The Incredible Shrinking Car Company!

Ford Motor Company is shrinking. From today's Wall Street Journal:

Ford Motor Co.'s plan to cut North American production as much as 12% in the first half of next year signals that Detroit's Big Three auto makers -- as well as their many suppliers -- could face headwinds in 2007 despite industry cost-cutting efforts.

Meanwhile, as a fresh sign of the ripples the auto makers could send across the manufacturing belt with further production cuts, Dura Automotive Systems Inc. became the latest auto-parts supplier to file for Chapter 11 bankruptcy-court protection. The separate developments highlight the continuing pain faced by General Motors Corp., Ford and DaimlerChrysler AG's Chrysler Group, amid signs of a slowing economy.

Ford's projected first-half 2007 cuts -- reported yesterday by trade publication Automotive News -- come on top of a 21% production cut planned for the current quarter.

The following picture, which I've reproduced from the Wall Street Journal piece, sums up the story.

Ford is now only 60% as large as they were a few years ago. And of course, they're not the only ones; GM and Daimler-Chrysler have been losing money for a while now, and just like Ford, they are also responding by obeying Alice's "DRINK ME" sign.

But note that the US auto industry as a whole has not been shrinking. Overall production of motor vehicles in the US continues to grow over time, despite fluctuations from quarter to quarter or year to year. The following picture shows total auto production in the US, measured in real terms, as reported by the Bureau of Economic Analysis (table 7.2.3b).



Even with the most recent quarter's possibly aberrant measurement of real auto production, the US as a whole has clearly been producing more cars over the past year or two than ever before.

So how do we reconcile these two pictures? Obviously, the answer is that auto production in the US is being gradually taken over by the big Japanese auto manufacturers, who seem to be able to make up for Ford and GM's production cuts, and then some.

That's why I tend not to see Ford and GM's problems as being signs of a sick industry in the US, but something much more prosaic: the replacement of poorly-run firms with well-run firms.