Virtual carmaking? All is forgiven, Jac

When General Motors, the world's largest car maker, issues a profits alert and Wall Street analysts warn GM's credit rating could be cut to junk status, you could be forgiven for thinking the edifice of modern capitalism is about to come crashing down.

Doubtless, you will be relieved to hear that this is not the case. GM still makes profits, but only just, largely because its car finance and leasing arm throws off cash. Ford is in a similar position, although its car manufacturing operations are in an even worse state than GM's.

But make no mistake, the American car industry is in dire straits, and so are quite a few of the European majors - Germany's Daimler comes to mind. As the US consumer-led boom comes off the boil, the American car companies are trying to keep it alive by offering even bigger incentives to potential buyers and margins are being squeezed as never before.

Of course, some of the industry's problems have been with us for some time: Western car makers are being beaten up by Toyota and Honda, which have made huge inroads in both North and South America. Then there is the festering issue of over-capacity.

Rationalisation has been painfully slow because restrictive labour practices and powerful unions have forced employers into agreements over pay and conditions that make little commercial sense. Of course, this cannot go on for much longer, especially if the consumer stops spending.

But a bigger issue is the damage that will be inflicted once the Chinese become major exporters of cars. That can only be a matter of time. Then the Detroit trio of GM, Ford and Chrysler will be in real trouble. This doesn't mean one must go to the wall. What is required is a major effort to get supply and demand back on to an even kilter. Unfortunately, that means more plant closures and job losses.

One additional measure, and a radical one, would be for Western car groups to revisit an idea put forward three years ago by Ford's ex-boss Jac Nasser.

Nasser toyed with the idea of turning Ford into a 'virtual' manufacturer - buying in vehicles from low-cost producers, built to exacting specifications and then simply badged with the blue oval and sold to customers via the internet and independent dealer networks. It sounded far-fetched at the time, but it may be the only way to compete in five or 10 years' time when Chinese, and even Indian auto companies, become global competitors, sweeping all before them.

High street's low spirits

Retailers gathered for their annual 'Oscars' last Thursday night at the Grosvenor House Hotel and they were in a mood to party.

Alan Giles, chief executive of HMV, was last seen heading for the bar clutching a token for a free pint of Guinness ('I'm a retailer, we all love a bargain,' he called over his shoulder). Rob Templeman and John Lovering (Debenhams) cut a rug on the dance floor and the last guests were swept out at past 3am.

The happy mood, though, was no indicator of the general health of this sector. Morrison's had earlier issued another profits warning (Sir Ken, due at the event, stayed away). House of Fraser was the latest retailer to report negative current trading in like-for-like sales and Kingfisher admitted that DIY had taken a hit from the cold weather.

All this on top of official figures confirming what most retailers know already: shoppers are tightening their belts. January's fair performance appears to have been down to very deep discounting. No wonder M&S and BHS are on sale. M&S chief executive Stuart Rose is, in addition, determined to match any of his peer retailers on a downward price curve. That is a tough pledge and it suggests that M&S is now prepared to cut into its very muscle to stabilise falling sales.

John Lewis, a bellwether for department stores, reported sales down 17 per cent last Saturday and other bosses confide it was a bad day. Worryingly, none seems to know why. Can it really be so bad out there? Well, yes. Despite seven months of static interest rates and stable (indeed strengthening) employment, shoppers are retrenching. Add to that price deflation and it is an ugly picture. On some lines, volumes are rising by as little as 1 per cent while prices fall by 8 per cent. In electricals and computer games the deflation is far worse.

Traditional confidence boosters are absent. House prices are, say experts, going one way, and that is down. The City fears one more interest rate rise, possibly as early as May. The outlook is gloomy. The partying had the air of a last hurrah.

Prattle of the bulge

'At the end of 2002, I said it's hard to imagine 2003 would be better. It was hard to imagine in 2003 that 2004 would be better. At the end of 2004 we said it's hard to imagine the first quarter would be better.' David Viniar, chief financial officer of Goldman Sachs, had to stretch his imagination a bit further last week as his bank, along with rivals Lehman Brothers, Bear Sterns and Morgan Stanley reported yet another record quarter.

It is all a bit reminiscent of the late 1990s except that, this time around, it is bonds, not equities, driving the profits growth. There are plenty of people warning that the corporate bond market has all the characteristics of a bubble with high-yield bonds, in particular, offering little compensation for their risks. The big question is whether the big investment banks will prove more resilient to a reversal in the bond market than they were to the stock market crash five years ago. Viniar and his colleagues stress how diversified their businesses are these days, and the results bear that out, with revenues from equity trading and corporate finance all performing well so far this year.

And, with interest rates and inflation apparently set to stay at these levels, it is hard to see what could spark a bond market crash: indeed, investors say it is already undergoing a gradual correction unwinding some of the excesses. But with bond trading accounting for almost a third of revenues at Morgan Stanley, for example, there is a risk Viniar and his bulge-bracket colleagues will finally run out of superlatives.