UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

FORM 10-K

(Mark One)
R	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the fiscal year ended December 31, 2010
	or
£	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from  __________ to __________
	Commission file number 1-3950

Ford Motor Company

(Exact name of Registrant as specified in its charter)

Delaware	38-0549190
(State of incorporation)	(I.R.S. employer identification no.)
One American Road, Dearborn, Michigan	48126
(Address of principal executive offices)	(Zip code)

313-322-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered*
Common Stock, par value $.01 per share	New York Stock Exchange
7.50% Notes Due June 10, 2043	New York Stock Exchange
Ford Motor Company Capital Trust II	New York Stock Exchange
6.50% Cumulative Convertible Trust Preferred
Securities, liquidation preference $50 per share

__________

* In addition, shares of Common Stock of Ford are listed on certain stock exchanges in Europe.

Securities registered pursuant to Section 12(g) of the Act:  None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  R  No  £

Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or Section 15(d) of the Act.

Yes  £    No  R

Indicate by check mark if 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  R   No  £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  R   No  £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.   Large accelerated filer R    Accelerated filer £    Non-accelerated filer £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  £   No  R

As of June 30, 2010, Ford had outstanding 3,359,860,225 shares of Common Stock and 70,852,076 shares of Class B Stock.  Based on the New York Stock Exchange Composite Transaction closing price of the Common Stock on that date ($10.08 per share), the aggregate market value of such Common Stock was $33,867,391,068.  Although there is no quoted market for our Class B Stock, shares of Class B Stock may be converted at any time into an equal number of shares of Common Stock for the purpose of effecting the sale or other disposition of such shares of Common Stock.  The shares of Common Stock and Class B Stock outstanding at June 30, 2010 included shares owned by persons who may be deemed to be "affiliates" of Ford.  We do not believe, however, that any such person should be considered to be an affiliate.  For information concerning ownership of outstanding Common Stock and Class B Stock, see the Proxy Statement for Ford's Annual Meeting of Stockholders currently scheduled to be held on May 12, 2011 (our "Proxy Statement"), which is incorporated by reference under various Items of this Report as indicated below.

As of February 14, 2011, Ford had outstanding 3,711,858,859 shares of Common Stock and 70,852,076 shares of Class B Stock.  Based on the New York Stock Exchange Composite Transaction closing price of the Common Stock on that date ($16.09 per share), the aggregate market value of such Common Stock was $59,723,809,041.

DOCUMENTS INCORPORATED BY REFERENCE

Document	Where Incorporated
Proxy Statement*	Part III (Items 10, 11, 12, 13 and 14)

__________

* As stated under various Items of this Report, only certain specified portions of such document are incorporated by reference in this Report.

Exhibit Index begins on page 91.

PART I

ITEM 1. Business

Ford Motor Company (referred to herein as "Ford", the "Company", "we", "our" or "us") was incorporated in Delaware in 1919.  We acquired the business of a Michigan company, also known as Ford Motor Company, which had been incorporated in 1903 to produce and sell automobiles designed and engineered by Henry Ford.  We are one of the world’s largest producers of cars and trucks.  We and our subsidiaries also engage in other businesses, including financing vehicles.

In addition to the information about Ford and our subsidiaries contained in this Annual Report on Form 10-K for the year ended December 31, 2010 ("2010 Form 10-K Report" or "Report"), extensive information about our Company can be found at www.corporate.ford.com, including information about our management team, our brands and products, and our corporate governance principles.

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

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

To access our SEC reports or amendments or the Section 16 filings, go to our corporate website and click "Investors," then "Reports and Financial Information," then "View SEC Filings," which links to a list of reports filed with the SEC.  Our reports filed with the SEC may also be found on the SEC's website at www.sec.gov.

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

1

ITEM 1. Business (continued)

OVERVIEW

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

The reportable segments within our Automotive and Financial Services sectors as of December 31, 2010 are as described in the table below:

Business Sector	Reportable Segments (a)	Description
Automotive:	Ford North America	Primarily includes the sale of Ford- and Lincoln-brand vehicles and related service parts in North America (the United States, Canada and Mexico), together with the associated costs to develop, manufacture, distribute and service these vehicles and parts. (b)
	Ford South America	Primarily includes the sale of Ford-brand vehicles and related service parts in South America, together with the associated costs to develop, manufacture, distribute and service these vehicles and parts.
	Ford Europe	Primarily includes the sale of Ford-brand vehicles and related service parts in Europe, Turkey and Russia, together with the associated costs to develop, manufacture, distribute and service these vehicles and parts.
	Ford Asia Pacific Africa	Primarily includes the sale of Ford-brand vehicles and related service parts in the Asia Pacific region and South Africa, together with the associated costs to develop, manufacture, distribute and service these vehicles and parts.
Financial Services:	Ford Motor Credit Company	Primarily includes vehicle-related financing, leasing, and insurance.
	Other Financial Services	Includes a variety of businesses including holding companies, and real estate.

(a)	We have experienced a number of changes to our reportable segments in recent years, including the following:
	§	We discontinued the Mercury brand as of the end of 2010.
	§	We sold our Volvo operations on August 2, 2010.
	§	During the fourth quarter of 2008, we sold a portion of our equity in Mazda Motor Corporation ("Mazda"), reducing our ownership percentage from approximately 33.4% at the time of sale to about 11% ownership shortly thereafter.  Through a subsequent sale in the fourth quarter of 2010, we further reduced our ownership to about 3.5%.  Beginning with the fourth quarter of 2008, we have accounted for our interest in Mazda as a marketable security (instead of as an operating segment).
	§	We sold our Jaguar Land Rover operations on June 2, 2008.
	§	We sold Aston Martin on May 31, 2007.
(b)	For periods prior to January 1, 2009, this segment also included the sale of Mazda6 vehicles produced by our then-consolidated affiliate AutoAlliance International, Inc. ("AAI").

We provide financial information (such as revenue, income, and assets) for each business sector and reportable segment in three areas of this Report:  (1) "Item 6. Selected Financial Data;" (2) "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" ("Item 7"); and (3) Note 28 of the Notes to the Financial Statements located at the end of this Report.  Financial information relating to certain geographic areas is included in Note 29 of the Notes to the Financial Statements.

2

ITEM 1. Business (continued)

AUTOMOTIVE SECTOR

General

Our vehicle brands are Ford and Lincoln.  In 2010, we sold approximately 5,524,000 vehicles at wholesale throughout the world.  See Item 7 for discussion of our calculation of wholesale unit volumes.

Substantially all of our cars, trucks and parts are marketed through retail dealers in North America, and through distributors and dealers (collectively, "dealerships") outside of North America, the substantial majority of which are independently owned.  At December 31, 2010, the approximate number of dealerships worldwide distributing our vehicle brands was as follows:

Brand	Number of Dealerships at December 31, 2010
Ford	10,719
Ford-Lincoln (combined)	997
Lincoln	284
Total	12,000

In addition to the products we sell to our dealerships for retail sale, we also sell cars and trucks to our dealerships for sale to fleet customers, including commercial fleet customers, daily rental car companies, leasing companies, and governments.  We do not depend on any single customer or small group of customers to the extent that the loss of such customer or group of customers would have a material adverse effect on our business.

Through our dealer network and other channels, we provide retail customers with a wide range of after-sale vehicle services and products, including maintenance and light repair, heavy repair, collision repair, vehicle accessories and extended service contracts.  In North America, we market these products and services under several brands, including Ford Service, Lincoln Service, Ford Custom AccessoriesTM, Ford Extended Service PlanSM, and MotorcraftSM.

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

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

3

ITEM 1. Business (continued)

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

§ Wholesale unit volumes

§ Margin of profit on each vehicle sold, which in turn is affected by many factors, such as:

●      Mix of vehicles and options sold

●      Costs of components and raw materials necessary for production of vehicles

●      Level of "incentives" (e.g., price discounts) and other marketing costs

●      Costs for customer warranty claims and additional service actions

●      Costs for safety, emissions and fuel economy technology and equipment

§ A high proportion of relatively fixed structural costs, so that small changes in wholesale unit volumes can significantly affect overall profitability

Our industry continues to face a very competitive pricing environment, driven in part by industry excess capacity, particularly in mature markets such as North America and Europe.  For the past several decades, manufacturers typically have given price discounts and other marketing incentives to maintain market share and production levels.  A discussion of our strategies to compete in this pricing environment is set forth in the "Overview" section in Item 7.

Competitive Position.  The worldwide automotive industry consists of many producers, with no single dominant producer.  Certain manufacturers, however, account for the major percentage of total sales within particular countries, especially their countries of origin.  Detailed information regarding our competitive position in the principal markets where we compete may be found below as part of the overall discussion of the automotive industry in those markets.

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

We manage our vehicle production schedule based on a number of factors, including retail sales (i.e., units sold by our dealerships to their customers at retail) and dealer stock levels (i.e., the number of units held in inventory by our dealerships for sale to retail and fleet customers).  In the past, we have experienced some seasonal fluctuation in the business, with production in many markets tending to be higher in the first half of the year to meet demand in the spring and summer (typically the strongest sales months of the year).  Third quarter production has tended to be the lowest.  As a result, operating results for the third quarter typically have been less favorable than other quarters.

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

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

Intellectual Property.  We own or hold licenses to use numerous patents, copyrights and trademarks on a global basis.  Our policy is to protect our competitive position by, among other methods, filing U.S. and international patent applications to protect technology and improvements that we consider important to the development of our business.  We have generated a large number of patents, and expect this portfolio to continue to grow as we actively pursue additional technological innovation.  We currently have approximately 15,600 active patents and pending patent applications globally, with an average age for patents in our active patent portfolio of just over five and a half years.  In addition to this intellectual property, we also rely on our proprietary knowledge and ongoing technological innovation to develop and maintain our competitive position.  Although we believe that these patents, patent applications, and know-how, in the aggregate, are important to the conduct of our business, and we obtain licenses to use certain intellectual property owned by others, none is individually considered material to our business.  We also own numerous trademarks and service marks that contribute to the identity and recognition of our Company and its products and services globally.  Certain of these marks are integral to the conduct of our business, a loss of any of which could have a material adverse effect on our business.

4

ITEM 1. Business (continued)

Warranty Coverage and Additional Service Actions.  We currently provide warranties on vehicles we sell.  Warranties are offered for specific periods of time and/or mileage, and vary depending upon the type of product, usage of the product and the geographic location of its sale.  In compliance with regulatory requirements, we also provide emissions-defects and emissions-performance warranty coverage.  Pursuant to these warranties, Ford will repair, replace, or adjust all parts on a vehicle that are defective in factory-supplied materials or workmanship during the specified warranty period.  In addition to the costs associated with the warranty coverage provided on our vehicles, we also incur costs as a result of additional service actions not covered by our warranties, including product recalls and customer satisfaction actions.

For additional information regarding warranty and related costs, see "Critical Accounting Estimates" in Item 7 and Note 31 of the Notes to the Financial Statements.

Industry Sales Volume

Industry volumes are internal estimates based on publicly-available data collected from various government, private, and public sources around the globe.  Our market share is a percentage that our sales represent in the total industry volumes.

The following chart shows industry sales volume for the United States, and for the markets we track in Europe, South America and Asia Pacific Africa for the last five years (in millions of units):

	Industry Sales Volume *
	2010		2009		2008		2007		2006
United States		11.8		10.6		13.5		16.5		17.1
Europe		15.3		15.9		16.6		18.0		17.8
South America		5.0		4.2		4.3		4.1		3.2
Asia Pacific Africa		30.7		24.5		20.9		20.4		18.6

* Throughout this Report, industry sales volume includes sales of medium and heavy trucks.  See discussion of each market below for definition of the markets we track.

United States

Industry Sales Data.  The following table shows U.S. industry sales of cars and trucks (in millions of units):

	U.S. Industry Sales
	Years Ended December 31,
	2010		2009		2008		2007		2006
Cars		5.9		5.6		7.1		7.9		8.1
Trucks		5.9		5.0		6.4		8.6		9.0

We classify cars by small, medium, large, and premium segments, and trucks by compact pickup, bus/van (including minivans), full-size pickup, utilities (both car-based and traditional truck-based platform vehicles), premium, and medium/heavy segments.  In the tables below, we have classified all of our luxury cars and trucks as "premium," regardless of size.  Annually, we review various factors to determine the appropriate classification of vehicle segments and the vehicles within those segments, and this review occasionally results in a change of classification for certain vehicles.

5

ITEM 1. Business (continued)

The following tables show the proportion of U.S. car and truck unit sales by segment for the industry (including domestic and foreign-based manufacturers) and for Ford:

	U.S. Industry Vehicle Mix of Sales by Segment
	Years Ended December 31,
	2010			2009			2008			2007			2006
CARS
Small		21.9	%		23.7	%		22.9	%		19.8	%		19.0	%
Medium		15.5			16.1			15.5			13.6			13.1
Large		5.3			5.4			6.1			7.0			7.5
Premium		6.9			7.3			7.8			7.8			7.6
Total U.S. Industry Car Sales		49.6			52.5			52.3			48.2			47.2
TRUCKS
Compact Pickup		2.2			2.6			2.8			3.2			3.5
Bus/Van		5.7			5.5			6.1			6.6			7.8
Full-Size Pickup		11.7			10.8			11.9			13.5			13.3
Utilities		24.3			22.7			21.0			22.4			21.2
Premium		4.9			4.4			3.9			4.1			4.0
Medium/Heavy		1.6			1.5			2.0			2.0			3.0
Total U.S. Industry Truck Sales		50.4			47.5			47.7			51.8			52.8
Total U.S. Industry Vehicle Sales		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

	Ford U.S. Vehicle Mix of Sales by Segment*
	Years Ended December 31,
	2010			2009			2008			2007			2006
CARS
Small		13.9	%		14.0	%		15.0	%		12.8	%		12.5	%
Medium		12.8			12.8			9.3			7.8			12.9
Large		6.8			6.8			7.7			8.4			8.2
Premium		2.5			3.1			3.1			2.5			3.1
Total Ford U.S. Car Sales		36.0			36.7			35.1			31.5			36.7
TRUCKS
Compact Pickup		2.9			3.4			3.4			3.0			3.4
Bus/Van		7.0			5.8			6.5			7.2			8.6
Full-Size Pickup		27.3			25.6			27.2			29.1			29.6
Utilities		24.7			26.2			25.1			26.0			20.1
Premium		1.9			2.0			2.3			2.6			1.0
Medium/Heavy		0.2			0.3			0.4			0.6			0.6
Total Ford U.S. Truck Sales		64.0			63.3			64.9			68.5			63.3
Total Ford U.S. Vehicle Sales		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

_________

* These data include sales of Ford, Lincoln, and Mercury vehicles; as previously disclosed, the Mercury brand was discontinued at the end of 2010.

As the tables above indicate, the industry had been shifting from trucks to cars as consumer preferences moved toward smaller, more fuel-efficient vehicles.  In 2010, this trend reversed as car-like crossover utilities became more prevalent in the marketplace.  The full-size pickup segment, both for recreational and commercial users, also has rebounded in response to new product introductions and economic improvement.  In 2010, overall changes in our U.S. vehicle mix generally followed the overall direction of U.S. industry trends.  Our year-over-year decline in car mix was slightly less than the general industry as our new Fiesta and full-year availability of our redesigned Fusion and Fusion Hybrid continued to gain customers.  In our truck segments, the F-Series outpaced the industry full-size pickup segment as well as the total industry leading to the higher mix gain.  Also increasing our truck segment mix was the first full year of our Transit Connect van designed to combine improved fuel economy with commercial vehicle capability and durability.

Market Share Data.  The competitive environment in the United States has intensified and is expected to continue to intensify as Japanese and Korean manufacturers increase imports to the United States and increase production capacity in North America.  Our principal competitors in the United States include General Motors Company ("General Motors"), Chrysler Group LLC ("Chrysler"), Toyota Motor Corporation ("Toyota"), Honda Motor Company ("Honda"), Nissan Motor Company ("Nissan"), and Hyundai-Kia Automotive Group ("Hyundai-Kia").

6

ITEM 1. Business (continued)

The following tables show U.S. car and truck market share for Ford (Ford, Lincoln, and Mercury brand vehicles only) and for the other six leading vehicle manufacturers:

	U.S. Car Market Shares (a)
	Years Ended December 31,
	2010			2009			2008			2007			2006
Ford		5.9	%		5.5	%		5.0	%		4.6	%		5.8	%
General Motors		7.5			9.0			9.9			9.6			9.8
Chrysler		2.6			2.5			3.6			4.2			4.1
Toyota		8.2			10.0			10.0			9.2			8.6
Honda		6.0			6.5			6.6			5.3			4.9
Nissan		5.0			4.8			4.4			3.8			3.2
Hyundai-Kia		5.1			4.8			3.5			3.0			2.8
All Other (b)		9.3			9.4			9.3			8.5			8.0
Total U.S. Car Deliveries		49.6	%		52.5	%		52.3	%		48.2	%		47.2	%

	U.S. Truck Market Shares (a)
	Years Ended December 31,
	2010			2009			2008			2007			2006
Ford		10.5	%		9.8	%		9.2	%		10.0	%		10.2	%
General Motors		11.3			10.6			12.0			13.6			14.1
Chrysler		6.6			6.3			7.2			8.4			8.4
Toyota		6.8			6.7			6.4			6.7			6.3
Honda		4.4			4.3			4.0			4.1			3.9
Nissan		2.7			2.5			2.7			2.7			2.8
Hyundai-Kia		2.5			2.1			1.5			1.7			1.6
All Other (b)		5.6			5.2			4.7			4.6			5.5
Total U.S. Truck Deliveries		50.4	%		47.5	%		47.7	%		51.8	%		52.8	%

	U.S. Combined Car and Truck Market Shares (a)
	Years Ended December 31,
	2010			2009			2008			2007			2006
Ford		16.4	%		15.3	%		14.2	%		14.6	%		16.0	%
General Motors		18.8			19.6			21.9			23.2			23.9
Chrysler		9.2			8.8			10.8			12.6			12.5
Toyota		15.0			16.7			16.4			15.9			14.9
Honda		10.4			10.8			10.6			9.4			8.8
Nissan		7.7			7.3			7.1			6.5			6.0
Hyundai-Kia		7.6			6.9			5.0			4.7			4.4
All Other (b)		14.9			14.6			14.0			13.1			13.5
Total U.S. Car and Truck Deliveries		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

__________

(a)  All U.S. sales data are based on publicly available information from the media and trade publications.

(b) "All Other" primarily includes other Japanese manufacturers and various European manufacturers, and, with respect to the U.S. Truck Market Shares table and U.S. Combined Car and Truck Market Shares table, includes medium and heavy truck manufacturers.

Our improvement in overall market share is the result of several factors, including favorable acceptance of our redesigned products, product focus on industry growth segments, and customers' increasing awareness and acceptance of our commitment to leadership in quality, fuel efficiency, safety, smart technologies, and value.

Fleet Sales.  The sales and market share information provided above includes both retail and fleet sales.  Fleet sales include sales to commercial fleet customers, leasing companies, daily rental car companies, and governments.  In general, fleet sales tend to be less profitable than retail sales.  See Item 7 for discussion of revenue recognition for sales to daily rental car companies.

7

ITEM 1. Business (continued)

The table below shows our fleet sales in the United States, and the amount of those combined sales as a percentage of our total U.S. car and truck sales for the last five years (in thousands):

	Ford Fleet Sales*
	Years Ended December 31,
	2010			2009			2008			2007			2006
Commercial and Other Units		256			156			217			268			277
Daily Rental Units		236			205			237			304			447
Government Units		126			127			153			158			162
Total Fleet Units		618			488			607			730			886
Percent of Total U.S. Car and Truck Sales		32	%		30	%		32	%		30	%		32	%

________

* These data include sales of Ford, Lincoln, and Mercury vehicles.

Higher fleet sales in 2010 primarily reflected an overall industry increase in commercial and rental sectors.  We also improved year-over-year fleet segment market share as our commercial and government business outperformed the industry.  We continue to maintain commercial and government segment market share leadership over all brands.

Canada and Mexico

Canada and Mexico also are important markets for us.  In Canada, industry sales volume for new cars and trucks in 2010 was approximately 1.58 million units, up 7% from 2009 levels.  Industry sales volume in Mexico for new cars and trucks in 2010 was approximately 848,000 units, up about 10% from 2009.  The increase in industry sales volume in these markets reflected the recovery of the economy from the slowdown that had begun in late 2008.

Our combined car and truck market share in Canada was 16.9% in 2010 (up 2.1 percentage points from a year ago), which represents our highest full-year share since 2001 and made Ford the number-one selling automaker in Canada.  In Mexico, our market share in 2010 was 10.5%, down 1.3 percentage points from the previous year.

Europe

19 Markets Data.  Outside of the United States, Europe is our largest market for the sale of cars and trucks.  The automotive industry in Europe is intensely competitive.  Our principal competitors in Europe include General Motors, Volkswagen A.G. Group, PSA Group, Renault Group, and Fiat SpA.  For the past 10 years, the top six manufacturers have collectively held between 69% and 75% of the total market.  This competitive environment is expected to intensify further as Japanese and Korean manufacturers increase their production capacity in Europe, and as manufacturers of premium brands (e.g., BMW, Mercedes-Benz, and Audi) continue to broaden their product offerings.

For purposes of this discussion, 2010 market data are based on estimated registrations currently available; percentage change is measured from actual 2009 registrations.  We track industry sales in Europe for the following 19 markets: Britain, Germany, France, Italy, Spain, Austria, Belgium, Ireland, Netherlands, Portugal, Switzerland, Finland, Sweden, Denmark, Norway, Czech Republic, Greece, Hungary, and Poland.  In 2010, vehicle manufacturers sold approximately 15.3 million cars and trucks in these 19 markets, down about 3.5% from 15.9 million units in 2009.  The decline was largely attributable to the cessation of government scrappage programs during 2010, which were in place during 2009 to incentivize new vehicle purchases during the economic crisis that began in late 2008.  Ford-brand combined car and truck market share in 2010 was approximately 8.4% (down 0.7 percentage points from the previous year).

Britain and Germany are our highest-volume markets within Europe.  Any change in the British or German market has a significant effect on the results of our Ford Europe segment.  In Britain, industry sales increased to 2.3 million units in 2010, or by 3.2% from 2009 levels (which were considerably lower than the prior year due to the economic crisis that began late in 2008).  In Germany, government stimulus programs ended in the last quarter of 2009, contributing to a 21% decrease in 2010 industry sales to 3.2 million units compared with 4 million units in 2009.  Our Ford-brand combined car and truck share in 2010 was 15% in Britain (down 1.8 percentage points from the previous year), and 6.9% in Germany (down 0.8 percentage points from the previous year).

Turkey.  Although not included in the 19 European markets discussed above, Turkey contributes to our Ford Europe segment results.  Industry sales volume in Turkey in 2010 was about 800,000 units, compared with 600,000 units in 2009.

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ITEM 1. Business (continued)

Ford's share of the Turkish market increased in 2010 by 0.7 percentage points to 15.8%, the ninth year in a row that the Ford brand led the market in sales in Turkey.

Russia.  In addition to the 19 markets and Turkey discussed above, Russia also is becoming a significant market for our Ford Europe segment.  As a result of government stimulus in Russia, industry sales volume in 2010 was about two million units, an increase of 31% compared to 2009 levels, which had fallen nearly 50% from 2008 levels as a result of the economic crisis.  In 2010, our market share in Russia declined by 0.9 percentage points from 2009 to 4.6%.

Over the next several years, we expect industry sales volumes in Russia to grow rapidly and perhaps even exceed sales volumes in Germany, Europe's largest market.  In February 2011, Russia introduced a new automotive industrial regime pursuant to which automotive manufacturers in Russia must meet the following criteria in order to qualify for reduced import duties on automotive components for the next eight years:  (i) assembly capacity of 350,000 vehicles annually within the next three years, (ii) substantial localization of component supply, including engines, stampings and other components, and (iii) establishment of a research and development center.  Applications to participate in this new industrial regime are due in February 2011.  We, together with our proposed Russian joint venture partner, have submitted an application to qualify for the reduced import duties.

Motor Vehicle Distribution in Europe.  In October 2009, the European Commission decided to abolish the 2002 block exemption law that had been specific to vehicle distribution agreements, and to adopt instead a new generic regulation applying to all manufacturer-distributor relationships.  There were no changes to after-market rules, but for retail distribution the following significant changes as compared with the previous block exemption law are now in effect:

● Termination at will of distributor agreements is permitted (generally, with two years' notice) – previously, there could only be termination for cause.

● All distributor showroom/selling areas may be required to be exclusive – previously, manufacturers were required to permit multi-brand outlets.

● No guaranteed right exists for distributors to open additional sales or delivery outlets – previously, this right did exist.

● Manufacturers now may object to a transfer of ownership by the existing dealer, and have right of first refusal – previously, this right did not exist.

The new law represents a marked improvement for manufacturers, and Ford Europe currently is negotiating new agreements with its dealers reflecting these improvements.

South America

Ford South America market share is based on our six major markets in the region (Argentina, Brazil, Chile, Colombia, Ecuador and Venezuela).  Of these, Brazil, Argentina, and Venezuela are our principal markets in South America.  Industry sales in 2010 were approximately 3.5 million units in Brazil (up 11.9% from 2009), 655,000 units in Argentina (up 28.7% from 2009), and 126,000 units in Venezuela (down 7.4% from 2009).  Our combined car and truck share for Ford-brand vehicles in these markets was 10.4% in Brazil (up 0.1 percentage points from 2009), 12.4% in Argentina (down 0.9 percentage points from 2009), and 18.5% in Venezuela (down 2.4 percentage points from 2009).

Brazil's economic environment and demographics, with relatively low inflation in recent years, growing per capita income, low vehicle ownership rates and a young population, have allowed its automotive market to more than double since 2002.  These favorable factors are expected to continue to contribute to growth in vehicle sales in Brazil.

Asia Pacific Africa

Ford Asia Pacific Africa industry and market share data focus on our 12 major markets in the region (Australia, China, Japan, India, Indonesia, Malaysia, New Zealand, Philippines, South Africa, Taiwan, Thailand and Vietnam). Industry sales in the region in 2010 were more than 30 million units, up from 24 million units in 2009. Of the markets we track in this region, Australia, China, India, South Africa, and Taiwan are our principal markets. Industry sales in 2010 were approximately 1 million units in Australia (up 10.5% from 2009), 18.3 million units in China (up 30% from 2009), 3.1 million units in India (up 35.5% from 2009), 426,000 units in South Africa (up 20.3% from 2009), and 328,000 units in Taiwan (up 11.3% from 2009).

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ITEM 1. Business (continued)

Small cars account for 60% of Asia Pacific Africa industry sales volume, and are anticipated to continue to benefit from government fiscal policy.  We anticipate that the ongoing relaxation of import restrictions (including duty reductions) will continue to intensify competition in the region, particularly around small, ultra-affordable passenger cars.  The highly successful launch of our all-new Figo in India demonstrates our ability to successfully compete in key growth segments.

Our combined car and truck share in these markets (including sales of Ford-brand vehicles, and market share for certain unconsolidated affiliates, particularly in China) was as follows in 2010:

	2010
Market	Market Share		Over/(Under) 2009
Australia		9.2%	(1.1) ppt.
China		2.5%	—
India		2.6%	1.3 ppt.
South Africa		7.7%	0.1 ppt.
Taiwan		6.1%	—

China and India are key markets in the Asia Pacific Africa region that will continue to drive new economic growth.  Already, China's industry sales volume has increased from about six million units in 2005 to more than 18 million units in 2010, and India's industry sales volume increased from about one million units in 2005 to about three million units in 2010.  Moreover, the driving age population with disposable income for vehicle purchases is expected to grow from about 700 million to more than 1.1 billion in China by 2020, and from about 165 million to more than 500 million in India over the same period.  This suggests continued rapid and substantial growth in those markets in the next ten years.

Accordingly, we have increased and are planning to increase further our dealer networks and manufacturing capacity in the region.  In China, through our joint ventures, we plan to open three new plants by 2014 to meet anticipated demand and grow Ford-brand market share.  In India, we have invested $500 million to significantly increase our presence through expansion of our current manufacturing facility in Chennai for production of our new Ford Figo sub-B car, and construction of a fully-integrated and flexible engine manufacturing plant.  We are aggressively expanding in Thailand as well.  At our joint venture assembly facility in Rayong, Thailand we have completed a $500 million expansion for the production of Ford Fiesta and Mazda2 small cars, and announced an investment of $350 million to support the production of next-generation pickup trucks with production of the all-new Ford Ranger commencing this year.  Additionally, construction is underway for a new, highly-flexible $450 million Ford assembly plant, also located in Rayong, which is scheduled for completion in 2012 and which will begin with production of the new Ford Focus.

FINANCIAL SERVICES SECTOR

Ford Motor Credit Company LLC

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

● Payments made under retail installment sale and lease contracts that it originates and purchases;

● Interest supplements and other support payments from us and our subsidiaries on special-rate financing programs; and

● Payments made under wholesale and other dealer loan financing programs.

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

Ford Credit does business in all states in the United States and in all provinces in Canada through regional business centers.  Outside of the United States, FCE Bank plc ("FCE") is Ford Credit's largest operation.  FCE's primary

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ITEM 1. Business (continued)

business is to support the sale of our vehicles in Europe through our dealer network.  FCE offers a variety of retail, leasing and wholesale finance plans in most countries in which it operates; FCE does business in the United Kingdom, Germany, and most other European countries.  Ford Credit, through its subsidiaries, also operates in the Asia Pacific and Latin American regions.  In addition, FCE, through its Worldwide Trade Financing division, provides financing to dealers in countries where typically we have no established local presence.

Ford Credit's share of retail financing for new Ford, Lincoln, and Mercury brand vehicles sold by dealers in the United States and new Ford-brand vehicles sold by dealers in Europe, as well as Ford Credit's share of wholesale financing for new Ford, Lincoln and Mercury brand vehicles acquired by dealers in the United States (excluding fleet) and of new Ford-brand vehicles acquired by dealers in Europe, were as follows during the last three years:

United States	Years Ended December 31,
Financing share – Ford, Lincoln, and Mercury	2010			2009			2008
Retail installment and lease		32	%		29	%		39	%
Wholesale		81			79			77
Europe
Financing share – Ford
Retail installment and lease		26	%		28	%		28	%
Wholesale		99			99			98

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

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

On November 6, 2008, we and Ford Credit entered into an Amended and Restated Support Agreement ("Support Agreement").  Pursuant to the Support Agreement, if Ford Credit’s managed leverage for a calendar quarter were to be higher than 11.5 to 1 (as reported in Ford Credit’s then-most recent Form 10-Q Report or Form 10-K Report), Ford Credit could require us to make or cause to be made a capital contribution to Ford Credit in an amount sufficient to have caused such managed leverage to have been 11.5 to 1.  A copy of the Support Agreement was filed as Exhibit 10 to our Quarterly Report on Form 10-Q for the period ended September 30, 2008.  No capital contributions have been made to Ford Credit pursuant to the Support Agreement.  In addition, Ford Credit has an agreement to maintain FCE's net worth in excess of $500 million.  No payments have been made by Ford Credit to FCE pursuant to the agreement during the 2001 through 2010 periods.

GOVERNMENTAL STANDARDS

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

Mobile Source Emissions Control

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

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ITEM 1. Business (continued)

The EPA also has standards and requirements for EPA-defined "heavy-duty" vehicles and engines (generally, those vehicles with a gross vehicle weight rating of 8,500-14,000 pounds gross vehicle weight).  These standards and requirements include stringent evaporative hydrocarbon standards for gasoline vehicles, and stringent exhaust emission standards for all vehicles.  In order to meet the diesel standards, manufacturers must employ after-treatment technologies, such as diesel particulate filters or selective catalytic reduction ("SCR") systems, which require periodic customer maintenance.  These technologies add significant cost to the emissions control system, and present potential issues associated with consumer acceptance.  The EPA has issued guidance regarding maintenance intervals and the warning systems that must be used to alert motorists to the need for maintenance of SCR systems, which are incorporated into some of our heavy-duty vehicles.  One heavy-duty engine manufacturer that does not rely on SCR technology challenged EPA's heavy-duty standards and related SCR guidance, and also challenged the certification of SCR-equipped vehicles by the California Air Resources Board ("CARB").  In settling these cases, the agencies agreed to hold manufacturer workshops and consider the development of more stringent criteria for SCR warning systems.  EPA has indicated that it will be issuing revised draft guidance on SCR warning systems in early 2011.  Should the agencies develop guidance or policies that interfere with our ability to use SCR technology, it could have an adverse effect on our ability to produce and sell heavy-duty vehicles.

U.S. Requirements – California and Other State Emissions Standards.  Pursuant to the Clean Air Act, California may seek a waiver from the EPA to establish unique emissions control standards for motor vehicles; each new or modified proposal requires a new waiver of preemption from the EPA.  California has received a waiver from the EPA to establish its own unique emissions control standards for certain regulated pollutants.  New vehicles and engines sold in California must be certified by CARB.  CARB's current low emission vehicle or "LEV II" emissions standards treat most light-duty trucks the same as passenger cars, and require both types of vehicles to meet stringent new emissions requirements.  Like the EPA's Tier 2 emissions standards, CARB's LEV II vehicle emissions standards also present a difficult engineering challenge.

The California program includes requirements for manufacturers to produce and deliver for sale zero-emission vehicles ("ZEVs") which emit no regulated pollutants.  CARB has adopted amendments to the ZEV mandate that allow advanced-technology vehicles (e.g., hybrid electric vehicles or natural gas vehicles) with extremely low tailpipe emissions to qualify for ZEV credits.  The rules also give some ZEV credits for so-called "partial zero-emission vehicles" ("PZEVs"), which can be internal combustion engine vehicles certified to very low tailpipe emissions and zero evaporative emissions.  The current rules require increasing volumes of battery electric and other advanced technology vehicles with each passing model year.  We plan to comply with the ZEV regulations through the sale of a variety of battery-electric vehicles, hybrid vehicles, plug-in hybrid vehicles, and PZEVs.  Our compliance plan entails significant costs, and has a variety of inherent risks, including potential component shortages that may make it difficult to produce vehicles in sufficient quantities.

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

CARB has indicated that it is planning a complete overhaul of its LEV, ZEV, and GHG regulations.  The agency is expected to propose "LEV III" rules in the third quarter of 2011, and finalize the rules in 2012.  We anticipate that the LEV III rules will contain a host of new and more stringent requirements for tailpipe emissions, evaporative emissions, and test procedures beginning with the 2014 model year.  CARB also is expected to propose modifications to its ZEV regulations this year.  The revised ZEV program is expected to focus on requirements to produce ever-increasing numbers of vehicles using battery-electric, fuel cell, plug-in hybrid, and hydrogen internal combustion engine technologies.  Under the new regulatory approach, manufacturers that produce higher numbers of vehicles specified as ZEVs may be allowed to meet less stringent fleet average GHG levels.  The revised ZEV regulations likely will apply to the 2018-2025 model years, and preliminary indications are that the regulations will require a steep ramp-up in ZEVs.

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ITEM 1. Business (continued)

In general, compliance with the revised regulations is likely to require costly actions that could have a substantial adverse effect on our sales volume and profits, depending on such factors as the specific emission levels required in the LEV III program and the volumes of advanced-technology vehicles required by the ZEV mandate.  In particular, there is concern that neither consumer preferences nor the refueling/recharging infrastructure will support the dramatic increase in advanced-technology vehicles likely to be required by 2025 under the new ZEV mandate.  Ford will work with CARB directly and through the Alliance of Automobile Manufacturers ("Alliance") in an effort to promote regulations that are reasonable and technologically feasible.

U.S. Requirements – Warranty, Recall, and On-Board Diagnostics.  The Clean Air Act permits the EPA and CARB to require manufacturers to recall and repair non-conforming vehicles (which may be identified by testing or analysis done by the manufacturer, the EPA or CARB), and we may voluntarily stop shipment of or recall non-conforming vehicles.  The costs of related repairs or inspections associated with such recalls, or a stop-shipment order, could be substantial.

Both CARB and the EPA also have adopted on-board diagnostic ("OBD") regulations, which require a vehicle to monitor its emissions control system and notify the vehicle operator (via the "check engine" light) of any malfunction. These regulations have become extremely complicated, and require substantial engineering resources to create compliant systems. CARB's OBD rules for vehicles under 14,000 pounds gross vehicle weight include a variety of requirements that phase in between the 2006 and 2012 model years. CARB also has adopted OBD requirements for heavy-duty gasoline and diesel engines that apply to the 2010 and later model years, and EPA has adopted light-duty and heavy-duty OBD requirements that generally align with CARB's; the EPA also accepts certification to CARB's OBD requirements.

The complexity of the OBD requirements and the difficulties of meeting all of the monitoring conditions and thresholds make OBD approval one of the most challenging aspects of certifying vehicles for emissions compliance. CARB regulations contemplate this difficulty, and, in certain instances, permit manufacturers to comply by paying per-vehicle "deficiency" fines in lieu of meeting the full array of OBD monitoring requirements. Ford is paying deficiency fines on some models as we work to upgrade our OBD monitoring systems. If a vehicle does not comply with certain, specified core OBD requirements, CARB regulations provide for automatic recalls. Many states have implemented OBD tests as part of inspection and maintenance programs. Failure of in-service compliance tests could lead to vehicle recalls with substantial costs for related inspections or repairs. CARB has finalized amendments to the OBD regulations for 2010-2017 model years; these rules relax or defer some requirements in the earlier model years, while phasing in some additional requirements in the later model years. Additional OBD monitoring requirements for diesel vehicles will take effect beginning with the 2013 model year. These requirements will be challenging and may necessitate the temporary payment of deficiency fines for some vehicles as we develop new monitoring systems to satisfy the regulatory criteria. CARB also is required to undertake a biennial review of its OBD regulations for light-duty vehicles, which is expected to occur in 2011. The biennial review is expected to lead to new OBD requirements for hybrid and plug-in hybrid vehicles. Automobile manufacturers will make suggestions for streamlining and improving the regulations, but it also is possible that CARB may alter the rules in ways that make it more difficult for manufacturers to comply.

European Requirements.  European Union ("EU") directives and related legislation limit the amount of regulated pollutants that may be emitted by new motor vehicles and engines sold in the EU.  Stringent new emissions standards ("Stage IV Standards") were applied to new passenger car certifications beginning January 1, 2005, and to new passenger car registrations beginning January 1, 2006.  The comparable light commercial truck Stage IV Standards went into effect for new certifications beginning January 1, 2006, and for new registrations beginning January 1, 2007.  This directive on emissions also introduced OBD requirements, more stringent evaporative emissions requirements, and in-service compliance testing and recall provisions for emissions-related defects that occur in the first five years or 100,000 kilometers of vehicle life.  Failure of in-service compliance tests could lead to vehicle recalls with substantial costs for related inspections or repairs.

Stage V emissions requirements began in September 2009 for vehicle registrations starting in January 2011; Stage VI requirements will apply from September 2014.  Stage V particulate standards drove the deployment of particulate filters across diesels, and Stage VI further tightens the standard for oxides of nitrogen.  This will drive the need for additional diesel exhaust aftertreatment which will add cost and potentially impact the diesel CO2 advantage.  These technology requirements add cost and further erode the fuel economy cost/benefit advantage of diesel vehicles.

Vehicles equipped with SCR systems require a driver inducement and warning system to prevent the vehicle being operated for a significant period of time if the reductant (urea) dosing tank is empty.  The Stage V/VI emission

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ITEM 1. Business (continued)

legislation also mandated the internet provision of all repair information (not just emissions-related); information also must be provided to diagnostic tool manufacturers.

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

In South America, Brazil, Argentina and Chile also are introducing more stringent emissions standards.  Brazil approved Euro V emissions and OBD standards for heavy trucks starting in 2012; most heavy vehicle manufacturers will use urea SCR.  More stringent light vehicle limits come into effect in 2012.  Argentina approved Euro IV emissions standards starting in 2009, and Euro V for 2012.  Chile approved a new decontamination plan for its metropolitan region with more stringent emission requirements based on U.S. or EU regulations.

Fuel Quality and Content

U.S. Requirements. Currently, EPA regulations allow conventional gasoline to contain up to 10% ethanol ("E10").  We and other manufacturers design gasoline-powered vehicles to be able to run on E10 fuel for the full useful life of the vehicle.  In 2008 and 2009, a coalition of ethanol producers filed a petition with the EPA seeking approval for an increase in the amount of allowable ethanol content in gasoline to 15% ("E15").  Under the Clean Air Act, the EPA may approve changes to gasoline only if it determines that the change will not cause or contribute to the failure of emission control devices or systems.  In 2010, EPA announced its decision approving the use of E15 in 2007 model year and newer vehicles.  In January 2011, EPA issued a supplemental decision expanding its approval of the use of E15 in vehicles dating back to the 2001 model year.  The automobile industry has concerns about EPA's approval of E15 fuel for use in past model-year gasoline-powered vehicles that were not originally designed to use E15 fuel.  Ethanol is more corrosive than pure gasoline, and fuel containing more than 10% ethanol may detrimentally affect vehicle durability if the vehicle's fuel system has not been designed to accommodate it.  The addition of more ethanol to fuel has the potential to result in increased customer dissatisfaction and/or warranty claims for fuel system failures, OBD system warnings, and other problems.  Older vehicles are likely to be more susceptible to such problems.  The Alliance and the Association of International Automobile Manufacturers ("AIAM"), along with many other industry and environmental groups, have filed petitions in the D.C. Circuit Court of Appeals for review of EPA's E15 decision.  EPA also has issued a proposed rule that would require pump labeling and other measures to prevent the misfueling of vehicles not approved to use E15 fuel.  The Alliance and AIAM believe the proposed measures are inadequate and have filed comments to this effect.        

Biomass-based diesel fuel, known as "biodiesel," also is becoming more common in the United States.  Biodiesel typically is a combination of petroleum-based diesel fuel and fuel derived from "biomass" (biological material from plant or animal sources).  Biodiesel is approved by the EPA as well as a number of U.S. state agencies for use in motor vehicles.  While diesel fuel containing 5% biomass-based fuel is now common, higher-concentration blends are becoming more common as well.  The content and quality of biodiesel fuels varies considerably.  Diesel fuel that contains higher concentrations of biomass-based fuels, and/or that contains lower-quality ingredients, can have adverse effects on the durability and performance of diesel engines and on the exhaust emissions from such engines.

European Requirements.  In general, the use of automotive fuel derived from biomass is increasing in the EU, primarily driven by the EU directive on renewable energy.  EU member states have issued national implementation plans that suggest different national strategies to comply with its target of 10% renewable energy in 2020.  This non-harmonized approach may drive additional costs into engine development to ensure compatibility for higher bio-blend ranges (up to E25 and B10 or even more).

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ITEM 1. Business (continued)

Stationary Source Emissions Control

U.S. Requirements.  The Clean Air Act requires the EPA to periodically review and update its NAAQS, and to designate whether counties or other local areas are in compliance with the new standards.  If an area or county does not meet the new standards ("non-attainment areas"), the state must revise its implementation plans to achieve attainment.  In 2006, the EPA issued a final rule increasing the stringency of the NAAQS standard for fine particulate matter (particles 2.5 micrometers in diameter or less), while maintaining the existing standard for coarse particulate matter (particles between 2.5 and 10 micrometers in diameter).  The EPA estimates that the new standard will put approximately 124 counties into non-attainment status for fine particulate matter.  Various parties have filed petitions for review of the final particulate matter rules in the U.S. Court of Appeals for the District of Columbia Circuit, in most cases seeking more stringent standards for both fine and coarse particulate matter.  In February 2009, the court ordered the EPA to reconsider the fine particulate standards, but left the standards in place in the meantime.  The EPA is in the process of developing new proposed fine particulate NAAQS standards, and we expect the revised standards to be more stringent than the 2006 standards.

In March 2008, the EPA promulgated rules setting a new ozone NAAQS at a level more stringent than the previous standard.  The EPA estimates that as a result of the new standard, the number of counties out of attainment for the ozone NAAQS could triple.  A number of states and environmental groups filed suit seeking to compel the EPA to issue an even more stringent ozone standard.  The EPA agreed to reconsider the rule and issued a new proposed rule in January 2010.  In the new proposal, the EPA is considering a primary NAAQS standard of 0.060 – 0.070 parts per million measured over eight hours (by comparison, the 2008 rule was set at 0.075 parts per million).  Depending upon the standard that ultimately is chosen, approximately 76% to 96% of all areas would be in non-attainment.  EPA had been expected to issue its final decision on the ozone NAAQS in 2010, but the timing has been postponed to 2011.

After issuance of the final ozone and particulate matter NAAQS and designation of non-attainment areas, areas that do not meet the standards will need to revise their implementation plans to require additional emissions control equipment and impose more stringent permit requirements on facilities in the area.  The existence of additional non-attainment areas can lead to increased pressure for more stringent mobile source emissions standards as well.  The cost of complying with the requirements necessary to help bring non-attainment areas into compliance with the revised NAAQS may be substantial.

The EPA also proposed a new hourly NAAQS for oxides of nitrogen (as measured by ambient concentrations of nitrogen dioxide ("NO2")) in 2009, and adopted a final NAAQS in January 2010.  The new rule will result in a substantial number of new non-attainment areas for oxides of nitrogen.  The NAAQS also incorporated a plan for monitoring NO2 concentrations using a newly-developed roadside monitoring network.  The roadside monitoring plan may tend to impose additional scrutiny on mobile sources of NO2 relative to other sources that contribute to overall ambient levels.  The revised NAAQS for oxides of nitrogen may lead to additional NO2 standards for both stationary and mobile sources that could be costly and technologically challenging.

The EPA also issued a final rule in 2009 establishing a national GHG reporting system.  Facilities with production processes that fall into certain industrial source categories, or that contain boilers and process heaters and emit 25,000 or more metric tons per year of GHGs, will be required to submit annual GHG emission reports to the EPA.  Facilities subject to the rule were required to begin collecting data as of January 1, 2010, and submit an annual report for calendar year 2010 by March 31, 2011.  Many of our facilities in the United States will be required to submit reports.  Under the rule, we also will be required to report emissions of certain GHGs from heavy-duty engines and vehicles; these requirements phase in beginning with the 2011 model year.  

In 2010, the EPA issued a final rule (the "PSD Tailoring Rule") that defines the circumstances under which certain GHGs are regulated under the Clean Air Act's New Source Review - Prevention of Significant Deterioration ("PSD") rules and Title V operating permits program.  The PSD Tailoring Rule was issued due to concerns that, once the EPA begins regulating GHGs from motor vehicles, GHGs will become regulated air pollutants under PSD and Title V, triggering permit requirements for many small sources not currently regulated under those programs.  The PSD Tailoring Rule addresses this by phasing in permit requirements through 2012 for sources with at least a 100,000 ton per year CO2 equivalent ("CO2e") emission level.  Emission sources that are required to obtain PSD permits will be required to apply "Best Available Control Technology" ("BACT") to limit CO2e emissions according to guidance issued by EPA.  EPA will reevaluate the rule over time to determine if smaller sources should be included in its scope.  A large number of lawsuits have been filed challenging the rule.

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ITEM 1. Business (continued)

A large percentage of our facilities will be required to obtain permits for GHG emissions.  EPA's implementation of the BACT guidance, parallel changes to state air programs, and the outcome of the litigation could lead to the installation of additional pollution control equipment, potential delay in the issuance of permits due to changes at a facility, and increased operating costs.

European Requirements.  In Europe, environmental legislation is driven by EU law, in most cases in the form of EU directives that must be converted into national legislation.  All of our European plants are located in the EU region, with the exception of one in St. Petersburg, Russia and Ford Otomotiv Sanayi Anonim Sirketi ("Ford Otosan") in Turkey.  One of the core EU directives is the Directive on Integrated Pollution Prevention Control ("IPPC").  The IPPC regulates the permit process for facilities, and thus the allowed emissions from these facilities.  As in the United States, engine testing, surface coating, casting operations, and boiler houses all fall under this regime.  The Solvent Emission Directive which came into effect in late 2007 and the Industry Emissions Directive which came into effect in 2011 affect vehicle manufacturing plants, which must upgrade their paint shops to meet the new requirements.  The cost of complying with these requirements could be substantial.

The European Emission Trading Scheme requires large emitters of carbon dioxide within the EU to monitor and annually report CO2 emissions, and each is obliged every year to return an amount of emission allowances to the government that is equivalent to its CO2 emissions in that year.  The impact of this regulation on Ford Europe primarily involves our on-site combustion plants, and we expect that compliance with this regulation may be costly as the system foresees stringent CO2 emission reductions in progressive stages.  Periodic emission reporting also is required of EU Member States, in most cases defined in the permits of the facility.  The Release and Transfer Register requires more reporting regarding emissions into air, water and soil than its precursor.  The information required by these reporting systems is publicly available on the Internet.

Motor Vehicle Safety

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

In 2010, there was substantial federal activity related to a spate of recalls from other automobile manufacturers, including significant investigative activity by both NHTSA and committees authorized by Congress.  NHTSA has taken an aggressive enforcement position related to safety defect investigations in general, increasing the likelihood of safety recalls and civil penalties for the entire industry.  While proposed new Safety Act legislation is not anticipated to be a top priority for the new Congress, it is anticipated that NHTSA will propose new regulations related to keyless ignition controls, transmission shifter designs, and brake override of the accelerator function.

The Safe, Accountable, Flexible, and Efficient Transportation Equity Act: A Legacy for Users was signed into law in 2005; the Cameron Gulbransen Kids Transportation Safety Act of 2007 mandates that NHTSA enact regulations related to rearward visibility and brake-to-shift interlock, and mandates that NHTSA consider regulations related to automatic reversal functions on power windows.  Both Acts establish substantive, safety-related rulemaking mandates for NHTSA that already have resulted in or will result in new regulations and product content requirements.  In 2010, NHTSA issued one final rule regulating the crash test requirements for vehicles with electric powertrains.  NHTSA also issued Notices of Proposed Rulemaking concerning rear visibility, ejection mitigation, and automatic reversal function on power windows.  Driver distraction continues to be a top priority for the Department of Transportation, and NHTSA activity is anticipated on this subject including voluntary visual-manual interface guidelines and additional research.  Each of these regulatory actions may add substantial cost to the design and development of new products, depending on the final rules adopted.

Foreign Requirements.  The EU and many countries around the world have established safety standards and regulations applicable to motor vehicles, and are likely to adopt additional or more stringent requirements in the future.  Recent examples of such legislation for the EU include the adoption and mandatory fitment requirement for the new UN-ECE regulation for tire-pressure monitoring systems ("TPMS"); this regulation differs from the North

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ITEM 1. Business (continued)

American regulation in that it addresses both safety and environmental aspects of TPMS.  In addition, the European General Safety Regulation was introduced that replaces existing European Directives with UN-ECE regulations.  These UN-ECE regulations will be required for the European Type Approval process.  EU regulators also are expected to focus on active safety features such as lane departure warning systems, electronic stability control, and automatic brake assist.  Globally, governments generally have been adopting EU-based regulations with minor variations to address local concerns.  The difference between North American and EU-based regulations adds complexity and costs to the development of global platform vehicles; we continue to support efforts to harmonize regulations to reduce vehicle design complexity while providing a common level of safety performance.

Global Technical Regulations ("GTRs") developed under the auspices of the United Nations ("UN") continue to have increasing impact on automotive safety activities.  The most recently adopted GTRs on electronic stability control, head restraints, and pedestrian protection by the UN "World Forum for the Harmonisation of Vehicle Regulations" are now in different stages of national implementation.  While global harmonization is fundamentally supported by the auto industry in order to reduce complexity, national implementation yet may introduce subtle differences into the system.

In the Asia Pacific Africa region, China adopted new motor vehicle recall requirements in 2010.  The full extent and application of these requirements will be further developed in 2011.  Governments within the Asia Pacific Africa region continue to adopt European requirements, often with local modifications.  Among other measures, Japanese regulators are pursuing accident avoidance measures for vulnerable road users.

South American countries are implementing requirements for features such as airbags, safety belts, and anti-lock braking systems ("ABS") consistent with U.S. and European requirements.  Examples of more stringent safety requirements in South America include the approval in Brazil of more severe impact requirements, the mandatory use of front airbags and ABS, and the introduction of mandatory vehicle tracking and blocking systems.  In Argentina, regulations have addressed mandatory phased-in introduction of front airbags, ABS, central head restraint, belt alarm, and daytime running lights.  A Latin American version of the European New Car Assessment Programme was introduced in late 2010.

Canadian safety legislation and regulations are similar to those in the United States, and the differences that do exist generally have not prevented the production of common product for both markets.  Recent amendments to Canadian standards have incorporated UN-ECE standards as a compliance option, where equivalency exists.

For each of these markets, the possibility of more stringent or different requirements exists, and the cost to comply with new standards may be substantial.

Motor Vehicle Fuel Economy

There are ever-increasing demands from regulators, public interest groups, and consumers for improvements in motor vehicle fuel economy, for a variety of reasons.  These include concerns regarding energy security and GHG emissions, and consumer preferences for more fuel-efficient vehicles.  In recent years, we have made significant changes to our product cycle plan to improve the overall fuel economy of vehicles we produce in upcoming model years.  These cycle plan changes involve both the deployment of various fuel-saving technologies, some of which have been announced publicly, and changes to the overall fleet mix of vehicles we offer, in response to a recent increase in demand for smaller vehicles.  There are limits on our ability to achieve fuel economy improvements over a given time frame, however, primarily related to the cost and effectiveness of available technologies, consumer acceptance of new technologies and changes in vehicle mix, willingness of consumers to absorb the additional costs of new technologies, the appropriateness (or lack thereof) of certain technologies for use in particular vehicles, and the human, engineering and financial resources necessary to deploy new technologies across a wide range of products and powertrains in a short time.

Our ability to comply with a given set of fuel economy standards (including GHG emissions standards, which are functionally equivalent to fuel economy standards), depends on a variety of factors, including:  1) prevailing economic conditions, including fluctuations in fuel prices; 2) the alignment of the standards with actual consumer demand for vehicles; and 3) adequate lead time to make the necessary product changes.  Consumer demand for vehicles tends to fluctuate based on a variety of external factors.  Consumers are more likely to pay for vehicles with fuel-efficient technologies (such as hybrid-electric vehicles) when the economy is robust and fuel prices are relatively high.  When the economy is in recession and/or fuel prices are relatively low, many consumers may put off new vehicle purchases altogether, and among those who do purchase new vehicles, demand for higher-cost

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ITEM 1. Business (continued)

technologies is not likely to be strong.  If consumers demand vehicles that are relatively large, have high performance, and/or are feature-laden, while regulatory standards require the production of vehicles that are smaller and more economical, the mismatch of supply and demand would have an adverse effect on both regulatory compliance and our profitability.  Moreover, if regulatory requirements call for rapid, substantial increases in fleet average fuel economy (or decreases in fleet average GHG emissions), we may not have adequate resources and time to make major product changes across most or all of our vehicle fleet (assuming the necessary technology can be developed).

U.S. Requirements – Light Duty Vehicles – Federal Standards.  Federal law requires that light-duty vehicles meet minimum corporate average fuel economy ("CAFE") standards set by NHTSA.  A manufacturer is subject to potentially substantial civil penalties if it fails to meet the CAFE standard in any model year, after taking into account all available credits for the preceding three model years and expected credits for the five succeeding model years.

In December 2007, Congress enacted new energy legislation restructuring the CAFE program and requiring NHTSA to set new CAFE standards beginning with the 2011 model year.  The key features of the law are as follows:  1) maintaining the distinction between cars and trucks; 2) requiring NHTSA to set "reformed" CAFE standards for cars along the lines of the reformed truck standards in which each manufacturer's CAFE obligation is based on the specific mix of vehicles it sells; 3) calling for NHTSA to set car and truck standards such that the combined fleet of cars and trucks in the United States achieves a 35 mile per gallon ("mpg") industry average by model year 2020; 4) allowing manufacturers to trade credits among their CAFE fleets; and 5) retaining CAFE credits for the manufacture of flexible-fuel vehicles, but phasing them out by model year 2020.  Domestic passenger cars also are subject to a minimum fleet average of the greater of 27.5 mpg or 92% of NHTSA's projected fleet average fuel economy for domestic and imported passenger cars for that model year.  In March 2009, NHTSA published a final rule setting CAFE standards for the 2011 model year.

Pressure to increase CAFE standards stems in part from concerns about the impact of carbon dioxide and other GHG emissions on the global climate.  In 1999, a petition was filed with the EPA requesting that it regulate carbon dioxide emissions from motor vehicles under the Clean Air Act.  This is functionally equivalent to imposing fuel economy standards, because the amount of carbon dioxide emitted by a vehicle is directly proportional to the amount of fuel consumed.  The EPA denied the petition on the grounds that the Clean Air Act does not authorize the EPA to regulate GHG emissions because they did not constitute "air pollutants," and only NHTSA is authorized to regulate fuel economy under the CAFE law.  A number of states, cities, and environmental groups filed for review of the EPA's decision.

The matter was eventually brought before the U.S. Supreme Court, which ruled that GHGs did constitute "air pollutants" subject to regulation by the EPA pursuant to the Clean Air Act.  Upon taking office, the Obama Administration indicated its intention to promulgate rules to control mobile source GHG emissions.  Under the Clean Air Act, EPA must issue a determination that GHGs endanger the public health and welfare in order for EPA to finalize GHG regulations for both mobile and stationary sources.  In December 2009, EPA issued its endangerment finding for GHGs.  In early 2010, several industry groups filed a petition for review of the endangerment finding; nevertheless, EPA is proceeding with rulemaking activity to regulate GHGs.

As described more fully below, the Obama Administration has brokered an agreement in principle for a harmonized national program of mobile source fuel economy and GHG regulations for light-duty vehicles for the 2012-2016 model years.  This program includes new CAFE standards for the 2012-2016 model years.  To put this program in context, it is important to understand the GHG standards for light-duty vehicles promulgated by California and other states.

U.S. Requirements – Light Duty Vehicles – California and Other State Standards.  In 2004, pursuant to a law known as Assembly Bill 1493 ("AB 1493"), CARB adopted California GHG emissions regulations applicable to 2009-2016 model-year cars and trucks.  Although adopted under California's authority to set vehicle emission standards, the practical effect of these regulations was to impose more stringent fuel economy standards than those set by NHTSA.  Pursuant to the Clean Air Act, thirteen other states subsequently adopted California's GHG regulations for motor vehicles.  In order for the states to enforce the AB 1493 rules, EPA needed to issue a waiver of preemption under the Clean Air Act.

The prospect of state-by-state regulation of motor vehicle GHG emissions and fuel economy is very troubling to the automobile industry.  The adoption of the AB 1493 rules created an unwieldy patchwork of state-by-state regulations, with a strong likelihood that there would need to be product restrictions in some states in order to comply.  Because the mix of vehicles sold varies from state to state, the potential need for product restrictions is much greater if compliance with fuel economy or GHG standards is based on state (or even regional) sales than if it is based on nationwide sales.

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ITEM 1. Business (continued)

U.S. Requirements – Light Duty Vehicles – "One National Program" for Model Years 2012-2016.  By early 2009, it had become apparent that the United States was headed toward a series of overlapping regulations aimed at motor vehicle fuel economy and GHGs.  NHTSA was setting federal CAFE standards, EPA was planning to regulate motor vehicle GHG emissions at the federal level, and California and other states were getting set to impose stringent regulations on motor vehicle emissions at the state level if and when a Clean Air Act waiver was granted.

In order to avoid this confusing patchwork of regulations, President Obama announced in May 2009 an agreement in principle among the automobile industry, the federal government, and the state of California concerning motor vehicle GHG emissions and fuel economy regulations.  Under the agreement in principle, California would enforce its existing GHG standards for the 2009-2011 model years, and defer to a set of federal standards for the 2012-2016 model years.  With respect to the 2009-2011 model years, California agreed to modify its regulations so that:  1) manufacturers would be able to use federal test procedures to determine compliance with California's standards, and 2) compliance would be determined based on the fleet average emissions across all states that have adopted the California standards.  With respect to the 2012-2016 model years, EPA and NHTSA agreed to conduct joint rulemaking to establish GHG standards and fuel economy standards that align with each other.  California agreed to modify its regulations to provide that compliance with the 2012-2016 federal requirements will constitute compliance with the California regulations for California and any states that have adopted California requirements.  Manufacturers also agreed to seek an immediate stay of pending litigation challenging EPA's waiver decision and the right of states to issue motor vehicle GHG standards.  Assuming California and the federal government carried out their obligations under the agreement in principle, manufacturers agreed to dismiss the pending litigation.

The agreement in principle now has been implemented.  The EPA issued a revised decision granting a Clean Air Act waiver for California's GHG regulations.  The automotive industry refrained from challenging that decision (although the waiver decision was challenged by the National Automobile Dealers Association and the U.S. Chamber of Commerce, and that case is pending).  CARB adopted the modifications to its regulations necessary to implement the agreement in principle.  Most importantly, in May 2010 EPA and NHTSA promulgated a joint rulemaking establishing harmonized GHG and fuel economy standards for the 2012-2016 model years.  In response to these actions, the automobile industry sought and obtained dismissal of its federal court preemption litigation in California, Vermont, and Rhode Island.

The 2012-2016 federal GHG and fuel economy standards are very challenging.  They require new light-duty vehicles to ramp up to an industry average fuel economy of approximately 35.5 mpg by the 2016 model year, which amounts to the steepest rate of increase in fuel economy standards since the inception of the CAFE program.  We believe that we will be able to comply with the California GHG standards for the 2009-2011 period, and the harmonized federal CAFE/GHG standards for the 2012-2016 period, as a result of aggressive actions to improve fuel economy built into our cycle plan and through a variety of flexible compliance mechanisms.  In contrast, we had projected that we would be unable to comply with the state GHG standards throughout the 2012-2016 period without undertaking costly product restrictions in some states.  Key differences that enable us to project compliance with the national program include:  1) the new federal standards, although very stringent, do not increase rates as steeply as the state standards they are replacing; and 2) the national program allows us to determine compliance based on nationwide sales rather than state-by-state sales.  The ability to average across the nation eliminates state-to-state sales variability and is a critical element for us and for the auto industry.

The agreement in principle does not address what will happen in the 2017 model year and beyond.  NHTSA and EPA have indicated that they are planning to continue harmonizing the federal CAFE and GHG standards in 2017 and beyond (although they are not required by law to do so).  The agencies issued a joint Notice of Intent ("NOI") in September 2010.  The NOI indicated that the agencies are considering standards that would require auto manufacturers to achieve annual fleet average GHG reductions of in the range of 3% to 6% per year for the 2017-2025 model years.  At the upper end of the range, an annual reduction of 6% per year would equate to a fleet average fuel economy of approximately 62 mpg in the 2025 model year.  This rate of fuel economy improvement is unprecedented, and cannot be achieved without a dramatic shift in consumer purchases away from conventional gasoline-powered vehicles and toward newer-technology vehicles such as hybrids, plug-in hybrids, and battery-electric vehicles.  There is significant potential for consumer resistance to such a shift for reasons of cost, infrastructure limitations, vehicle characteristics (e.g., range, towing ability), and/or other factors.  NHTSA and EPA are expected to propose new standards within the 3% to 6% range by September 2011.  Meanwhile, California has indicated that it also will promulgate new state-level GHG standards for the 2017-2025 model years by September 2011.  Thus, there may be a return to conflicting state and federal regimes for regulating fuel economy and GHG emissions beginning

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ITEM 1. Business (continued)

with the 2017 model year.  Compliance with both of these regimes would at best add enormous complexity to our planning processes, and at worst could be virtually impossible.  If either of these regulatory regimes impose and enforce extreme fuel economy or GHG standards, we likely would be forced to take various actions that could have substantial adverse effects on our sales volume and profits.

Such actions likely would include restricting offerings of selected engines and popular options; increasing market support programs for our most fuel-efficient cars and light trucks; and ultimately curtailing the production and sale of certain vehicles such as high-performance cars, utilities, and/or full-size light trucks, in order to maintain compliance.  These actions might need to occur on a state-by-state basis, in response to the rules adopted by California and other states, or they may need to be taken at the national level if the federal standards are excessively stringent.  Therefore, we believe that for 2017 and beyond, it is essential to 1) maintain a single national program that regulates motor vehicle GHGs and fuel economy in a harmonized fashion, and 2) develop national fuel economy and GHG standards that are reasonable in light of consumer preferences, infrastructure limitations, and technology barriers.  We will work toward legislative and regulatory solutions that would establish such a national program on a permanent basis.

In 2006, California enacted a law known as Assembly Bill 32 ("AB 32") mandating that statewide GHG emissions be capped at 1990 levels by the year 2020, which would represent a significant reduction from current levels.  It also requires the monitoring and annual reporting of GHG emissions by all "significant" sources, and delegates authority to CARB to develop and implement GHG emissions reduction measures.  AB 32 also provides that CARB must implement alternative measures to control mobile source GHG emissions if they do not achieve the emission reductions envisioned by AB 1493.  The full ramifications of AB 32 are not clear, but it may lead to the imposition of additional regulations on the auto industry.

U.S. Requirements – Heavy Duty Vehicles – Federal Standards.  To date, fuel economy regulations have applied primarily to light-duty vehicles.  Energy legislation enacted in 2007 directed the National Academy of Sciences ("NAS") to undertake a study of the fuel efficiency of heavy-duty vehicles (vehicles with a gross vehicle weight rating over 8,500 pounds), and directed NHTSA to develop fuel efficiency regulations for such vehicles after the NAS study was completed.  Separately, EPA began work on the development of GHG standards for heavy-duty vehicles pursuant to the Clean Air Act.  In November 2010, NHTSA and EPA issued a joint notice of proposed rulemaking containing proposed fuel consumption and GHG standards for heavy-duty vehicles commencing with the 2014 model year.  The NHTSA fuel consumption standards would be voluntary in the 2014 and 2015 model years, since NHTSA does not have statutory authority to promulgate mandatory fuel consumption standards for heavy-duty vehicles until the 2016 model year.  EPA takes the position that its proposed GHG standards will be enforceable in the 2014 model year, although there are questions about whether this provides adequate lead time under the Clean Air Act.  The proposed standards would add a number of testing and certification burdens to the development of heavy-duty engines and vehicles (both complete and incomplete), as well as new warranty and in-use testing requirements, and new enforcement provisions that would impose penalties for noncompliance.  The fuel consumption reductions necessary to comply with these proposed rules represent a significant new challenge for us and for other manufacturers of heavy-duty trucks.  If the final standards are overly stringent or impose excessive regulatory burdens in other ways, it could adversely affect our ability to produce and sell heavy-duty trucks.  We have commented on the proposed rules through the American Automotive Policy Council (a trade association representing Ford, General Motors, and Chrysler), and also through the Engine Manufacturers Association.

European Requirements. In December 2008, the EU approved a regulation of passenger car carbon dioxide beginning in 2012 which limits the industry fleet average to a maximum of 130 g/km, using a sliding scale based on vehicle weight. This regulation provides different targets for each manufacturer based on its respective average vehicle weight for its fleet of vehicles. Limited credits are available for CO2 off-cycle actions ("eco-innovations"), certain alternative fuels, and vehicles with CO2 emissions below 50 g/km. For manufacturers failing to meet targets, a penalty system will apply with fees ranging per vehicle from €5 to €95 per each g/km shortfall in the years 2012-18, and €95 for each g/km shortfall beginning in 2019. Manufacturers would be permitted to use a pooling agreement between wholly-owned brands to share the burden. Further pooling agreements between different manufacturers are also possible, although it is not clear that they will be of much practical benefit under the regulations. For 2020, an industry target of 95 g/km has been set. This target will be further detailed in a review in 2013. Other non-EU European countries (such as Switzerland, for example) are likely to follow with similar regulation.

In separate legislation, so-called "complementary measures" have been mandated (for example, tire-related requirements) and more mandates are expected.  These include requirements related to gearshift indicators, fuel economy indicators, and more-efficient low-CO2 mobile air conditioning systems.  These proposals are likely to be finalized in 2011.  The EU Commission, Council and Parliament are close to formally approving a target for commercial light duty

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ITEM 1. Business (continued)

vehicles to be at an industry average of 175 g/km (with phase-in from 2014 – 2017), and 147 g/km in 2020.  This regulation would also provide different targets for each manufacturer based on its respective average vehicle weight in its fleet of vehicles.  The final mass and CO2 requirements for so-called ‘multi-stage vehicles’ (e.g., Transit chassis cabs) are fully allocated to the base manufacturer (e.g., Ford) so that the base manufacturer is fully responsible for the CO2 performance of the final up-fitted vehicles.  The EU proposal also includes a penalty system, "super-credits" for vehicles below 50 g/km, and limited credits for CO2 off-cycle actions (“eco-innovations”), pooling, etc., similar to the passenger car CO2 regulation.

Some European countries have implemented or are still considering other initiatives for reducing CO2 emissions from motor vehicles, including fiscal measures and CO2 labeling.  For example, the United Kingdom, France, Germany, Spain, Portugal, and the Netherlands among others have introduced taxation based on carbon dioxide emissions.  The EU CO2 requirements are likely to trigger further measures.

Other National Requirements.  The Canadian federal government has regulated vehicle GHG emissions under the Canadian Environmental Protection Act, beginning with the 2011 model year.  The standards track the new U.S. CAFE standards for the 2011 model year and U.S. EPA GHG regulations for 2012 through 2016 model years.  In December 2009, Quebec enacted province-specific regulations setting fleet average GHG standards for the 2010-2016 model years effective January 2010.  Although the announcement indicated that Quebec's standards had been based on the California AB 1493 rules, there are a number of key differences.  The Quebec program defines vehicle fleets differently than either the U.S. federal government or California, does not apply attribute-based standards, does not allow for alternative means of compliance (e.g., industry credit for new and advanced technologies), and does not take into account the fact that California has altered its regulation to recognize U.S. federal compliance equivalents for the 2012 – 2016 model years.  If a manufacturer fails to meet the required fleet average standard, the provincial government has established a formula to determine the level of non-compliance within the fleet and impose a fee.  We have analyzed the regulations, and anticipate that some level of fees may be imposed under the regulations as written.  Quebec has published interpretation guidelines which clarify that the definition of vehicle fleets is intended to match California's, significantly reducing the potential for incurring fees under the regulation.  Now that the Canadian federal regulation is in place, the Quebec government has indicated that it will reevaluate the situation and alter its approach if the federal requirements are satisfactory.

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

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

Chemical Regulation and Substance Restrictions

U.S. Requirements.  Several states are considering moving beyond a substance-by-substance approach to managing substances of concern, and are moving towards adopting green chemistry legislation that give state governments broad regulatory authority to determine, prioritize, and manage toxic substances.  In 2008, California became the first state to enact a broad "Green Chemistry" Program, which will be implemented beginning in 2011.  Initial regulatory proposals by the California Department of Toxic Substance Control ("DTSC") raised substantial concerns about burdensome requirements to restrict, ban, and/or label a multitude of substances, which in turn could compel changes in motor vehicle components and add complexity to our manufacturing and product planning activities.  In November 2010, the DTSC issued a revised set of proposal rules for implementing the Green Chemistry Program.  This new proposal addressed many of the auto industry's concerns about the program, although some issues remain.  The Alliance of Automobile Manufacturers has filed comments on the revised proposal.  Other states, such as Maine, are considering so-called "product stewardship" bills that would require sellers of products to establish elaborate plans, approved by the state agency, to address life-cycle impacts of each product.  These programs would impose extensive reporting and auditing requirements, along with penalties for non-compliance.  If enacted, compliance with such legislation would be costly and resource-intensive.

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ITEM 1. Business (continued)

European Requirements.  The Commission has implemented its regulatory framework for a single system to register, evaluate, and authorize the use of chemicals with a production volume above one ton per year ("REACH").  The rules took effect on June 1, 2007, with a preparatory period through June 1, 2008 followed by a six-month registration phase.  Compliance with the legislation is likely to be administratively burdensome for all entities in the supply chain, and research and development resources may be redirected from "market-driven" to "REACH-driven" activities.  We and our suppliers have registered those chemicals that were identified to fall within this requirement.  The regulation also will accelerate restriction or banning of certain chemicals and materials, which could increase the costs of certain products and processes used to manufacture vehicles and parts.  We are implementing and ensuring compliance within Ford and our suppliers through a common strategy together with the global automotive industry.

The European End-of-Life Vehicle directive and EU Battery directive prohibit the use of the heavy metals lead, cadmium, hexavalent chromium, and mercury with limited exceptions that are regularly scrutinized.  These regulations also include broad manufacturer responsibility for disposing of vehicle parts and substances, including taking vehicles back without charge for disposal and recycling requirements.  This legislation has triggered similar regulatory actions around the globe, including, for example, in China, Korea, and possibly India in the near future.  Other European regulatory developments will ban the use of refrigerants with a "global warming potential" higher than 150 on the European scale (which would include the refrigerant commonly in use) beginning in 2011 in new vehicle models and in 2017 for all new vehicles, which some other governments, such as Japan, have been closely monitoring and are likely to adopt in some form.  This European restriction is expected to lead to a general change in refrigerants for future vehicles worldwide.

Regulations requiring a globally-harmonized system of classification and labeling of chemicals also took effect in January 2009.  This regulation is the implementation of the UN regulation UN-GHS, and should harmonize the classification and labeling of chemicals worldwide with impact on existing storage facilities and labeling.

Pollution Control Costs

During the period 2011 through 2015, we expect to spend about $200 million on our facilities in the Americas and Europe to comply with stationary source air and water pollution and hazardous waste control standards that are now in effect or are scheduled to come into effect during this period.  Of this total, we currently estimate we will spend between $30 million and $40 million in each of 2011 and 2012.  Specific environmental expenses are difficult to isolate because expenditures may be made for more than one purpose, making precise classification difficult.

EMPLOYMENT DATA

The approximate number of individuals employed by us and entities that we consolidated as of December 31, 2010 and 2009 was as follows (in thousands):

	2010		2009*
Automotive
Ford North America		75	71
Ford South America		15	15
Ford Europe		49	49
Ford Asia Pacific Africa		18	15
Volvo		—	19
Financial Services
Ford Credit		7	8
Total		164	177

* Data reflect retrospective application of the accounting standard for consolidation of variable interest entities ("VIEs").

The year-over-year decrease in employment primarily reflects completion of the sale of Volvo, as well as Ford Credit global personnel-reduction programs, offset partially by increases in North America and Asia Pacific Africa largely to support increased production.

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

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ITEM 1. Business (continued)

salaried employees are represented by unions.  Most hourly employees and many non-management salaried employees of our subsidiaries outside of the United States also are represented by unions.

We have entered into collective bargaining agreements with the UAW, and the National Automobile, Aerospace, Transportation and General Workers Union of Canada ("CAW").  In 2007, we negotiated with the UAW a transformational agreement, enabling us to improve our competitiveness and establishing a Voluntary Employee Benefit Association ("VEBA") trust ("UAW VEBA Trust") to fund our retiree health care obligations.  We completed prepayment in full of our obligation to the UAW VEBA Trust during 2010; see "Liquidity and Capital Resources" in Item 7 and Note 19 of the Notes to the Financial Statements for additional discussion of the prepayment of this obligation.

In March 2009, Ford-UAW membership ratified modifications to the existing collective bargaining agreement that significantly improved our competitiveness, saving us up to $500 million annually and bringing us near to competitive parity with the U.S. operations of foreign-owned automakers.  The operational changes affected wage and benefit provisions, productivity, job security programs, and capacity actions, allowing us to increase manufacturing efficiency and flexibility.

On November 1, 2009, the CAW announced that a majority of its members employed by Ford Canada had voted to ratify modifications to the terms of the existing collective bargaining agreement between Ford Canada and the CAW.  The modifications are patterned off of the modifications agreed to by the CAW for its agreements with the Canadian operations of General Motors and Chrysler and are expected to result in annual cost savings.  The agreement also confirmed the end of production at the St. Thomas Assembly Plant in 2011.

On November 2, 2009, the UAW announced that a majority of its members employed by Ford had voted against ratification of a tentative agreement that would have further modified the terms of the existing collective bargaining agreement between Ford and the UAW.  These latest modifications were designed to closely match the modified collective bargaining agreements between the UAW and our domestic competitors, General Motors and Chrysler.  Among the proposed modifications was a provision that would have precluded any strike action relating to improvements in wages and benefits during the negotiation of a new collective bargaining agreement upon expiration of the current agreement, and would have subjected disputes regarding improvements in wages and benefits to binding arbitration, to determine competitiveness based on wages and benefits paid by other automotive manufacturers operating in the United States.

Even with recent modifications, our agreements with the UAW and CAW provide for guaranteed wage and benefit levels for the term of the respective agreements, and a degree of employment security, subject to certain conditions.  As a practical matter, these agreements may restrict our ability to close plants and divest businesses during the terms of the agreements.  Our collective bargaining agreement with the UAW expires on September 14, 2011; our collective bargaining agreement with the CAW expires on September 14, 2012.

In 2010, we negotiated new collective bargaining agreements with labor unions in Argentina, Brazil, France, Germany, Mexico, Russia, Taiwan and Venezuela.

In addition to the United States, in 2011 we negotiate new collective bargaining agreements with labor unions in Argentina, Brazil, Britain, France, Mexico, New Zealand, Romania, Russia, Taiwan and Thailand.

ENGINEERING, RESEARCH AND DEVELOPMENT

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

We recorded $5 billion, $4.7 billion, and $7.1 billion of engineering, research, and development costs that we sponsored during 2010, 2009, and 2008, respectively (pre-2010 data adjusted to reflect the impact of the accounting standard on consolidation of VIEs).  The significant decrease in costs in recent years primarily reflects efficiencies in our global processes and the non-recurrence of costs related to our former Volvo operations in 2010 and to our former Jaguar Land Rover operations in 2009.  Research and development costs sponsored by third parties during 2010 were not material.

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ITEM 1A. Risk Factors

We have listed below (not necessarily in order of importance or probability of occurrence) the most significant risk factors applicable to us:

Decline in industry sales volume, particularly in the United States or Europe, due to financial crisis, recession, geo-political events, or other factors. Beginning in the fall of 2008, the global economy entered a financial crisis and severe recession, putting significant pressure on Ford and the automotive industry generally.  These economic conditions dramatically reduced industry sales volume in the United States and Europe, in particular, and began to slow growth in other markets around the world.  In the United States, industry sales volume declined from 16.5 million units in 2007, to 13.5 million units in 2008 and to 10.6 million units in 2009, before rebounding slightly to 11.8 million units in 2010.  For the 19 markets we track in Europe, industry sales volume declined from 18 million units in 2007, to 16.6 million units in 2008, 15.9 million units in 2009 and 15.3 million units in 2010.

Because we, like other manufacturers, have a high proportion of relatively fixed structural costs, relatively small changes in industry sales volume can have a substantial effect on our cash flow and profitability.  If industry vehicle sales were to decline to levels significantly below our planning assumptions, particularly in the United States or Europe, due to financial crisis, recession, geo-political events, or other factors, our financial condition and results of operations would be substantially adversely affected.  For discussion of economic trends, see the "Overview" section of Item 7.

Decline in market share or failure to achieve growth.  Between 1995 and 2008, our full-year U.S. market share declined each year; from 2004 to 2008, our U.S. market share declined from 18% to 14.2%.  With our One Ford plan, we have seen U.S. market share gains in 2009 and 2010.  To maintain competitive economies of scale and grow our global market share, however, we also must grow our market share in fast-growing emerging markets, particularly in Asia Pacific, as well as maintain or grow market share in mature markets.  Our market share in certain growing markets, such as China, is substantially lower than it is in our mature markets.  A decline in our market share in mature markets or failure to achieve growth in emerging markets could have a substantial adverse effect on our financial condition and results of operations.

Lower-than-anticipated market acceptance of new or existing products.  Although we conduct extensive market research before launching new or refreshed vehicles, many factors both within and outside of our control affect the success of new or existing products in the marketplace.  Offering highly desirable vehicles that customers want and value can mitigate the risks of increasing price competition and declining demand, but vehicles that are perceived to be less desirable (whether in terms of price, quality, styling, safety, overall value, fuel efficiency, or other attributes) can exacerbate these risks.  For example, if a new model were to experience quality issues at the time of launch, the vehicle's perceived quality could be affected even after the issues had been corrected, resulting in lower sales volumes, market share, and profitability.

An increase in or acceleration of market shift beyond our current planning assumptions from sales of trucks, medium- and large-sized utilities, or other more profitable vehicles, particularly in the United States.  Trucks and medium- and large-sized utilities historically have represented some of our most profitable vehicle segments, and the segments in which we have had our highest market share.  In the 2005 – 2008 period, the general shift in consumer preferences in the U.S. market away from medium- and large-sized utilities and trucks adversely affected our overall market share and profitability.  Although we now have a more balanced portfolio of small, medium, and large, cars, utilities, and trucks, a shift in consumer preferences away from more profitable vehicle sales at levels greater than our current planning assumption – whether because of fuel prices, declines in the construction industry, governmental actions or incentives, or other reasons – could have a substantial adverse effect on our financial condition and results of operations.

An increase in fuel prices, continued volatility of fuel prices, or reduced availability of fuel.  An increase in fuel prices, as well as continued price volatility or reduced availability of fuel, particularly in the United States, could result in further weakening of demand for relatively more-profitable medium and large cars, utilities, and trucks, while increasing demand for relatively less-profitable small vehicles.  Continuation or acceleration of such a trend beyond our current planning assumption, or volatility in demand for these segments, could have a substantial adverse effect on our financial condition and results of operations.

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ITEM 1A. Risk Factors (continued)

Continued or increased price competition resulting from industry overcapacity, currency fluctuations, or other factors.  The global automotive industry is intensely competitive, with manufacturing capacity far exceeding current demand.  According to the January 2011 report issued by IHS Automotive, the global automotive industry is estimated to have had excess capacity of 17 million units in 2010.  Industry overcapacity has resulted in many manufacturers offering marketing incentives on vehicles in an attempt to maintain and grow market share; these incentives historically have included a combination of subsidized financing or leasing programs, price rebates, and other incentives.  As a result, we are not necessarily able to set our prices to offset higher costs of marketing incentives or other cost increases, or the impact of adverse currency fluctuations, particularly in the European and U.S. markets.  A continuation or increase in excess capacity could have a substantial adverse effect on our financial condition and results of operations.

Adverse effects from the bankruptcy, insolvency, or government-funded restructuring of, change in ownership or control of, or alliances entered into by a major competitor.  Prior to the government-funded bankruptcy of our domestic competitors General Motors and Chrysler, each of the domestic automakers had substantial "legacy" costs (principally related to employee benefits), as well as a substantial amount of debt.  These conditions historically had put each of us at a competitive disadvantage to foreign competitors who began manufacturing in the United States more recently.  The government-funded bankruptcy of our domestic competitors has allowed them to eliminate or substantially reduce contractual obligations, including significant amounts of debt, and avoid other liabilities.  The elimination or reduction of these obligations, combined with the benefits attendant to restructuring brands and dealer networks as well as access to low-cost government funding, could have an adverse effect on our competitive position and results of operations.

Fluctuations in foreign currency exchange rates, commodity prices, and interest rates.  As a resource-intensive manufacturing operation, we are exposed to a variety of market and asset risks, including the effects of changes in foreign currency exchange rates, commodity prices, and interest rates.  These risks affect our Automotive and Financial Services sectors.  We monitor and manage these exposures as an integral part of our overall risk management program, which recognizes the unpredictability of markets and seeks to reduce the potentially adverse effects on our business.  Nevertheless, changes in currency exchange rates, commodity prices, and interest rates cannot always be predicted or hedged.  In addition, because of intense price competition and our high level of fixed costs, we may not be able to address such changes even if they are foreseeable.  As a result, substantial unfavorable changes in foreign currency exchange rates, commodity prices or interest rates could have a substantial adverse effect on our financial condition and results of operations.  See Item 7A for additional discussion of currency, commodity price and interest rate risks.

Economic distress of suppliers that may require us to provide substantial financial support or take other measures to ensure supplies of components or materials and could increase our costs, affect our liquidity, or cause production constraints or disruptions.  Our industry is highly interdependent, with broad overlap of supplier and dealer networks among manufacturers, such that the uncontrolled bankruptcy or insolvency of a major competitor or major suppliers could threaten our supplier or dealer network and thus pose a threat to us as well.  Even in the absence of such an event, our supply base has experienced increased economic distress due to the sudden and substantial drop in industry sales volumes in recent years that affected all manufacturers.  Dramatically lower industry sales volume made existing debt obligations and fixed cost levels difficult for many suppliers to manage.  These factors increased pressure on the supply base, and, as a result, suppliers were not only less willing to reduce prices, but some requested direct or indirect price increases, as well as new and shorter payment terms.  In addition, in the past we have taken and may continue to take actions to provide financial assistance to certain suppliers to ensure an uninterrupted supply of materials and components.  Suppliers also exited certain lines of business or closed facilities, which results in additional costs associated with transitioning to new suppliers.  In addition, as industry volume improves with the general economic recovery, suppliers that downsized significantly during the economic downturn may face capacity constraints as demand recovers that could cause temporary shortages of supplies or components.

Single-source supply of components or materials.  Many components used in our vehicles are available only from a single supplier and cannot be quickly or inexpensively re-sourced to another supplier due to long lead times and new contractual commitments that may be required by another supplier in order to provide the components or materials.  In addition to the risks described above regarding interruption of supplies, which are exacerbated in the case of single-source suppliers, the exclusive supplier of a key component potentially could exert significant bargaining power over price, quality, warranty claims, or other terms relating to a component.

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ITEM 1A. Risk Factors (continued)

Labor or other constraints on our ability to maintain competitive cost structure.  Substantially all of the hourly employees in our Automotive operations in the United States and Canada are represented by unions and covered by collective bargaining agreements.  We negotiated a new agreement with the UAW in 2007 and with the CAW in 2008 which expire in September 2011 and September 2012, respectively.  Although these transformational agreements were amended during 2009 to bring us much of the way to parity with our competitors, the agreements still provide guaranteed wage and benefit levels throughout their terms and a degree of employment security, subject to certain conditions.  As a practical matter, these agreements restrict our ability to close plants and divest businesses.  Additionally, rejection by Ford-UAW membership of further modifications to the collective bargaining agreement in late 2009 (i.e., rejection of a proposed "no strike" clause and binding arbitration provision), which were agreed to with our domestic competitors, may put us at a disadvantage during the next round of labor negotiations; see "Employment Data" in "Item 1. Business" ("Item 1") for additional discussion.

A substantial number of our employees in other regions are represented by unions or government councils, and legislation or custom in these regions promoting retention of manufacturing or other employment in the state, country, or region may constrain as a practical matter our ability to close manufacturing or other facilities.

Work stoppages at Ford or supplier facilities or other interruptions of production.  A work stoppage or other interruption of production could occur at Ford or supplier facilities as a result of disputes under existing collective bargaining agreements with labor unions or in connection with negotiation of new collective bargaining agreements, supplier financial distress, production constraints, or other reasons.  For example, many suppliers experienced financial distress due to decreasing production volume and increasing prices for raw materials during 2008 and 2009, jeopardizing their ability to produce parts for us.  Now, because of the restructuring that took place in the supply base during that period, as production volume increases suppliers may experience capacity constraints.  A work stoppage or interruption of production at Ford or supplier facilities due to labor disputes, shortages of supplies, or any other reason (including but not limited to tight credit markets or other financial distress, natural or man-made disasters, information technology issues, or production constraints or difficulties) could substantially adversely affect our financial condition and results of operations.

Substantial pension and postretirement health care and life insurance liabilities impairing our liquidity or financial condition. We have qualified defined benefit retirement plans in the United States that cover our hourly and salaried employees.  We also provide pension benefits to non-U.S. employees and retirees, primarily in Europe.  In addition, we and certain of our subsidiaries sponsor plans to provide other postretirement benefits for retired employees, primarily health care and life insurance benefits.  See Note 18 of the Notes to the Financial Statements for more information about these plans, including funded status.  These benefit plans impose significant liabilities on us that are not fully funded and will require additional cash contributions, which could impair our liquidity.

Our U.S. defined benefit pension plans are subject to Title IV of the Employee Retirement Income Security Act of 1974 ("ERISA").  Under Title IV of ERISA, the Pension Benefit Guaranty Corporation ("PBGC") has the authority under certain circumstances or upon the occurrence of certain events to terminate an underfunded pension plan.  One such circumstance is the occurrence of an event that unreasonably increases the risk of unreasonably large losses to the PBGC.  Although we believe that it is not likely that the PBGC would terminate any of our plans, in the event that our U.S. pension plans were terminated at a time when the liabilities of the plans exceeded the assets of the plans, we would incur a liability to the PBGC that could be equal to the entire amount of the underfunding.

As of December 31, 2010, our U.S. and worldwide defined benefit pension plans were underfunded by a total of $6.7 billion and $11.5 billion, respectively.  If our cash flows and capital resources were insufficient to fund our pension or postretirement health care and life insurance obligations, we could be forced to reduce or delay investments and capital expenditures, seek additional capital, or restructure or refinance our indebtedness.  In addition, if our operating results and available cash were insufficient to meet our pension or postretirement health care and life insurance obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our pension or postretirement health care and life insurance obligations.  We might not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and any proceeds might not be adequate to meet any pension and postretirement health care or life insurance obligations then due.

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ITEM 1A. Risk Factors (continued)

Worse-than-assumed economic and demographic experience for our postretirement benefit plans (e.g., discount rates or investment returns).  The measurement of our obligations, costs, and liabilities associated with benefits pursuant to our postretirement benefit plans requires that we estimate the present values of projected future payments to all participants.  We use many assumptions in calculating these estimates, including assumptions related to discount rates, investment returns on designated plan assets, and demographic experience (e.g., mortality and retirement rates).  To the extent actual results are less favorable than our assumptions, there could be a substantial adverse impact on our financial condition and results of operations.  For discussion of our assumptions, see "Critical Accounting Estimates" in Item 7 and Note 18 of the Notes to the Financial Statements.

Restriction on use of tax attributes from tax law "ownership change."  Section 382 of the U.S. Internal Revenue Code restricts the ability of a corporation that undergoes an ownership change to use its tax attributes, including net operating losses and tax credits ("Tax Attributes").  At December 31, 2010 we had Tax Attributes that would offset $20 billion of taxable income (representing about $7 billion of our $15.7 billion in deferred tax assets subject to valuation allowance).  An ownership change occurs if 5 percent shareholders of an issuer's outstanding common stock, collectively, increase their ownership percentage by more than 50 percentage points over a rolling three-year period.  Restructuring actions we took in 2009, including our exchange of Ford Common Stock for convertible debt and our public issuance of additional Ford Common Stock, contributed significantly to the collective increase in ownership by 5 percent shareholders.  At present, 5 percent shareholders may have collectively increased their ownership in Ford by more than 25 percentage points.  In September 2009, we implemented a tax benefit preservation plan (the "Plan") to reduce the risk of an ownership change under Section 382.  Under the Plan, shares held by any person who acquires, without the approval of our Board of Directors, beneficial ownership of 4.99% or more of Ford's outstanding Common Stock could be subject to significant dilution.

The discovery of defects in vehicles resulting in delays in new model launches, recall campaigns, reputational damage, or increased warranty costs.  Meeting or exceeding many government-mandated safety standards is costly and often technologically challenging, especially where standards may conflict with the need to reduce vehicle weight in order to meet government-mandated emissions and fuel-economy standards.  Government safety standards also require manufacturers to remedy defects related to motor vehicle safety through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that they do not comply with a safety standard.  Should we or government safety regulators determine that a safety or other defect or a noncompliance exists with respect to certain of our vehicles prior to the start of production, the launch of such vehicle could be delayed until such defect is remedied.  The costs associated with any protracted delay in new model launches necessary to remedy such defect, or the cost of recall campaigns or warranty costs to remedy such defects in vehicles that have been sold, could be substantial.  Further, adverse publicity surrounding actual or alleged safety-related or other defects could damage our reputation and adversely affect sales of our products.

Increased safety, emissions, fuel economy, or other regulation resulting in higher costs, cash expenditures, and/or sales restrictions.  The worldwide automotive industry is governed by a substantial amount of governmental regulation, which often differs by state, region, and country.  Governmental regulation has arisen, and proposals for additional regulation are advanced, primarily out of concern for the environment (including concerns about the possibility of global climate change and its impact), vehicle safety, and energy independence.  In addition, many governments regulate local product content and/or impose import requirements as a means of creating jobs, protecting domestic producers, and influencing their balance of payments.  In recent years, we have made significant changes to our product cycle plan to improve the overall fuel economy of vehicles we produce, thereby reducing their GHG emissions.  There are limits on our ability to achieve fuel economy improvements over a given time frame, however, primarily relating to the cost and effectiveness of available technologies, consumer acceptance of new technologies and changes in vehicle mix, willingness of consumers to absorb the additional costs of new technologies, the appropriateness (or lack thereof) of certain technologies for use in particular vehicles, and the human, engineering and financial resources necessary to deploy new technologies across a wide range of products and powertrains in a short time.  The cost to comply with existing governmental regulations is substantial, and future, additional regulations (already enacted, adopted or proposed) could have a substantial adverse impact on our financial condition and results of operations.  For more discussion of the impact of such standards on our global business, see the "Governmental Standards" discussion in Item 1 above.

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ITEM 1A. Risk Factors (continued)

Unusual or significant litigation, governmental investigations or adverse publicity arising out of alleged defects in our products, perceived environmental impacts, or otherwise.  We spend substantial resources ensuring that we comply with governmental safety regulations, mobile and stationary source emissions regulations, and other standards.  Compliance with governmental standards, however, does not necessarily prevent individual or class action lawsuits, which can entail significant cost and risk.  In certain circumstances, courts permit tort claims even where our vehicles comply with federal law and/or other applicable law.  Furthermore, simply responding to actual or threatened litigation or government investigations of our compliance with regulatory standards, whether related to our products or business or commercial relationships,may require significant expenditures of time and other resources.  Litigation also is inherently uncertain, and we could experience significant adverse results.  In addition, adverse publicity surrounding an allegation of a defect, regulatory violation or other matter (with or without corresponding litigation or governmental investigation) may cause significant reputational harm that could have a significant adverse effect on sales of our products.

A change in our requirements where we have long-term supply arrangements committing us to purchase minimum or fixed quantities of certain parts, or to pay a minimum amount to the seller ("take-or-pay" contracts).  We have entered into a number of long-term supply contracts that require us to purchase a fixed quantity of parts to be used in the production of our vehicles.  If our need for any of these parts were to lessen, we could still be required to purchase a specified quantity of the part or pay a minimum amount to the seller pursuant to the take-or-pay contract.

Adverse effects on our results from a decrease in or cessation or clawback of government incentives related to investments.  We receive economic benefits from national, state and local governments in various regions of the world in the form of incentives designed to encourage manufacturers to establish, maintain or increase investment, workforce or production.  These incentives may take various forms, including grants, loan subsidies, and tax abatements or credits.  The impact of these incentives can be significant in a particular market during a reporting period.  For example, most of our manufacturing facilities in South America are located in Brazil, where the state or federal governments have historically offered, and continue to offer, significant incentives to manufacturers to encourage capital investment, increase manufacturing production, and create jobs.  As a result, the performance of our South American operations has been impacted favorably by government incentives to a substantial extent as we have increased our investment and manufacturing presence in Brazil, and we expect this favorable impact to continue for the next several years.  A decrease in, expiration without renewal of, or other cessation or clawback of government incentives for any of our business units, as a result of administrative decision or otherwise, could have a substantial adverse impact on our financial condition and results of operations, as well as our ability to fund new investments.  See Note 2 of the Notes to the Financial Statements for discussion of the accounting for government incentives, and "Item 3. Legal Proceedings" for discussion of administrative tax proceedings in Brazil.

Adverse effects on our operations resulting from certain geo-political or other events.We conduct business in countries around the world, and are pursuing growth opportunities in a number of emerging and newly-developed markets.  These activities expose us to, among other things, risks associated with geo-political events, such as:  governmental takeover (i.e., nationalization) of our manufacturing facilities; disruption of operations in a particular country as a result of political or economic instability, outbreak of war or expansion of hostilities; or acts of terrorism.  Such events could have a substantial adverse effect on our financial condition and results of operations.

Inherent limitations of internal controls impacting financial statements and safeguarding of assets.  Our internal control over financial reporting and our operating internal controls may not prevent or detect misstatements or loss of assets because of their inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to financial statement accuracy and safeguarding of assets.

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ITEM 1A. Risk Factors (continued)

Substantial levels of Automotive indebtedness adversely affecting our financial condition or preventing us from fulfilling our debt obligations.  Although we reduced Automotive debt significantly in 2010, we remain highly leveraged as we work to improve our balance sheet.  Our significant Automotive debt could have important consequences, including the following:  we must pay interest on our significant indebtedness, which may reduce funds available to us for operations and other purposes to levels below that of our competitors with lower interest costs; and our level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business.  For further information regarding our liquidity and capital resources, including our secured credit agreement established in December 2006 ("Credit Agreement"), see the discussion in Item 7 under the captions "Liquidity and Capital Resources" and "Overview," and in Note 19 of the Notes to the Financial Statements.

Failure of financial institutions to fulfill commitments under committed credit facilities.  As permitted under our Credit Agreement, we have repaid $6.7 billion under our revolving credit facility, which we can re-borrow until the facility terminates.  If the financial institutions that provide these or other committed credit facilities were to default on their obligation to fund the commitments, these facilities would not be available to us, which could substantially adversely affect our liquidity and financial condition.  For discussion of our Credit Agreement, see "Liquidity and Capital Resources" in Item 7 and Note 19 of the Notes to the Financial Statements.

A prolonged disruption of the debt and securitization markets.  In the event of a prolonged disruption of the debt and securitization markets, Ford Credit would consider reducing the amount of receivables it purchases or originates.  A significant reduction in the amount of receivables Ford Credit purchases or originates would significantly reduce its ongoing profits, and could adversely affect its ability to support the sale of Ford vehicles.  To the extent Ford Credit's ability to provide wholesale financing to our dealers or retail financing to those dealers' customers is limited, Ford's ability to sell vehicles could be adversely affected.

Inability of Ford Credit to access debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts due to credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors.  In 2005 and 2006, the credit ratings assigned to Ford Credit were lowered to below investment grade, which increased its unsecured borrowing costs and restricted its access to the unsecured debt markets.  In response, Ford Credit increased its use of securitization transactions (including other structured financings) and other sources of funding.  In 2010, although Ford Credit experienced several credit rating upgrades and its credit spreads narrowed considerably, its credit ratings are still below investment grade.  Ford Credit's higher credit ratings have provided it more economical access to the unsecured debt markets, but it is still utilizing asset-backed securitization transactions for a substantial amount of its funding.

Ford Credit’s ability to obtain funding under its committed asset-backed liquidity programs and certain other asset-backed securitization transactions is subject to having a sufficient amount of assets eligible for these programs as well as Ford Credit’s ability to obtain appropriate credit ratings and, for certain committed programs, derivatives to manage the interest rate risk.  Over time, and particularly in the event of any credit rating downgrades, market volatility, market disruption, or other factors, Ford Credit may reduce the amount of receivables it purchases or originates because of funding constraints.  In addition, Ford Credit may reduce the amount of receivables it purchases or originates if there were a significant decline in the demand for the types of securities it offers or Ford Credit was unable to obtain derivatives to manage the interest rate risk associated with its securitization transactions.  A significant reduction in the amount of receivables Ford Credit purchases or originates would significantly reduce its ongoing profits and could adversely affect its ability to support the sale of Ford vehicles.

Higher-than-expected credit losses. Credit risk is the possibility of loss from a customer's or dealer's failure to make payments according to contract terms.  Credit risk (which is heavily dependent upon economic factors including unemployment, consumer debt service burden, personal income growth, dealer profitability, and used car prices) has a significant impact on Ford Credit's business.  The level of credit losses Ford Credit may experience could exceed its expectations and adversely affect its financial condition and results of operations.  For additional discussion regarding credit losses, see the "Critical Accounting Estimates" disclosures in Item 7.

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ITEM 1A. Risk Factors (continued)

Increased competition from banks or other financial institutions seeking to increase their share of financing Ford vehicles.  No single company is a dominant force in the automotive finance industry.  Most of Ford Credit's bank competitors in the United States use credit aggregation systems that permit dealers to send, through standardized systems, retail credit applications to multiple finance sources to evaluate financing options offered by these finance sources.  This process has resulted in greater competition based on financing rates.  In addition, Ford Credit may face increased competition on wholesale financing for Ford dealers.  Competition from such competitors with lower borrowing costs may increase, which could adversely affect Ford Credit's profitability and the volume of its business.

Collection and servicing problems related to finance receivables and net investment in operating leases. After Ford Credit purchases retail installment sale contracts and leases from dealers and other customers, it manages or services the receivables.  Any disruption of its servicing activity, due to inability to access or accurately maintain customer account records or otherwise, could have a significant negative impact on its ability to collect on those receivables and/or satisfy its customers.

Lower-than-anticipated residual values or higher-than-expected return volumes for leased vehicles. Ford Credit projects expected residual values (including residual value support payments from Ford) and return volumes of the vehicles it leases.  Actual proceeds realized by Ford Credit upon the sale of returned leased vehicles at lease termination may be lower than the amount projected, which reduces the profitability of the lease transaction.  Among the factors that can affect the value of returned lease vehicles are the volume of vehicles returned, economic conditions, and the quality or perceived quality, safety, fuel efficiency, or reliability of the vehicles.  Actual return volumes may be higher than expected and can be influenced by contractual lease end values relative to auction values, marketing programs for new vehicles, and general economic conditions.  All of these factors, alone or in combination, have the potential to adversely affect Ford Credit's profitability.  For additional discussion of residual values, see the "Critical Accounting Estimates" disclosures in Item 7.

Imposition of additional costs or restrictions due to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Act") and its implementing rules and regulations.  The Act was enacted on July 21, 2010 to reform practices in the financial services industries, including automotive financing and securitizations.  The Act directs federal agencies to adopt rules to regulate the consumer finance industry and the capital markets, including certain commercial transactions such as derivatives contracts.  Among other things, the Act creates a Consumer Financial Protection Bureau with broad rule-making authority for a wide range of consumer protection laws that will regulate consumer finance businesses, such as Ford Credit's retail automotive financing business in the United States.  The Act also creates an alternative liquidation framework under which the Federal Deposit Insurance Corporation ("FDIC") may be appointed as receiver of a non-bank financial company if the U.S. Treasury Secretary (in consultation with the President of the United States) determines that it is in default or danger of default and the resolution of the company under other applicable law (e.g., U.S. bankruptcy law) would have serious adverse effects on the financial stability of the United States.  The FDIC's powers under this framework may vary from those of a bankruptcy court under U.S. bankruptcy law, which could adversely impact securitization markets, including Ford Credit's funding activities, regardless of whether Ford Credit ever is determined to be subject to the Act's alternative liquidation framework.

In addition, the Act provides that a finance company could be designated a "significant non-bank financial company" by the Financial Stability Oversight Council and thus be subject to regulation by the Board of Governors of the Federal Reserve System.  Such a designation would mean that a non-bank finance company such as Ford Credit, in effect, could be regulated like a bank with respect to capital and other requirements, but without the benefits of being a bank – such as the ability to offer FDIC-insured deposits.  Further, the Act prohibits the use of credit ratings in a prospectus (which is required to be included for securitization offerings such as those conducted by us) without the consent of the rating agency.  The rating agencies have indicated they will not consent to such inclusion.  The SEC has provided indefinite relief from this requirement for public offerings of asset-backed securities through a no-action letter.  Without such relief, the public securitization markets would be impaired in the United States.

Federal agencies are given significant discretion in drafting the rules and regulations necessary to implement the Act, and, consequently, the effects of the Act on the capital markets and the consumer finance industry may not be known for months or years.  The Act and its implementing rules and regulations could impose additional costs on Ford Credit and adversely affect its ability to conduct its business.

30

ITEM 1A. Risk Factors (continued)

New or increased credit, consumer, or data protection or other regulations resulting in higher costs and/or additional financing restrictions. As a finance company, Ford Credit is highly regulated by governmental authorities in the locations where it operates.  In the United States, its operations are subject to regulation, supervision and licensing under various federal, state and local laws and regulations, including the federal Truth-in-Lending Act, Equal Credit Opportunity Act, and Fair Credit Reporting Act.  In some countries outside the United States, Ford Credit's subsidiaries are regulated banking institutions and are required, among other things, to maintain minimum capital reserves.  In many other locations, governmental authorities require companies to have licenses in order to conduct financing businesses.  Efforts to comply with these laws and regulations impose significant costs on Ford Credit, and affect the conduct of its business.  Additional regulation could add significant cost or operational constraints that might impair its profitability.

Inability of Ford Credit to obtain competitive funding.  Other institutions that provide automotive financing to certain of our competitors have access to relatively low-cost government-insured or other funding.  For example, financial institutions with bank holding company status may have access to other lower cost sources of funding.  Access by our competitors' dealers and customers to financing provided by financial institutions with relatively low-cost funding that is not available to Ford Credit could adversely affect Ford Credit's ability to support the sale of Ford vehicles at competitive cost and rates.  This in turn would adversely affect the marketability of Ford vehicles in comparison to certain competitive brands. 

ITEM 1B.  Unresolved Staff Comments

None to report.

ITEM 2. Properties

Our principal properties include manufacturing and assembly facilities, distribution centers, warehouses, sales or administrative offices, and engineering centers.

We own substantially all of our U.S. manufacturing and assembly facilities, although many of these properties have been pledged to secure indebtedness or other obligations.  Our facilities are situated in various sections of the country and include assembly plants, engine plants, casting plants, metal stamping plants, transmission plants, and other component plants.  About half of our distribution centers are leased (we own approximately 48% of the total square footage and lease the balance).  A substantial amount of our warehousing is provided by third-party providers under service contracts.  Because the facilities provided pursuant to third-party service contracts need not be dedicated exclusively or even primarily to our use, these spaces are not included in the number of distribution centers/warehouses listed in the table below.  The majority of the warehouses that we operate are leased, although many of our manufacturing and assembly facilities contain some warehousing space.  Substantially all of our sales offices are leased space.  Approximately 99% of the total square footage of our engineering centers and our supplementary research and development space is owned by us.  Many of the facilities, as well as most of the machinery and equipment, that we own and operate in the United States have been pledged to secure our obligations under the Credit Agreement.  For discussion of the Credit Agreement, see "Liquidity and Capital Resources" in Item 7 and Note 19 of the Notes to the Financial Statements.

In addition, we maintain and operate manufacturing plants, assembly facilities, parts distribution centers, and engineering centers outside of the United States.  We own substantially all of our non-U.S. manufacturing plants, assembly facilities, and engineering centers.  The majority of our parts distribution centers outside of the United States are either leased or provided by vendors under service contracts.  As in the United States, space provided by vendors under service contracts need not be dedicated exclusively or even primarily to our use, and is not included in the number of distribution centers/warehouses listed in the table below.

31

ITEM 2. Properties (continued)

The total number of plants, distribution centers/warehouses, engineering and research and development sites, and sales offices used by our Automotive segments as of December 31, 2010 are shown in the table below:

Segment	Plants			Distribution Centers/ Warehouses		Engineering, Research/ Development		Sales Offices
Ford North America		38	*		30		45		58
Ford South America		8			3		1		8
Ford Europe		15			7		4		24
Ford Asia Pacific Africa		12			1		7		16
Total		73			41		57		106

* We have announced plans to close a number of North American facilities as part of our restructuring actions; facilities that have been closed to date are not included in the table.  The table includes five facilities operated by Automotive Components Holdings, LLC ("ACH"), which is controlled by us.  We have been working to sell or close the majority of the 15 ACH component manufacturing plants; to date, we have sold five ACH plants and closed another five.  We plan to close a sixth plant in 2011.  We are exploring our options for the remaining ACH plants (Milan, Saline, Sandusky and Sheldon Road), and intend to transition these businesses to the supply base as soon as practicable.

Included in the number of plants shown above are several plants that are not operated directly by us, but rather by consolidated joint ventures that operate plants that support our Automotive sector.  The accounting standard related to the consolidation of variable interest entities that became effective as of January 1, 2010 resulted in the deconsolidation of many of our consolidated joint ventures.  As of December 31, 2010, the significant consolidated joint ventures and the number of plants each owns is as follows:

• Cologne Precision Forge GmbH ("CPF") — a 50/50 joint venture of Ford-Werke GmbH ("Ford") and Neumayer Tekfor Holding GmbH ("Neumayer") to which Ford transferred the operations of its Cologne forge plant in 2003.  The joint venture produces forged components, primarily for transmissions and chassis, for use in Ford vehicles and for sale to third parties.  Those Ford employees who worked at the Cologne forge plant at the time of the formation of the joint venture were assigned to CPF and remain our employees, and CPF reimburses us for the cost of these employees.  In the event of surplus labor at the joint venture, which operates this one plant, Ford employees assigned to the venture may return to Ford.  New workers at CPF are hired as employees of the joint venture.  On December 21, 2010, Ford and Neumayer signed an agreement pursuant to which Neumayer will withdraw from the joint venture.  The agreement provides that Neumayer will sell its shares in the joint venture to Ford, and describes the future business relationship between the parties.  The agreement becomes effective at closing, which is expected to take place in the first quarter of 2011, and at that point CPF will become a wholly-owned subsidiary of Ford.

• Ford Lio Ho Motor Company Ltd. ("FLH") — a joint venture in Taiwan among Ford (70% partner), the Lio Ho Group (25% partner) and individual shareholders (5% ownership in aggregate) that assembles a variety of Ford and Mazda vehicles sourced from Ford as well as Mazda.  In addition to domestic assembly, FLH also has local product development capability to modify vehicle designs for local needs, and imports Ford-brand built-up vehicles from Europe and the United States.  This joint venture operates one plant.

• Ford Vietnam Limited — a joint venture between Ford (75% partner) and Song Cong Diesel Limited Company (25% partner).  Ford Vietnam Limited assembles and distributes several Ford vehicles in Vietnam, including Escape, Everest, Fiesta, Focus, Mondeo, Ranger, and Transit models.  This joint venture operates one plant.

In addition to the plants that we operate directly or that are operated by consolidated joint ventures, additional plants that support our Automotive sector are operated by unconsolidated joint ventures of which we are a partner.  These plants are not included in the number of plants shown in the table above.  The most significant of these joint ventures are:

• AutoAlliance International, Inc. ("AAI") — a 50/50 joint venture with Mazda that operates as its principal business an automobile assembly plant in Flat Rock, Michigan.  AAI currently produces the Mazda6 and Ford Mustang models.  Ford supplies all of the hourly and substantially all of the salaried labor requirements to AAI, and AAI reimburses Ford for the full cost of that labor.

• AutoAlliance (Thailand) Co. Ltd. ("AAT") — a joint venture among Ford (50%), Mazda (45%) and a Thai affiliate of Mazda's (5%) that owns and operates a manufacturing plant in Rayong, Thailand.  AAT produces the Ford Everest SUV and Ford Ranger and Mazda BT-50 pickup trucks for the Thai market and for export to over 100 countries worldwide (other than North America), in both built-up and kit form.  AAT has completed construction of

32

ITEM 2. Properties (continued)

its new, highly flexible car plant using state-of-the-art manufacturing technologies to produce both the Ford Fiesta and Mazda2 small cars for domestic and export sale.

• Blue Diamond Truck, S. de R.L. de C.V. ("Blue Diamond Truck") — a joint venture between Ford (25% partner) and Navistar International Corporation (formerly known as International Truck and Engine Corporation) (75% partner) ("Navistar").  Blue Diamond Truck develops and manufactures selected medium and light commercial trucks in Mexico and sells the vehicles to Ford and Navistar for their own independent distribution.  Blue Diamond Truck manufactures Ford F-650/750 medium-duty commercial trucks that are sold in the United States and Canada and Navistar trucks that are sold in Mexico.

• Changan Ford Mazda Automobile Corporation, Ltd. ("CFMA") — a joint venture among Ford (35% partner), Mazda (15% partner), and the Chongqing Changan Automobile Co., Ltd. ("Changan") (50% partner).  Through its facility in the Chinese cities of Chongqing and Nanjing, CFMA produces and distributes in China the Ford Mondeo, Focus, S-MAX and Fiesta, the Mazda2, the Mazda3, the Volvo S40 and the Volvo S80.

• Changan Ford Mazda Engine Company, Ltd. ("CFME") — a joint venture among Ford (25% partner), Mazda (25% partner), and the Chongqing Changan Automobile Co., Ltd (50% partner).  CFME is located in Nanjing, and produces the Ford New I4 and Mazda BZ engines in support of the assembly of Ford- and Mazda-branded vehicles manufactured in China.

• Ford Otosan — a joint venture in Turkey between Ford (41% partner), the Koc Group of Turkey (41% partner), and public investors (18%) that is a major supplier of the Ford Transit Connect vehicle and our sole distributor of Ford vehicles in Turkey.  In addition, Ford Otosan makes the Ford Transit series and the Cargo truck for the Turkish and export markets, and certain engines and transmissions, most of which are under license.  This joint venture owns and operates two plants, a parts distribution depot, and a Product Development Center in Turkey.

• Getrag Ford Transmissions GmbH ("Getrag Ford") — a 50/50 joint venture with Getrag Deutsche Venture GmbH and Co. KG, a German company, to which we transferred our European manual transmission operations, including plants, from Halewood, England; Cologne, Germany; and Bordeaux, France.  In 2008, we added the Kechnec plant in Slovakia.  Getrag Ford produces manual transmissions for Ford Europe and Volvo.  We currently supply most of the hourly and salaried labor requirements of the operations transferred to this joint venture.  Our employees who worked at the manual transmission operations transferred at the time of formation of the joint venture are assigned to the joint venture.  In the event of surplus labor at the joint venture, our employees assigned to Getrag Ford may return to Ford.  Getrag Ford reimburses us for the full cost of the hourly and salaried labor we supply.  Employees not supplied by us to work in these operations are employed directly by Getrag Ford.  This joint venture operates four plants.

• Jiangling Motors Corporation, Ltd. ("JMC") — a publicly-traded company in China with Ford (30% shareholder) and Jiangxi Jiangling Holdings, Ltd. (41% shareholder) as its controlling shareholders.  Jiangxi Jiangling Holdings, Ltd. is a 50/50 joint venture between Chongqing Changan Automobile Co., Ltd. and Jiangling Motors Company Group.  The public investors of JMC own 29% of its outstanding shares.  JMC assembles the Ford Transit van and other non-Ford-technology-based vehicles for distribution in China.

• Tenedora Nemak, S.A. de C.V. — a joint venture between Ford (6.75% partner) and a subsidiary of Mexican conglomerate Alfa S.A. de C.V. (93.25% partner), which owns and operates, among other facilities, a portion of our former Canadian castings operations, and supplies engine blocks and heads to several of our engine plants.  Ford supplies a portion of the hourly labor requirements for the Canadian plant, for which it is fully reimbursed by the joint venture.

The facilities owned or leased by us or our subsidiaries and joint ventures described above are, in the opinion of management, suitable and more than adequate for the manufacture and assembly of our products.

The furniture, equipment and other physical property owned by our Financial Services operations are not material in relation to their total assets.

33

ITEM 3. Legal Proceedings

The litigation process is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance.  See Note 31 of the Notes to the Financial Statements for discussion of loss contingencies.

Following is a discussion of our significant pending legal proceedings:

ASBESTOS MATTERS

Asbestos was used in some brakes, clutches, and other automotive components from the early 1900s.  Along with other vehicle manufacturers, we have been the target of asbestos litigation and, as a result, are a defendant in various actions for injuries claimed to have resulted from alleged exposure to Ford parts and other products containing asbestos.  Plaintiffs in these personal injury cases allege various health problems as a result of asbestos exposure, either from component parts found in older vehicles, insulation or other asbestos products in our facilities, or asbestos aboard our former maritime fleet.  We believe that we are being more aggressively targeted in asbestos suits because many previously targeted companies have filed for bankruptcy.

Most of the asbestos litigation we face involves individuals who claim to have worked on the brakes of our vehicles over the years.  We are prepared to defend these cases, and believe that the scientific evidence confirms our long-standing position that there is no increased risk of asbestos-related disease as a result of exposure to the type of asbestos formerly used in the brakes on our vehicles.  The extent of our financial exposure to asbestos litigation remains very difficult to estimate and could include both compensatory and punitive damage awards.  The majority of our asbestos cases do not specify a dollar amount for damages; in many of the other cases the dollar amount specified is the jurisdictional minimum, and the vast majority of these cases involve multiple defendants with the number in some cases exceeding one hundred.  Many of these cases also involve multiple plaintiffs, and often we are unable to tell from the pleadings which plaintiffs are making claims against us (as opposed to other defendants).  Annual payout and defense costs may become substantial in the future.

ENVIRONMENTAL MATTERS

We have received notices under various federal and state environmental laws that we (along with others) are or 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.  We 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 we may be held responsible could be significant.

Following are individual environmental legal proceedings to which a governmental authority is a party and in which there is the possibility of monetary sanctions in excess of $100,000:

Edison Assembly Plant Concrete Disposal.  During demolition of our Edison Assembly Plant, we discovered very low levels of contaminants in the concrete slab.  The concrete was crushed and reused by several developers as fill material at ten different off-site locations.  The New Jersey Department of Environmental Protection ("DEP") asserts that some of these locations may not have been authorized to receive the waste.  In 2006, DEP ordered Ford, supplier MIG-Alberici, Inc., and developer Edgewood Properties, Inc., to investigate, and, if appropriate, remove contaminated materials.  We have substantially completed the work at a number of locations, and Edgewood is completing the investigation and remediation at several locations that it owns.  We resolved the matter with DEP through an administrative consent order ("Order"), pursuant to which we paid approximately $460,000 for oversight costs, penalties, and environmental education projects and donated emissions reduction credits to the State of New Jersey.  After reviewing comments submitted by Edgewood, DEP finalized the Order in 2009.  Edgewood appealed issuance of the Order to the Appellate Division of the New Jersey Superior Court.

34

ITEM 3. Legal Proceedings (continued)

CLASS ACTIONS

In light of the fact that very few of the purported class actions filed against us in the past ever have been certified by the courts as class actions, the actions listed below are those (i) that have been certified as a class action by a court of competent jurisdiction (and any additional purported class actions that raise allegations substantially similar to a certified case), and (ii) that, if resolved unfavorably to the Company, would likely involve a significant cost.

Canadian Export Antitrust Class Actions.  Eighty-three purported class actions on behalf of all purchasers of new motor vehicles in the United States since January 1, 2001 have been filed in various state and federal courts against numerous defendants, including Ford.  The federal and state complaints allege, among other things, that vehicle manufacturers, aided by dealer associations, conspired to prevent the sale to U.S. citizens of vehicles produced for the Canadian market and sold by dealers in Canada at lower prices than vehicles sold in the United States.  The complaints seek injunctive relief under federal antitrust law and treble damages under federal and state antitrust laws.  The federal court actions were consolidated for coordinated pretrial proceedings in the U.S. District Court for the District of Maine and have been dismissed.  Cases remain pending in state courts in Arizona, California, Florida, New Mexico, Tennessee and Wisconsin.  A statewide class has been certified in the California case.

Medium/Heavy Truck Sales Procedure Class Action.  This action pending in Ohio state court alleges that Ford breached its Sales and Service Agreement with Ford truck dealers by failing to publish to all Ford dealers all price concessions that were approved for any dealer.  The court certified a nationwide class consisting of all Ford dealers who purchased from Ford any 600-series or higher truck from 1987 to 1997 and granted plaintiffs' motion for summary judgment on liability.  Our motion to decertify the class is pending.  During February 2011, a jury awarded $4.5 million in damages to the named plaintiff dealer.  We will appeal.  If similarly calculated amounts are awarded to other class members, total damages could be substantial.

OTHER MATTERS

ERISA Fiduciary Litigation.  A purported class action suit filed in the U.S. District Court for the Eastern District of Michigan named Ford and several current or former employees and officers as defendants (Nowak, et al. v. Ford Motor Company, et al., along with three consolidated cases).  The suit alleged that defendants violated ERISA by failing to prudently and loyally manage funds held in employee savings plans we sponsored.  Specifically, plaintiffs alleged (among other claims) that the defendants violated fiduciary duties owed to plan participants by continuing to offer Ford Common Stock as an investment option in the savings plans.  On February 15, 2011, the court approved a final settlement of this matter pursuant to which we will enhance communications to active participants in our employee savings and investment plans, make related improvements to the employee investment process, and pay attorney fees and related costs.

Apartheid Litigation. Along with two other prominent multinational companies, we are a defendant in purported class action lawsuits seeking unspecified damages on behalf of South African citizens who suffered violence and oppression under South Africa's apartheid regime.  The lawsuits allege that the defendant companies aided and abetted the apartheid regime and its human rights violations.  These cases, collectively referred to as In re South African Apartheid Litigation, were initially filed in 2002 and 2003, and are being handled together as coordinated "multidistrict litigation" in the U.S. District Court for the Southern District of New York.  The District Court dismissed these cases in 2004, but in 2007 the U.S. Court of Appeals for the Second Circuit reversed and remanded the cases to the District Court for further proceedings.  Amended complaints were filed during 2008; motions to dismiss have been granted in part and denied in part, and defendants' appeal to the U.S. Court of Appeals is pending.

Brazilian Tax Matters.  In December 2010, a tax tribunal in Brazil ruled against Ford Brazil in a matter involving an assessment relating to federal tax incentives Ford Brazil received during 2004 through 2008.  The matter at issue concerns the extent to which tax incentives and a special tax regime can be used simultaneously.  We intend to appeal the December ruling to the next administrative level within the Brazilian federal tax authority, and believe the law supports our position.  If we do not prevail at the next administrative level, we plan to appeal the matter to the federal court in Brazil, which likely would require posting of substantial cash or other collateral.  Administrative proceedings also are pending against Ford Brazil regarding state tax incentives.  These incentives are being challenged by two states on the basis that the incentives granted by another state did not receive formal approval from the organization of Brazilian state treasury offices.  If we do not prevail at the administrative level, we plan to appeal to the relevant state court, which likely also would require posting of significant cash or other collateral.

35

ITEM 4A. Executive Officers of Ford

Our executive officers are as follows, along with each executive officer's position and age at February 1, 2011:

Name	Position	Position Held Since	Age
William Clay Ford, Jr. (a)	Executive Chairman and Chairman of the Board	Sept. 2006	53
Alan Mulally (b)	President and Chief Executive Officer	Sept. 2006	65
Michael E. Bannister	Executive Vice President – Chairman and Chief Executive Officer, Ford Motor Credit Co.	Oct. 2007	61
Lewis W. K. Booth	Executive Vice President and Chief Financial Officer	Nov. 2008	62
Mark Fields	Executive Vice President – President, The Americas	Oct. 2005	50
John Fleming	Executive Vice President – Global Manufacturing and Labor Affairs	Dec. 2009	60
Tony Brown	Group Vice President – Purchasing	Apr. 2008	54
Susan M. Cischke	Group Vice President – Sustainability, Environment and Safety Engineering	Apr. 2008	56
James D. Farley, Jr.	Group Vice President – Global Marketing, Sales and Service	Nov. 2007	48
Felicia Fields	Group Vice President – Human Resources and Corporate Services	Apr. 2008	45
Bennie Fowler	Group Vice President – Quality	Apr. 2008	54
Joseph R. Hinrichs	Group Vice President – President, Asia Pacific and Africa	Dec. 2009	44
Derrick M. Kuzak	Group Vice President – Global Product Development	Dec. 2006	59
David G. Leitch	Group Vice President and General Counsel	Apr. 2005	50
J C. Mays	Group Vice President and Chief Creative Officer – Design	Aug. 2003	56
Stephen T. Odell	Group Vice President, Chairman and CEO, Ford of Europe	Aug. 2010	55
Ziad S. Ojakli	Group Vice President – Government and Community Relations	Jan. 2004	43
Nick Smither	Group Vice President – Information Technology	Apr. 2008	52
Bob Shanks	Vice President and Controller	Sept. 2009	58

(a)	Also a Director, Chair of the Office of the Chairman and Chief Executive, Chair of the Finance Committee and a member of the Sustainability Committee of the Board of Directors.
(b)	Also a Director and member of the Office of the Chairman and Chief Executive and the Finance Committee of the Board of Directors.

With the exceptions noted below, each of the officers listed above has been employed by Ford or its subsidiaries in one or more capacities during the past five years.  Described below are the recent positions (other than those with Ford or its subsidiaries) held by those officers who have not yet been with Ford or its subsidiaries for five years:

§ Prior to joining Ford in September 2006, Mr. Mulally served as Executive Vice President of The Boeing Company, and President and Chief Executive Officer of Boeing Commercial Airplanes.  Mr. Mulally also was a member of Boeing's Executive Council, and served as Boeing's senior executive in the Pacific Northwest.  He was named Boeing's president of Commercial Airplanes in September 1998; the responsibility of chief executive officer for the business unit was added in March 2001.

§ Prior to joining Ford in November 2007, Mr. Farley was Group Vice President and General Manager of Lexus, responsible for all sales, marketing and customer satisfaction activities for Toyota’s luxury brand.  Before leading Lexus, he served as group vice president of Toyota Division marketing and was responsible for all Toyota Division market planning, advertising, merchandising, sales promotion, incentives and internet activities.

Under our by-laws, executive officers are elected by the Board of Directors at an annual meeting of the Board held for this purpose.  Each officer is elected to hold office until a successor is chosen or as otherwise provided in the by-laws.

36

PART II

ITEM 5. Market for Ford's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our Common Stock is listed on the New York Stock Exchange in the United States and on certain stock exchanges in Belgium, France, Switzerland, and the United Kingdom.

The table below shows the high and low sales prices for our Common Stock and the dividends we paid per share of Common and Class B Stock for each quarterly period in 2009 and 2010:

	2009								2010
Ford Common Stock price per share (a)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		First Quarter		Second Quarter		Third Quarter		Fourth Quarter
High	$	2.99	$	6.54	$	8.86	$	10.37	$	14.54	$	14.57	$	13.24	$	17.42
Low		1.50		2.40		5.24		6.61		10.05		9.75		10.02		12.12
Dividends per share of Ford Common and Class B Stock (b)	$	0.00	$	0.00	$	0.00	$	0.00	$	0.00	$	0.00	$	0.00	$	0.00

(a)	New York Stock Exchange composite intraday prices as listed in the price history database available at www.NYSEnet.com.
(b)	Under our Credit Agreement, which is scheduled to terminate in December 2013, we are prohibited from paying dividends (other than dividends payable solely in stock) on our Common and Class B Stock, subject to certain limited exceptions.  See Note19 of the Notes to the Financial Statements for more information regarding the Credit Agreement and related covenants.

As of February 14, 2011, stockholders of record of Ford included 162,254 holders of Common Stock (which number does not include 804 former holders of old Ford Common Stock who have not yet tendered their shares pursuant to our recapitalization, known as the Value Enhancement Plan, which became effective on August 9, 2000) and 85 holders of Class B Stock.

During the fourth quarter of 2010, we purchased shares of our Common Stock as follows:

Period	Total Number of Shares Purchased (a)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b)		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased  Under the Plans or Programs (b)
Oct. 1, 2010 through Oct. 31, 2010		—	$	—		—		—
Nov. 1, 2010 through Nov. 30, 2010		58,882		16.28		—		—
Dec. 1, 2010 through Dec. 31, 2010		50,469		16.73		—		—
Total/Average		109,351		16.48		—		—

(a)

We presently have no publicly-announced repurchase program in place.  Shares were acquired from our employees or directors in accordance with our various compensation plans as a result of share withholdings to pay:  (i)income tax related to the lapse of restrictions on restricted stock or the issuance of unrestricted stock; and (ii)the exercise price with respect to certain exercises of stock options.

(b)

No publicly announced repurchase program in place.

37

ITEM 6. Selected Financial Data

On January 1, 2010, we adopted the new accounting standard regarding consolidation of VIEs.  We have applied the standard retrospectively to periods covered in this Report, and present prior-year financial statement data on a basis that is revised for the application of this standard.  The following table sets forth selected financial data for each of the last five years (dollar amounts in millions, except for per share amounts).

SUMMARY OF OPERATIONS	2010			2009			2008			2007			2006
Total Company
Sales and revenues	$	128,954		$	116,283		$	143,584		$	168,884		$	156,711
Income/(Loss) before income taxes	$	7,149		$	2,599		$	(14,895	)	$	(4,286	)	$	(15,490	)
Provision for/(Benefit from) income taxes		592			(113	)		(62	)		(1,467	)		(2,880	)
Income/(Loss) from continuing operations		6,557			2,712			(14,833	)		(2,819	)		(12,610	)
Income/(Loss) from discontinued operations		—			5			9			41			16
Income/(Loss) before cumulative effects of changes in accounting principles		6,557			2,717			(14,824	)		(2,778	)		(12,594	)
Cumulative effects of changes in accounting principles		—			—			—			—			(7	)
Net income/(loss)		6,557			2,717			(14,824	)		(2,778	)		(12,601	)
Less: Income/(Loss) attributable to noncontrolling interests		(4	)		—			(58	)		17			16
Net income/(loss) attributable to Ford Motor Company	$	6,561		$	2,717		$	(14,766	)	$	(2,795	)	$	(12,617	)
Automotive Sector
Sales	$	119,280		$	103,868		$	127,635		$	152,691		$	141,727
Operating income/(loss)		5,789			(3,352	)		(9,976	)		(4,979	)		(18,518	)
Income/(Loss) before income taxes		4,146			785			(12,314	)		(5,510	)		(17,456	)
Financial Services Sector
Revenues	$	9,674		$	12,415		$	15,949		$	16,193		$	14,984
Income/(Loss) before income taxes		3,003			1,814			(2,581	)		1,224			1,966
Amounts Per Share Attributable to Ford Motor Company Common and Class B Stock
Basic:
Income/(Loss) from continuing operations	$	1.90		$	0.91		$	(6.50	)	$	(1.43	)	$	(6.73	)
Income/(Loss) from discontinued operations		—			—			—			0.02			0.01
Cumulative effects of change in accounting principles		—			—			—			—			—
Net income/(loss)	$	1.90		$	0.91		$	(6.50	)	$	(1.41	)	$	(6.72	)
Diluted:
Income/(Loss) from continuing operations	$	1.66		$	0.86		$	(6.50	)	$	(1.43	)	$	(6.73	)
Income/(Loss) from discontinued operations		—			—			—			0.02			0.01
Cumulative effects of change in accounting principles		—			—			—			—			—
Net income/(loss)	$	1.66		$	0.86		$	(6.50	)	$	(1.41	)	$	(6.72	)
Cash dividends	$	—		$	—		$	—		$	—		$	0.25
Common Stock price range (NYSE Composite Intraday)
High	$	17.42		$	10.37		$	8.79		$	9.70		$	9.48
Low		9.75			1.50			1.01			6.65			6.06
Average number of shares of Ford Common and Class B Stock outstanding (in millions)		3,449			2,992			2,273			1,979			1,879
SECTOR BALANCE SHEET DATA AT YEAR-END
Assets
Automotive sector	$	64,606		$	79,118		$	71,556		$	115,484		$	120,198
Financial Services sector		103,270			119,112			151,667			169,261			169,691
Intersector elimination		(2,083	)		(3,224	)		(2,535	)		(2,023	)		(1,467	)
Total assets	$	165,793		$	195,006		$	220,688		$	282,722		$	288,422
Debt
Automotive sector	$	19,077		$	33,610		$	23,319		$	24,190		$	26,906
Financial Services sector		85,112			98,671			128,842			141,833			142,036
Intersector elimination *		(201	)		(646	)		(492	)		—			—
Total debt	$	103,988		$	131,635		$	151,669		$	166,023		$	168,942
Total Equity/(Deficit)	$	(642	)	$	(7,782	)	$	(15,371	)	$	7,771		$	(1,235	)

*  Debt related to Ford's acquisition of Ford Credit debt securities; see Note 1 of the Notes to the Financial Statements for additional detail.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Revenue

Our Automotive sector's revenue is generated primarily by sales of vehicles, parts and accessories to our dealers and distributors (i.e., our customers).  Vehicles we produce generally are subject to firm orders from our customers.  The vehicles generally are deemed sold, and revenue recognized, when produced and shipped or delivered to our customers.  This is not the case, however, with respect to vehicles produced for sale to daily rental car companies that are subject to a guaranteed repurchase option, or vehicles produced for use in our own fleet (including management evaluation vehicles).  Vehicles sold to daily rental car companies subject to a guaranteed repurchase option are accounted for as operating leases, with lease revenue and profits recognized over the term of the lease.  When we sell the returned vehicle at auction, we recognize a gain or loss on the difference, if any, between actual auction value and the projected auction value.  In addition, revenue for finished vehicles we sell to customers or vehicle modifiers on consignment is not recognized until the vehicle is sold to the ultimate customer.

Most of the vehicles sold by us to our dealers and distributors are financed at wholesale by Ford Credit.  Upon Ford Credit originating the wholesale receivable related to a dealer's purchase of a vehicle, Ford Credit pays cash to the relevant legal entity in our Automotive sector in payment of the dealer's obligation for the purchase price of the vehicle.  The dealer then pays the wholesale finance receivable to Ford Credit when it sells the vehicle to a retail customer.

Our Financial Services sector's revenue is generated primarily from interest on finance receivables, net of certain deferred origination costs that are included as a reduction of financing revenue, and such revenue is recognized over the term of the receivable using the interest method.  Also, revenue from operating leases, net of certain deferred origination costs, is recognized on a straight-line basis over the term of the lease.  Income is generated to the extent revenues exceed expenses, most of which are interest, depreciation, and operating expenses.

Transactions between our Automotive and Financial Services sectors occur in the ordinary course of business.  For example, we offer special retail and lease incentives to dealers' customers who choose to finance or lease our vehicles from Ford Credit.  The estimated cost for these incentives is recorded as revenue reduction to Automotive sales at the later of the date the related vehicle sales to our dealers are recorded or the date the incentive program is both approved and communicated.  In order to compensate Ford Credit for the lower interest or lease rates offered to the retail customer, we pay the discounted value of the incentive directly to Ford Credit when it originates the retail finance or lease contract with the dealer's customer.  Ford Credit recognizes the amount over the life of the related contracts as an element of financing revenue.  See Note 1 of the Notes to the Financial Statements for a more detailed discussion of transactions and payments between our Automotive and Financial Services sectors.

Costs and Expenses

Our statement of operations classifies our Automotive total costs and expenses into two categories:  (i) cost of sales, and (ii) selling, administrative and other expenses.  We include within cost of sales those costs related to the development, manufacture, and distribution of our vehicles, parts and accessories.  Specifically, we include in cost of sales each of the following:  material costs (including commodity costs); freight costs; warranty, product recall and customer satisfaction program costs; labor and other costs related to the development and manufacture of our products; depreciation and amortization; and other associated costs.  We include within selling, administrative and other expenses labor and other costs not directly related to the development and manufacture of our products, including such expenses as advertising and sales promotion costs.

Certain of our costs, such as material costs, generally vary directly with changes in volume and mix of production.  In our industry, production volume often varies significantly from quarter to quarter and year to year.  Quarterly production volumes experience seasonal shifts throughout the year (including peak retail sales seasons, and the impact on production of model changeover and new product launches).  As we have seen in recent years, annual production volumes are heavily impacted by external economic factors, including the pace of economic growth and factors such as the availability of consumer credit and cost of fuel.

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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

As a result, we analyze the profit impact of certain cost changes holding constant present-year volume and mix and currency exchange, in order to evaluate our cost trends absent the impact of varying production and currency exchange levels.  We analyze these cost changes in the following categories:

● Material excluding commodity costs – primarily reflecting the change in cost of purchased parts used in the assembly of our vehicles.

● Commodity costs – reflecting the change in cost for raw materials (such as steel, aluminum, and resins) used in the manufacture of our products.

● Structural costs – reflecting the change in costs that generally do not have a directly proportionate relationship to our production volumes, such as labor costs, including pension and health care; other costs related to the development and manufacture of our vehicles; depreciation and amortization; and advertising and sales promotion costs.

● Warranty and other costs – reflecting the change in cost related to warranty coverage, product recalls, and customer satisfaction actions, as well as the change in freight and other costs related to the distribution of our vehicles and support for the sale and distribution of parts and accessories.

While material (including commodity), freight and warranty costs generally vary directly in proportion to production volume, elements within our structural costs category are impacted to differing degrees by changes in production volume.  We also have varying degrees of discretion when it comes to controlling the different elements within our structural costs.  For example, depreciation and amortization expense largely is associated with prior capital spending decisions.  On the other hand, while labor costs do not vary directly with production volume, manufacturing labor costs may be impacted by changes in volume, for example when we increase overtime, add a production shift or add personnel to support volume increases.  Other structural costs, such as advertising or engineering costs, are not necessarily impacted by production volume.  Our structural costs generally are within our discretion, although to varying degrees, and can be adjusted over time in response to external factors.

We consider certain structural costs to be a direct investment in future growth and revenue.  For example, increases in structural costs are necessary to grow our business and improve profitability as we expand around the world, invest in new products and technologies, respond to increasing industry sales volume and grow our market share.

Automotive total costs and expenses for full-year 2010 was $113.5 billion (including about $8 billion related to Volvo).  Material costs (including commodity costs) make up the largest portion of our Automotive total costs and expenses, representing in 2010 about two-thirds of the total amount.  Of the remaining balance of our Automotive costs and expenses, the largest piece is structural costs.  Although material costs are our largest absolute cost, our margins can be affected significantly by changes in any category of costs.

Key Economic Factors and Trends Affecting the Automotive Industry

Global Economic Recovery.  By mid-2009, the global economy had begun to recover from the financial crisis and economic recession that began in 2008 and was entering a period of improving economic activity, with some markets advancing more quickly than others.  In the United States, the economic recovery began in June 2009, as officially designated by the National Bureau of Economic Research.  In 2010, global economic growth advanced an estimated 3.8%, a significant improvement as compared to the weak conditions which prevailed in 2008 and the first half of 2009.  The current economic performance in many European countries, particularly Greece, Ireland, Portugal and Spain, is being hampered by excessive government debt levels and the resulting budget austerity measures which are contributing to weak economic growth.  The European Union, the European Central Bank, and the International Monetary Fund have provided important support for many of these countries undergoing structural changes.  During 2011, economic growth is likely to be weak in these markets.  At the same time, economic growth in Germany is likely to remain solid, attributable in part to its export growth to Asia, good manufacturing base, and better budgetary conditions.  The U.K. government has implemented budget cuts, while the housing market is still working off its slump.  These factors will continue to be a drag on economic conditions there.

While the economic outlook is improving, it is rebounding from a very low base and with a range of possible outcomes due to the uncertain financial market environment and dependence upon ongoing policy responses.  The consumer and commercial sectors of the global economy appear to be improving, although recovery remains fragile due to continuing tightness in the credit markets, weak labor markets in many countries, and uncertainty regarding fiscal and monetary policy adjustments.  Although the housing market is stabilizing in the worst hit markets, such as the United States, the United Kingdom, and Spain, challenges remain associated with rising foreclosure rates and excess housing stocks.

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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

In 2010, global industry vehicle sales volume (including medium and heavy truck) is estimated to have increased to 73.9 million units, up 8.7 million units or 13% from 2009 levels.

Excess Capacity.  According to IHS Automotive, an automotive research firm, in 2010 the estimated automotive industry global production capacity for light vehicles (about 89 million units) exceeded global production of light vehicles by about 17 million units.  In North America and Europe, the two regions where the majority of revenue and profits are earned in the industry, excess capacity as a percent of production was an estimated 34% and 18%, respectively.  According to production capacity data projected by IHS Automotive, global excess capacity conditions could continue for several years at an average of about 20 million units per year during the 2011-2015 period.

Pricing Pressure.  Excess capacity, coupled with a proliferation of new products being introduced in key segments, will keep pressure on manufacturers' ability to increase prices. In addition to incremental new manufacturing capacity being added in the United States and Europe, Japanese and Korean manufacturers also have capacity (located outside of the regions) directed to these markets.  This has contributed and likely will continue to contribute to pricing pressure in these markets.  In the future, Chinese manufacturers also are expected to enter the U.S. and European markets, further intensifying competition.  Although there has been some firming of pricing in the U.S. market, particularly in 2010, it seems likely that over the longer term intense competition and apparent excess capacity will continue the industry trend of reduction of inflation-adjusted prices for similarly-contented vehicles in the United States and contribute to a challenging pricing environment.

Commodity and Energy Price Increases.  Commodity prices have resumed upward movement since early 2009.  Despite weak demand conditions, oil prices increased from an average of $62 per barrel in 2009 to a range exceeding $90 per barrel in February 2011.  With the global economic outlook improving and financial investment returning to commodity and oil markets, we expect commodity and oil prices to continue trending upward with potentially higher volatility.  Higher fuel prices, combined with efforts to achieve environmental policy objectives, are likely to continue to generate demand for more fuel-efficient vehicles.

Consumer Spending and Credit.  Limited ability to increase vehicle prices has been offset in recent years, at least in part, by the long-term trend toward purchase of higher-end, more expensive vehicles and/or vehicles with more features.  Over the long term, spending on new vehicles is expected to resume correlation with growth in per capita incomes.  Emerging markets also will contribute an increasing share of global industry sales volume and revenue, as growth in wholesales (i.e., volume) will be greatest in emerging markets in the next decade.  We believe, however, the mature automotive markets (e.g., North America, Western Europe, and Japan) will retain the largest share of global revenue over the coming decade.

Increasing Sales of Smaller Vehicles. Like other manufacturers, we are increasing our participation in newly-developed and emerging markets, such as Brazil, Russia, India and China, in which vehicle sales are expected to increase at a faster rate than in most mature markets. The largest segments in these markets are small vehicles (i.e., Sub-B, B and C segments). To increase our participation in these fast-growing markets, we are increasing significantly our production capacity, directly or through joint ventures. In addition, we expect that increased demand for smaller, more fuel-efficient vehicles will continue in the mature markets of North America and Europe and, consequently, we have seen and expect in the future strong demand in those markets for our small car offerings (including the new Ford Fiesta and Focus models that are based on our global platforms). Although we expect positive contribution margins from higher small vehicle sales, one result of increased production of small vehicles may be that, over time, our average per unit margin decreases because small vehicles tend to have lower margins than medium and large vehicles.

Currency Exchange Rate Volatility.  Ongoing deleveraging in financial markets has generated significant volatility in currencies.  The sovereign debt crisis and banking sector weakness in Europe is contributing to euro exchange rate volatility.  At the same time, concerns for U.S. monetary policy (e.g., quantitative easing programs) and deficits (i.e., current account and fiscal deficits) have put downward pressure on the U.S. dollar.  Some emerging market currencies have strengthened beyond their fair value in light of substantial capital inflows.  Central banks in some of these markets are attempting to temper the effect of these inflows and stabilize their currencies so they are not overvalued.  The latest rising inflation in emerging markets has started to erode the strength of some local currencies, reducing the need for government intervention.  To varying degrees, exchange rates are market determined, and all are impacted by many different macroeconomic and policy factors.  In the current business environment, it is likely exchange rates will remain volatile.

Other Economic Factors.  The eventual implications of higher government deficits and debt, with potentially higher long-term interest rates, could drive a higher cost of capital over our planning period.  Higher interest rates and/or taxes to address the higher deficits also may impede real growth in gross domestic product and, therefore, vehicle sales over our planning period.

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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Trends and Strategies

We remain firm in our belief that our continued focus on executing the four key priorities of our One Ford plan is the right strategy to achieve our objectives:

● Aggressively restructure to operate profitably at the current demand and changing model mix;

● Accelerate development of new products our customers want and value;

● Finance our plan and improve our balance sheet; and

● Work together effectively as one team, leveraging our global assets.

Despite the external economic environment in recent years, we have made significant progress in transforming our business.