Can Japan’s Carmakers Survive China’s EV Threat?

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Remember this scene from the movie Too Fast, Too Furious: the cars racing each other are from Nissan, Honda, Mazda, and Toyota. These Japanese automakers have long been fierce rivals off-screen, which is why this moment was so significant. Nissan and Honda had agreed to start talks to merge under a holding company, but in a dramatic reversal, the plan was dropped. Both companies have now reported that they are scrapping merger talks. This drama reflects a larger struggle—Japanese car makers are facing one of the biggest threats to their global domination of the automobile industry. It’s a cautionary tale for automakers like Honda and Nissan: you can never become complacent. So why are Japanese car makers losing their edge, and are some at risk of running out of road?

In the 1970s and 1980s, when Japanese brands seemed to be everywhere, their global dominance extended beyond consumer electronics to cars. In 1970, U.S. automakers found themselves in a global automotive battle as Japanese manufacturers challenged the older makers in Europe and the U.S. Japanese automakers had the right product at the right time: during the early ’70s oil shock, when gasoline prices spiked in North America, they offered economical cars developed over decades under tight manufacturing constraints. This strategy allowed them to gain a foothold in the U.S. market.

By the 1980s, Japanese automakers were dominant in many parts of the world, with cars known for their reliability and durability. Today, out of the 10 largest car producers globally, three are Japanese—but signs indicate that they are starting to lose their edge. Their market share is declining, especially in Asia, which accounts for more than 50% of global passenger car sales over the last five years. Japanese car makers have lost significant market share in China and other key markets such as Indonesia, Thailand, and Singapore.

Back in 1998, Japan was the leading car maker worldwide, producing about one-tenth of all passenger cars. That share has now fallen by almost half. Two key reasons explain this decline. First is electrification. Nissan was one of the pioneers of electric vehicles, introducing the 100% electric Nissan Leaf in 2010—a true innovation for the planet that sold well in around 60 markets worldwide. However, it can be argued that Nissan may have been too early, as the market has since shown a continued demand for hybrid vehicles and traditional internal combustion engine cars. Consequently, Nissan never quite captured the market with the right battery-based EV at the right time.

Meanwhile, major players like Toyota never fully committed to EV technology; they preferred to offer a range of options—from pure gasoline engines to hybrids and battery-based EVs. Their challenge has been delivering the right battery-based EV at the right price. This brings us to the second reason for Japan’s setback. When you factor in the market share of Chinese car makers, it becomes clear that much of China’s recent growth has been driven by a company that was virtually unknown a few years ago: BYD, the biggest car brand you’ve never heard of.

Competitors are ramping up. In 2011, during an interview, Elon Musk was asked about BYD. He paused, chuckled, and said, “Have you seen their car?” At that time, BYD’s vehicles were seen as dinky and boxy. Fast forward a decade, and in one quarter, BYD outsold Tesla by about 42,000 EVs. Their rapid growth has allowed them to quickly overshadow their smaller Japanese rivals, contributing to Japan’s declining dominance.

Japanese media recently reported that Honda and Nissan were aiming to finalize a merger agreement as soon as June. The idea of these two companies combining—especially with Honda taking the lead—would have been unthinkable years ago. However, Nissan has been struggling to maintain its edge, particularly after the dramatic exit of its former chairman, Carlos Ghosn. Arrested in Tokyo for an alleged breach of Japanese financial trading laws, Ghosn later fled to Lebanon, claiming he couldn’t get a fair trial in Japan (though he has denied any wrongdoing). Following his departure, Nissan embarked on a three-year cost-cutting program. In November 2024, Nissan announced it would cut 9,000 jobs and reduce manufacturing capacity by 10% as it struggled with plummeting sales and profits. One month later, Honda entered the picture.

The idea of the two companies working together was born out of necessity. They knew that merging their corporate cultures and R&D efforts would be extraordinarily challenging, but pooling resources seemed like the only way to compete in the future EV industry. Both operate in many of the same markets, and in my opinion, both are lagging behind. It was a desperate move. Then, in February, Nissan announced its full-year operating income forecast, signaling that the merger talks with Honda were coming to an end.

Does this mean that Japanese cars may suffer the same fate as the Walkman? Not entirely. Despite their rivalry, Japanese car companies are beginning to collaborate—sharing software and working together on R&D. For example, Toyota and Nissan have taken a hard look at solid-state batteries, which promise to be cheaper to build, offer longer ranges, and charge faster. And despite the challenges, Toyota remains the largest car producer in the world by a wide margin. While it’s hard to imagine Toyota disappearing, there may come a time when some Japanese automakers fade into obscurity. The threat they face is similar to what companies like Volkswagen and Ford are experiencing. The big question is whether they can embrace change, innovate, and perfect their strategies to stay relevant in the coming years and decades.