yahoo

Friday December 22 4:33 PM ET CORRECTED: Auto Industry Moves Into Slowdown Lane

(Corrects paragraphs 7-10 to fix quotes)

By Ben Klayman

DETROIT (Reuters) - Automakers are laying off workers, idling plants and squeezing suppliers, raising tensions in an industry increasingly moving into the slowdown lane, industry observers said on Friday.

Ford Motor Co. on Thursday cut its fourth-quarter earnings estimate about 13 percent and its first-quarter North American production plan for the second time, scaling back its scheduled vehicle output in the first three months of 2001 by 17 percent compared to this year.

The No. 2 automaker blamed the slowing U.S. economy, a refrain heard more often in the headquarters of the Big Three automakers and their suppliers.

Analysts and portfolio managers agree the auto industry will cool from this year's expected record pace, which should top last year's all-time high of 16.9 million sales.

``We're bound for a pretty hard landing here,'' said George Tall, portfolio manager with David L. Babson & Co., an investment firm near Boston that owns small positions in Ford and General Motors Corp.. ``The production rates for the first quarter are going to be down and there's a multiplier effect through the whole supplier chain.''

Ford executives said as much when they announced their bad news on Thursday.

``It's clear that U.S. economic growth is slowing, and surveys of consumer sentiment point to lower levels of spending in the future,'' Ford's North American vice president Martin Inglis said.

Goldman Sachs analyst Gary Lapidus echoed those sentiments.

``It is clear that weakening consumer confidence and less availability of bank financing and low residual values (on the automobiles) are weighing on the consumer,'' he said, ``there's certainly a risk of an automotive recession and it is very likely we are going to see much more significant production cuts moving forward.''

In addition to Ford's cuts, GM last week cut its fourth-quarter earnings estimate as much as 35 percent, and announced it would lay off 15,000 people and close a plant in England. On Dec. 7, it said it would trim first-quarter North American vehicle output 14.5 percent compared to this year.

DaimlerChrysler AG's Chrysler unit said on Monday it will lose about $1.25 billion in the fourth quarter, following a $512 million third-quarter loss. In response to its struggles, Chrysler cut fourth-quarter North American vehicle production almost 20 percent compared with last year and has begun curtailing first-quarter output.

The struggling U.S. division also recently demanded its suppliers cut costs by 5 percent on Jan. 1, and added its engineers would help the parts makers come up with another 10 percent in savings over the next two years.

While many suppliers are publicly saying they will meet Chrysler's requirements, privately there has been some grumbling about the increasing pressure on them to cut costs so the automakers can improve their profit margins.

``The operating outlook for automotive component suppliers in the fourth quarter of 2000 has gone from bad to wretched,'' UBS Warburg analyst Joseph Phillippi said in a research report on Friday.

In fact, Dennis Pawley resigned on Tuesday as head of Guide Corp., a manufacturer of headlights and turn signals, after less than a year on the job. He blamed GM, Guide's largest customer, for not helping it remain profitable by allowing price hikes.

``This ill-fated approach by the automotive (manufacturers) to improve their financials by wringing profits out of an already stretched supply base seems to be in fashion this winter,'' Pawley said.

Matt Greenberg, portfolio manager at Greenhaven Associates, a New York investment firm that owns small positions in GM and Ford, said the industry is probably in for a couple of tough quarters but there's no reason to panic.

``We're coming off a very high level and unsustainable level, so it was inevitable things would slow down,'' he said.

-- Rachel Gibson (rgibson@hotmail.com), December 23, 2000