Have Japanese carmakers reached the end of the road?

This article explores how Japanese carmakers are losing market share at an alarming rate just as China is taking the lead in electrification.

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Nissan, Honda, Mazda and Toyota have been fierce rivals for a very long time in the Japanese auto sector. This is why it was a huge deal when Nissan and Honda agreed to start talks to merge under a common holding company, before in a dramatic reversal, the plan was dropped. Honda and Nissan scrapped merger talks when they reported their results. This drama is really a reflection of a larger struggle. Japanese car makers are seeing one of the biggest threats to their global domination of the automobile industry that they have ever seen. It is a cautionary tail, particularly, for automakers like Honda and Nissan that you just cannot 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 80s, Japanese brands seemed to be everywhere. Japan's global dominance did not stop at consumer electronics, it also extended to cars. Essentially, Japanese automakers had a perfect mix of having the right product at the right time. In the early 1970s, when there was a global oil shock and gasoline prices were spiking, the Japanese had economical cars that they had developed over decades under really tight manufacturing constraints. That's when they really gained a foothold not only into the US market, the world's largest auto market, but also the rest of the world. Japanese automakers were dominant in many parts of the world as their cars were known for their reliability and durability.

Global car sales

Fast forward to now and three out of the 10 largest car producers in the world are Japanese. But, Japanese automakers are seeing their market share erode, particularly, in Asia. That is especially significant given that Asia accounts for more than 50% of passenger car sales globally.

Global passenger cars production share

Back in 1998, Japan was the leading car maker globally, making about one-fifth of all passenger cars. Now, that has fallen by almost half and there are two key reasons why.

1. Electrification

Nissan was actually one of the world's pioneers of electric vehicles. It released the Nissan Leaf, a zero gas 100% electric car in 2010. It was very popular and it went on to sell very well in around 60 markets all around the world. But in hindsight, we can see that maybe they were too early because in the interim, we have observed continued demand for hybrid vehicles and pure combustible engine cars, rather than EVs. So, they were not able to capture the market with the right product at the right time.

Meanwhile, major players like Toyota never committed fully to EV technology. They wanted to have a wide range of offerings for their customers from pure petrol or diesel burning engines to hybrids to battery based EVs. So, they have fallen a bit short is having the right battery based EV at the right price. That brings us to the second key reason why Japan fell behind.

2. Rise of the Chinese automakers

Remember the previous chart depicting how Japan lost its place as the number one car producer globally? You might have noticed that the share of Chinese car makers in the same chart increased from 1.4% to 38.4% in a span of 25 years. Much of China's edge has been driven by a company that was unheard of a few years ago, BYD.

In 2011, Elon Musk did an interview and he was asked what he thought about BYD. He stopped and gave a bit of a chuckle and said, "have you seen their car?" and that was a fair comment. At the time, BYD cars were disappointingly small and boxy. But a decade after that interview, in the fourth quarter of 2024, BYD outsold Tesla by about 42,000 EVs. They are now ahead on a global basis. One of the reasons why BYD and the other Chinese carmakers have been so successful is that they have managed to come out with electric cars across all price points on the spectrum.

BYD's rapid growth has meant that it has been able to quickly overshadow its smaller Japanese rivals. It is a part of the reason why Honda and Nissan were aiming to finalize a merger agreement. The idea of them combining, with Honda taking the lead would have been unthinkable a few years ago. But Nissan, in particular, has been struggling especially after the rather dramatic exit of its former chairman Carlos Ghosn. Carlos Ghosn was pursuing a high volume strategy and when he left abruptly, Nissan embarked on a three-year cost cutting program. In November 2024, Nissan announced that it will cut 9,000 jobs and reduce manufacturing capacity by 20% as the Japanese automaker struggles with plummeting sales and profits.

One month later, Honda entered the picture. The idea of the pair working together was in reality born out of need. They knew merging their cultures and R&D would be extraordinarily challenging but pulling resources seemed like a way to compete in the future EV industry. It was a desperate move as both these companies were lagging behind in the EV race. In February 2025, the companies announced a conclusion of talks between them and that conclusion is that they are not going anywhere with this deal.

So does this mean that Japanese cars may suffer the same fate as the Walkman? Well, its not all doom and gloom. Despite being rivals, Japanese car companies are starting to work together. They are doing things like sharing software and collaborating on R&D. Toyota and Nissan have started to pursue solid state battery technology. These batteries are cheaper to build, have a longer range and are quicker to charge. When we consider the threat that the Japanese automakers are facing, it is not substantially different from what other carmakers like Volkswagen or Ford are facing.

The big question is whether they can embrace change, bring in new ideas and do what they do best, which is perfect those ideas to stay relevant in the coming years and decades?