The Japanese car industry is vowing to work closer together in order to gameplan just how to head off a series of existential threat to a long-established and deeply ingrained business.

The list of problems is long and includes:

⬤ The rise of protectionism led by increased US tariffs, which is hurting Japan’s lucrative car export business, the world’s second largest by volume. 

⬤ Emissions regulations forcing EVs in regions including Europe, showing up Japanese weakness in electric drivetrains. 

⬤ Problems obtaining materials like rare earths and parts including chips. 

⬤ New Chinese players, which are eating Japanese market share both in China and globally. 

The pile-up of problems has prompted deep soul-searching in the country. “The automotive industry today stands at a major turning point,” Masanori Katayama, the head of Isuzu Motors and the outgoing chairman of the Japan Automobile Manufacturers Association (JAMA) stated in December. “A decline in competitiveness could have wide-ranging impacts on society.”

The next JAMA chairman will be none other than Koji Sato, the outgoing CEO of Toyota. JAMA presidents are typically local car industry bosses – Toyota chairman Akio Toyoda led the association three times – but Sato’s appointment coincides with him handing over the Toyota reins to the CFO, Kenta Kon. 

Instead of treating JAMA chairmanship as a sideline, Sato is resigning his Toyota board membership to take up a new role as chief industry officer that coupled with the JAMA role will empower him to go looking within Japan’s automotive business for solutions to some of the problems. 

“I will focus my efforts on the broader industry including JAMA. And I intend to be able to accelerate the pace of the collaboration,” Sato said in a conversation with his company’s internal communications arm, the Toyota Times.

Reaching for a football analogy, Kon described Sato as moving from captaining the club team to overseeing the national squad. Who better than the former head of a company who, in club terms, is Japan’s equivalent of Arsenal, Man City, Chelsea, Man United and Liverpool all rolled into one?

“I think we have a common understanding unless we go through changes in the industry, then this auto industry that Japan has always been cherished as the critical industry will no longer serve its role,” Sato said.

Already JAMA has come up with seven priorities in its ‘Vision 2035’ plan. Those including stable procurement of critical resources (eg those rare earths) and working harder on Japan’s long-stated aim to get to zero emissions without relying just on EVs, ie trying again to interest the world in hydrogen and other petrol alternatives. 

JAMA also wants the government to speed up automated driving, another area that Japan feels like it’s lagging due to an excess of regulatory caution. Finally it wants a “fundamental reform” of Japan’s onerous car tax system.

Japan’s lack of natural resources has hampered it in the digital, electric age. Put off by the sheer cost of sourcing materials, the country has not embraced electric as a powertrain and as a result just 1.6 percent of the country’s 3.8 million car sales last year were EVs.

China’s cornering of the rare-earths processing business has also harmed Japan, which is reduced to apply for export licences to a country with which it has historically had strained relations. 

The tensions being felt by the country’s automotive industry have most recently shown up in Honda’s most recent quarterly results. The company’s automotive unit was pushed into the red in the quarter ending December after having to pay additional US tariffs equivalent of £1.37 billion compared to the year before. It also booked £1.27 billion in costs after backing out of a planned EV partnership with General Motors in the US, becoming the latest to cancel an electric push after President Donald Trump dramatically U-turned on the policies of the previous government.

In the US, Japan’s tardy embrace of EVs has meant it was better prepared for the country’s hard reverse back into the comfort of combustion engines. In China however lack of competitive electric cars is hurting Honda. “Unfortunately, we are still behind…local EV manufacturers over there,” said Noriya Kaihara, the executive vice president tasked with telling investors the bad news on the earnings call. “So we have to go back to scratch and then rebuild our strategies for EV”.

After running through many of the global headwinds listed above, Kaihara, concluded that: “We need to conduct a fundamental review of our strategies to rebuild our competitive strength.”

Japan’s message exhorting companies to all pull together was weakened last year after Honda declined to merge with struggling compatriot Nissan. But Kaihara said that two companies are continuing to discuss working on a software architecture as well as batteries and axles for future EVs. “If we can commonize those or have a core development together that will help reduce the development cost,” he added. The two could even localise production with Honda cars built in Nissan plants or vice versa, he added. “If those are complementary to the other company, we could look for the possibility,” he said.

Mitsubishi Motors was another carmaker flagging concerns after less than stellar economic results. “The global business environment remains uncertain,” CEO Takao Kato told in investors, flagging the need to increase incentives to remain competitive. “Price competition continues to be severe due to the continued aggressive stance to export by Chinese manufacturers,” he said. Kato also highlighted “U.S.-China tensions, policy friction over green products and concern about a global economic slowdown”.

Mitsubishi remains profitable but said it expects its profit margins to halve in the financial year ending March to 2.4%, down from 5.0% the year before. Its US tariff bill is part of that hit, amounting to the equivalent of £176m in the first three quarters of its financial year.

The hit to exports can already been seen in the figures. While Japan’s export figures were fairly stable at 3.76 million in the 11 months between January and November according to JAMA figures, digging a deeper shows worrying trends. For example exports to Australia – a key market now being targeted by the Chinese – were down 17%, while Europe was down 10%. 

Car exports to the UK specifically were down 8% to 94,116, likely a direct result of Chinese rapidly increasing market share to over 10% last year.

Some of the markets balancing those losses were less revenue-generating – for example a 50% jump in exports to Pakistan, mostly tiny Kei cars. 

Exports to the US remain the highest of any country, accounting for around a third of the total cars Japan shipped out last year, which accounts for the sky-high tariff bills the country’s carmakers are now having to cough up.

Japan’s problems are not unique to the country. The world’s other leading car-exporting nations of Germany and South Korea are also struggling with US tariffs and the unstoppable  rise of China, now the world’s leading vehicle exporter. Efforts to halt China’s rise and protect local companies in places like Europe also have the knock-on effect of hurting Japanese exports.

Of course Japan over the years has localised production including in the UK with Nissan in Sunderland and Toyota in Derby. But underpinning its global network of factories has been a strong healthy local industry with exports at its core. The rise of protectionism, the Chinese, EV sales and a supply-chain shake up threatens that base, unless it can reinvent itself for a new era.