6 bumps in the road automakers still face by Alex Taylor III @FortuneMagazine October 24, 2014, 9:25 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons With car sales headed for a fourth year of growth in 2014, automakers should be uncorking the champagne. By the time the year concludes, total sales are expected to approach 16.5 million units, the most since 2007. But if you take a look beyond this year’s bubbly sales, there are plenty of reasons to put the celebration on hold. While manufacturers are guilty of many missteps – producing too many cars, over-indulging on incentives, installing faulty ignition switches and dangerous airbags – they also face an assortment of circumstances that are mostly beyond their control. More than most industries, automakers can become victims of collateral damage. From the outside, the auto business looks simple – design, engineer, build, market, and distribute appealing cars and trucks. But it is so large, so complex, and so essential to so many people’s lives that it is buffeted by a variety of forces that it often cannot control. Here are six outside forces that could put the brakes on the auto industry recovery. Falling gasoline prices Paying less at the pump should be an unalloyed blessing for nearly everyone. After all, cheaper gas represents a price cut that leaves money in the pockets of overstretched consumers and gives them an opportunity to spend it somewhere else. But falling gas prices also create industry havoc, both in today’s sales and tomorrow’s planning. Reason: it demolishes the appeal of alternative fuel vehicles and makes it more difficult for automakers to meet federal mileage requirements. Fuel-gulping trucks and SUVs are surging this year while hybrids, plug-ins and all-electric cars are in slump. For instance, sales of Toyota’s pioneering Prius are off 11% to 165,490 units for 2014’s first nine months, while the Chevy Volt, called “game–changing” and “revolutionary” when it first came out, is down 13% to a mere 14,500 cars for the year. Silicon Valley Two of the biggest automotive innovations in recent years have come not from Detroit—or Stuttgart or Toyota City, for that matter—but Silicon Valley. The battery-powered Tesla Model S TSLA has become a must-have automotive accessory for high rollers—and its manufacturer a darling of investors—while Google GOOG has established itself as the leader in developing self-driving cars. Nor are these merely one-shot efforts. Tesla is getting ready to start production of its second volume product, the Model X crossover. For its part, Google is busy signing up automakers and suppliers for its Open Auto Alliance effort to make the Android operating system the dominant force in car-based communication. Meanwhile, Detroit intiatives like General Motors’ GM OnStar and Ford’s F Microsoft-based MSFT InTouch seem to be faltering. Urbanism A lot of ink has been spilled decrying the lack of interest by the millennial generation in driving or owning cars when the reason may be a simple case of economics. More durable and likely more devastating is the movement away from the car-friendly suburbs to more congested cities. By 2050 approximately 90% of the North America’s population is expected to live in urban areas, a shift that will drive wrenching change in the auto industry. According to Deloitte’s 2014 Global Automotive Consumer Study “Overcrowding, the realities of traffic, and new capabilities enabled by technology are all leading to more collaborative approaches to transport: for example, the ‘sharing economy,’ driverless cars, and improved public transportation.” When consumers are asked why they are giving up car ownership, the report finds, lifestyle is the primary reason. More people prefer living in a neighborhood that has everything within walking distance, are willing to relocate closer to work to reduce their commute, and are willing to use car-sharing, car-pooling, or similar services if they are readily available and convenient. China China has quickly become the 800-pound gorilla of the auto industry, and by its sheer size is influencing decisions made far beyond its borders. GM counts China as its biggest market, and figures it sold 3.16 million cars there last year, about one-third of its worldwide total. Ford Motor Co., which got a late start in China, saw its deliveries there surge 49% to 935,813 units. But the good times are in danger of being squeezed out by congestion and pollution. Pressure is building on the Chinese government to restrict sales and licensing as pollution chokes residents and traffic congestion turns roads into parking lots. “As more and more big cities put in place restriction measures, automakers will have to count on smaller cities and inland areas for growth,” Harry Chen, a Shenzhen-based analyst with Guotai Junan Securities Co. told Bloomberg foreign automakers will have to work harder for their China sales. Lawsuits When safety issues come to trial, nobody looks good. Automakers appear to be covering up, suppliers look slipshod, government regulators seem asleep, and juries appear to be either vindictive or naïve. Every car on the road represents a potential lawsuit. Toyota recently was ordered to pay $12.5 million in a California accident involving a drunken driver, a gravely injured passenger wearing a lap-only seatbelt, and a 1996-model SUV. Even though a shoulder strap was not required by law, the Supreme Court has ruled that automakers can be sued for not providing them. “Toyota and other manufacturers have known for decades that lap-only belts are needlessly dangerous, [yet] they have failed to recall or warn about those existing older vehicles still on the road,” said a plaintiff’s lawyer quoted in Automotive News. “These older vehicles are ticking time-bombs.” Still to come: more lawsuits surrounding the 29 fatalities attributed to GM’s faulty ignition switches, not to mention the recall of 7.6 million cars by several makers for defective airbags. Of course this is only the first step of a long process,”said Karl Brauer of Kelley Blue Book. “With so many vehicles being recalled, it will take years to address the danger.” Distribution Long protected by state franchise laws that block competitors, the business practices of new car retailers are coming under attack from three directions: • Tesla has been challenging state laws that bar manufacturers from selling direct to customers, though so far with limited success. In the latest skirmish, Michigan reaffirmed a law that effectively keeps the car maker out of the dealership business, becoming the fifth state to do so. Tesla vows to keep fighting. • The consolidation of dealerships into super-groups accelerated when Warren Buffett got into the business by buying the fifth largest chain. As the groups become more powerful, they have the potential to upset the traditional balance between factory and dealer. • Consumers are replacing Saturday tire-kicking with keystrokes from home. Armed with more data, they are making smarter decisions and detouring around traditional haggling over price and options. Still in the future: the day when customers can order cars on-line and manufacturers build them to order.