Crushed by China, Japan's Automotive Industry on the Brink of Collapse
Japan’s automotive industry, which has dominated the global market for decades, is now facing serious pressure. This pressure stems from high trade tariffs, the disruption of electric vehicles (EVs), and a surge in production costs.
This has impacted giant companies like Honda and Nissan, which are in the most vulnerable phase in recent decades. Indeed, for the first time since 1957, Honda is projected to record a net loss.
Trade Tariffs and Erosion of Competitiveness
The competitiveness of Japanese car manufacturers continues to weaken, both in the global and regional markets. The imposition of a 25% import tariff by the United States has eroded profit margins, particularly in major export markets. At the same time, Nissan has been forced to undertake major restructuring, with plans to close seven factories by 2028.
However, the most significant pressure comes from the decline in market share. Globally, the dominance of Japanese manufacturers has fallen from 31% in 2019 to around 26% in 2025.
Asia, as the main sales market, has also experienced a sharp decline. Sales in China have plummeted drastically, while market share in Southeast Asia has dropped from 68% to 57% in just two years. This situation reflects the loss of competitive advantage in markets that were previously dominated.
EV Disruption and Delayed Adaptation
The root of the Japanese automotive industry’s problems lies in the delay in anticipating the shift towards electric vehicles. Japanese manufacturers have tended to maintain a focus on hybrid and hydrogen technology, which is considered more aligned with production infrastructure based on conventional engines.
However, market developments show a different direction. Global EV penetration has surged from 3% in 2019 to around 26% in 2025, with the fastest growth occurring in Asia. Chinese manufacturers like BYD have become dominant players thanks to rapid innovation and aggressive production scaling.
In addition, the industry transformation also encompasses a shift towards software-based vehicles. Modern cars now rely on systems like Autonomous Driving and Advanced Driver Assistance Systems (ADAS), areas in which Japanese manufacturers are still lagging.
Japan is attempting to catch up on its lag through collaborations such as Nissan with Wayve, a British startup developing self-driving technology, to enhance ADAS.
However, the effectiveness of this strategy is still in question. On the other hand, Honda has cancelled its electric vehicle project with Sony. According to Ken Shibusawa from Commons Asset Management, who recently sold his Honda shares after supporting the company for 17 years, collaboration between two large companies with similarly strong characters often faces obstacles in execution.
Amid the need for massive investments in electrification and digitalisation, the industry’s cost structure has risen sharply. Fixed costs per unit are reported to have increased by up to 78% over the past decade, driven by research and development spending as well as investments in new technologies. Rising wages and labour market conditions in Japan have further narrowed the room for efficiency.
The problem is that this cost increase is not matched by a strong sales recovery. Sales volume is still below pre-pandemic levels, thus pressuring profit margins.
Amid industry pressures, Toyota is the exception. Its strong position as the global leader in hybrid vehicles with around 40% market share benefits it from policy changes in the United States that reduce support for EVs. Toyota is collaborating with BYD and Huawei to maintain a stable market share in China, while preparing for electric vehicle expansion in the coming years.
Failed Mergers, Industry Seeks Other Paths
Amid increasing pressure, discussions on consolidation in Japan’s automotive industry have resurfaced as an effort to survive in the global market. Talks of a merger between Honda and Nissan at the end of 2024 once opened the possibility of forming a new automotive giant, but it failed to materialise.
The main challenge lies in product overlap and the complexity of production integration, which could potentially reduce efficiency. On the other hand, Toyota prefers to strengthen its influence through minority ownership rather than large acquisitions.
As an alternative, more flexible collaborations are being pursued, such as joint procurement and supply chain integration, though the industry will still need bolder strategies to survive in the future.