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Doubting Detroit's Turnaround

An S&P analyst says Ford and GM are a long way from recovery.
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General Motors





have had a rough year. But the worst may be yet to come.

August sales numbers show that deep discounting has run its course. Now the companies face a sales hangover. Their product mix still favors gas-guzzling trucks and sport utiilty vehicles, while prices at the pump have soared above $3 a gallon in the wake of Hurricane Katrina.

On Wednesday, Standard & Poor's managing director of ratings services, Solomon Samson, told

that his firm remains nervous that more credit downgrades could be forthcoming for the automakers. (


quoted another S&P analyst making similar remarks overnight in Europe.)

"Since we downgraded them in May, more negative things have happened than good things, and that only underscores our negative outlook that we have had in place since then," Samson said. "These companies face a long litany of problems, and their ability to be profitable in North America is at the head of the list."

The issue of Detroit's profitability leads to questions about GM's ongoing negotiations with the United Auto Workers. GM executives have not been shy about claiming that concessions on soaring health care costs for unionized workers would provide the most effective and immediate boost to the company's profitability.

Organized labor points to the Big Three's declining sales and market share as evidence that poor product management has led to their predicament. Still, investors were upbeat about the potential for successful negotiations when

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reported last month that UAW Vice President Richard Shoemaker told a gathering of labor leaders that the union expects another bleak year for GM in 2006. The paper said Shoemaker indicated that the union is now considering helping the ailing company to cut costs.

Samson sounded a different note Wednesday.

"We're skeptical about the potential for radical concessions on the part of the union," he said.

Further credit downgrades will become more likely if



, a former GM unit and the largest U.S. auto parts supplier, files for bankruptcy in October, as it has threatened to do.

Meanwhile, billionaire investor Kirk Kerkorian's growing stake in GM remains a wild card. His investment company, Tracinda, recently disclosed that it is acquiring 13.1 million shares in the company, raising its stake to over 9%. While Kerkorian has been only a passive investor so far, some observers think he may become an activist if the situation continues to deteriorate.

After a spurt of strong sales by the companies over the earlier summer months, August sales showed renewed signs of weakness as GM's "employee discount" promotion appeared to lose steam. GM's sales were down 13.2% from a year ago. Ford posted a gain of 6.2%, but its SUV sales plummeted by a third.

In a sign that American consumers are losing their sweet tooth for gas guzzlers, small SUV sales across the nation declined 15% while large SUV sales fell 26%. Japanese manufacturers such as






, which have benefited from focusing on more fuel-efficient vehicles, posted big gains in market share for North America.

Burnham Securities analyst David Healy said U.S. automakers will pay for the transitory success of their recent promotions.

"Sales in late August, September and October will be almost as much below normal as June, July and early August were above normal," Healy said. "They're trying to figure out an exit strategy from these promotions. The problem is, they're facing a hangover. They're right in the middle of a backwash right now."