Further shockwaves hit the global car industry yesterday when Peugeot Citroën said that it would have to cut production by 30 per cent and Chrysler set out plans to shed up to 5,000 jobs.

The gloom extended to the lorry market when Volvo reported a sharp fall in third-quarter earnings and a slump in orders. Peugeot Citroën said that it had to make “massive production cuts” in the last three months of the year to try to balance output with dwindling demand. The cuts will come in Europe and are likely to fall most heavily in France and Spain.

Peugeot's cuts, news of which came as it reported a 7 per cent fall in car sales for the third quarter, follow a series of warnings about the weak state of the market from other car companies.

On Thursday Renault cut its full-year profits forecast after what it said was a “sharp drop in the European market”. Daimler, of Germany, also lowered its forecast for the full year. Renault, which controls Nissan, the Japanese manufacturer, expects an operating margin of between 2.5 and 3 per cent. Previously it had set a target of 4.5 per cent. Peugeot slashed its margin from 3 per cent to 1.3 per cent.

Christian Streiff, Peugeot Citroën's chief executive, said: “We have reacted very swiftly to this market collapse, with exceptional measures to cut production, even though this is obviously detrimental to our 2008 operating margin. Massive production cuts will be made in the fourth quarter as it is vital that we are correctly positioned to face 2009.”

However, Volkswagen, Europe's biggest carmaker, stuck to its goal of selling more cars this year than last and it will be reporting its third-quarter figures next week.

The third-quarter slump in orders for Volvo lorries was a worrying 55 per cent. Volvo's shares slumped by 21 per cent after its third-quarter earnings fell from SKr4.57billion (£366million) for the period last year to SKr2.9 billion this year. Its share-price fall dragged down its peers Scania, the Swedish manufacturer, and MAN, of Germany, which is due to report figures next week.

In the United States, speculation intensified that the struggling General Motors and Cerberus, the private equity owner of Chrysler, could be nearing a deal that would give GM control of Chrysler. Although their markets overlap, GM is thought to be attracted by Chrysler's cash.

Moreover, it is being driven towards a deal by evidence that the US is falling out of love with the car. Yesterday it emerged that Americans have driven 78billion fewer miles in the past ten months than they did in the same period a year ago, according to government figures.

Industry set for smaller mode

Production cuts in the global car industry are accelerating at an alarming rate. Peugeot Citroën became the latest to take the bull by the horns with projected cuts of 30 per cent this year. Nissan, which is teamed with Renault, Peugeot's national rival, has also made substantial cuts in Britain and Spain. And these are companies that produce smaller, fairly fuel-efficient cars, not premium, petrol-guzzling leviathans. So far, the carmakers are addressing cuts only for this year with the aim of reviewing the situation in 2009. Few, however, believe that there will be much respite after three months. It is probably a case of waiting to see how bad the future cuts will be.

In the United States, merger talk surrounds the stricken giants General Motors, Ford and Chrysler. One industry observer viewed the courtship of Chrysler and GM as like two drunks propping each other up in a bar. The rationale from GM's point of view is that it would have access to Chrysler's cash, which in turn would help it to face the difficult finnacial conditions in a sober fashion. Yet the cost in terms of rationalisation and jobs of such a merger could be enormous.

As the European companies face their own tough tests, might they, too, look at taking the merger route? Few in the industry are expecting any imminent moves, but by the end of next year the global car industry will be much smaller. (Christine Buckley)

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts