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The head of BorgWarner Inc. (BWA) said Thursday European auto makers remain "too optimistic" about demand as it prepares for further production cuts in the region.

The U.S.-based transmission specialist derives half its revenue from European auto makers, and Chief Executive Timothy Manganello said demand in the region remains "like a falling knife." "The Europeans have been in denial, and I don't mean a river," said Manganello on a conference call after reporting a fourth quarter loss.

Manganello said some of the company's European factories are "on the verge" of moving from a four-day work week to three days, and said facilities in Germany could operate for a single day or be idled completely.

BorgWarner has cut production and shed workers, but executives said it had shrunk to restore margins and position itself for a return to profitability in 2009.

The company said it is "staffed" for European vehicle production of 16.6 million this year compared with 21.2 million last year. U.S. vehicle output is expected to be 9.3 million versus 12.7 million in 2008.

With the outlook for demand from mature markets remaining uncertain, BorgWarner is diverting resources to China through a new joint venture.

While emerging market growth has slowed, the company is using some production from Europe and the U.S. to fulfill orders from China.

In December, BorgWarner said it would cut 2,900 workers, or 17% of its work force, because it was "struggling to respond fast enough" to Detroit's constantly shrinking production needs. The company also said it would shutter a U.K. drivetrain facility in 2010.

BorgWarner reported a net loss of $81.4 million, or 70 cents a share, for the December quarter. This compared with net income of $71.2 million, or 60 cents a share, a year earlier.

The fourth quarter included per-share charges of 56 cents, largely for the job cuts and 23 cents for other restructuring moves. Excluding items, the company had break-even earnings.

Net sales skidded to $931.5 million, down from $1.4 billion. The stronger dollar reduced sales by $114.1 million, and gross margin plunged to 7.9% from 18.8%.

Analysts polled by Thomson Reuters were expecting a loss of 8 cents a share, excluding items, on revenue of $1.04 billion.

BorgWarner shares were up 5.8% at $19.98.

-By Doug Cameron, Dow Jones Newswires; 312-750-4135; doug.cameron@dowjones.com

(Mike Barris contributed to this report)