What's bad for General Motors also spells big trouble for Detroit rival Ford

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The Independent Online

Just when America's ailing car industry thought conditions could get no worse, it is finding it cannot even rely on the country's love of all things big to buoy up profits. Americans are abandoning their monster sports utility vehicles (SUVs) in favour of smaller, less expensive cars. For carmakers, which are already fighting intense competition from Asia, adverse economic conditions and high healthcare and pension costs, it's looking dangerously like the end of the road.

Just when America's ailing car industry thought conditions could get no worse, it is finding it cannot even rely on the country's love of all things big to buoy up profits. Americans are abandoning their monster sports utility vehicles (SUVs) in favour of smaller, less expensive cars. For carmakers, which are already fighting intense competition from Asia, adverse economic conditions and high healthcare and pension costs, it's looking dangerously like the end of the road.

Big SUVs, with their promise of conquering the great outdoors and pleasing roominess, have been the vehicle of choice for many Americans in the past 15 years. For their Detroit manufacturers, who have been able to convert historic pick-up truck parts into components for the large jeeps, SUVs have been a huge generator of profits.

Unfortunately, the age of super-sizing of cars seems to be coming to an end. Sales of large SUVs have been hit by competition from Asian manufacturers which offer smaller, cheaper models, known as small SUVs or cross utility vehicles, and by the fact that the seemingly relentless rise in oil prices is making the American national past-time of gas guzzling too expensive for many.

Ford warned on Friday that sales of its truck-like SUVs had fallen by 15 per cent during the first quarter of 2005 and said the car market overall was weaker than expected.

As a result, America's second largest carmaker said the best it could hope for this year from its core automotive business would be to break even. Overall, it said earnings would be between $1.25 and $1.50 a share, down sharply from previous estimates of $1.75 to $1.95 a share.

Meanwhile, over at the other of Detroit's "Big Two", General Motors has also been in distress. Among a host of reasons cited by the world's largest carmaker for its even more dramatic profit warning that it would slump to a loss in the first quarter was a fall-off in SUV sales, as well as lacklustre demand in its core north American market.

In response to the profit warnings, several analysts slashed their recommendations on GM and Ford, and ratings agencies downgraded what used to be two of America's most reliable blue chip investments to just above junk status.

In fact, many on Wall Street believe the fall-off in demand for SUVs is just the latest unwelcome development for an industry which has been slowly sickening for two decades in America and Europe due to stiff competition from Japanese and Korean carmakers and now from even lower-cost rivals in China.

Jon Rogers, Citigroup's car analyst, who cut GM to a sell, said the company's market share slide has been "both deep and persistent" since the 1980s. He added he saw "things getting worse before they get better" at the company, whose makes include Chevrolet, Buick, Saab and, in the UK, Vauxhall.

Mr Rogers was less damning about Ford, where a member of the Ford family, William Clay Ford, is running the show and its management is credited with having done a reasonable job to deal with the shifting dynamics of the industry.

But still, sales of vehicles with high profit margins has been "precipitous", and the company would also not be able to "avoid the collateral damage stemming from GM's woes," according to Mr Rogers.

With Standard & Poor's and Moody's having reduced both companies' ratings last week, a new urgent fear is that further a downgrade will follow. That could trigger a sell-off of bonds in the two companies by fund managers who cannot hold stakes in companies below investment grade. A worst-case scenario would be a massive credit crunch, especially for GM, which with its parent GMAC has about $300bn in corporate debt, at a time when the company needs access to cash to fund a restructuring.

It is a scenario which was underplayed by the company's famously self-confident chief executive, Rick Wagoner. But he did acknowledge the seriousness of the company's situation when he said last week he would take charge of GM's north American business, where most of the difficulties are concentrated.

Top of Mr Wagoner's to-do list is reducing the hefty healthcare and pension costs enshrined in many of the GM employee contracts which date back to the 1960s, when Detroit was at the centre of the carmaking world and profits growth was exponential.

According to Mr Wagoner, those costs make up "some of the long-standing chronic issues" which GM has now got to deal with, as it had to spend $5.2bn on healthcare last year and is heading for a $6bn bill this year. While the battle with unions is expected to be bloody, Mr Wagoner will be able to raise the prospect that the alternative is a repeat of what has happened to the US's flailing airlines industry, where bankruptcies have left some pensioners with nothing.

GM has already implemented painful downsizing and job cutting in car-making centres such as Flint, Michigan, which inspired the filmmaker Michael Moore to pursue GM's former chief executive, Roger Smith, in the film Roger and Me. But the company still has the capacity to make a third of America's cars, but its actual share of the market is 26 per cent.

Wall Street is looking to the company which started life a century ago to make deeper cuts - the kind implemented by Ford three years ago when it laid off 20,000 and fought unions to close several plants.

Yet, things may not be completely glum for GM and its 180,000 workforce. While the case for slimming down is overwhelming, Mr Wagoner is resisting a complete slash and burn, saying: "we cannot shrink our way to victory".

The company has been trashed for not having a decent showroom of cars to tempt customers, but a key hope for Mr Wagoner is that its new line of trucks, on sale next year, will provide a much-needed boost.

In addition, while the company has in the past few years been struggling with problems in Europe, including an unwise marriage proposal with Italy's Fiat, those difficulties are under control and Mr Wagoner can concentrate on breathing life into the US business.

At Ford, the company said it would make further job cuts among white collar workers, as it admitted it would not achieve its goal of earning $7bn before tax next year, which had been a key part of Mr Ford's three-year programme.

As at GM, Ford's designers have returned to their drawing boards, and great hope is being invested in new models which are being rolled out now, in the hope that America can be persuaded to again be a patriotic car-buying nation.

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