Serious Problems for Automotive Giants. Earthquake Started in China

• Japanese companies are trying to coordinate research, implementation and market policy. Nissan is in the most difficult situation, announcing previously unseen reductions.
• The belief in the benefits of testing different types of drives is quite strong on the islands. Not everyone is betting on electrics.
• Meanwhile, BYD is preparing to enter a segment of the Japanese automotive market avoided by foreign companies called kei-car.

The earthquake began in China. According to data from the China Association of Automobile Manufacturers, between 2019 and 2024, the share of domestic manufacturers in the local market increased from 39 to 65 percent. For German companies, this meant a drop from 24 to 15 percent, and for Japanese companies from 21 to 11 percent. The reason for this trend is known - the spread of electric cars. Incentives and discounts for customers brought profits primarily to Chinese companies , which, with generous support from the authorities, focused on the development of EVs.

This has a measurable impact on turnover and profits. Toyota's year-on-year sales in China fell by 7% in 2024, Nissan's by 12%, and Honda's by as much as 31%. The latter, which was the third most popular carmaker on the Chinese market in terms of sales in 2019, dropped out of the top ten.

Nissan, however, found itself in the most difficult situation . The corporation ended the fiscal year 2024 with a loss of 650 billion yen (PLN 16.6 billion) . The company had been struggling with falling sales since 2017, then came the wave of Chinese electric cars and Donald Trump's American tariffs.

Nissan CEO Ivan Espinosa has made a decision on a series of difficult changes. The cuts are to cover 20,000 positions and reduce the number of assembly plants from 17 to 10. Two factories in Japan alone are to be closed, one each in Argentina, India and South Africa, and the closure of two plants in Mexico is also being considered. The latter produced mainly for export to the US, but due to the threat of rising tariffs, their profitability is in serious doubt. Nissan has also withdrawn from the planned construction of a battery plant for electric cars in Japan .

The domino effect, or not only the giants lose

The problems of large manufacturers always affect their subcontractors . An example is Marelli Holdings, which on June 11 announced that it had filed a motion to the court in the American Delaware for protection from creditors. This group is a manufacturer of car parts, and Nissan was the recipient of about 30% of its production. Marelli's debt exceeded 650 billion yen (16.6 billion zloty).

The holding company's name and the conduct of the proceedings in the US may be misleading. The group is strongly connected to Japan. In 2017, the American investment company Kohlberg Kravis Roberts bought the Japanese car parts manufacturer Calsonic Kansei. Two years later, it merged with the Italian Magneti Marelli.

The group got into trouble as a result of the Covid-19 pandemic. In 2022, it presented a debt restructuring project in a Tokyo court. At that time, its liabilities amounted to 1.2 trillion yen (31 billion zlotys) and it was close to the largest bankruptcy in the manufacturing sector in post-war Japan . The salvation was supposed to be the purchase by the Indian car parts manufacturer Motherson Group. Unfortunately for the company, the negotiations broke down.

Manufacturers are adapting to the Chinese market

Like German corporations, Japanese carmakers are not going to give up on the Chinese market. The profits, even if uncertain, are potentially too big. That is why, in parallel with reductions in other parts of the world, Nissan intends to invest 10 billion yuan (5.15 billion zloty) in China by the end of next year.

The next step is a partnership with local startup Momenta to develop an AI-powered advanced driver assistance system (ADAS), and a joint venture with Dongfeng Motor Group to create a new line of electric vehicles for the Chinese market.

Nissan doesn't intend to focus solely on electrics. This year's Auto Shanghai premiered the Frontier Pro, a hybrid plug-in pickup truck. The model is set to go on sale in China later this year, with other markets to follow.

Honda has also partnered with Momenta on ADAS for its Ye series electric cars for the Chinese market. The company is also working with DeepSeek, known in Europe as a competitor to ChatGPT, on an AI-based voice command system for vehicles.

In turn, in addition to its partnership with Momenta, Toyota will use Huawei’s HarmonyOS operating system in its first electric sedan, the bZ7, introduced exclusively for the Chinese market.

Cooperation with local entities and specially created models have two reasons. The first is the desire to stay in the Chinese market. During Auto Shanghai, Toyota representatives even spoke of the creation of a new "car culture" in China . This requires models that meet local specifics and customer tastes. Such cars will not necessarily sell well elsewhere.

There is also a second reason. In the face of American sanctions and restrictions on technology exports, the automotive market is becoming another industry where the bifurcation of the previously homogeneous global trade system is becoming increasingly visible. Within corporations, production is being divided for the needs of China and the rest of the world , or at least that part of it centered around the US.

Japanese companies are looking for their opportunities wherever they can

At the same time, Japanese companies are developing plans that do not include the Chinese market and are looking for ways to gain an advantage over their rivals there. One of them is electronics. The Japanese automotive industry consortium ASRA is in talks to create a standardized project for next-generation car chips. It is to be ready by March 2029. In this way, ASRA wants to reduce costs and speed up the development of new cars.

The solution would not only be standardized, but also scalable. Simpler models would need fewer integrated circuits, more advanced ones more. The consortium also sees opportunities for the Japanese semiconductor industry. In an era when everyone wants to produce processors for AI, interest in producing simpler systems for the automotive industry is falling. So there is hope for synergy and reduced dependence on China, which is increasingly dominant in the segment of less advanced semiconductors.

There is also a chance to solve another problem, especially important in an era when cars are starting to resemble smartphones on wheels and the first autonomous vehicles are appearing on the roads.

One reason for the success of Chinese EV manufacturers is the development of new models based on software, for which hardware is then selected. In Japan, it is the other way around. Software and semiconductors are selected based on the needs of the machine. Meanwhile, as Nobuaki Kawahara, executive director of ASRA, notes in an interview with Nikkei Asia, Japan lags behind "in terms of having the right hardware to provide real-time safety control and the ability to run the software reliably."

Hybrid, electric or something else?

Another difference in the approach to car development concerns the drive. Although Japanese companies set trends in this field, they were not convinced that electric drive was really the future. As a result, they devoted a lot of attention to hydrogen fuel cells and hybrids. In China, there is a concentration of efforts on electric vehicles and the related successes. In Japan, work is scattered, focused on various drives. So if other solutions turn out to be more efficient than electrics, the Japanese automotive industry will gain a significant advantage.

The belief in the benefits of diversification is still quite strong in Japan. In mid-May, Honda announced a 30% reduction in its planned investment in electrification by 2031. The company's president, Toshihiro Mibe, justified this by saying that it was impossible to implement the previously planned strategy due to the market situation, political trends, and environmental regulations. On June 11, Honda announced a focus on hybrid drive development, at least in the transition period until it fully phases out combustion engines.

Toyota, on the other hand, is focusing on hydrogen as the fuel of the future . In early June, a breakthrough was achieved. A car powered by liquid hydrogen completed a 24-hour endurance race. This is a great success, because attempts in the previous two years ended in failure.

Chinese tycoon heads into the unknown. Do the Japanese have anything to fear?

This approach from the Japanese automotive industry is justified. Competition with the Chinese in the EV segment is too difficult , so it is worth looking for advantages elsewhere.

Meanwhile, Chinese giant BYD is preparing to enter the Japanese market, which has so far been a stronghold of domestic producers.

It is about kei-cars (kei-jidōsha, literally "light cars"), a large segment of miniatures that includes passenger cars, vans, SUVs, minivans, and even semi-trucks. Kei-cars were born in the post-war years, when the authorities were looking for a way to motorize cheaply and quickly. Over time, it turned out that these small vehicles are perfect for crowded, narrow-street cities.

In order for a vehicle to be classified as a kei car, it must meet certain requirements. Dimensions cannot exceed 3400 mm in length, 1480 mm in width and 2000 mm in height. The engine can have a maximum capacity of 660 cm³ and a power of up to 64 HP. Such restrictions encouraged manufacturers to differentiate their offer by using new technical solutions, from automatic transmissions to hybrid drives. American and European corporations, on the other hand, considered these restrictions to be senseless and a form of non-tariff barriers to market entry.

Where Volkswagen and Ford saw an obstacle, BYD sees an opportunity . Miniature vehicles are extremely popular in Japan. Last year, they accounted for 40 percent of all new cars sold.

The environment in which kei cars operate promotes electric drive. BYD plans to enter this market with its first model next year and is actively looking for Japanese employees who understand the specifics and needs of local customers. This has caused a great stir in the local automotive industry. A fight is brewing in a segment that the Japanese have so far considered their backyard.