General Motors (GM) Europe will slash its workforce by around a fifth, cutting as many as 12,000 jobs in a bid to halt chronic losses in the region, the world's biggest carmaker said on Thursday.

The drastic cutbacks over the next two years will hit hardest in Germany, GM Europe officials said, insisting they had to reduce annual costs at European operations by 500 million euros ($613.4 million) by 2006 because demand remains feeble.

Some 90 percent of the reductions will take place in 2005, triggering charges in 2005 and possibly 2006 whose extent will depend on negotiations with labor unions, executives said.

"With losses since 1999 and no reasonable indication that market or economic conditions will improve substantially in the coming years, we have no other choice than to take tough steps to ensure our long-term success," General Motors Europe Chairman Fritz Henderson (search) said in a statement.

He declined to discuss the impact on specific plants in Europe pending discussions with unions and refused to rule out a plant closure if need be, although he said it may be possible to hit the savings target without shuttering any factories.

GM employed around 63,000 people at 11 production and assembly plants in Europe at the end of 2003. It has 32,000 workers in Germany. GM Europe makes around 1.9 million vehicles a year.

IMPROVE OR PERISH

Henderson's deputy, Carl-Peter Forster (search), was more blunt, telling reporters that German plants in Bochum and Ruesselsheim and a Swedish plant in Trollhattan had to bring down costs and boost productivity and quality if they wanted to survive.

Union sources said GM plans to axe 8,000 jobs at its two main German plants — 4,000 each at Bochum and Ruesselsheim — and 600 staff at Opel in Spain.

The job cuts come as the latest blow to carmaking in western Europe that is desperately trying to cope with a toxic mixture of stark currency headwinds, high labor costs and intense competition in weak car markets.

Ford's (F) luxury brand Jaguar is cutting 1,150 jobs in Britain in a bid to return to profit and Volkswagen (search) is trying to push through a 30 percent reduction in German labor costs by 2011 in tough talks with unions.

Henderson said the latest steps should not be seen as a lack of commitment to grow the company or provide new products, but said "the lack of industry growth, the pricing environment and the competitiveness of the market do not allow us to grow fast enough to offset the cost base we have today."

Sales should be flat in Europe again next year as the industry awaits an elusive upturn. "We are not forecasting any demand growth," he said.

GM Europe's loss widened in the second quarter to $45 million from $3 million a year earlier amid intense pricing pressure, adverse currency impact and restructuring costs for a joint venture with Fiat.

That brought its first-half loss to $161 million versus $68 million in the first six months of 2003. It had already abandoned its target of making a profit in Europe this year.

GM will report third-quarter results later on Thursday, and Henderson said GM Europe's numbers would again be "unsatisfactory."

He would not say whether the cuts would restore GM Europe to profits by 2006, noting only, "This [cost-cutting] is clearly required and necessary to put us on the right path."

GM had already reduced capacity in Europe by 28 percent from 1999 levels. It clipped the wings of its independence-minded European divisions in June by concentrating power at its regional headquarters in Zurich under beefed-up management, but stopped short then of announcing job cuts or plant closures.

Henderson was brought in in June to turn around GM's European operations after a stint in Asia/Pacific.