the Safety Administration published a proposed advanced
air bag rule that would significantly affect the design and testing of new
vehicles. While Ford supports efforts to further improve air bag systems, and is
aggressively working with suppliers to quickly introduce new designs, Ford has
many concerns about the proposed rule. These concerns include a dramatic
increase in the number of required tests, complex and vague requirements, the
need to incorporate new and unproven technology, and a potential increase in
safety risks. Ford is moving aggressively to install even more advanced air bag
restraint systems in its vehicles, but the proposed rule could substantially
interfere with these plans. If such a rule were to become effective, it could
significantly increase Ford's costs, especially if it requires Ford to change
its present advanced air bag design programs. Ford outlined its concerns in a
December 1998 response to the Safety Administration's proposal. The Safety
Administration is expected to publish a supplemental notice which likely will
propose additional changes to the rule. Ford and other vehicle manufacturers
will have another chance to respond to the new proposal before a final rule is
published.
The Safety Administration has published a rule requiring a revised
standardized label that automakers must display prominently to warn drivers of
sport utility vehicles about rollover risks. The label must be affixed to the
sun visor or the driver side window of all such vehicles beginning with the
model year 2000. The Safety Administration is also investigating the feasibility
of a test to measure the propensity of a vehicle to roll over. It is unlikely
that an objective meaningful stability test can be developed. Nonetheless, the
Safety Administration has announced its intention to issue a final rule to
require manufacturers to label vehicles
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based on their performance on the yet-to-be-determined stability test. Such a
label could impact customer satisfaction and the sales of Ford products.
The subject of truck-to-car compatibility in relation to collisions
continues to receive significant media attention and the government is studying
this issue. While Ford and its suppliers are continuing to work on this complex
issue, government regulation to address vehicle compatibility also is possible.
Final regulations implementing the Fastener Quality Act of 1990 are
applicable to certain fasteners (i.e., nuts, bolts, washers and screws)
manufactured after July 26, 1998. The regulations impose burdensome and costly
testing, certification and record keeping requirements which are not compatible
with quality assurance systems currently used in the automotive industry.
Congress delayed the implementation of the Act pending a Department of Commerce
report. The report, issued in February 1999, addressed automotive industry
concerns by suggesting a narrowing of covered fasteners and an exemption for
fasteners manufactured to industry standards. Congress is considering amendments
to the Act. If amendments are adopted consistent with the principles outlined in
the Commerce Department report, it would significantly lessen the burden of the
legislation.
Canada, the European Union, individual member countries within the EU and
other countries in Europe, South America and the Asia Pacific markets also have
safety standards applicable to motor vehicles and are likely to adopt additional
or more stringent standards in the future.
Motor Vehicle Fuel Economy -- U.S. Requirements. Under the Motor Vehicle
Information and Cost Savings Act vehicles must meet minimum CAFE standards set
by the Safety Administration. 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 three succeeding model years.
The Cost Savings Act established a passenger car CAFE standard of 27.5 mpg
for the 1985 and later model years, which the Safety Administration believes it
has the authority to amend to a level it determines to be the maximum feasible
level. The Safety Administration has established a 20.7 mpg CAFE standard
applicable to light trucks.
Ford expects to be able to comply with the foregoing CAFE standards, in
some cases using credits from prior or succeeding years. In November 1998, Ford
filed a plan to meet the 1998 light truck standards using credits to be
generated in future years, and this plan has been approved by the Safety
Administration. In general, a continued increase in demand for larger vehicles,
coupled with a decline in demand for small and middle-size vehicles could
jeopardize Ford's long-term ability to maintain compliance with CAFE standards.
It is anticipated that efforts may be made to raise the CAFE standard
because of concerns for carbon dioxide ("CO(2)") emissions, energy security or
other reasons. President Clinton's Climate Change Action Plan ("CCAP") sets a
goal to improve new vehicle fuel efficiency in an amount equivalent to at least
2% per year over a 10 to 15 year period. In addition, international concerns
over global warming due to the emission of "greenhouse gasses" have given rise
to strong pressures to increase fuel economy. During the December 1997 meeting
of the parties to the United Nations Climate Change Convention in Kyoto, Japan,
the United States agreed to reduce greenhouse gas emissions by 7% below their
1990 levels during the 2008-2012 period (the "Kyoto Protocol"). The Kyoto
Protocol is not yet binding on the United States, pending signature by the
President and ratification by the Senate. If the CCAP or Kyoto Protocol goals
are partially or fully implemented through increases in the CAFE standard, or if
significant increases in car or light truck CAFE standards for subsequent model
years otherwise are imposed, Ford would find it necessary to take various costly
actions that would have substantial adverse effects on its sales volume and
profits. For example, Ford might have to curtail or eliminate production of
larger family-size and luxury cars and full-size light trucks, restrict
offerings of engines and popular options, and continue or increase market
support programs for its most fuel-efficient cars and light trucks.
Foreign Requirements. The EU is also a party to the Kyoto Protocol and has
agreed to reduce greenhouse gas emissions by 8% below their 1990 levels during
the 2008-2012 period. In December 1997, the European Council of Environment
Ministers (the "Environment Council") reaffirmed its goal to reduce
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average CO(2) emissions from new cars to 120 grams per kilometer by 2010 (at the
latest) and invited European motor vehicle manufacturers to negotiate further
with the European Commission on a satisfactory voluntary environmental agreement
to help achieve this goal. In October 1998, the EU agreed to support an
environmental agreement with the European Automotive Manufacturers Association
(of which Ford is a member) on CO(2) emission reductions from new passenger cars
(the "Agreement"). The Agreement establishes an emission target of 140 grams of
CO(2) per kilometer for the average of new cars sold in the EU by the
Association's members in 2008. In addition, the Agreement provides that certain
Association members (including Ford) will introduce models emitting no more than
120 grams of CO(2) per kilometer in 2000, and establishes an estimated target
range of 165-170 grams of CO(2) per kilometer for the average of new cars sold
in 2003. Also in 2003, the Association will review the potential for additional
CO(2) reductions, with a view to moving further toward the EU's objective of 120
grams of CO(2) per kilometer by 2012. The Agreement assumes (among other things)
that no negative measures will be implemented against diesel-fueled cars and the
full availability of improved fuels with low sulfur content in 2005. Average
CO(2) emissions of 140 grams per kilometer for new passenger cars corresponds to
a 25% reduction in average CO(2) emissions compared to 1995.
The Environment Council requested the European Commission to review in 2003
the EU's progress toward reaching the 120 gram target by 2010, and to implement
annual monitoring of the average CO(2) emissions from new passenger cars and
progress toward achievement of the objectives for 2000 and 2003.
In February 1999, the European Commission published an amended proposal for
a new EU directive on the availability of consumer information about the fuel
economy and CO(2) emissions of new passenger cars. Although the proposal
includes certain minimum EU requirements on the information to be made
available, individual Member States would be able to set national requirements
for (i) labels to be displayed on passenger cars at their point of sale, (ii)
guides listing all passenger cars available for sale in the EU to be available
in booklet and electronic form, and (iii) posters to be displayed in dealerships
ranking the fuel economy, CO(2) emissions, and estimated fuel costs of passenger
cars available for sale there.
In 1995, members of the German Automobile Manufacturers Association
(including Ford Werke AG) made a voluntary pledge to reduce by 2005 the average
fuel consumption of new cars sold in Germany by 25% from 1990 levels, to review
before the year 2000 the need for and feasibility of further reductions in
average fuel consumption, to make regular reports on fuel consumption, and to
increase industry research and development efforts toward this end.
Other European countries are considering other initiatives for reducing
CO(2) emissions from motor vehicles. Taken together such proposals could have
substantial adverse effects on Ford's sales volumes and profits in Europe.
Japan has adopted automobile fuel consumption goals that manufacturers must
attempt to achieve by the 2000 model year. The consumption levels apply only to
gasoline-powered vehicles, vary by vehicle weight, and range from 5.8 km/l to
19.2 km/l.
U.S. Stationary Source Air Pollution Control -- The Clean Air Act limits
various emissions into the atmosphere from stationary sources as well as mobile
sources, and allows states to adopt even more stringent standards. The Act
imposes comprehensive permit requirements for manufacturing facilities in
addition to those required by various states. Regulations continue to be
promulgated under the Act, and the costs to comply with the Act could be
substantial. In addition, the enormous complexity and time-consuming nature of
the comprehensive permit program provided for by the Act may reduce operational
flexibility and may interfere with future competitive upgrading of Ford's U.S.
production facilities.
U.S. Water Pollution Control -- Pursuant to the Federal Water Pollution
Control Act (the "Clean Water Act"), Ford is required to obtain permits for its
manufacturing facilities that regulate the facilities' discharge of wastewater
into public waters and municipal sewerage systems. The EPA also requires
management standards and, in some cases, permits for the discharge of storm
water. The standards under the Clean Water Act are established by the EPA and by
the state where a facility is located. Many states have requirements that go
beyond those established under the Clean Water Act.
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The EPA also adopted regulations, pursuant to the Great Lakes Critical
Programs Act of 1990, that require more restrictive standards for discharges
into waters that impact the Great Lakes. These regulations may require the
addition of costly control equipment.
U.S. Hazardous Substance and Waste Control -- Pursuant to the Federal
Resource Conservation and Recovery Act, the EPA has issued regulations
establishing certain procedures and standards for persons who generate,
transport, treat, store, or dispose of hazardous wastes and requiring corrective
action for prior releases. States may adopt even more extensive requirements.
The Federal Comprehensive Environmental Response, Compensation, and Liability
Act requires notification regarding certain releases into the environment, and
creates potential liability for remediation costs and for damage to natural
resources at sites where Ford's waste was taken for treatment or disposal. A
number of states have enacted separate laws of this type. In addition, under the
Federal Toxic Substances Control Act ("TSCA"), the EPA evaluates environmental
and health effects of existing chemicals and new substances. Pursuant to TSCA,
the EPA regulates the use of polychlorinated biphenyls in transformers,
capacitors and other equipment that may be located at Ford's U.S. facilities.
European Stationary Source Environmental Control -- The European Union and
individual member countries impose requirements on waste and hazardous wastes,
incineration, packaging, landfill, soil pollution, integrated pollution control,
air emissions standards, import/export and use of dangerous substances, air and
water quality standards, noise, environmental management systems, energy
efficiency, emissions reporting, and planning and permitting. Additional or more
stringent requirements (including tax measures and civil liability schemes for
cleaning polluted sites) are likely to be adopted in the future. The cost of
complying with these standards could be substantial.
The European Commission has published a draft proposal to introduce an
obligation for motor vehicle manufacturers to take back end-of-life vehicles on
a cost-free basis beginning in 2003, to impose requirements on the proportion of
the vehicle that may be disposed of in landfills and the proportion that must be
reused or recycled beginning in 2005, and to ban the use of certain substances
in vehicles beginning in 2003. Such proposals could, if adopted, impose a
substantial cost on manufacturers. The German Automobile Association (including
Ford Werke AG) and the German Automobile Importers Association made a voluntary
pledge to establish a nationwide infrastructure network to take back passenger
cars that are at least 12 years old (and meet certain other requirements) on a
cost-free basis to their owners.
Pollution Control Costs -- During the period 1999 through 2003, Ford
expects to spend approximately $468 million on Ford's North American and
European facilities to comply with air and water pollution and hazardous waste
control standards which now are in effect or are scheduled to come into effect.
Of this total, Ford estimates spending approximately $90 million in 1999 and $92
million in 2000.
Worldwide Regulatory Compatibility -- Ford's efforts to develop new markets
and increase imports are impeded by incompatible automotive safety,
environmental and other product regulatory standards. At present, differing
standards either restrict the vehicles Ford can export to serve new markets or
increase the cost and complexity to do so.
LEGAL PROCEEDINGS
Various legal actions, governmental investigations and proceedings and
claims are pending or may be instituted or asserted in the future against Ford
and Ford's subsidiaries, including those arising out of the following: alleged
defects in Ford's products; governmental regulations covering safety, emissions
and fuel economy; financial services; employment-related matters; dealer,
supplier and other contractual relationships; intellectual property rights;
product warranties; and environmental matters. Some of the pending legal actions
are, or purport to be, class actions. Some of the foregoing matters involve or
may involve compensatory, punitive or antitrust or other multiplied damage
claims in very large amounts, or demands for recall
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campaigns, environmental remediation programs, sanctions or other relief which,
if granted, would require very large expenditures. Included among the foregoing
matters are the following:
Product Liability Matters
Occupant Restraint Systems. Ford is a defendant in various actions for
damages arising out of automobile accidents where the plaintiffs claim that
their injuries resulted from (or were aggravated by) alleged defects in the
occupant restraint systems in vehicle lines of various model years. For those
cases in which damages have been specified, the damages specified by the
plaintiffs, including both actual and punitive damages, aggregated approximately
$1 billion at December 31, 1998.
Bronco II. Ford is a defendant in various personal injury lawsuits
involving the alleged propensity of Bronco II utility vehicles to roll over. For
those cases in which damages have been specified, the damages specified by the
plaintiffs, including both actual and punitive damages, aggregated approximately
$1.8 billion at December 31, 1998.
In most of the actions described in the two paragraphs above, no dollar
amount of damages is specified or the specific amount referred to is only the
jurisdictional minimum. It has been Ford's experience that in cases that allege
a specific amount of damages in excess of the jurisdictional minimum, such
amounts, on average, bear little relation to the actual amounts of damages paid
by Ford in resolving such cases. The damages Ford pays generally are, on
average, substantially less than the amounts originally claimed. In addition to
the pending actions, accidents have occurred and claims have arisen which also
may result in lawsuits in which the plaintiffs may allege similar defects.
Asbestos. Ford is a defendant in various actions for injuries claimed to
have resulted from alleged contact with certain Ford parts and other products
containing asbestos. The plaintiffs in these actions seek damages, including
both actual and punitive damages, of approximately $2.1 billion at December 31,
1998. (In some of these actions, the plaintiffs have not specified a dollar
amount of damages or the specific amount referred to is only the jurisdictional
minimum.) As distinguished from most lawsuits against Ford, in most of these
asbestos-related cases, Ford is but one of many defendants, and many of Ford's
co-defendants have substantial resources.
Environmental Matters
General. Ford has received notices from government environmental
enforcement agencies concerning four matters which potentially involve monetary
sanctions exceeding $100,000. The agencies believe that Ford facilities may have
violated regulations relating to certain emissions from facility operations.
Ford has received notices under various federal and state environmental
laws that it (along with others) may be a potentially responsible party for the
costs associated with remediating numerous hazardous substance storage,
recycling or disposal sites in many states and, in some instances, for natural
resource damages. Ford also may have been a generator of hazardous substances at
a number of other sites. The amount of any such costs or damages for which Ford
may be held responsible could be substantial. The contingent losses that Ford
expects to incur in connection with many of these sites have been accrued and
those losses are reflected in Ford's financial statements in accordance with
generally accepted accounting principles. However, for many sites, the
remediation costs and other damages for which Ford ultimately may be responsible
are not reasonably estimable because of uncertainties with respect to factors
such as Ford's connection to the site or to materials there, the involvement of
other potentially responsible parties, the application of laws and other
standards or regulations, site conditions, and the nature and scope of
investigations, studies and remediation to be undertaken (including the
technologies to be required and the extent, duration and success of
remediation). As a result, Ford is unable to determine or reasonably estimate
the amount of costs or other damages for which it is potentially responsible in
connection with these sites, although that total could be substantial.
CCA Lawsuit. The Corporation for Clean Air, Inc., a California non-profit
group ("CCA"), filed a lawsuit in California against Ford and numerous other
engine and vehicle manufacturers and owners of vehicle
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fleets, under California's Safe Drinking Water and Toxic Enforcement Act
("Proposition 65"). Under Proposition 65 any business that knowingly and
intentionally exposes any person to certain carcinogens and reproductive toxins
must provide that person with an advance clear and reasonable warning, unless
the business can prove that the exposures are insignificant. CCA's complaint
alleges that manufacturers and fleet owners of diesel powered vehicles are
exposing California's citizens to diesel exhaust in violation of Proposition 65.
Maximum penalties under Proposition 65 are $2,500 per vehicle per day of
violation. In September 1998, the California Superior Court dismissed the
lawsuit, finding that CCA failed to provide admissible evidence sufficient to
maintain a case under Proposition 65 and that vehicle manufacturers are not
responsible for providing warnings of exposures for vehicles that are not under
their control. CCA has filed notice of its intent to appeal the court's
decision.
Class Actions
Ford has been named a defendant in various class action lawsuits. Class
action lawsuits can involve very large groups of plaintiffs, such as statewide
or nationwide classes, if plaintiffs persuade the court to grant class
certification. Ford believes it has valid defenses in each of these cases;
however, if plaintiffs were to prevail in any of these lawsuits, Ford could be
required to pay substantial damages.
Paint. There are four purported class actions pending against Ford alleging
defects in the paint processes used on more than six million vehicles Ford
manufactured in model years 1984 through 1993. One case (Landry) is nationwide
in scope and is pending in the U.S. District Court for the Eastern District of
Louisiana. In August 1998, the Landry court denied the plaintiffs' motion for
class certification. In February 1999, the Court of Appeals denied plaintiffs'
request to permit them to appeal the class certification decision prior to
trial. In another case (Sheldon), a Texas state court certified two subclasses
of Texas residents for trial. The Texas Court of Appeals affirmed the class
certification order and approved a bifurcated trial process that would require
class members to prove causation and damages in separate trials following a
classwide trial on the existence of a defect and Ford's knowledge of the defect.
Ford appealed the class certification to the Texas Supreme Court and oral
argument was heard in February 1999. Ford is awaiting a ruling. The third case,
Nienhuis, was filed in Illinois state court in May 1998. It raises the same
allegations as Landry and Sheldon with respect to a larger group of vehicles,
and alleges a nationwide class or, alternatively, a class of Illinois residents.
Ford removed the action to federal court and, in June 1998, the case was
conditionally transferred to the Louisiana federal court where Landry is
pending. The case was later remanded to state court, and Ford's appeal of the
remand order is pending. The fourth case, Clayman, was filed in Pennsylvania
state court and asserts, on behalf of Pennsylvania residents, claims similar to
those raised in Nienhuis. Ford removed Clayman to federal court and sought to
have it consolidated with Landry in the U.S. District Court for the Eastern
District of Louisiana. It too was remanded to state court. In each pending
lawsuit, the plaintiffs seek unspecified compensatory damages, as well as
punitive damages, attorneys' fees and costs.
Ignition Switch. In 1996, Ford was served with fourteen purported class
action lawsuits alleging that certain 1983 to 1993 model year vehicles were
equipped with defective ignition switches that could cause an electrical short
circuit, resulting in smoke and fire damage. Most of the suits were brought on
behalf of plaintiffs who have not experienced a problem, but who claim that
their vehicles have diminished value because of the allegedly defective
switches. Some of the lawsuits were purportedly brought on behalf of plaintiffs
who claim to have suffered fire or smoke damage to their vehicles. Plaintiffs
seek unspecified compensatory damages, punitive damages, attorneys' fees and
costs, as well as injunctive relief requiring, among other things, that Ford
replace the allegedly defective ignition switch in all affected vehicles. All
fourteen lawsuits were consolidated for pretrial proceedings in federal court in
New Jersey. In August 1997, the court denied plaintiffs' motion for class
certification. In September 1997, the court dismissed all of the claims brought
by the non-incident class members except the implied warranty claims brought
under Louisiana law and the breach of contract claims. In May 1998, plaintiffs
in the "incident" (smoke and fire damage) cases filed an amended complaint which
attempts to consolidate all such claims in a single action. The complaint
proposes alternative classes and several subclasses. The plaintiffs have
indicated that the proposed classes and subclasses may be amended following
further discovery. In August 1998, the court
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reaffirmed its denial of class certification and ruled on plaintiffs' motion to
remand the actions, remanding one of the fourteen consolidated actions to
Alabama state court and retaining jurisdiction over the others. In October 1998,
plaintiffs in the non-incident cases filed a motion to amend an earlier court
ruling that dismissed with prejudice the claims under the federal Magnuson-Moss
Warranty Act and requested leave to file an amended complaint restating these
and other claims. The court denied the motion as to two of the plaintiffs but
allowed the third plaintiff to amend the complaint to pursue breach of express
warranty claims and claims for injunctive relief and/or restitution under the
California Business and Professions Act.
In a related matter, State Farm Mutual Automobile Insurance Company filed a
lawsuit in federal court in California in January 1998 against Ford and United
Technologies Automotive, Inc. State Farm seeks damages for insurance claims it
paid to cover vehicle damage caused by allegedly defective ignition switches,
the deductible amounts paid by its insureds, other compensatory damages,
disgorgement of profits and attorneys' fees and costs. Ford has moved to dismiss
State Farm's claims and obtained a transfer of the action to the New Jersey
federal court where the ignition switch class actions are pending. State Farm
opposed the transfer. Also, a private insurer, the California State Automobile
Association Inter-insurance Bureau has filed a separate action against Ford
seeking to recover amounts it paid for 15 vehicle fire claims allegedly caused
by defective ignition switches. The Bureau's lawsuit has also been transferred
to the New Jersey federal court for consolidated pre-trial proceedings with the
other ignition switch-related lawsuits. Ford has moved to dismiss the Bureau's
complaint.
TFI Module. Six purported class actions are pending in state courts on
behalf of owners and lessees of 1983 through 1995 model year Ford vehicles
containing a distributor-mounted thick film ignition (TFI) module. The
plaintiffs allege that distributor-mounted TFI modules are defective because
they have a high propensity to fail due to exposure to engine heat, causing the
engine to stumble, stall, or not start. The plaintiffs in these cases seek
pre-and post-judgment interest, attorneys' fees, disgorgement of profits,
compensatory damages, punitive damages, notice to the public, and the recall and
retrofit of all vehicles with the allegedly defective TFI modules. The cases are
pending in Alabama, California, Illinois, Maryland, Tennessee and Washington.
The Alabama and Tennessee cases were conditionally certified as nationwide class
actions (excluding California). The cases in Illinois, Maryland and Washington
purport to be regional class actions, and the California case is statewide in
scope. The California case is the "lead" case and proceedings in the other cases
are stayed. The court has certified a class of California residents who
currently own or lease the subject vehicles and residents who purchased such
vehicles when they were new. The court also certified a sub-class of consumers
pursuing Consumer Legal Remedies Act claims, bringing the total class to
approximately 3.2 million members. In the unlikely event that plaintiffs
recovered fully on all of their claimed damages, the total award in the
California action would exceed $4 billion. Trial in the California case is
scheduled for April 5, 1999. The trial court recently denied Ford's motions to
decertify the class and for summary judgment. Ford is seeking leave to appeal
some of those rulings. If leave to appeal is denied, Ford will have the right to
appeal after trial if necessary.
Air Bag. One purported class action lawsuit is pending in Alabama state
court alleging that air bags are defective because they can cause injury,
particularly to children and small adults. Plaintiffs allege that their vehicles
are unsuitable for transporting children and small adults and, therefore, are
not worth the purchase price they paid. They seek compensatory damages,
including the alleged diminution in value of their vehicles. The Alabama action
appears to be nationwide in scope and purports to represent owners of 1993
through 1996 (and some 1997) model year cars and light trucks with passenger air
bags. The plaintiffs named as defendants Ford, General Motors Corporation,
Chrysler Corporation, and an Alabama automobile dealership. The trial court
denied defendants' motion for change of venue, and the Alabama Supreme Court
declined to hear an appeal on that issue. Ford has asked the court to reconsider
that decision. Ford's motion to dismiss this action is pending.
Ford/Citibank Visa. Following the June 1997 announcement of the termination
of the Ford/Citibank credit card rebate program, five purported nationwide class
actions and one purported statewide class action were filed against Ford;
Citibank is also a defendant in some of these actions. The actions allege
damages in an amount up to $3,500 for each cardholder who obtained a
Ford/Citibank credit card in reliance on the rebate program and who is precluded
from accumulating discounts toward the purchase or lease of new Ford vehicles
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after December 1997 as a result of the termination of the rebate program.
Plaintiffs contend that defendants deceptively breached their contract by
unilaterally terminating the program, that defendants have been unjustly
enriched as a result of the interest charges and fees collected from
cardholders, and further, that defendants conspired to deprive plaintiffs of the
benefits of their credit card agreement. Plaintiffs seek compensatory damages,
or alternatively, reinstatement of the rebate program, and punitive damages,
costs, expenses and attorneys' fees. The five purported nationwide class actions
were filed in state courts in Alabama, Illinois, New York, Oregon and
Washington, and the purported statewide class action was filed in a California
state court. The Alabama court has conditionally certified a class consisting of
Alabama residents. Ford removed all of the cases to federal court, which
consolidated and transferred the cases to federal court in Washington for
pretrial proceedings. In September 1998, Ford and Citibank jointly filed a
motion to dismiss the consolidated lawsuit pending before the court in
Washington. The motion to dismiss was denied in November 1998 and the parties
are currently pursuing pretrial discovery. The plaintiffs in the Oregon and
Alabama cases have moved to remand their cases to state court.
Flat Glass. Ford is a defendant in 14 purported class actions brought on
behalf of purchasers of flat glass alleging that Ford and other manufacturers
fixed prices and allocated markets in violation of federal and state antitrust
laws. Twelve of the class actions are nationwide in scope and pending in federal
court and the other two class actions are statewide in scope and are pending in
state courts. The other defendants include Pilkington, Libbey-Owens Ford, AFG
Industries, PPG Industries, Asahi Glass, and Guardian Industries. Nineteen
similar purported class actions are pending in various courts in which Ford is
not currently named as a defendant. A total of 28 federal cases have been
consolidated in a federal court in Pennsylvania for pretrial proceedings. The
parties are currently engaged in discovery related to class certification. In
the actions involving Ford, the plaintiffs seek economic and treble damages.
Lease Residual. In January 1998 in connection with a case pending in
Illinois state court, Ford and Ford Credit were served with a summons and
intervention counterclaim complaint relating to Ford Credit's leasing practices
(Higginbotham v. Ford Credit). The counterclaim plaintiff, Carla Higginbotham,
is a member of a class that has been conditionally certified for settlement
purposes in Shore v. Ford Credit. In the Shore case, Ford Credit commenced an
action for deficiency against Virginia Shore, a Ford Credit lessee. Shore
counterclaimed for purported violations of the Truth-in-Leasing Act (alleging
that certain lease charges were excessive) and the Truth-in-Lending Act
(alleging that the lease lacked clarity). Shore purported to represent a class
of all similarly situated lessees. Ford was not a party to the Shore case.
Higginbotham objected to the proposed settlement of the Shore case, intervened
as a named defendant, filed separate counterclaims against Ford Credit, and
joined Ford as an additional counterclaim defendant. Higginbotham asserts claims
against Ford Credit for violations of the Consumer Leasing Act, declaratory
judgment concerning the enforceability of early termination provisions in Ford
Credit's leases, and fraud. She also asserts a claim against Ford Credit and
Ford for conspiracy to violate the Truth-in-Lending Act. The Higginbotham
counterclaims allege that Ford Credit inflates the residual values of its leased
vehicles, which results in lower monthly lease payments but higher termination
fees for lessees who exercise their right of early termination. Higginbotham
claims that the early termination fees were not adequately disclosed on the
lease form and that the fees are excessive and illegal because of the allegedly
inflated residual values. She also alleges that Ford dictated the residual
values to Ford Credit and thereby participated in an unlawful conspiracy. This
case was stayed pending the approval/rejection of the settlement in Shore. In
November 1998, the court issued a ruling that rejected the proposed settlement
in Shore. Consequently, the Higginbotham case is proceeding and Ford Credit is
in the process of responding to discovery requests. Ford intends to remove the
case to federal court and move to dismiss the counterclaims.
Lease Agreement Disclosure. Twenty purported class action lawsuits have
been filed in various courts against Ford Credit and, in all but three cases,
Primus Automotive Financial Services, Inc., a subsidiary of Ford Credit. The
lawsuits, each of which purports to be brought on behalf of a statewide class,
allege that Ford Credit and Primus leasing contracts improperly failed to
disclose acquisition and administrative fees that are included in the amount of
a customer's monthly lease payment. Plaintiffs seek compensatory damages in the
amount of all such undisclosed fees, an injunction prohibiting the companies
from continuing the practice of not disclosing such fees, attorneys' fees,
interest, costs and in some cases, punitive damages. Ford is seeking
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dismissal of all the lawsuits. A Georgia federal court and Alabama, Arkansas,
Iowa, Minnesota, Missouri and Wisconsin state courts have recently dismissed
seven of the lawsuits, finding that itemization of monthly lease charges is not
required under federal or state law.
Lifetime Service Guarantee. In June 1998, a purported class action lawsuit
was filed against Ford in California state court challenging the legality of
Ford's termination of the Lifetime Service Guarantee program as of January 1,
1992. Plaintiff alleges that the program, which ran from 1983 until the
program's termination date, constituted a product warranty that could not be
terminated. Plaintiff alleges claims for violation of the federal Magnuson-Moss
Warranty Act, breach of contract, negligent misrepresentation, violation of the
California Song-Beverly Consumer Warranty Act, violation of the California
Consumer Legal Remedies Act ("CLRA"), violations of the California Unfair
Competition Law ("UCL") and declaratory relief. The Magnuson-Moss and
declaratory relief claims are alleged on behalf of a purported nationwide class.
The breach of contract, negligent misrepresentation, and Song-Beverly claims are
alleged on behalf of a purported subclass of California residents. The CLRA and
UCL claims are alleged on behalf of "the general public" ostensibly under
"private attorney general" provisions in those statutes. Plaintiff claims
compensatory, exemplary, and punitive damages, attorneys' fees, civil penalties,
disgorgement, and interest in unspecified amounts, as well as an injunction
compelling Ford to reinstate the Lifetime Service Guarantee program. Ford has
removed the case to federal court in California. The parties are currently
engaged in pretrial discovery.
Other Matters
Patents. A number of claims have been made or may be asserted in the future
against Ford alleging infringement of patents held by others. Ford believes that
it has valid defenses with respect to the claims that have been asserted. If
some of these claims should lead to litigation, however, and if the claimant
were to prevail, Ford could be required to pay substantial damages.
OFCCP Proceeding. In April 1997, the Department of Labor issued an
administrative enforcement proceeding challenging Ford's compliance with
obligations imposed by Executive Order 11246, which prohibits employment
discrimination and requires affirmative action by government contractors and
subcontractors. The Office of Federal Contract Compliance Programs ("OFCCP")
claims that Ford's Kentucky Truck Plant used a hiring process in 1993 for
entry-level hourly laborer positions that discriminated against female
applicants. OFCCP seeks an order awarding back pay to the "affected class of
women," a job offer to each of these persons, and retroactive seniority for each
person. Ford and the OFCCP have completed a partial consent decree that resolves
the disputes relating to Ford's cooperation in various OFCCP investigations
concerning hourly hiring practices at Ford facilities. Trial before an
administrative law judge on the OFCCP proceeding relating to Ford's Kentucky
Truck Plant is set for August 16, 1999.
FTC Investigation. The Federal Trade Commission and the Department of
Justice are continuing their investigation, commenced in 1995, of the retail
vehicle financing credit practices of Ford Credit for compliance with the Equal
Credit Opportunity Act and Regulation B.
Red Carpet Lease Terminations. Ford and Ford Credit have been advised that
a consortium of 37 states is investigating certain Ford Credit Red Carpet Lease
("RCL") practices and that the Florida Attorney General's Office is leading the
investigation. The investigation focuses on whether Ford Credit RCL customers
who want to terminate leases early and purchase the leased vehicle have been
misled by the alleged improper failure to itemize (i) the cost of terminating
the lease and (ii) the vehicle purchase price. Ford and Ford Credit believe that
Ford Credit's business practices are fair under applicable law, and Ford and
Ford Credit are attempting to negotiate a resolution of the matter.
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EMPLOYMENT DATA
The average number of people Ford employed by geographic area was as
follows for the years indicated:
1998 1997
---- ----
United States.............................................. 173,899 189,787
Europe..................................................... 105,351 104,014
Other...................................................... 65,925 70,091
------- -------
Total.................................................... 345,175 363,892
======= =======
In 1998, the average number of people Ford employed decreased 5.1 percent
reflecting Ford's divestiture of The Associates, offset partially by increased
employment at Hertz. The above figures for 1997 include 21,161 employees at The
Associates. Most of Ford's employees work in its Automotive and Visteon
operations.
Substantially all of the hourly employees in Ford's Automotive and Visteon
operations in the United States are represented by unions and covered by
collective bargaining agreements. Approximately 99% of these unionized hourly
employees in Ford's Automotive segment (as well as many of those in Ford's
Visteon segment) are represented by the United Automobile Workers (the "UAW").
Approximately 3% of Ford's salaried employees are represented by unions. Most
hourly employees and many non-management salaried employees of Ford's
subsidiaries outside the United States also are represented by unions.
Collective bargaining agreements between Ford and the UAW and between Ford of
Canada and the Canadian Automobile Workers were entered into in 1996 and are
scheduled to expire in September 1999. Ford does not know whether it will be
able to reach new agreements with these unions without a work stoppage
occurring. If there is a work stoppage, Ford's profits could be substantially
adversely affected.
In recent years Ford has not had significant work stoppages at its
facilities, but they have occurred in some of Ford's suppliers' facilities. Any
protracted work stoppages in the future, whether in Ford's facilities or those
of certain suppliers, could substantially adversely affect Ford's results of
operations.
RESEARCH AND DEVELOPMENT
Ford conducts research and development primarily to improve the performance
(including fuel efficiency), safety and customer satisfaction of its products,
and to develop new products. Ford also has staffs of scientists who engage in
basic research. Ford maintains extensive engineering, research and design
facilities for these purposes, including large centers in Dearborn, Michigan;
Dunton, England; and Merkenich, Germany. Most of Ford's research and development
relates to its Automotive and Visteon operating segments.
During the last three years Ford took charges to its consolidate