Once upon a time (oh, about six months ago), a lot of people thought General Motors (NYSE:GM) was too big to fail. Pundits predicted that a GM bankruptcy would send the nation's unemployment rate soaring past 9%. House Speaker Nancy Pelosi warned of a "devastating impact on our economy."

Well guess what, folks? Unemployment's already at 9.4%. The economy is already in tatters. And yes, GM failed anyway.

Failure on a catastrophic scale
Oh, thanks to its transformation into Government Motors, GM won't disappear. But I submit to you that when a company loses more than its own market cap, it's a failure. If you have to spend $50 billion to save a company with negative $90 billion in book value, it's failed.

(And Chrysler? Don't gloat. Whenever your plan for salvation includes partnering with Fiat, you've failed, too.) But here's the good news, folks: At long last, General Motors is too small to fail.

So long, GM. We hardly knew ye
When I say "GM," I might as well be using the name as a euphemism for the American car industry. The "Big Three" is no more; in its place we've got what I'm going to call "The Seven Dwarfs" of Detroit. If your fairy tale knowledge is a bit rusty, let me run down the list and make some introductions.

First and foremost, is Ford (NYSE:F) -- the figurative "last man standing" (and literal last local firm still publicly traded) in Detroit. Next door is Chrysler, now run out of Fiat in Italy.

General Motors
After shedding Saab and Opel, Pontiac and Saturn and Hummer, GM's ceding pole position once and for all to recently crowned global No. 1 Toyota (NYSE:TM), but that still leaves Chevy and GMC, Buick and Cadillac, with which to defend GM's No. 2 slot.

Penske Automotive
Speaking of number twos, the No. 2 car dealer in the U.S. is making a play to double in size as it acquires GM's Saturn division. Penske doesn't want to build cars, mind you, preferring to leave that to third party suppliers. But the Saturn brand and the dealers who service it? That's something Penske can put to good use.

Sichuan Tengzhong
And of course you've heard about Hummer's new owners. The Chinese plan to keep management and production here in the U.S. But whether: "Hummer fuel efficiency, Chinese quality" works from a marketing standpoint remains to be seen.

Magna International (NYSE:MGA)
Just a bit north of Detroit, a Canadian auto parts Magna(te) is building an empire. Magna has no intention of selling cars under its own name in the U.S. … yet. But it is building an electric car for Ford, and will soon own a 20% stake in Opel over in Europe.

Is Pontiac for the birds?
Pontiac would appear to be the odd man out. The vultures who've been picking over Detroit's bones appear to be turning up their beaks at Pontiac, suggesting this brand could go the way of the dodo... and the Oldsmobile. But who knows? Maybe Autonation will "pull a Penske?"

Snowy Detroit and the Seven Dwarfs
Now that we've met the players, let's consider what they portend for the future of American auto manufacturing. Last Sunday, Meet the Press gathered the CEOs of Xerox, Caterpillar (NYSE:CAT), and Google together to discuss just this.

Xerox CEO Anne Mulcahy waxed poetic about how a "smaller" and "leaner" GM would be able to "invest in the future vs. just protect the past." Google's Eric Schmidt suggested that as Detroit declines, we could see a corresponding rise in new automotive technologies, such as rechargeable batteries.

Jim Owens' comment, though, was most telling. The Alpha Cat hailed the elimination of "significant excess capacity" in the global auto industry -- which appears to fly in the face of Fiat's assertion that any company building less than five million cars a year just cannot hack it in today's market.

Too big to fail, too small to succeed?
That's an interesting comment, folks. Because if you think about it, Honda (NYSE:HMC) produced four million cars last year. Even "tiny" BMW made only 1.2 million in sales last year -- and I don't think anyone's predicting BMW's failure as a brand. Mind you, these are totals for the namesake brands, but even throwing in Honda's luxury brand totals or BMW's Mini line-up doesn't change the fact they both parent companies produce less than five million automobiles annually. Smaller companies can still survive in this environment.

Now, as I've said many a time, I'm not a certified car guy. I don't know what the magic number is for how many car sales makes an automaker succeed. All I know for sure is that BMW proves Fiat's number is off by a factor of four -- at least. Scale is an important factor to leverage fixed costs, but is a production figure of five million a requisite? Apparently not.

And this is good news. BMW's success puts the lie to Fiat's assertion, and proves we can profit from investing in smaller car companies. More importantly, by divvying the auto market up into several, smaller carmakers, we reduce the likelihood that a failure by any one of them will destroy the economy.

Because as we now know, even companies that are too big to fail, sometimes do.

More Foolishness about the auto-wreck that is GM:

Fool contributor Rich Smith is not a certified "car guy." Before he bought his truck a couple of years ago, he consulted the experts on The Motley Fool's Buying and Maintaining a Car discussion board. You can find him most days hanging out there -- near, but not talking with, the cool kids -- just listening and nodding a lot. Google is a Motley Fool Rule Breakers pick. The Fool's disclosure policy is never too big to fail.