TOKYO -- Dark clouds are looming over the world's two biggest auto markets, with new vehicle sales in the U.S. and China cooling after hitting record highs in 2016.
The U.S. auto market has clearly passed its peak. Sales reached an all-time high of around 17.55 million vehicles last year, but they shrank, year on year, for the fifth straight month in May. For the full year, most forecasts put the number below 17 million units.
Toyota Motor aims to sell 2.82 million vehicles in North America during fiscal 2017, which started April 1, down 10,000 from the previous year. "The market shows signs of weakening," said Osamu Nagata, the top Japanese carmaker's executive vice president.
Sales incentives offered by automakers in the U.S. are staying high amid intensifying competition. Early this year, General Motors and others cut production of some models.
The Chinese auto market, the world's largest, is also running out of gas. According to the China Association of Automobile Manufacturers, sales in China surged 14%, year on year, to a record-high of about 28.02 million vehicles in 2016. But they fell for the second month in a row in May.
The recent slump in China is partly due to lower tax breaks for compact cars. The lower taxes were introduced in October 2015, stimulating demand. Growth in annual sales is expected to slow to between 3% and 5% in 2017.
Zhang Yi, a group manager at Nomura Research Institute, paints an even more bearish picture of the Chinese auto market in 2018. "The Chinese market will post zero growth, or slip into negative territory" that year, Zhang said.
Amid the expected slowdown, SUVs hold the key for a growing number of carmakers. SUVs are popular with Chinese motorists, especially in urban areas, accounting for about one-third of new auto sales in 2016. Japanese manufacturers Honda Motor and Nissan are taking advantage of their popularity. They expect to outperform the Chinese market as a whole this year.
XR-V compact SUVs keep rolling off the assembly line at a second plant owned by Dongfeng Honda Automobile, Honda Motor's joint venture in China's central Hubei Province, while GAC Honda Automobile, another Japanese joint venture, based in Guangdong Province in the southeast, turns out Vezel SUVs.
The XR-V and Vezel use a common platform but have different interiors and exteriors. This allows the carmakers to appeal to a wider range of customers.
The strategy is paying off. Honda expects its sales in China to rise 7% in 2017 from a year earlier to a record high 1.34 million vehicles. "Sales will increase in the long term, as there is room for growth in inland areas and elsewhere," said Honda President Takahiro Hachigo.
Nissan hopes to sell 1.48 million vehicles in China in 2017, up 9% from a year earlier.
But Chinese automakers are a growing force in SUVs. The Haval H6, made by Great Wall Motor, topped the SUV sales ranking in 2016.
The base price for the Haval H6 is 88,800 yuan ($13,000), around half the price Japanese competitor. In China's inland areas, the price range for mass-market cars is between 90,000 yuan and 120,000 yuan.
"Dealerships are increasing sales promotional spending," said Nomura Research Institute's Zhang. Price competition in the SUV segment is therefore likely to heat up.
In June, the Chinese government eased regulations on foreign automakers trying to break into the local market. In the past, foreign carmakers have been allowed to establish up to two joint ventures. But they will now be allowed to have up to three joint ventures, provided the third one makes electric vehicles or other eco-cars. The authorities are also considering requiring a certain percentage of cars sold to be environmentally friendly, starting next year.
If those plans go ahead, foreign carmakers' bet on SUVs in China may begin to look risky.