Ford Motor's (F) CEO Mark Fields Presents at Deutsche Bank Global Auto Industry Conference (Transcript)

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Ford Motor Company (NYSE:F)

Deutsche Bank Global Auto Industry Conference Call

January 10, 2016 18:30 ET

Executives

Mark Fields - Chief Executive Officer

Jim Hackett - Chairman, Ford Smart Mobility

Joe Hinrichs - President, The Americas

Bob Shanks - Chief Financial Officer

Joy Falotico - Chairman and Chief Executive Officer, Ford Credit

John Casesa - Group Vice President, Strategy

Raj Nair - Executive Vice President, Product Development, and Chief Technical Officer

Jim Farley - Executive Vice President And President, Europe, Middle East and Africa

Dave Schoch - Group Vice President and President, Asia-Pacific

Analysts

Rod Lache - Deutsche Bank

John Murphy - Bank of America

Ryan Brinkman - JPMorgan

Emmanuel Rosner - CLSA

Colin Langan - UBS

Joe Spak - RBC

Brian Johnson - Barclays

Dave Whiston - Morningstar

Jim Irwin - Moon Capital

Rod Lache

So, for those of you that know the Ford management team and have attended these dinners in the past, you know that this is certainty amongst the most strategic and thoughtful and most insightful leaders in the automotive industry. And because of this, I always look forward to the insights that we get at our annual dinners here at this conference. And clearly this year, we have a lot to talk about as the industry faces potential changes on many different fronts, whether it’s technologies such as vehicle electrification and autonomous driving, new mobility paradigms, and more recently, political changes that have been making many headlines. And I am sure Mark will be very candid with all of us on those. So we are very grateful to have the full complement of Ford executives here with us at dinner tonight. And I am very pleased to welcome Mark Fields, the CEO of Ford Motor Company.

Mark Fields

Okay, good evening everybody. How are you doing? Alright, so I as well as the rest of my team are at your dinner entertainment for tonight. And it’s a busy start for the year for us as you can see. And it’s really a pleasure to be with you, Rod, we always appreciate the invite to come and talk during the auto show. And tonight, what I would like to do is spend some time, about 30 minutes, giving you an overview of what’s going on in the company. And then we will have about 60 minutes of Q&A and I will bring my colleagues up to have a good Q&A.

And so what I’d like to do this evening is share some progress that we are making in expanding our business model to be both in auto and a mobility leader in the years as we go forward. And what I will do is I will touch on our progress in 2016. And then of course, we will touch on the outlook for 2017. So, let’s get started. Let me get the clicker here and we are on our way.

Okay. So, on this slide here, I know we have folks listening in, so I will reference the slide numbers. So, on Slide #2, very importantly building on what we said back in our Investor Day, back in September, we want to equip you with the evidence that Ford is a solid investment with an attractive upside on emerging opportunities. And in the near-term, we want to make clear that our core business is robust and defensible. And we are much more, if I could call it, physically fit to withstand a downturn than I think ever we have been in our past. And along with that comes a stable and a sustainable dividend like the one that we just announced a little earlier today. Now longer term, what I want to make sure we do is make clear the upside opportunities for you and for us from transitioning what we call underperforming parts of our business, but also reallocating capital to growth areas of the business like mobility, autonomy and electrification.

So looking at Slide 3, let me just recap 2016 for us. It was another strong year of results for us. And as you can imagine, we are still racking up the numbers, but we are confident that we will achieve our second best company pre-tax adjusted profits since 2000 and that’s going to include a record profit in Europe. What’s more, our operations outside of North America, on a combined basis, will be profitable and they will be improved on a year-over-year basis.

Looking at automotive operating margins, we will come in above 6%. And that’s the fifth time in the last 7 years that we have come in above 6%. And that includes double-digit net income margins, once again, at our joint ventures in China. Of course, we expect our return on invested capital is coming in and exceeding our cost of capital and with that strong automotive related operating cash flow. Our global pension plans, funded pension plans are now nearly fully funded. And as you know, we have talked about the last couple of years, our strategy around fully funding our pension, so we are nearly there on that. Importantly, our risk profile was recognized with ratings upgrades from each of the four major rating agencies in the past year. And of course for our shareholders, they continue to benefit from our success and we had total distributions of $3.5 billion last year and also including our first supplemental dividend of $1 billion that we declared last year.

Now, as a result of this strong performance and as you can see on this slide, we are confident that we are going to deliver on our guidance in 2016 of a full year adjusted pre-tax profit of about $10.2 billion. I would like to note, however, that based on our preliminary results, our full year adjusted effective tax rate is expected to be in the low 30% range and probably around 32%. And that’s higher than we had forecasted and higher than the present First Call estimates. So, let me mention that again. It’s around 32% and this is higher than what we had forecasted and it’s currently higher than the First Call estimates. So, there were several areas of the business that caught investors’ attention last year for our business.

And on Slide 5 here and I would like to go through this, it shows and I think demonstrates we remain very, very committed to running a disciplined business as a company, balancing production with demand, but also at the same time delivering profitable share. So, let me take you through this. If you look at the upper left-hand corner there, of course, we delivered – we continue to deliver on bringing exciting products to the marketplace. And we have always said we want to bring to a marketplace products that people really want and value. And importantly, you can see that’s evidenced by our growing transaction prices, which are growing at a much higher rate than the industry.

Moving to the right there on incentives, we have taken a very disciplined approach to incentives. And as we have talked about in the past, our approach is to be competitive, but disciplined on incentives. And while the industry incentives were up as you can see in 2016, I think our measured approach really allowed us to increase at a lower rate than the rest of the industry. And then finally, on the bottom there, as we look at the lease mix, we took steps to reduce our lease mix and we were doing that in response to the lower residual values that we were seeing. And we not only widened our gap to the industry, it also declined for the most part during the year.

Now looking at a few other things, we have said we have a very experienced and prudent management team. And you know us really well, we call them the way we see them. And when we see them, we act on them. And I think we have done that again in 2016 and you can expect us going forward to continue to do that. So in 2016, if you look at the upper left hand side here, we said we would reduce our days supply after we reached our desired run-rate on Super Duty, because remember during the year, we had higher stocks, and part of it was to anticipate the Super Duty launch. And as you can see here, we did just that. We came out of the year at 70 days supply. So, we feel really good about where we are from an inventory standpoint, from an overall level and from a mix level.

We also said that, if you move over to the right hand side of the chart here that our higher rental volume in the first half of the year was temporary. And the reason that was temporary that was based on requests from our fleet customers on when they wanted deliveries. And you can see in the fourth quarter and in the second half in total, our rental volumes are down versus the first half and our full year rental volume was the same as 2015 and that was as expected and as we guided to, I think it was our first quarter earnings call. In China, if you recall during the second quarter earnings call, we discussed that our market share was down and that we were taking actions to address that. And you can see in our performance in the balance of the year, we improved market share literally in the remaining months of the year. So, our team really delivered on that.

So we will talk more about our 2016 results at the earnings call a little later this month. And what I would like to move on to now is spend some time talking about how we are creating value, our approach to creating value going forward as a company and as a team. Very importantly and this is the slide that we showed in Investor Day, we have a very clear vision and strategy for our business going forward. And our plan is pretty simple and straightforward. We want to achieve top quartile returns by expanding our scope from vehicles to mobility through business model innovation. And we are doing this by focusing on some strategic priorities that are going to drive value. And four of these strategic priorities focus on the core business and three of them focus on the emerging opportunities. And as we think through these, its all governed by pretty simple questions that we ask ourselves, where do we want to play, where do we not want to play and then how do we win in those areas that we want to play.

And as we do this, our choices are really going to be driven by the key drivers of valuation, as you see on this slide. And this slide is very consistent with the slide we have shown here for the past 2 years or 3 years, because these are the things that drive value; growth, we want to grow faster than global GDP over time. On risk, we want to have a very strong balance sheet and also counter volatility in the business. On returns, we are shooting for 8% operating margins on our core business and 20% on the emerging opportunities, particularly around mobility. And of course, we want to drive rewards for our shareholders that entrust their capital to us.

Now, we are very well aware that as we think about core and emerging, that we keep our core business very, very strong, because we need that so that we can then invest aggressively in line with the strategic priorities that we have laid out. And so what I would like to take you through is, in each of these areas the progress that we have made since we last met in September. And this is really around fortifying our profit pillars, transforming the underperforming parts of our business and growing in the emerging opportunities. And you can see them there, we are fortifying our strengths trucks and vans, commercial vehicles, performance vehicles, utilities, our customers – our parts and service operation and our Ford Credit operation. Transform the underperforming parts of our business Lincoln, small vehicles in developed markets and emerging markets and then growing in electrification, autonomy and mobility.

So let me take you through what are we – what’s going on since the last time we got together in September. So let’s start with our profit pillars. This is the foundation and it’s the underlying strength of the business. And we are not only focused on keeping it strong, but we intend to strengthen them further through new innovations to continue to address the needs of our customers. And with the recent introduction of the all-new Super Duty, which launched in the third quarter of last year, I think we are really solidifying our long-term U.S. leadership in full-size pickups. To put it in perspective, we sold over 820,000 F-Series last year in the U.S. That’s one F-Series every 39 seconds. So since we sat down to dinner, I think we have sold, I don’t know, we have sold a number of F-Series. So it’s a really important part of our business. But not only were they a truck leader in the U.S., we are also the commercial vehicle leader in Europe as well. And we also saw strong performance with our Ranger in a number of markets around the world in that midsize pickup segment.

Now going forward, obviously as a leader, you have to keep setting your sights higher because everybody is always coming after you. And that will be further strengthened. We showed at the show yesterday our new F-150, which features new powertrains, including our first diesel for F-150. But also at the same time, we have equipped it with advanced connectivity to really provide even more productivity for our customers, because keep in mind, many of our customers that are buying an F-150, it’s a tool for them. And we want that tool to work better and better and better for them. We will also raise the game again for F-150 in 2020 and that’s with the introduction of the Hybrid version. And of course, that will improve capability, it will improve productivity, but also to boot, it will give them better fuel efficiency. And think about when you are at the worksite that could actually be used as a mobile generator as well. And if you bid on construction work sites, one of the things they are always looking for is an outlet to be able to power their tools. In addition, as saw yesterday, in 2019, the F-150 and the Super Duty are going to be joined by the globally successful Ranger, the midsize pickup, which we just announced yesterday is coming back into the market in 2019 and is going to add I think to our truck lineup and our truck leadership.

Moving on to utilities, another key strength for us, we are taking actions to strengthen our utilities. And that starts this year, we are going to introduce all-new aluminum bodied Expedition. This is the first redo of the Expedition in over 15 years. So it’s a really important introduction for us. And that’s going to be followed by five new SUVs through 2020 in segments that we don’t currently compete. And of course, that includes the all-new Bronco that we talked about yesterday at the show, but also our fully electric long range small utility vehicle, which will have a range of at least 300 miles.

Moving on to another profit pillar for us, performance vehicles, these vehicles are not only fun, they are profitable and they help build our brand. And globally in 2016 to put this in perspective, we sold over 200,000 of these vehicles. And we are absolutely on track to deliver 12 new performance vehicles by the end of the decade. And as we speak right now, we are starting to deliver F-150 Raptors to our customers. And we started to build and deliver the Ford GT. And we announced another 2 years, additional 2 years to the Ford GT. So if any of you are interested, we will have another application process. And I encourage you to check out the stand because it’s a really a fantastic vehicle and showcases our technology, our powertrain technology, our fuel economy, our light-weighting, etcetera. In addition, on Mustang in 2020, we are going to be adding a Mustang Hybrid. And that will give customers the equivalent of V8 power with even more low end torque, which is important for our performance in Mustang customers. And of course to boot, they will get better fuel economy.

Ford Credit is another profit pillar again delivering strong, consistent financial results for us, but doing in a way that not only supports our business around the world, but also provides leading U.S. customer financing satisfaction, as measured by J.D. Power both for Ford of our Lincoln brands. And then finally, we don’t talk a lot about this, but we have a highly profitable and growing parts and service organization, consistently delivering strong results. And we feel we have a lots of opportunity to continue to expand that business around the world. And it has the ancillary benefits of not only being highly profitable, but adding to customer satisfaction and to owner loyalty. In the case here in the U.S., our owner loyalty, we are tops in loyalty here and we want to build on that.

So in addition to the profit pillars, another really important piece is transforming the underperforming parts of our business. And you can see in – let’s start with Lincoln. In the case of Lincoln, there are many signposts of progress. And these include strong global sales. Our sales last year were up 24%. We sold a little bit more than 159,000 units, but also at the same time, third-party recognition for our product appeal, our quality and our customer satisfaction. And we are going to continue to strengthen our Lincoln product portfolio and we just launched the Continental and we have the new Lincoln Navigator coming a little later this year. Now despite the progress that we have seen, there are – we are evaluating further opportunities to improve returns on capital in the Lincoln business. Small vehicles in developed markets is another area of challenge. We have talked about that a number of times before. We have learned a lot in recent years on what it takes to generate appropriate returns for products in these very competitive segments. And we have begun to implement actions in this area.

A couple of things that we have down even since Investor Day, we have repositioned and we have capped capacity for the next generation Fiesta in Europe. And then we have underpinned that with an attractive value entry, our KA+, which is made in India from a low-cost operation, so it provides a really nice pricing for the Fiesta. We are producing the EcoSport mini-utility for Europe and North America in low-cost manufacturing locations. And of course, we are matching production, but also capacity to demand. And as you know, we opted to build the next generation Focus in an existing Mexican plant. And the reason for that and as you can expect, I got a ton of questions and I am sure there will be a few tonight. But the bottom line is we didn’t need the capacity anymore. The small vehicle segment is coming down in North America. So we decided, rather than build that $1.6 billion new plant in Mexico, we are going to put it in an existing plant in Mexico.

Moving on to emerging markets, as you can see on this slide on Slide 14, we have made progress in a number of areas. As you know, we have exited Indonesia in 2016 and in Japan, because there just wasn’t a clear path to profitability. In ASEAN, we did turn return to profit in 2016, while in Russia, the business improved substantially and we expect further improvement this year, particularly as commodities and the price of oil firms. If we look at South America, we do expect results to improve in 2017 as the economic conditions have started to stabilize and will begin to improve. In Middle East and Africa, we do expect our results to improve in 2017 as we work to strengthen distribution, particularly in the Middle East. And we did achieve significant double-digit growth in production in India in 2016 and that’s been driven primarily by exports. But despite this, India remains a significant challenge for us and that’s why we are continuing to work this year to evaluate different business models for this market.

Now, let’s move on to growing in the emerging opportunities and we are driving for leadership in three key areas: electrification, mobility and autonomy. And in each as you can imagine, we are leveraging strengths in the core, but also looking for synergies across these three areas. And in electrification as you can see on this slide, bottom line is, we are focusing on our strength. We are focusing on our profit pillars, right, the trucks, the vans, the commercial vehicles, utilities and performance vehicles, to provide customers more. We want to give them more of what they love about our products today, more capability, more productivity and more power. And by the way, you get better fuel economy. And last week, we announced 7 of the 13 electrified vehicles that are coming by 2020. And this is part of our $4.5 billion investment in fuel economy. And these include, as I mentioned, an F-150 Hybrid, a Mustang Hybrid, the Transit custom plug-in Hybrid which will be in Europe, and of course, the all new small SUV, full battery electric SUV that will have the range of 300 miles plus two electrified police vehicles. That’s an important business for us and it fits into our view of the City of Tomorrow, which I will touch on in a moment. We also announced the memorandum of understanding with a number of OEMs in Europe for an ultra-fast charging network in the region. And then finally, we announced that a little earlier this week that we are piloting new wireless charging technology both here in the U.S. and in Europe.

Looking at autonomy, as you know, last August, very simply, we announced that our intent is to have a fully autonomous SAE Level 4 vehicle in the marketplace in 2021. And last week at CES, we debut our Fusion Hybrid Autonomous Research vehicle, our next generation research vehicle. And I think this vehicle really demonstrates Ford’s in-house hardware and software engineering efforts. And if you get a chance to go down to our stand while we have the vehicle, I encourage you to check it out. We also announced earlier last week that we would invest $700 million in our Flat Rock Michigan plant, not only to build the autonomous vehicle Hybrid, but also the long-range fully electric small utility vehicle. And last year, we expanded our test fleet from 10 to 30 vehicles. We will have this month 30 vehicles on the road. And then we will triple that during the year to have 90 by the end of this year. And we begin testing in Europe which complements the testing that we are doing in Michigan and Arizona and in California.

On mobility, which is covered on this slide, Slide 17, our team is very hard at work developing services and related business models, really designed to reduce transportation congestion and increase transportation capacity in dense cities. These cities face these issues. This paradox of they need more capacity, they need more flow, but at the same time, they need to reduce congestion and they need to reduce pollution. And we have a very clear understanding of where we intend to play and how we propose to win. Our ride-sharing play is Chariot, which is our crowd-sourced shuttle. We are now in two U.S. cities in San Francisco and Austin. We are going to expand to 8 cities by the end of this year with one market being outside of the United States. And Jim Hackett on our Ford Smart Mobility team is building technology platforms to support both the shared, but also the owned business models and at the same time aggressively developing new products and services. And as you heard maybe a little earlier yesterday, we are moving quickly to develop partnerships with major cities to co-create solutions for the future and that’s why we talked about the City of Tomorrow yesterday in addition to talking about our core products to show you how we are thinking about these things. So, it gives you a perspective of our strategy as we make plans and announce plans and how it fits in within that. Importantly, we want to make money on this stuff. So, we have done our early work shows indicate their realistic potential of earnings of about 20% operating margins of 20% or more.

Now, another area of emerging opportunity for us that you see on the slide is a connectivity which is really an enabling platform that supports really good growth opportunities for us both in our core and in our emerging business. And last week at CES, we announced a number of initiatives on this that you can see on the screen here, one of them being our working with Amazon to integrate Alexa, the most comprehensive integration of Alexa into our vehicles. So, you can do home to car and car to home and make people’s lives easier.

So, that was a brief run-through of what’s been happening. And hopefully you can see that we have delivered not only another strong year financially, but also operationally in 2016 and one that’s completely in line with the guidance that we provided last September. We are making progress on our profit pillars, transforming the underperforming parts of our business, but also developing our points of view and the action plans on where to play and how to win in the areas of emerging opportunities. So, the next step on that transformation obviously is 2017. So, let me get into some specifics on what we expect for the outlook for 2017.

So, let’s start with GDP and industry volumes. Bottom line, we expect the global GDP to grow at a 3.4% rate, positive rates across all regions including Brazil. We expect the global industry to grow about 2% with higher volumes in all markets with the exception of the U.S. And in the U.S., we do expect a small decline off the record level that we saw in 2016. And our view is the market has plateaued, but it has plateaued at a strong level. Now, one other note and I am sure we will get some questions on this on the business environment in the U.S. We expect significant action by the new administration in Congress on pro-growth policies, particularly around tax and regulatory reform and also action on infrastructure. And while it’s too early to speak about specifics, because it has to go through the process, we are encouraged by what we have seen so far including the blue print tax proposal that’s under discussion right now in Congress. And as usual, we look forward to being part of the dialog with the administration in the Congress as these new policies are debated and finalized in the months ahead.

Now, turning to launches in 2017, we will have 11 global launches, which is the same as 2016 and includes a new EcoSport, a new Focus Electric, the all-new Fiesta, both the 3-door and the 5-door and the new F-150 as well as the all new Expedition and the all new Navigator and we will have two more that we will talk a little bit later this year as we get closer to the launches.

Let’s turn to the financials and if you look at the total company adjusted pre-tax profit that’s shown on the left slide of this chart and I am looking down at the slides here. We expect 2017 results to be strong, but again, as we indicated at Investor Day lower than 2016 and that’s driven primarily by the effects of increasing investments in the emerging opportunities. We expect 2018, we expect profitability to improve and that will be led by gains in our core business.

Cash flow, which you can see on the right hand side here, we expect strong results in 2017 although lower than 2016 and the reason its lower about half of that decline is going to be related to timing differences in the core business and the other half is going to be due to the increased investments that we are taking in the emerging opportunities and that’s primarily in electrification. For 2018, we do expect cash flow to be about flat with increased investments in the emerging opportunities that nearly are nearly offset by gains in the core business. And as usual we expect our automotive cash balance to maybe remain or above our targeted level of $20 billion for the business. Now, taking a look at some of the metrics, you can see here compared to 2016 we do expect key financial metrics for ’17 for the company to be either lower or about the same and again this was consistent with the guidance that we talked about in September and at a company level the change for 2016 is driven primarily by the investments that we are making in the areas of emerging opportunities.

Now, let’s take a look at some of the factors that are driving change from ‘16 to ‘17, as you know we report the company in three segments automotive, financial services and all other. And in all other we have treasury operations as well as our Ford Smart Mobility LLC. And as you can see profit will be down in 2017 from last year in each segment. In the Automotive segment, the decline is primarily driven by investments again in the emerging opportunities. If you exclude the emerging opportunities, we expect costs to be slightly higher and that’s more than driven by increases in commodity costs. We expect the profit impact of volume and mix to be about flat year-over-year, net pricing to be higher and exchange to be unfavorable in all regions with the exception of Middle East and Africa. And again consistent with our guidance, in the Financial Service Group segment, it’s expected to be lower and that’s due to the effect of the lower residual or lower auction values that we are seeing and then the subsequent increase in accumulated depreciation on our lease portfolio. All other will be down and that’s due to increased investment not only in Ford Smart Mobility LLC, but higher interest expense and that’s mainly related to the auto debt issue of $2.8 billion that we did in early December of last year.

Now, let’s spend a little bit of time on costs. As you can see from this slide, the increase in costs in the Automotive segment is mainly due to the investments in the emerging opportunities. And what you can see here is we expect to deliver about $3 billion of cost efficiencies net of economics during the year. And this will nearly offset all other cost increases other than for the emerging opportunities. And just to note, if you look at some of the cost increases for price related feature, keep in mind that adds positive contribution margins from related pricing and also the increase in regulatory costs we do assume some partial recovery – price recovery in that area.

Now, let’s look at the regional look and also some of the puts and takes in each one of the regions. You can see our profits in North America and Europe to be lower than last year while we expect to see improvements in South America and Asia Pacific and Middle East and Africa and of course as we talked about Ford Credit will be lower in 2016. Now, the decline in North America which will remain by far almost profitable business unit is due mainly to unfavorable volume and mix, but also increased investments in the emerging opportunities. We expect South America there are lots to improve as a result of favorable market factors and as the economy starts to recover. We expect Europe’s profit to decline and that’s mainly due to unfavorable exchange and as you can imagine that’s primarily the benefit so to speak of Brexit and the impact on our business. Results in Middle East and Africa will improve due to lower cost, higher pricing and also some favorable exchange. And then finally Asia Pacific, our profit is expected to improve and that’s due to favorable volume and mix. Now, net pricing will be lower, it will continue to be negative in China. We have seen that over the last 8 years to 10 years or so, but we do expect to see unfavorable exchange mainly weaker Chinese renminbi that we have already started to see.

So, let’s talk about shareholders, very important constituency for us. In ‘17 they can expect distribution totaling about $2.8 billion and this reflects a regular dividend, of course always subject to Board approval and that’s unchanged from 2016 $0.15 per share or about $2.4 billion annually. It also reflects a supplemental dividend which we announced today of $0.05 per share or $200 million and that’s based on 2016 adjusted net income. We also plan again subject to Board approval to have a share repurchase program that we have done in the last number of years to offset dilution of share issuances basically associated with management compensation. Now, I would like to point out that these actions are completely consistent with a payout ratio in the lower half of our stated strategy of 40% to 50% of prior year net income and excluding the after tax effect of the pension mark to market. And so with this plan we will have distributed $15.4 billion to shareholders by the end of 2017 since we restored the dividend back in 2012.

So let me wrap this up before we bring everybody up for Q&A. In sum, we delivered on 2016 which was our seventh consecutive year of strong performance as a company and as a team, we expect 2017 to be another good year of results and again in line with the expectations that we set back in September at Investor Day. We are well along the way on the process of transformation of our business as we are not just talking about it. We are well along the way on that from a strong healthy automotive company to one that will be bigger and stronger as we expand to be both an auto and a mobility company in the future. We are focusing on our core strengths, we are transforming the underperforming parts of our business and we are investing aggressively, but also I think very prudently in emerging opportunities and so we think forward as a solid investment with an attractive upside on the emerging opportunities and as usual we look forward to continuing to show you our progress and reporting out on that during the year.

So at this point what I would like to do – that’s my report to the committee. Okay. The audience or Jury, no, sorry, let’s bring up my colleagues and we will start the Q&A session. And I think as usual I think Rod you will ask the first question and then if you could if you could just introduce yourself and tell us what company you are representing?

Question-and-Answer Session

Q - Rod Lache

Maybe before you start maybe we can just have everybody introduce themselves. So may be Jim.

Jim Hackett

Yes. Good evening everyone. Jim Hackett, Chairman of Ford Smart Mobility.

Joe Hinrichs

Joe Hinrichs, President of the Americas.

Bob Shanks

Bob Shanks, CFO.

Joy Falotico

Joy Falotico, Chairman and CEO of Ford Credit.

John Casesa

John Casesa, Group Vice President, Strategy.

Raj Nair

Raj Nair, Product Development.

Jim Farley

Jim Farley, Europe, Middle East and Africa.

Dave Schoch

Hi, good evening Dave Schoch, Asia Pacific.

Rod Lache

Okay, alright. Well, thanks everybody. Thanks again Mark for that presentation. There were two things that I was hoping you might be able to dive in a little bit more into one is you talked about the improvement in underperforming areas, luxury cars, small cars in emerging markets, could you just give us your latest view on the magnitude of what the opportunity is and the timeframe that you are expecting and it sounds like that might be part of what you are expecting with that improvement out to 2018. The second question is both you and Bob mentioned that you are encouraged by some of the tax proposals, so maybe just at a very high and I know there is a lot that is still being developed here, but if we looked at the Ryan plan, the Brady bill, just on a very high level to most of us and the most suppliers, it seems like this could cause significant inflation. There is maybe $90 billion of parts imports that come from Mexico to North America, maybe close to that from Canada to the U.S. Just give us the sort of big picture mechanical on how you see that is actually encouraging or there are encouraging elements that would offset some of those negatives?

Mark Fields

Well, let me start with the second question. And then Bob, I would like you to take the first question. That’s the right answer. I think first off, this is going to take a lot of twists and turns as tax reform happens. We strongly believe that we probably have the best conditions for tax reform that we have had in this country in quite some time. And the President-elect has made it very clear that, that’s a priority. And I think we will see what happens when the inauguration happens on the 20th, but our expectation is that will be one of the key things that they will prioritize. As you look at the blueprint, it’s interesting to us, because with the border adjustability, you have to look at the net export profile of carmakers, of suppliers, etcetera. So, you could see obviously a lot of math that has to go into that to see what the local content, if you will, of your vehicles here in the U.S. But given that we are the largest producer of vehicles here in the United States on a top exporter, that’s kind of interesting to us. I also think at the same time as we look at those tax proposals. Again, you have to put it in the light of where does it falloff competitively, but we will see how it plays out our approach as you can imagine as we have had very good working relationships with administrations going all the way back to Teddy Roosevelt. And as a company, we will be very straightforward with the facts and what we think is appropriate, but also good for our business and jobs. But I just say one last thing, listen, with tax reform, most companies most good companies try and basically minimize the tax reform, because we are running a business. We are responsible to our shareholders. If the tax code changes, companies will change.

Bob Shanks

Yes. Just before getting to the other question, I would also add that we are making this statement around at least positive attitude towards potential tax changes, because our tax team has actually done some great modeling based on their understanding of what the blueprint proposal is recognizing there is a lot of details to be sorted out, right, lot of gives and takes and pay-fors and a lot of TBDs. But to the best of our ability, we are going to try to keep up with that proposal as it progresses and based on what we have modeled so far, it looks quite attractive to us, so….

Rod Lache

Would you be willing to just give us some high level on what is the export number, because Ford generally is not perceived to be, it’s certainly in completed vehicles, maybe there is parts and admissions.

Bob Shanks

No, I am not going to get any details now, but you do have to look at the net position as Mark is saying and when we look at that as well as other aspects of the proposal beyond the border adjustable tax, it looks attractive. So, we are actually quite interested in being part of the dialog as Mark said and helping shape this as it progresses through Congress. In terms of what you said, you are right, when you look at the improvement in ‘18 and we obviously go out beyond that in our own internal planning, we do see improvements in the business coming from these areas of underperformance, particularly in the emerging markets, but a lot of good work that has been underway on small vehicles, but we are not satisfied with that level of improvement. So the opportunity for us is to take what I’d call more incremental or business as usual type improvement that we see in the years ahead and make more choices around where to play, where not to play and potentially around different business models. And I think the discussion that or the comment that Mark made around India is a really good case, because that is one area of the business that we are still scratching our heads on a bit in terms of trying to figure out what is the right answer in terms of coming up with the business model there that works. So, I think you will see more from us in all that space, but we do see improvements even with the actions that we have in place in that part of the business going ahead, we just need to see more.

Rod Lache

Would you be able to sign any metrics to – this is what the target is for these underperforming areas if you were to achieve these targets, let’s say in the next 2 or 3 years, what would be the magnitude of the opportunity for Ford?

Bob Shanks

Not now, but we will come back to you on that. I mean, we do see opportunities in each of the areas that we talked about. In the case of the emerging markets, I think there are even just at least the outlooks that we have putting aside India has actually some pretty good levels of improvement even where we are sitting today. I think the opportunity is for us to find further opportunity beyond that level as I mentioned.

Mark Fields

And to your point, where you are seeing it a bit as you saw from our chart as you look at 2018 but beyond, we want to target some improvements.

Rod Lache

Thank you.

Mark Fields

John?

John Murphy

Great, thanks. John Murphy, Bank of America. Maybe if we get to a sort of a maybe a more mundane question, I mean, you mentioned parts and services as an opportunity, I was just curious if you could scale that. I mean, there was kind of been a thought that you might make as much as $1 billion on parts and service in North America. Just curious if there is upside North America or this is a global strategy and does this go beyond just dollars and cents and maybe sort of on a blocking and tackling basis create a longer tether to the consumer?

Mark Fields

Well, we won’t get into absolute levels of profitability, but as you can imagine, the parts and service business is less subject to the economic cycles than our base business of selling cars and trucks. And so that’s been a very steady contributor to us. To put it in perspective there is not only opportunities on how you add accessories to vehicles, but one of the things we showed in the chart was quick lane, which is our fast service operation. We have currently, I think Joe what we have about 1,500…

Joe Hinrichs

Yes.

Mark Fields

We have about 1,500 of these quick lane operations around the world. We want to grow that substantially. That is good business for us. And the dealers that have invested in those quick lane operations have the benefit of not only generating service business and obviously profits for us, but also attracting competitive mix to have actually sold some more cars. The other opportunity going forward particularly in the service business is as our vehicles become connected and we have said by what is it, next 5 years, 20 million of our vehicles will have modems in them, but you can generate a lot of opportunity by making people’s lives better as the vehicle needs to be serviced and actually prompt them to actually come and get their vehicles service and we see it as another opportunity, John.

John Murphy

Okay. And then just the second question jump for basically, John Casesa and Jim Hackett, when we think about sort of the investment in sort of all these new business models that you are looking at in partnerships, I mean, how do you evaluate making the investment. I mean, it sounds – it’s very intangible at this point. I am just curious how you come up with metrics and frame this out? And then also, once you get involved with something how you evaluate it with the KPIs and when do you decide to cut deep?

John Casesa

Sure. So, maybe I will frame and Jim I am sure will have some comments. It relates so much to the question you asked – somebody asked Mark and Bob about the 4 to 5 transformed grow businesses. We have a lot of capital in the 4 to 5 businesses and Mark talked about the things we are trying to do to widen the mote. We got all the capital in the transformed businesses and Bob discussed a little bit with you how we are reevaluating that. We don’t have very much capital yet in the grow businesses. They are very new. Some are quite speculative. So, I guess the main principle is we start with the small amount of capital and then stage the growth as we get visibility, as we get confidence, as we see opportunities. So, it’s a very different lens from which we look at the core business. Does it mean we would say well, they are new, their growth businesses are just – it’s alright if we lose money in them, that’s not we are saying, we are just saying we have to be judicious and as we get visibility and as we refine the business models, then you can scale it up. And it’s a good example, really a small company, but there is huge synergy with Ford in technology, in vehicle purchases, in relationships with cities. So, we can take their growth plan and supercharge it and Jim could talk with you a little bit about the technology we are going to add to create value. So, I would say that’s the lens we are using and I just looked at the numbers before I came over here. Last year, we looked at 123 companies that we vetted M&A. We did 13 deals. And 123 is not the stuff we said we are not even going to spend time on, but it’s a very robust environment. We have got a very active pipeline in a good process and we are pretty selective. We are happy to be more active, but got it fit into the strategy. Jim?

Jim Hackett

I think that’s well said John. And I think you know what, he would be humble about it the deals we passed on, there is no summary of that and we saved a lot of money. If you look back at the kind of euphoria at the beginning of the year about mobility valuations, I didn’t believe some of them and they proved not be true. So I think you approached that we as a team look at and let’s just take Chariot, because it’s a real case. We got early in that, but yes it’s a big premium to where they were in one market, but absolute terms is not that big. John talked about the synergies we found very quickly that we – because what we know there were 12 people in the firm when we bought them that we can really help them become an efficient business scaled. But I think the other thing that John inferred is that inside of these mobility businesses are more software like entity. So the capital cost is not the issue, it’s two things that it’s the operating expense they have the kind of software engineering capability which you can source all over the world. And then the speed of which you have to transact because the customers change what they want in software. So this has a prospect if we get this right of much higher margins, much lower capital.

John Murphy

About just the 32% on the tax rate, is that something if nothing changes of the new administration we should run forward on our models is just was a little bit higher than we are expecting, just what happened there and…?

Mark Fields

Yes. Let me tell first what happened because I think as a group the first call consensus is around 28.5 or so I think if I remember correctly. And we weren’t too far off that ourselves going back into the fall, but what’s happened was two things. One is in terms of what we do during the course of the year, let’s take ‘16 where we were going to file taxes late in the year for 2015 tax year, so the team just like we do with our around pay checks we have withholding, so we were accruing against what we saw the tax return would be. And as it turned out when they completed the tax return we have done recruit by $150 million. So that’s one piece. So we have to top that up as we get into the fourth quarter. The second piece is around a tax optimization opportunity that we had high confidence and largely around couple of tax cities in Europe as they got into the details of that opportunity got deeper into what we thought would enable us to capture some tax attributes it just wasn’t here. And so that was over $100 million and there was about $50 million of just smaller things in terms of geographic distribution of where the profits are. So that’s the difference of taking us from sort of the 28.5% to about 32%. Now, looking ahead, probably for 2017 modeling, about 30% looks like about where we are right now in terms of an adjusted operating effective tax rate. And we will give you updates on that if and when it changes during the course of the year.

Rod Lache

Thank you very much.

Ryan Brinkman

Ryan Brinkman from JPMorgan, in the past you have targeted $20 billion of automotive cash and Mark I heard you say that again tonight and yet you finished 3Q with $24.3 billion of cash incents that have gone out and actually raised another $2.8 billion of cash, this has caused investors to ask you why are you building this cash, I suspect those questions will only increase tomorrow because you elected today to be a $200 million special dividend instead of $1 billion that you did last year, you have said you don’t see a downturn on the horizon, you have down played the possibility of a large one-time repurchase so what is it are you maybe readying for a large acquisition or is there some other factor that explains this building of cash?

Bob Shanks

Yes. Well, I think you have touched on it. When we look at the forward years and we talked about this in fact when we announced the new auto debt issue back in December. I mean we are trying to develop a strategic cash reserve that we can use as John and Jim mentioned as we started to flush out even further opportunities for us and the emerging opportunities we would like to make sure that we have got the ability to have a substantial cash reserve that we can use to take advantage of that, so that was certainly one thought. The other thing is that when we look ahead in terms of our spending plans over the next 3 years, 4 years, 5 years, we do see even in the core business increasing requirements and so we are trying to look ahead, it’s not just this year but looking ahead to the next 3 years, 4 years, 5 years, so that’s part of it. And I think it probably doesn’t hurt as we are getting towards the later part of the cycle and hopefully it’s got more legs than it certainly seems to have more legs than what the market thought earlier last year. But I think just given where we are in the cycle having a healthy cash reserve is not a bad thing also. I mean we have got some experience with having done that the last time around and that serves us pretty well.

Mark Fields

Ryan, can I just want to accentuate what Bob said in the first part of his answer. We did the debt issuance of $2.8 billion that gives us strategic flexibility and to the question earlier opportunities that come up, they can come up pretty fast and we have to bang that against what is our strategy and again those questions are where to play and how to win and then the third question we ask is what capabilities do we need. And in some cases, we may say we are going to build that capability or we have the capability and so I have no problem. In other cases we may say what, we don’t have the capability when we have to go buy something or we have to partner with somebody that gives us that flexibility because we are in a different environment now.

Bob Shanks

Ryan can I just mention one other thing. The other reason that we moved is because the rates were very attractive, the market looked very attractive and when we look at the leverage metrics on the balance sheet, we felt we have the capacity to take advantage of the market, take advantage of the lower rates, because clearly rates are going to be raising in the future, so we just thought it was a very opportune time to do this.

Ryan Brinkman

Certainly, that makes sense. The last question then is just on the guidance because since you introduced it in September, you beat 3Q earnings pretty handily U.S. light vehicle SAAR rose in December to the strongest level in the 11 years, consumer confidence has risen to the strongest in 15 years, small business confidence now is the strongest in 36 years, I don’t know what you assumed for the super duty, but the pricing and the sales have been pretty fantastic, are you willing to conceive that at least – then in China right there are some tax incentives some level which you didn’t know in September, are you willing to concede at least that there is upside risk to your 2017 guidance?

Mark Fields

Upside risk, our guidance is our guidance.

Rod Lache

It’s better than no comment.

Mark Fields

See, that’s why we hired John.

Emmanuel Rosner

Hi, Emmanuel Rosner from CLSA. Just wanted quick clarification in terms of some of the factors you were highlighting for the pretax work in 2017, it looks like you are assuming pricing up which I assume has something to do with your product line up, but I guess in the current environment with you highlighting yourselves some of the pressures in China for example as well as some pressure in the U.S. in the used cars side I guess what gives you confidence for having that factor up?

Mark Fields

Joe, will you take that?

Joe Hinrichs

Yes. We don’t see that opportunity in North America nor that we see it certainly China or in Asia Pacific its negative, our outlook. So it’s largely in South America, it’s also in Europe and as we also mentioned at least in Africa. So that’s where we see the positive North America is probably about flat maybe down a little bit and so that’s those three business units is what’s flowing through to the total company.

Emmanuel Rosner

Got it. And I guess more strategically so your plan for in the mobility services maybe our autonomous cars starting 2021, whole lot of announcements are pretty much over in that space, do you feel that coming out with the start of an offering in 2021 could place you at a timing of this event is versus other offerings?

Mark Fields

I think it’s always difficult for us to set other peoples timing. We know that our program that we have been on for 10 years and the rate of progress that we have been making and a pretty detailed program development plan that will be out in 2021 not just with level four vehicle and a small number in a sample or an engineering fleet, but high volume program facilitated in a high volume plant to capture the value in a ride-hailing service or ride-sharing service and possibly commercial package delivery service. So we are talking about the business opportunity capturing that in 2021.

Colin Langan

Colin Langan, UBS. I just had two questions, one beginning your questions about the border adjustment, I think you called it attractive, is that relative to the peers, because I would imagine given how much supply comes out of Mexico, you would have some sort of inflation because of all the costs there, I mean can you just clarify what makes it attractive versus peers or is there actually something I am missing in terms of the completion to the rest of the industry?

Mark Fields

Yes. I think when I was talking about attractive it’s the whole proposal including the border adjustable tax. And when we haven’t looked at our position, our position actually is not a bad position in terms of picking up the totality of the imports and the exports, both the vehicles to components picking up IP and other things as well. So, for us that – and also again I think someone made the comment or maybe I was talking to someone before the dinner, I mean, what we will also do all of us whatever that proposal turns out to be in terms of what’s enacted, we will behave differently. We will do things differently. And so we see the opportunity to make even further adjustments in line with what appears to be the direction that it’s heading. But I do think as we look on a relative basis, so in an absolute sense, it looks attractive when we look at it on a relative basis versus our peers that we think we are well positioned.

Colin Langan

Got it. Second question would be in the Investor Day you talked a little bit about connectivity oversight on it today and I think you mentioned you are building out datacenters, where do you think you stand in terms of relative to your peers on taking advantage of the connected Big Data opportunity and I think even you mentioned in your questions that there might be opportunities to sort of notify drivers of issues with their car and bring them back to dealers. I mean, when should we expect those kind of things to come through? Thanks.

Mark Fields

Well, you are already – when we talked about Big Data, first off, I am really encouraged by the progress that we are making in building up our data and analytics team. As we talked about it in Investor Day, we said we covered over 500 people. We are going to grow that significantly. An important, Colin, we are seeing contributions to the business now and through the business plan period throughout the business, whether it’s purchasing and figuring out sourcing patterns or in manufacturing how do you become more efficient, predictive maintenance, things of that nature. And I think as we approach autonomous vehicles and as we approach more one-on-one marketing where you will get a single actionable view of the customer, we are making a lot of progress on that. I can’t evaluate how we are versus other companies. We get anecdotal evidence from others. But I feel really good about how we are approaching this and how we are integrating this into our decision-making where we have a lot more science than art in terms of making decisions and getting insights and more importantly foresight.

Joe Spak

Joe Spak, RBC.

Mark Fields

Hi, Joe.

Joe Spak

First question is you guys have taken a pretty global approach to engineering centers meaning you develop crossovers trucks here, cars over in Europe or at least a lot of the development I think takes place there? As you look across the globe now and you see really an increase in globalization and nationalism and protectionism, does that make you change that view or that strategy as to sort of where you need some of those centers?

Mark Fields

No, not at all. I think the distribution of our engineering centers are 9 engineering centers on the world has been very beneficial to us both in terms of obviously leveraging the global resource, but getting insight into those global markets and where appropriate doing global vehicles, but also where appropriate doing regional vehicles and so even the discussion that we had or the announcement that we had this week about Ranger and Bronco, a lot of that is enabled, because we have got a global Ranger that was developed by our Melbourne, Australia engineering center and a great platform, the T6 platform underneath it, that we will not be able to adapt to the North American customer, North American requirements offered here as well as incrementally develop a Bronco off of that same platform. That will be done by our engineering center here in Dearborn, because we have a very integrated approach to each of the centers that we already have the capability of one center doing a platform and another center doing the top half both in terms of where do we have capacity available, but also which center is going to be closest to what the customer requirement is going to be. So, I would certainly recognize some of the aspects of protectionism and we will see what happens with trade agreements and etcetera, but relative to the leverage of engineering centers, I think that’s actually a competitive advantage that we want to continue to leverage going forward.

Joe Spak

So, my second – it dovetails into my second question which is now that the Ranger is official versus 3 years ago or 4 years ago maybe when you sat up there and said you didn’t see the market opportunity or you get hit with the F-150, what’s changed that lead to the interest Ranger 3 years from now?

Mark Fields

The market opportunity.

Bob Shanks

The market has changed. And also we listen to our customers it wasn’t that we got tired of answering questions when you are bringing the Ranger back.

Mark Fields

We got tired…

Bob Shanks

But it was really the market has changed and also at the same time, that segment is up about 50% over the last 5 years or so. And the other thing is we have a huge owner base. I mean, keep in mind, the last Ranger we sold was the end of 2011. So, there is still lot of folks out there that love Rangers and between that and the market changes and listening to customers, we just said now it’s the right time.

Mark Fields

And specifically on the customer insight, it wasn’t as much the aspect of fuel economy or didn’t need the capability of the F-150 it was much more about physical size that was a little bit different than what we have been hearing from the customer prior to that. And so that’s why we think it’s a great opportunity and it’s actually not a cannibalization of the F-150, but the incremental opportunity because of the size of the vehicle. Brian?

Brian Johnson

Brian Johnson, Barclays. Kind of three questions short, medium, short and then long-term vis-à-vis Ford Credit, which we haven’t talked a lot about, the short-term one is just sort of similar to question before with the greater consumer confidence, with the prospect of economic growth, do you see the possibility that the credit cycle in used car prices will stay better, stronger, longer if you will than perhaps where you were in October?

Mark Fields

Joy?

Joy Falotico

Sure. I think that’s certainly possible when we gave the guidance for the full year, obviously, we have seen our auction values declining and we still see that for 2017 based on the volume of off-lease vehicles, but certainly as the economy improves, we will look forward to some upside to that, but right now, with what we are seeing with the off-lease volumes, we are sitting with our guidance.

Mark Fields

Okay. And the short to mid-term one is a lot of the ride-share blogs for current non-robot ride-share says that 3-year-old quality used car is your best option for ride-share driver, are you seeking to enter into that market to help your dealers with the off-lease vehicles to provide financing solutions or do you think that’s too small or too interesting to go after?

Joy Falotico

Right now, we have no plans to do that. Jim, I don’t know if you want to add anything to that?

Jim Hackett

No, I think that’s not an attractive option, because if you think about it, it’s kind of a segment right now that is going to be moving and I wouldn’t want to see Ford making commitment with something that’s the demand and supply of that’s all over the place over time, so no….

Joy Falotico

We are looking for a profitable opportunity.

Brian Johnson

And I guess the third question for Jim and Joy and Mark is kind of just when we think of the distant future with mobility as a service move away from personal ownership of vehicles, what happens to Ford Credit in that environment and it’s a pretty big profit stream currently and historically and how does that evolve in the world that Jim and team are trying to make happen?

Jim Hackett

Well, when I call Joy, I say don’t plan on the lot of – lots of ownership. I mean, the forecast as you all read about that, I mean, in a way I can be a little feud about it, I was in college, I couldn’t afford to buy a car, so if they interviewed me and said are you buying a car, I’d say no, because I am in college. So, that group is the one segment. We actually have data that says the stickering of ownership is still very high, but the thing that moves me the most is the [indiscernible] behavioral economists like Dan Kahneman talks about ownership in the world of automobiles as a form of signaling. There is an emotional attachment to it. I mean, I would ask every one of you about that question. And so what we think is though the future of sharing is really robust. We are not – in fact, we are making a huge commitment to it, but it’s a plus kind of thing and in dense cities, it’s an option such as you don’t have to opt-in to ownership or you don’t have to take your car out more accurately. So I say to Joy, I don’t think that’s going to be the issue that we are going to face.

Joy Falotico

Yes. I would just add to that, we are really excited about the opportunity for Ford Credit in the mobility opportunities. We see that was the key enabler and a strategic asset in mobility, just like we are in the core and we can think of things that we can do with our transactional relationship with customers providing good services, financial solutions. An example of that would be like Ford pay the mobile payment solution that we develop for Ford Path. So, we are really excited about those opportunities.

Mark Fields

Just want to remind everybody, we’ve got the Head of Americas, we got the Head of Europe and we have the Head of Asia-Pacific. Now is your chance to ask some questions around the world if you want. How about right back there?

Unidentified Analyst

Yes, hi, [indiscernible]. A question for you. I wanted to understand, Ford Mobility Services on a global basis, are you thinking of rolling out some of the services like Chariot into Europe and into Asia rather than just looking at the Americas and also want to understand how many investment opportunities you have looked at and how you expect that to scale up going forward?

Mark Fields

I would like to leverage your question, the answer is yes. Yes, into those markets, but have Jim Farley who – both Jim and Dave have pushed with great clarity the role that we can play and there is big opportunity and may be Jim could talk about what’s going on in Europe with our plans.

Jim Farley

Sure. So we have – we are the market leader in the UK for example. We have a great opportunity. We have very close relationship with Transport London. There is nothing to announce at this point, but we do certainly see tremendous opportunity as we work with the City of London and Transport London for example. And there are a lot of other markets throughout Europe where we had very high presence in the cities that are really interested in our portfolio especially in Chariot now that we have that announcement. But we got to get experience right. Nothing to announce, nothing specific, but it’s clearly a big opportunity for us in Europe.

Dave Schoch

Clearly Ford Smart Mobility is or Smart Mobility is moving very quickly in China, we have been working very closely with Jim’s team. He was out with us for a week in December where we crystallized our strategic initiatives we are going to have going forward with the concentration on China. And now we are turning our sites to India. And one of the big opportunities there we call out the city as a customer, what can we do to help cities really congestion, reduce emissions. And we are very focused on that.

Unidentified Analyst

Yes, good evening. So general opportunity from consumer and research on electrification, there was the time when it was [indiscernible] think about six cylinder F-150 and that we are talking about an electrified F-150, so clearly you big volume in mind and I guess my core question is how do you think about sourcing and sort of cost evolution of the battery packs over time and may be a related questions just for the benefit of the European and sort of the Asian segments, is it more or less difficult as you see it to in terms of it modeling electric vehicle penetration in markets like Europe and is that one of the reasons why it’s part of your announcement with the infrastructure side, your partnering it seems in Europe first as opposed to announcing may be a partnership here or infrastructure investment here? Thanks.

Mark Fields

Take that first Raj and then maybe Jim.

Raj Nair

Yes, I think as you said the paradigms that you can break relative to the powertrain, I think we have proven in F-150 relative to EcoBoost and even to and also we are doing a hybrid Mustang and not have any Mustang [indiscernible] me yet is a positive. I think as we go into the increased volumes in electrification certainly looking through the value stream and seeing what the opportunities are and to capture more of that value stream. I think you would have to break it up from the battery pack level to actual cell level to pack an assembly. And certainly at the cell level the scales and volumes that you need to get back to the right level is probably more appropriate for some of our supplier partners. And then leveraging that particularly is battery chemistry changes happen and the risk in-sourcing that part of the value stream when we know we are doing a lot of work and changes in the battery chemistry both in terms of optimizing let’s say [indiscernible] but possibly a total breakthrough in chemistries post that, but relative to the pack and then relative to the assembly of the pack and relative to the cooling elements of that pack and similar to how we look at the internal combustion engines, we are already in-sourcing a portion of that right now. And I think we will be increasingly taking a look at that as the volumes increase in electrification.

Jim Farley

On Europe, it’s important I think to even look beyond use of gate on how much has changed in Europe in last year on electrification. Yes. All the competitors have made big announcements, but all you have to do is read any paper from any major Europeans sitting now on air pollution is a huge topic for customers. And so from the regulatory side even the politicians side this is really a big priority. When you look it from the customer standpoint they have a couple of pain points electrification, charging is really big deal. When you do make travel between big cities and also the complexity of all the energy companies like your roaming charges on your bill making those experiences easy for customers is clear we are going to have to work together as an industry across the companies to make it better for customers. So I think it’s more than just design the vehicle. The electrification business model where they requires us as an industry to do projects like the one we have entered the MOU on in Europe. And I think that will be the beginning there will be I think other areas like simplifying your charging bill as well.

Unidentified Analyst

I think the incremental aspect in the charging for Europe that we are looking at is probably even more important because of as a percentage the ability for residential charging is lower in Europe than in North America, so therefore good charging infrastructure is even more important?

Unidentified Analyst

Just a quick follow-up we expect announcements related to the battery side of the electrification independent of product announcements where you will be sort of updating us as that evolution occurs or will it be more sort of embedded and subtle in the newer product announcements over time?

Mark Fields

I am not sure we have talked about what our communication strategy would be, but we are trading in that strategy similar to our powertrain architectures, so the battery strategy is in the overall electrification powertrain architectures is a cost vehicle unit strategy than tied to individual vehicles.

Bob Shanks

And I would just finally add one other things we talked about in depth at Investor Day was around we use electrification as examples looking at eco systems and that’s very simply looking for service and revenue streams beyond just the sale of the thing, the vehicle. And that’s why you are seeing us do things like fast charging some of things Jim was talking about because we want to look at that and say are there opportunities for us to generate revenues, but also at the same time make customers lives easier.

Unidentified Analyst

Just on the all these changes that are occurring in Europe and Asia as well vis-à-vis electrification in the Chinese government promoting a lot of this, are these things when we as analysts kind of look at the business today we can see how North America, the franchise is going to be very strong, the truck business [indiscernible] position we don’t see going away anytime soon, but our impression is that the magnitude of the investment it’s going to be required to accomplish what you need to accomplish in China or in Europe for that matter given the CO2 requirements and are changing over the powertrains towards increasingly electrified is going to make it more difficult to achieve an attractive return of invested capital, is that a misperception, are we missing something and how is that affecting your strategy?

Mark Fields

Bob do you want to…?

Bob Shanks

Well, I certainly think it’s and we have talked about this in the shorter term maybe short-term to medium term as that transition occurs, as we and the supply base continue to grow scale, I think we certainly are seeing pressure on margins from electrification and we talked about that at Investor Day. But even in our own plants as we kind of look out over a 5-year timeframe we see a substantial improvement [indiscernible] profitable in total but the losses dramatically reduced as we move towards the end of the decade. As you go into the next decade which I think is where you see a big change in terms of take ups because of not only just the regulatory problems that you are talking about, but as the crossover plan occurs on selected powertrains between ICEs and certain types of electrification and we all become more agnostic about those costs. I think you will start to see the dynamic start to change. So I do think that there is a period of time in which there is a challenge around margins. In fact across all these aspects of transformation there is this area of investment in growth piloting exploration, moving towards scale and so forth that we will have some impact on the business which is what we have talked about. But we are very confident when we look into certainly the next decade middle of the next decade for example on electrification. We see the economics really starting to make sense and give us the opportunities not just to get good returns, but in some parts of the business particularly the services fantastic returns. So I think it’s the timing issue.

Dave Whiston

Hi, Dave Whiston, Morningstar. Two questions on mobility and I want to fast-forward in time to a fully autonomous world, you had mentioned earlier tonight that you are not looking to getting the off-lease market with ride-sharing, but in the fully autonomous world at some point the Uber and Lyfts of the world are going to need to buy a lot of – or at least a lot of vehicles and is that something Ford would be willing to participate in or at that point would you be competing against them? And tangentially to that, my second question would be I think personally I think that for the consumer it’s easy as they have just an Uber app or just a Lyft app on your phone. So how do you convince that consumer to add a second app in your case a Ford app?

Jim Hackett

Well, I would like to take the last one I heard something at the Auto Show, I learned things here as well. I don’t know if you have heard there is drivers that have determined that the app is actually an easy thing to replicate and they don’t they need Uber. And so that there is communities now that are gathering delivery kind of drivers that say if all I need to create is a way for a customer to know them in the area. So, let’s just bookmark that and say is the pressure on the design of their model, the simple app and the fact they really don’t have any control over the driver. And then when you go to the EB World, the prospect for Ford is really a good opportunity in both ways. For a business model that is doing well, we could be a supplier and we can do it ourselves. We haven’t decided yet. The other thing I just want to throw in there and it’s we are down towards the end of our hour, but the rate limiter in this EB World for me is the pace of the cities will be ready to convert operating systems to receive this kind of technology. So, we had four Mayors here this week talking about their priorities next week, Bill speaking at the Council of Mayors, John Kwant from my organization. And the number one question you get everyday is what do we got to do to get ready for these things. And so I think the opportunity here is really great for the OEMs, because we are leading these cities in ways that we want them to be ready for adoption. That bodes well for the services that are going to come along as Bob just said with these products that we haven’t told you about yet.

Mark Fields

Let me just add a couple of things, fast-forwarding to that time, the world that question implies that could be a long way out. Because as Jim said, first of all, nobody has made a robot that really works as we are dreaming about, we are all trying to invent it now. It’s pretty hard to do. Societal, regulatory legal acceptance is a big question and it’s very likely that it’s going to be a pretty messy process to get to their role. So, I think it’s going to take a long time. And right now, we are sort of internally, there is this tension between having a point of view on that future and having the humility to know that it’s not so easy to forecast what the world is going to be like a decade out. And the time Bell invented the telephone was pretty easy to – hard to see what 1920s would look like with telephone enabled business models. So, I think that is quite a ways out. And one of the critical things is to have great technology. And we do have a view that great technology is not going to be – it’s going to be pretty rare. It’s got to be reliable. It’s got to be safe. And so our focus is hugely on the engineering and product development effort, while we are thinking through the business model. So, it is hard to make the lead to – we are out there and the business has become commoditized, because all those ride-sharing businesses which are losing a lot of money now have got to survive from now until that world that’s a decade or 15 years out.

Jim Hackett

But even in that world 10 or 15 years from now, listen there is going to be a spectrum. When people are sitting in this room 20 years from now, there is going to be people that will want to shop, buy, own drive vehicles they have had for many, many years. So it will be a spectrum plus if you think of some of our modes in our truck business, our van business etcetera, the farmer in Kansas is not going to call up his Uber F-150 to say help me with my harvest this week or the tradesman that’s going to the work site to be able to put the drywall up. So I think just put it into perspective, there is going to be a spectrum and we want to be there for both the owned and the shared customer.

Mark Fields

Jim?

Jim Irwin

Hi, Jim Irwin of Moon Capital. I just want to ask kind of a basic question about cyclicality, it’s kind of mundane against all this exciting stuff, but China, you are over there on the far left and nobody has asked you about kind of the obvious question of China profitability. And I want to get your sense of how volatile you are thinking 2017 could be in terms of payback with what’s effectively going to be a 2.5% price increase on the 1.6-liter and below segments. And two, if you can kind of share your perspective on the industry profitability, which is very high in crossovers, but potentially very, very compressed in past future cars. Now that Volkswagen, one of the largest players now has SUVs coming into the market, 2 years late, but they are finally starting to come. So, I just want to be surprised by two quarters of much lower expectations on China profitability to be recovered in the second half when things normalize. I just want to kind of get your seasonality aspect of Q1 through Q4 if there is something we should be thinking about in terms of your China profitability?

Mark Fields

Well, given the tax incentive, we had a fairly strong fourth quarter industry and some of that was pull ahead from 2017. And for the first few days of 2017 we have seen some payback. We had programmed that. We had anticipated it in our plans. Over the next couple of weeks, I think you are going to probably see some volatility. And it’s going to be difficult before the Chinese New Year to get a good read on what the running rate is. But we are coming out of 2016 at an industry of about $26.5 million and we believe 2017 is going to be in the $27 million range, so fairly flat. And as I look forward ‘18 will probably be somewhere in that range as well. Okay. Now on the SUVs, when I think about the strength of the Ford family of SUVs, so we have the EcoSport, the Kuga, the Edge, the Everest, and the Explorer, our full family of SUVs in China. It’s a very strong lineup and I think we are well positioned for the movement, the shift of customer preference from sedans into SUVs.

Jim Irwin

Can you just share quickly SUV penetration for the industry in ‘16 and where you think it’s going to be in ‘17?

Mark Fields

Well, I don’t have the industry data, because the government doesn’t share it anymore, but I can tell you that our penetration right now in the SUVs and the larger vehicles is about 40% of what we sell.

Jim Irwin

And last, is there a substantially wide gap between your passenger car profitability and your SUV profitability in China?

Mark Fields

I can’t comment on profits by segment.

Jim Irwin

Thank you.

Mark Fields

Thanks, Jim. Okay, I think we are down to zero, not in our financials in the clock here. I want to be really clear about that. So, we really appreciate you spending or giving us the opportunity to share your dinner with you and appreciate your support. Thanks a lot.

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