Oct. 15 (Bloomberg) -- General Motors Corp. and Ford Motor Co., known for a century as manufacturers of cars and trucks, today make their living as money lenders.

There was continuing evidence of that yesterday when General Motors reported a third-quarter profit of $440 million, or 78 cents a share -- all from its financing business, General Motors Acceptance Corp. GMAC's earnings of $656 million covered the parent's losses from making vehicles.

For seven consecutive quarters now, General Motors has made more from lending than manufacturing. Ford has become dependent on its credit business too. The company, which reports third- quarter results Tuesday, got $897 million of its second-quarter profit of $1.17 billion from financing car purchases.

Does it make any difference whether the companies make their profit from making vehicles or lending on them? A profit is a profit after all. This is how it works: In the first half of 2004, Ford Motor Credit Co.'s business was subsidized by Ford auto to the tune of $1.67 billion in what Ford Credit calls ``interest supplements and other support costs.'' The finance unit's profit for the period was $1.59 billion.

Laggards

Still, the answer to the question is yes. The inability to make cars and trucks profitably is a refection of the inability of General Motors and Ford to compete with Japanese rivals Toyota Motor Corp. and Honda Motor Co. While U.S. consumers have been on a spending spree the past three years, GM and Ford could only sell cars and trucks by offering huge incentives, which reached a peak last month when GM offered buyers six-year interest-free loans.

Toyota and Honda have been forced into incentives too, but at numbers per vehicle far less than what the U.S. companies pay, according to CNW Marketing Research in Bandon, Oregon.

General Motors and Ford are losing money on their European manufacturing too. GM said yesterday it would cut its European payroll of about 63,000 workers by 19 percent. General Motors counts heavily on the growing China market but even here, third- quarter profit dropped to $80 million from $142 million in the same quarter last year.

Standard & Poor's yesterday lowered General Motors's credit ratings to just above junk because it's worried about the profitability of the company's auto business.

Crumbling Support

In the months ahead, the financing business may offer the American companies less help. GMAC said its third-quarter profit from vehicle lending actually fell to $259 million from $320 million in the same 2003 period because its net interest margin was lower. GMAC offset that in large part with rising profits from its expanding mortgage business.

Ford Credit says its profit next year will decline because it has decided to lend primarily to buyers of vehicles made by Ford units. Weakened demand for vehicles and an end to the housing boom could cut into GM and Ford financing profits significantly.

The U.S. auto companies also have become something akin to welfare organizations. Moody's Investors Service, which may also lower General Motors' credit ratings, says the company's health- care costs are about $5 billion a year, and rising.

Last year, GM sold $13.5 billion in debt to fund its pension plans, almost doubling its long-term debt to $29.1 billion. Ford planned to put $1.5 billion into its retirement funds in the third quarter.

If General Motors and Ford are ever to live up to their past, they must figure out how to sell cars and trucks at a profit. They can't survive in their current state.

To contact the writer of this column: David Pauly in Normandy Beach, New Jersey dpauly@bloomberg.net

Last Updated: October 15, 2004 00:07 EDT