As Ford releases the finer details of its European cost-cutting plan, VW has announced plans to cut capital spending by 11%. With General Motors' Project Olympia in full swing, having a similar effect, car makers in Europe continue to tighten their belts. However, this may result in longer term problems.

Ford Motor Company has released details of its cost-cutting plan, which it hopes will turn the company's fortunes around. The plan, already in progress, is expected to save its loss-making European business $US450 million next year, and could save up to $550 million annually from then on. The announcement follows Ford's decision to cut nearly 7,000 jobs through redundancies and early retirement, affecting operations in the UK, Germany and Belgium.

Pre-tax losses for Ford's European division increased from $286 million for the first half of 2002, to $774 million for the same period this year. Lewis Booth, newly installed as chief operating operator, has immediately moved to reduce spending.

The story is similar at Volkswagen, the number one European car manufacturer. The company has announced an 11% cut in planned capital spending over the next five years, as its new finance director Hans Dieter Potsch seeks to curb over-investment. General Motors is also in the middle of its Project Olympia plan, of which cost cutting is a major feature.

Despite a continuing uncertainty over the strength of the new car market in Europe, sales remain relatively high, with the UK still nearing record levels. Ford, Volkswagen and GM Opel have all under-performed against some of their rivals. In particular, certain Japanese manufacturers, notably Toyota, are increasing their share, albeit from a low base.

While costs undoubtedly need to be kept under control, the danger is that if product quality is affected, consumers will continue to switch to more reliable manufacturers such as Toyota, which regularly wins satisfaction surveys on both sides of the Atlantic. In the long term, Europe's car makers may not be able afford to cut costs to such a degree.

SOURCE: DATAMONITOR COMMENTWIRE (c) 2003 Datamonitor. All rights reserved. Republication or redistribution, including by framing or similar means, is expressly prohibited without prior written consent. Datamonitor shall not be liable for errors or delays in the content, or for any actions taken in reliance thereon.

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