Trouble is brewing on the horizon for the U.S. automotive industry as it prepares for tougher fuel economy standards calling for the auto industry's fleet of new vehicles to average 35.5 miles per gallon by 2016.

The Obama administration announced the new standards on Sept. 15 against the backdrop of plummeting sales for small fuel-efficient cars that already are on the market.

According to the latest sales figures, the "lower small car" or subcompact segment suffered a 15 percent drop in the sales year to date through last month, while the "upper small car" or compact car segment is off 28.5 percent. The small specialty car segment is off 15 percent, too.

By make, for example, Toyota Yaris sales are off 41 percent year to date, Honda Fit sales are off 8.2 percent, and Chevy Aveo sales are off 30.6 percent.

Used car buyers also are showing less interest in smaller cars. Kelley Blue Book officials say residual values for small cars have plummeted while they have gone up considerably for large cars and sport utility vehicles.

Adesa, a large wholesale auto auction company that conducts sales all over the country, reported that while pickup truck prices plummeted 17 percent in value from August 2007 to August 2008, they have risen 23 percent since then. Meanwhile, the auction house said, compact car prices went up by 17 percent from August 2007 to August 2008, but have fallen 15 percent since then.

In a study by AutoPacific, a California-based industry research firm, small car buyers were unhappy with their vehicles.

"This is buyer's remorse," said George Peterson, president of AutoPacific, "What they said in the study is they want a bigger car. They bought a fuel efficient car, but now they're saying, 'It does what I want, but it doesn't have what I want. It doesn't have the features, the power, the room, and next time I'll opt for a bigger car.' "

In the AutoPacific study, based on more than 32,000 new car and light truck buyers in the United States, 30 percent said they wanted more power than they have in their current small car, 25 percent wanted more cargo room, 18 percent want more room in general, and 25 percent want more technology. In addition, 22 percent wanted a softer ride, and 18 percent wanted more safety.

When they are asked what size car they will purchase next, 49 percent of the owners of the smallest cars said they would buy a compact sedan, 35 percent said they would buy a midsize sedan, and 18 percent said they would buy a compact crossover or SUV.

"Our research indicates that American car buyers are definitely willing to buy a more fuel-efficient car but that they don't want it to be much smaller than what they are driving today," said Mr. Peterson. "Tomorrow's successful small car won't be tiny. It will be reasonably sized, have increased fuel economy, adequate performance and a full load of customer features."

"When they bought the cars, they accepted lower power and cargo room for better fuel economy and a high value price, but in the future, they want something more -- bigger, faster and with more bells and whistles," he added.

Still, to get consumers to buy the new generation of small cars -- which could cost about $2,000 or so more than what they are paying now -- could mean car companies could be forced to offer rebates and incentives.

"Or they will have to offer more options and better styling to draw consumers. That's about it. Those are their options," said Tom Libby, an independent auto industry analyst.

"As we move to smaller vehicles, size will be less of a differentiator. Styling will be more of a differentiator across nameplates," Jeff Schuster, executive director of forecasting at J.D. Power & Associates, said. "As availability of small cars increases, market share will increase. Things in the market will get more competitive and competition generally leads to sexier design."

Small car designers usually get "more freedom to design them than a full-size car designer because full-size cars by nature are more traditional," said Jack Nerad, Kelley Blue Book editorial director.

Even with more innovative designs, Mr. Peterson of AutoPacific questions whether American car buyers "will avidly embrace smaller size new products. In our Motorist Choice Awards polling, released last month, 106 of the top 107 were large cars, luxury cars, sport utility vehicles, crossover SUVs or minivans. Only one small car, the BMW 1-Series, scored in the top 100, landing in the 35th slot."

Mr. Peterson said Americans' dislike of small cars can be traced to the introduction of the Corporate Average Fuel Economy (CAFE) regulations in 1975. "Cars in the early days of CAFE were emasculated and poor performing with poor economy. ... What that did was force consumers to buy trucks that had the safety, power and performance they wanted. That's why trucks went from 25 to 51 percent of the market. That was an unexpected result of the government fuel economy requirements."

As buyers swarmed to trucks and SUVs, domestic auto companies ignored passenger cars, which in turn opened up the playing field for Japanese and Korean firms.

The domestic car companies' market share -- now hovering around 45 percent from highs of as much as 90 percent years ago -- was decimated, eventually leading to plant closings, unemployment and even bankruptcy. Domestic automakers are only now beginning to regain footing in the passenger car business.

But the small car market won't always be stuck in a rut, analysts say.

"We don't expect to see gas prices remaining at the level that they are now [$2.69 to $2.89 a gallon] in the next five years. As demand increases with the recovery from the recession, we can expect an increase in gasoline prices, and that will help push us in the direction of small cars," Mr. Schuster said.

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