Charting a Course for Decarbonization: Japan in the Post-Glasgow Era

Japan’s Auto Makers Race to Make Up Lost Ground on EVs

Economy Technology Environment

As pressure to decarbonize causes the global transition to electric vehicles to gather pace, Japan’s auto manufacturers find themselves at a crossroads. With the rise of protectionism and more stringent environmental standards jeopardizing Japanese manufacturers’ competitive edge, government and industry must now come together to plot out a roadmap for the future of Japan’s automotive industry.

Global EV Sales Treble in Two Years

The sheer speed at which the global electric vehicle market has grown has sent shock waves through Japan’s auto industry. According to International Energy Agency figures, global drivers bought 6.6 million electric vehicles in 2021 (8.6% of all vehicles sold)— a threefold increase over 2019. The growth has been particularly pronounced in China, where, according to the China Association of Automobile Manufacturers, annual sales of “new-energy vehicles” (electric vehicles, plug-in hybrids, and fuel-cell vehicles) exceeded 3.5 million units in 2021. In 2022, this figure looks set to surpass 5 million, which is equivalent to the total number of new vehicles sold in Japan each year.

At the end of last year, Toyota CEO Toyoda Akio responded to the swift transition to electric vehicles by announcing a sales target of 3.5 million electric vehicles annually by 2030. However, compared with the likes of Tesla, which has spent the last 10 years investing heavily in proprietary semiconductors and batteries and ramped up global production capacity at its hubs in the United States (California and Texas), China (Shanghai), and Germany (greater Berlin) to over 1 million vehicles per year, China’s BYD, which sold 590,000 new energy vehicles in 2021, and Germany’s Volkswagen, which has responded to the Tesla onslaught by ramping up production in Germany and China, the action taken by Japan’s car manufacturers, who have long enjoyed a competitive advantage, may only be described as lagging, including with regard to the establishment of a domestic parts supply chain. In this article, I will consider how this state of affairs came about and ask what challenges are faced by Japan’s automotive industry.

US, European, and Chinese Manufacturers Reach Same Conclusion

The rapid growth in electric vehicle production in the early 2020s can be attributed to the individual circumstances of the United States, Europe, and China. In its home US market, Tesla’s ramping up of EV production has clearly been a strong driver of overall production growth. In 2012, the talented entrepreneur and South African immigrant Elon Musk declared his vision for the establishment of sustainable energy infrastructure and announced Tesla’s first mass-produced electric vehicle, the Tesla S, along with solar and other infrastructure capable of supplying the Tesla fleet with renewably-generated electricity. Tesla has released four models (the S, X, 3, and Y) in the space of 10 years, and grown its brand to rival what are regarded to be the top three premium brands in the United States: Mercedes-Benz, BMW, and Toyota’s Lexus. Tesla has acted as a catalyst for the growth of electric vehicle ownership in the United States, starting with California. The US “big three” (GM, Ford, and Chrysler) responded by ramping up their own EV production capacity, in accordance with the Joe Biden administration’s focus on climate change.

China, for its part, in 2015 announced “Made in China 2025,” a long-term industrial policy that aims to turn China into an auto manufacturing powerhouse by 2025. The policy sets a target (expected to be achieved in 2022) of making 20% of all new car sales electric vehicles and other new-energy vehicles. By offering massive subsidies for electric vehicles and implementing policies that favored wholly domestic manufacturers, the Chinese government successfully established a comprehensive supply chain for batteries and other electric vehicle components. At one point, the Chinese market became overcrowded with literally hundreds of EV manufacturers vying for business, leading to a phased reduction of subsidies in recent years and creating concerns that EVs would lose popularity, but rapid growth in charging infrastructure ensured that China’s EV policy got off the ground.

In Europe, stringent EU-led emissions standards meant the industry’s focus was diesel technology until the mid-2010s, but the emergence in 2015 of the colossal “Dieselgate” emissions-cheating scandal, which started with Volkswagen, caused work on EV technology—which had until then progressed in the shadow of diesel development—to accelerate. Manufacturing capacity continues to grow rapidly, with Germany leading the trend. European manufacturers, particularly German ones, have traditionally been highly dependent on the Chinese market, and the European response to the speed of the growth of China’s EV market was also a factor.

Japan Late to the Party

Let us now consider why Japanese auto manufacturers were late to join the rapid global transition to electric vehicles. In 2020, the number of Japanese-manufactured electric vehicles (including plug-in hybrids) sold worldwide was just under 120,000. This represents the total for Nissan and Toyota combined.

Japanese manufacturers were certainly not late in launching electric cars. Mitsubishi pioneered electric cars in Japan in 2009 with the i-MiEV, while Nissan released the Leaf in 2010 and Toyota released the RAV4 EV, a mid-sized SUV, in 2012. It is therefore not necessarily a case of Japanese manufacturers being late to the party. Rather, Japanese manufacturers never ramped up their EV production capacity. This can be attributed to many decades spent building expertise in internal combustion engine manufacture, at which Japanese automakers excel, combined with the considerable competitiveness of the Prius, launched by Toyota in 1997, and other hybrid vehicles.

In addition, hybrid production plants have now been fully depreciated, making hybrids a leading source of revenue for Japanese auto manufacturers, and it therefore cannot be denied that enormous costs associated with the development of a brand-new platform have made them hesitant to invest in new technology that would take a long time to turn a profit (a phenomenon similar to what Harvard lecturer Clayton Christensen dubbed the “innovator’s dilemma”).

Furthermore, within Japan, manufacturers remain wary about EVs due to the challenges of establishing charging infrastructure, safety and cost issues associated with lithium-ion batteries, range issues, and issues related to the rare earths and conflict minerals from Africa and elsewhere that are required to build the motors and batteries that are the chief EV components. With this situation exacerbated by delays in obtaining information on overseas markets due to the COVID-19 pandemic, Japanese manufacturers may have misread the rapid growth in the EV market seen in countries like the United States and China.

What is more, while there is some variation between manufacturers, the history of Japan’s automobile industry means that the industry still tends to be vertically integrated, with trade largely kept within corporate group silos, making the prospect of restructuring a component supply chain optimized for legacy technology extremely cost-intensive. Granted, it would have been difficult for manufacturers to establish a component supply chain or make other changes until they were sure that the EV market had indeed taken off.

CASE as the Key to Comeback

While Toyota, Honda, Nissan, and other major Japanese automobile manufacturers have all announced EV timelines, they all currently face many challenges. Electric vehicles require far fewer components than their ICE counterparts. Many car components, mainly in engines, will no longer be required. This means that the transition to an electric fleet will inevitably force a large number of suppliers to restructure their operations. At the same time, the impact on subcontractors that manufacture soon-to-be-obsolete components will be significant, and has a direct bearing on employment.

Furthermore, even were Japan’s automakers to successfully transition to EV production, the Japanese supply chain, including all components and finished products manufactured in Japan, remains dependent on fossil-fuel-based electricity following the shutdown of most of the country’s nuclear reactors in the wake of the March 11, 2011, disaster. This means that in terms of lifetime carbon footprints (the total greenhouse gas emissions arising during the lifetime of a product or service, including raw materials procurement, production, shipping, and disposal or recycling), Japanese auto manufacturers may be disadvantaged when exporting, including with regard to auto parts, compared with competitors in places like Europe, which is pushing ahead with the Carbon Border Adjustment Mechanism (a tariff on carbon-intensive articles imported from outside the EU).

In addition to this trend, in the name of economic security and the clean supply chain, the world is becoming increasingly protectionist, and tariff barriers of the sort imposed in the United States (Japan’s major trading partner) during the Donald Trump presidency are causing many to question the appropriateness of the current export-dependent model for Japan’s manufacturing industry. With electric vehicles not having caught on domestically, and less-than-impressive incentives offered to manufacturers to establish Japanese manufacturing hubs for these vehicles or their components, the question of how to keep production technologies for batteries and other significant EV components in Japan is a pressing one.

Finally, while within Japan the focus tends to be on the transition to electric vehicles themselves, if we are to take a more global perspective, we should be focusing on the concept of CASE (connected cars, autonomous driving, sharing, and electrification) that is currently being embraced by the automotive industry as a whole. When connected cars go online, it will create an enormous mobility services market; as that market undergoes enormous structural change, semiconductors, sensors, autonomous driving algorithms, cloud computing, and cyber security technologies will become key. However, Japan cannot be described as a force to be reckoned with in these areas either.

After the deadline for submitting this article had passed, news broke of Russia’s invasion of Ukraine. While there is not enough space here to consider the implications of the invasion, I predict that it will bring about significant changes in the global energy supply, while drastically influencing the decarbonization policies of major nations and further exacerbating the current chaos seen in the auto-parts supply chain. With more dramatic changes in the environment surrounding the global automobile industry projected to come, the industry will have to work together to solve these challenges.

(Originally published in Japanese. Banner photo: Toyota CEO Toyoda Akio announces the company’s electric vehicle strategy, including a goal to have 30 electric vehicle models on the market by 2030, on December 14, 2021, in Tokyo. © Jiji.)

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