DEARBORN – Just 10 months ago, William Clay Ford Jr. vowed that his auto company, despite its mounting losses, would “reclaim our legacy” in the American car market and “emerge stronger than we’ve ever been.”

But there is a new message coming out of the chief executive’s office at Ford. Alan Mulally, recruited last fall from Boeing to run the Ford Motor Co., has signaled that the bigger-is-better worldview that has defined Ford for decades is being replaced with a new approach: less is more.

Instead of insisting that Ford reverse its slide, Mulally says that Ford will become much smaller. Its forecasts show it may fall from second to fourth place this year in the American market, behind General Motors, Toyota and Chrysler.

The hiring of Mulally, leaving William Ford as chairman, marked the first time any Detroit carmaker has reached outside the industry for a new leader. And Mulally has broken with tradition in a hurry. He flew to Japan to meet with top executives of its toughest competitor, Toyota, to seek their advice on ways to streamline Ford’s manufacturing operations.

When asked about his priorities for fixing Ford, Mulally said in an interview this week, “At the top of the list, I would put dealing with reality.”

It is a harsh reality. Yesterday, Ford reported that it had the worst year in its history in 2006, when it lost $12.7 billion. In the last three months of last year, it lost $5.8 billion.

A big part of that was related to one-time charges from worker buyouts. But Ford’s losses are also accelerating because of falling sales of its big SUVs and pickups, and its inability to sell vehicles without offering costly rebates.

One Wall Street analyst, Jonathan Steinmetz, calculated that Ford’s “terrible” 2006 performance was equal to a loss of $4,700 per vehicle. Earlier this decade, Ford earned profits of that size on its big vehicles, a time when it held almost a quarter of the American car market.

Ford, whose market share dropped to 17.5 percent last year, is in the middle of shedding 44,000 workers, a third of its total staff. It is also closing 16 plants, and has said it does not expect to make any money in North America until 2009. By then, it expects to sell only about 14 percent of the cars and trucks purchased in the United States.

Mulally is trying to be both optimistic and pragmatic, creating of sense of urgency while reassuring his anxious workers that the company has a future.

Mulally is in a honeymoon period and has escaped any blame for Ford’s poor results last year, even though the worst performance came last quarter, when he was in charge.

Ford executives in the past also have made similar claims about breaking with tradition, installing new ways of working and accepting reality. In the end, Mulally will be judged as much by Ford’s success or failure in the marketplace as for his management techniques.

“The whole thing boils down to the product that’s being sold,” said Jan K. Brueckner, a professor of economics at University of California at Irvine. “We can do everything – we can build great computers, put men on the moon. Why can’t we design cars that appeal to people?”

Some analysts also said that Ford’s financial results could get worse before they got better, meaning Mulally might have to wait years to show improvements. “Ford will suffer the most severe market share decline among the Big Three in 2007,” Brian Johnson, an auto analyst with Lehman Brothers, wrote in a research report yesterday. “We expect Ford’s decade-long share loss to accelerate in 2007.”

Mulally is learning what a difficult tightrope he must walk in managing expectations amid the dire news.

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