It was a terrible decade for the auto business. Higher fuel prices choked sales. Escalating labor and health-care costs pinched margins. Two of Detroit's Big Three -- Chrysler and General Motors -- declared bankruptcy. And Toyota (NYSE: TM), once-proud owner of a near flawless reputation for quality, suffered immeasurable harm from this year's gas-pedal fiasco and massive recall.

Yes, investing in the auto industry over the past several years has been the equivalent of driving a brand-new, red sports car over a cliff. Your portfolio barely lived through it.

But there are reasons to think the auto industry is about to shift last decade's bad fortunes into reverse. In fact, a few have already slammed on the brakes, executed a sharp U-turn, and stepped on the gas toward more profitable futures. Here are two of the best ideas right now.

The new top dog: Ford
A slew of double-digit monthly sales, award-winning vehicles, and a new reputation for quality: Is this an American car company we're talking about? Yes, indeed!

Ford (NYSE: F), the iconic American brand, and the only one of Detroit's Big Three not to declare bankruptcy, is firing on all cylinders. Its second-quarter revenue rose 15% from last year to $31.3 billion, while its pre-tax operating profit jumped to $2.9 billion, reversing a year ago loss. In every geographic region, Ford was profitable, even in Europe. And its sales in Asia and Latin America continue to exceed expectations.

When I (Matthew here) sat down with CFO Lewis Booth at this year's Detroit auto show, a key priority for Ford was the paying down of its substantial debt load. Since we spoke, Ford has been relentless in cleaning up its balance sheet, paying down $7 billion in the last quarter alone.

As Booth made clear in our interview, Ford's ability to get its financial house in order and return to a level of consistent profitability ultimately comes down to making cars that people want to buy. On that front, Ford is putting the pedal to the metal.

Company

% Change in YTD Sales

2010 YTD Market Share

2009 YTD Market Share

Ford

24.1%

16.8%

15.5%

Chrysler

10.8%

9.3%

9.8%

GM

13%

19.2%

19.6%

Honda Motor (NYSE: HMC)

11.9%

10.6%

11%

Toyota

9.9%

15.2%

16%

Toyota's gas-pedal fiasco and subsequent recalls have tarnished the Japanese automaker's once rock-steady reputation for quality. Meanwhile, GM's and Chrysler's bankruptcies may have exonerated most of their immediate financial liabilities, but at a steep cost to their consumer image. That's giving Ford serious wins on the sales front and, more importantly on the market share front -- trends we expect will continue thanks to CEO Alan Mulally's vision and the enormously positive reception brands such as the Focus and Fusion are getting worldwide.

Ford's turnaround is already in full gear, but the turnaround in its stock price may just be beginning.

The hidden gem: BorgWarner
BorgWarner (NYSE: BWA), maker of high-performance, fuel efficient engine systems such as turbochargers, had a huge quarter. Sales grew 55.2%, driven by the trend toward fuel efficiency and lower emissions and rapidly growing volume in Asia. The tailwinds for the auto supplier were evident this quarter with diluted earnings per share of$0.78 compared to a net loss of $0.05 last year. This was the fifth straight quarter of sequential growth in sales and operating profit, and management expects record earnings this year of about $2.70 per share.

BorgWarner has been a big beneficiary of the rebound in auto sales:

YOY auto production growth in first half of 2010 vs. sales growth for BWA

Region

Unit growth (YOY)

BWA sales growth

Europe

13%

56%

Japan & Korea

32%

75%

China

24%

110%

Operating margins reached 9.7% -- the highest in nearly 10 years. The company expects full-year margins in the 8.5%-9% range, but over the next two years margins are expected to surpass 9%, creating a new historical profit margin range for the company. Overall profit margins in the auto industry are at decadelong highs, and global auto sales are expected to break records this year.

It's easy to focus on Borg's growth potential after sifting through Borg's earnings, but what I was impressed with the most was the work it has done on its cost structure and its commitment to keeping costs low. This is crucial if it is going to form a new historical range for operating margins, and it provides downside protection from macro issues we still face. It is currently operating at more than 90% capacity with sales levels nearing historical high levels with 3,000 fewer employees. It will be very frugal going forward.

Borg certainly is not dirt cheap at about 17 times this year's earnings expectations, but also consider that the auto market is still relatively depressed. The company's high-quality engine and drive-train systems will likely continue to reap high demand from auto manufacturers, but it's the improved cost structure that makes Borg a potential market beater. Over the next several years, auto production will likely trend upward toward more normalized levels taking Borg's profits to ever-higher heights with its new lean cost structure.

The Foolish bottom line
The auto industry's long hibernation may be finally over. Who will win? Old dogs such as Ford and BorgWarner? Or will it be some of the newer, more innovative companies such as Tesla (Nasdaq: TSLA) and its growing fleet of all-electric vehicles? Let us know in the comments section below.

Bryan White and Matthew Argersinger own no shares of the companies mentioned. BorgWarner and Ford Motor are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.