Ford Motor Co.'s dramatic restructuring plan - which would cut 25,000 to 30,000 jobs, fully one-fourth of its North American workforce - conjures up fears in some quarters that Detroit could become a manufacturing ghost town.
But it's not time to write the obituary for the American auto industry. Although it's struggling on its home turf, analysts say, the most likely scenario is continued downsizing and restructuring, from which leaner but profitable US operations will emerge.
In the near term, the road won't be easy. Bankruptcy, which could hurt already weak sales, looms as a remote possibility for Ford, which announced its cuts Monday. It's more of a possibility for General Motors, which unveiled its own restructuring late last year.
"GM and Ford are around to stay, but what their ultimate market share is going to be is difficult to tell at this point," says Don Rosenfield, an expert on manufacturing at the Massachusetts Institute of Technology's Sloan School of Management. "I think their market shares will continue to fall ... and hopefully they'll find a way to be profitable at those levels." [Editor's note: The original version misidentified the university with which Mr. Rosenfield is affiliated.]
Already, carmakers in the United States have made strides on several fronts. Their quality has improved, as has factory productivity. Recent deals with the United Auto Workers union promise to lower healthcare costs.
Overseas, their future looks much stronger.
Even as it announced its plan for US restructuring Monday, Ford reported a worldwide profit of $2 billion, its third straight year of positive earnings. "Outside of North America, we have made continuous progress," chairman and chief cxecutive Bill Ford said in a press conference.
By contrast, the company's North American operations lost $1.6 billion last year. GM may have lost some $4 billion, analysts say, when it reports its 2005 earnings later this week. North America counts for almost all those losses.
Detroit's challenge on its home turf is two-fold. First, global competition in the industry has been growing, with foreign-owned "transplant" factories in California or the South churning out new cars to replace each one no longer made by US carmakers in Flint or Dearborn, Mich.
Second, America's big three - Ford, GM, and Chrysler - have been hampered by their own history. As industry pioneers, they built up an early dominance. But they also built up huge "legacy costs" in pensions and healthcare liabilities.
Honda and Hyundai are younger companies, and their costs are lower as a result.
That's why some analysts say bankruptcy, clearly a last resort for Ford and GM, is possible. As the companies downsize, their obligations to former workers remain unchanged.
Moreover, the Big Three have been hurt more than their main rivals over the past year by rising oil prices. As gas-pump costs jumped, sales of a Detroit mainstay, sport-utility vehicles, have sagged.
For Ford, the decision to cut the jobs was a necessary one, analysts agree, given the company's excess capacity.
"It was a no-choice kind of thing," says David Cole, president of the Center for Automotive Research in Ann Arbor, Mich. "You shrink to grow.... A general in war will sacrifice a battalion to save a division. Failure to change would be a real disaster."
But the layoffs only solve one piece of a challenge that also involves a ballooning cost structure. According to some estimates, companies like Ford or GM pay $1,300 or more in healthcare costs for every car they make, two-thirds of which is for retirees.
"Any old organization that has a stable workforce and defined benefit responsibility for retirees has a problem," says Mr. Cole, citing industries like airlines. "The new guy has a tremendous advantage."
That's one reason, he and others say, that the new "transplant" companies like Toyota and Honda, which have developed large plants in the South, have been able to be successful. Workers at those nonunion plants still get relatively good wages, but the companies' responsibility for costs like healthcare is minimal compared to the enormous burden the large American companies have, particularly for retired workers.
Given the slump in sport-utility sales, US carmakers will have to refine their product mix.
"Ford and GM were depending for profitability on the SUV end of the market," says Jeff Layman of BKD Wealth Advisers, an investment company in Springfield, Mo.
Toyota and Honda haven't had to offer the same kind of profit-pinching incentives to move cars out of their showrooms, he says.
Chrysler, now a division of DaimlerChrysler AG, is smaller than Ford or GM - and is using size as an advantage. Analysts say it is succeeding as a niche player based on its tradition of stylish designs.
The question is, can the larger Ford and GM find the right mix of cars to retain a measure of their still-large US market share?
"If people were really, really excited about Ford cars, people would buy more of them," notes Charles Ballard, an economics professor at Michigan State University. He says that Ford seems almost to have ceded the sedan market to foreign manufacturers.
Ford is scrambling to adjust its product mix, aiming to compete more head-to-head with Asian rivals in the passenger-car market.
It has had successes in the past, such as the Taurus. Now its Fusion is getting good reviews. Others see a need to focus on new technologies and hybrid vehicles, particularly given concerns over fuel prices - something the company and autoworkers union has recognized as well.
Economists expect that the layoffs will have a significant impact on the Midwest's economy, although perhaps not as much as they would have 15 or 20 years ago.
"Our economy has been diversified by subtraction," Mr. Ballard notes. "Michigan, in particular, and the Upper Midwest in general is less dependent on heavy manufacturing and automobiles." Still, he notes, about 10 percent of the state's output is autos, compared to 1 percent nationwide.