MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Warranty and Additional Service Actions Pensions Nature of Estimates Required. The estimated warranty and additional service action costs are accrued for each vehicle at the  time of sale. Estimates are principally based on assumptions regarding the lifetime warranty costs of each vehicle line and  each model year of that vehicle line, where little or no claims experience may exist. In addition, the number and magnitude  of additional service actions expected to be approved, and policies related to additional service actions, are taken into  consideration. Due to the uncertainty and potential volatility of these estimated factors, changes in our assumptions could  materially affect net income. Assumptions and Approach Used. Our estimate of warranty and additional service action obligations is reevaluated on a  quarterly basis. Experience has shown that initial data for any given model year can be volatile; therefore, our process relies  upon long-term historical averages until sufficient data are available. As actual experience becomes available, it is used to  modify the historical averages to ensure that the forecast is within the range of likely outcomes. Resulting balances are then  compared with present spending rates to ensure that the accruals are adequate to meet expected future obligations. See Note 26 of the Notes to the Financial Statements for more information regarding costs and assumptions for warranties and  additional service actions. Nature of Estimates Required. The measurement of our pension obligations, costs and liabilities is dependent on a variety  of assumptions used by our actuaries. These assumptions include estimates of the present value of projected future pension  payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and  demographic experience. These assumptions may have an effect on the amount and timing of future contributions. The plan  trustee conducts an independent valuation of the fair value of pension plan assets. Assumptions and Approach Used. The assumptions used in developing the required estimates include the following key factors: We base the discount rate assumption on investment yields available at year-end on long-term bonds rated Aa- or better. In  the United States we use the Moody’s Aa long-term bond yield as the initial indicator of these yields. We also consider the yield  derived from matching projected pension payments with maturities of a portfolio of available bonds rated Aa- or better. Our  inflation assumption is based on an evaluation of external market indicators. The salary growth assumption reflects our long-term  actual experience, the near-term outlook and assumed inflation. The expected return on plan assets assumption reflects various  long-run inputs, including historical plan returns and peer data, as well as inputs from a range of internal and external advisors  for capital market returns, inflation and other variables, adjusted for specific aspects of our strategy. The expected amount and  timing of contributions is based on an assessment of minimum requirements, and additional amounts based on cash availability  and other considerations (e.g., funded status, avoidance of Pension Benefit Guaranty Corporation (“PBGC”) penalty premiums and  tax efficiency). Retirement and mortality rates are developed to reflect actual and projected plan experience. Plan obligations and  costs are based on existing retirement plan provisions. No assumption is made regarding any potential future changes to benefit  provisions beyond those to which we are presently committed (e.g., in labor contracts). The effects of actual results differing from  our assumptions and the effects of changing assumptions are included in unamortized net gains and losses. Unamortized gains and  losses are amortized over future periods and, therefore, generally affect our recognized expense in future periods. See Note 22 of the Notes to the Financial Statements for more information regarding costs and assumptions for employee  retirement benefits. Sensitivity Analysis. The December 31, 2004 funded status of our pension plans is affected by December 31, 2004 assumptions. Pension expense for 2004 is based on the plan design and assumptions as of December 31, 2003. Note that these sensitivities may be asymmetric, and are specific to 2004. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown. The effect of the indicated increase/(decrease) in selected factors is shown below (in millions). Increase/(Decrease) in: Percentage  Point  Change December 31, 2004 2004  U.S.  Expense U.S. Plans Non-U.S. Plans Funded Status Funded Status Equity Discount rate  +/- 1 pt. $4,490/$(5,240) $3,960/$(5,000) $3,320/$(6,970)  $(20)/$170 Actual return on assets +/- 1 350/(350) 180/(180) 200/(610) - Expected return on assets +/- 1 - - - (360)/360 • Discount rates • Salary growth • Retirement rates • Expected contributions • Inflation  • Expected return on plan assets • Mortality rates 4 4