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UPDATE 2-Tower to stop making Explorer frame, shares hit

(Adds analyst comments, background, byline; updates share activity)

By Susan Kelly

CHICAGO, Dec 17 (Reuters) - Tower Automotive Inc. , citing insufficient profits, said on Tuesday it will not supply the frame for the next-generation Ford Explorer sport utility vehicle, as the auto supplier bows to intense pressure to cut costs.

Shares of the auto body maker fell to new all-time lows. The stock was down 31 cents, or 6.2 percent, to $4.68 shortly after midday on the New York Stock Exchange.

"Ford was being aggressive in its cost-reduction efforts. Tower was unable to make the kind of return on capital that the company had targeted to make on its operations," said Richard Hilgert, an analyst with Fahnestock & Co. who rates the stock "neutral."

Fahnestock does not have an investment banking relationship with Tower, and does not own any shares in the company based in Grand Rapids, Michigan.

Automakers have been forced into a permanent mode of cost cutting partly due to consumer incentives such as interest-free loans and cash rebates.

Tower currently produces the frame for the Ford Explorer, the best-selling mid-size SUV, at its Corydon, Indiana, plant. The plant employs about 800 people, most of whom are members of the United Auto Workers union.

"Our decision ... is based strictly on the fact that the expected returns at targeted pricing levels did not meet our requirements," Tower President Dug Campbell said in a statement.

A Tower spokesman declined to comment on the plant's future. Options could include shuttering the plant, selling it to a company that would continue to make Explorer frames, or producing structures for other vehicles there.

A UAW spokesman had no immediate comment on the plant's fate.

Ford Motor Co. has not said when a new Explorer might be introduced. The current 2002 model was rolled out about 1-1/2 years ago.

Tower said the decision to stop making Explorer frames does not affect its previously announced backlog of $1.4 billion of new business.

Tower has said 35 percent of its revenue is derived from business with Ford.

Shares of Tower were pressured in September after investors interpreted remarks by a Ford official to suggest Tower was vulnerable to pricing pressure from Ford that could erode its profit margin.

Ford Chief Operating Officer Nick Scheele had said Ford worked with Tower to save $40 million a year on the Explorer frame, redesigning it to use less metal.

Automotive component makers are under relentless pressure from automakers to cut costs. Suppliers typically face demands for price reductions ranging from 1 percent to 8 percent a year, according to the Original Equipment Suppliers Association, a trade group.