The state of the US automobile industry is nothing short of apocalyptic. Ford and GM stocks are sinking further and further into junk status, automobile sales are down 30%, gas prices are astronomically high, and car dealerships are trying every gimmick in the book to get customers into lots.

The contagion isn’t limited to the companies themselves, subsidiaries are going under as well. Most recently, Delphi, an auto parts manufacturer and once-subsidiary of GM, filed for bankruptcy protection. Not only does this accentuate the generally poor state of affairs, but Delphi’s bankruptcy would be a disaster for GM. In the spin-off agreement, GM agreed to pay Delphi pensions in case of bankruptcy. This could come to about $11 billion out of GM’s already strapped coffers.

The situation has deteriorated to the point that even the usually militant labor unions are getting nervous. Ford lost $1.6 billion last quarter, and like good parasites ($1,500 of every automobile sold goes to pay for health insurance), labor realized that a dead host is no host. In an unprecedented move, the United Auto Workers (UAW) agreed to pay cuts of $1 an hour and increase insurance co-pay by $8. But despite this generosity, rumors persist that Ford may layoff as much as a third of its workforce.

There are several of explanations as to why Ford and GM are getting beat like they stole something. Prominent ones focus on their own shortcomings, such as inventory and labor problems. For example, whereas, in a perfect world, supply meets demand, in Detroit, GM and Ford not only lack the fuel-efficient cars the consumers want, but have warehouses full of gas-guzzling SUVs and trucks they spent lots of money building, but cannot sell. What got them through the 90s is going to sink them in this decade.

And, though it was once necessary to appease unions lest anarchy ensue (see Haymarket riot, Pullman Car riot, etc), unions are at their weakest point in American history. Both companies are looking to make the transition to non-union labor so they can finally put strike threats and cripplingly high worker benefits behind them.

However it might be misleading to focus on Ford and GM’s failures. In some respects, it is less a question of their failure and more a question of their competitors’ successes. The Japanese companies, Toyota, Nissan, and Honda, are posting record profits, making gains in every territory.

Toyota, in particular, epitomizes the right way to manage an auto company. Toyota is based on two principles: lean manufacturing and kaizen. Lean manufacturing is a pretty complex idea, but basically, lean manufacturing seeks to save money by cutting waste. To quote Andrew Carnegie, “Take care of the pennies and the pounds will follow.” Five to fifteen workers are put into a workspace with everything they will need, and arranged in such a way so that materials can enter, be processed, and exit as quickly as possible. The effectiveness of this system is well documented, but has not yet been adopted by GM or Ford.

“Kaizen” means “continuous improvement.” Even after Toyota hits a home run, it continues to innovate. It is well known that Toyota and its subsidiary Lexus have pioneered electric hybrids. The Prius is the first commercially successful, mass-produced hybrid and the Lexus 2006 RX Hybrid will be the first luxury hybrid. With gas prices high and hybrid sales doubling, hybrid manufacturers stand to make a pretty penny. But Ford and GM aren’t jumping on the band wagon. Although they are beginning to manufacturer hybrids, according to their own projections, their output in ten years will be equal to Toyota’s today.

Despite all the setbacks, Ford and GM can be turned around. They need a better long-term strategy. Betting the house on cars that guzzle gas was a short-term solution. So were the employee discounts that boosted sales earlier this year. Both companies could learn something from Nissan, which has staged a spectacular comeback in after a mortal slump. If not, they can just imitate Toyota. That is, of course, until the Chinese show up with their cars.