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05/12/2024by EOS Intelligence EOS Intelligence No Comments

Japan’s EV Hesitation: The High Cost of Delay to Its Automotive Sector

Japan is the world’s fourth largest automotive manufacturer, behind China, the USA, and India. The country has been long known for its innovation, technology, and efficiency in car manufacturing. Despite being one of the automotive superpowers, Japan has been slowly losing its dominance, struggling to maintain its competitive edge on the global stage. Rising consumer demand for electric vehicles (EVs) and Japan’s slower rate of adopting EV technology have largely contributed to this downfall. In 2022, Japanese brands accounted for less than 5% of global EV sales.

A 2022 report by the Climate Group, an international non-profit organization, warns that if Japan fails to adapt swiftly to global EV trends, the country could witness a 50% reduction in auto exports, impacting over 14% of its GDP by 2040.

Japan prioritizes hybrids and plug-in hybrids over electric vehicles

Japanese automakers are the pioneers of the EV development. Toyota launched Prius, the first mass-produced hybrid vehicle, in 1997, marking a significant development in the global automotive industry. Following Prius, Nissan launched Leaf in 2010, which gained significant attention worldwide as the first mass-produced battery electric vehicle.

Despite being the first to the EV revolution, Japan has failed to make a strong footprint in the global EV race so far. Japanese automakers have been largely skeptical about the EV’s future, profitability, and proposed environmental benefits. This has led them to tread cautiously. Instead, the Japanese government views hybrids (HEVs) and plug-in hybrids (PHEVs) as a strategic priority. It claims these vehicles meet both emissions targets and offer customers electrification features.

However, other major markets, such as the USA, China, the EU, and the UK, are trying to curtail HEVs and internal combustion engine vehicles (ICEVs) sales within the next 10-15 years. For instance, in 2021, the EU Commission announced a ban on ICEVs, including HEVs and PHEVs, starting in 2035. Similarly, the UK government proposed to ban all ICEVs beginning in 2035.

While Japan decided to ban gasoline vehicles by 2030, much of its focus is on promoting HEVs. Japan currently dominates the global gasoline-electric hybrids (HEVs) market and hopes to leverage its massive investment in the technology. Consequently, the country has delayed a significant push for EV adoption. Japan’s strong emphasis on hybrid technology has made other countries, especially China, gain a massive lead in developing and commercializing battery electric vehicles (BEVs).

With the looming bans on ICEVs and the increased consumer preference for BEVs over gasoline-powered engines, the limited number of Japanese BEVs on the market has led to a subsequent loss of market share for Japanese automakers.

Japan’s EV Hesitation The High Cost of Delay to Its Automotive Sector by EOS Intelligence

Traditional auto manufacturing environment makes the EV switch difficult

Japan’s economy is intertwined with its auto industry. Automotive manufacturing accounts for about 2.9% of the country’s GDP and 14% of the manufacturing GDP. The country spent years working on perfecting the ICEV automotive technologies and manufacturing. Japan wishes to retain its advantage from ICEVs for as long as possible. The current prevalence of traditional manufacturing capabilities and well-established supply chains make the country hesitant to switch to EVs.

ICEVs and EVs cannot be manufactured on the same platform. Remodeling existing ICEV facilities into EV facilities is a daunting and cost-intensive task. Moreover, as EVs require fewer parts, Japanese automakers are concerned about the impact on their extensive networks of components and parts suppliers, which could disrupt the entire industry.

Further, the significant costs associated with developing EV production technologies and platforms have led these automakers to question the potential profitability of EVs. Japan’s complacency with ICEVs has resulted in its lagging position in the global EV race.

Japan’s focus on fuel cell vehicles hampers EV development

Japan is a country with the least self-sufficient energy system. The country imports over 90% of its energy, heavily relying on foreign sources. Energy independence has been Japan’s major strategic goal for many years now. The government views hydrogen as a crucial clean energy source since the country can produce it domestically. On the contrary, EVs use electricity and could further increase the country’s energy dependence.

The government invested about US$3 billion between 2012 and 2021 in hydrogen technology. Some 70% of that was dedicated to fuel cell vehicles (FCEVs) and related infrastructure. The country aims to sell 800,000 FCEVs by the end of 2030 and provides massive subsidies and funds to Japanese automakers to research, develop, and commercialize FCEVs.

Thanks to substantial government support, in 2014, Toyota launched Mirai, the first mass-produced fuel cell vehicle. However, high fuel costs and insufficient hydrogen infrastructure have slowed its adoption in the country. As of January 2023, Japan had only built 164 hydrogen stations nationwide, far behind the target of 1,000 stations by 2030.

FCEVs demand and sales have not picked up the pace owing to the limited number of fueling stations and FCEVs’ high running costs. Automakers sold only 8,283 fuel cell vehicles by the end of July 2023. This was far below the sales that could lead to the 800,000-vehicle target set for 2030. Japan’s heavy focus on hydrogen technologies contributes to the slow EV transition, impacting its competitiveness in the global automotive space.

Increased EV competition puts Japan in a tight spot

Due to the surging interest in EVs, automakers from China, South Korea, Germany, and the USA have disrupted Japan’s dominance in the automotive sector over the past few years. This shift is especially evident in emerging markets such as Southeast Asia, with a surging demand for EVs. International automakers, especially the Chinese, have slowly expanded their presence in this region.

For instance, several Chinese automakers have entered Indonesia over recent years, challenging Japan’s long-standing dominance of the Indonesian automotive market. Wuling, a prominent Chinese EV automaker, has gained significant popularity in Indonesia, making it the seventh preferred car brand. In May 2024, BYD, another Chinese automaker, announced its plans to build a US$1 billion EV production facility in West Java, Indonesia. To be completed in 2026, this facility would significantly improve the Chinese market presence in Indonesia, which might further weaken the Japanese market share. Meanwhile, South Korean automakers Hyundai and Kia are also making significant strides in the Indonesian market.

Japanese automakers have also been losing their grip in Thailand as EVs are gaining traction. In 2023, new vehicle sales of Mazda, Mitsubishi, Nissan, Suzuki, and Isuzu fell by 25% in the country, while the market share of Chinese brands increased to 11% from 5% the previous year. As a response to these shifting dynamics, Japanese automakers either choose to close or merge factory operations in Thailand. In June 2024, Suzuki Motor decided to stop making cars in Thailand altogether. China’s BYD and Great Wall Motor are spending US$1.4 billion on new EV production and assembly facilities in Thailand to facilitate domestic production and overseas sales.

Sales of Japanese brands have also plunged in China in recent years. Amid low sales and intense EV competition, in October 2023, Japanese automaker Mitsubishi Motors announced its exit from a joint venture with the Guangzhou Automobile Group, a China-based automotive manufacturer. They shut down all the local manufacturing operations.

With the rising preference for EVs, Japanese automakers will likely face more fierce competition, which could profoundly transform their position in the global automotive landscape.

Toyota and Honda look to strengthen overseas EV manufacturing capabilities

Amidst increasing competition, Japanese automakers have recently started investing in EV technologies and production to catch up with rivals such as China, Europe, and the USA. Large carmakers, such as Honda and Toyota, are looking to develop and commercialize solid-state batteries to enhance the competitiveness of their EV line-up in the global EV market. These batteries are relatively safer than lithium-ion batteries, offering greater energy density and quick charging times. For instance, Toyota claims its first-generation solid-state batteries would cover a range of about 520 miles (about 830 km), with a 10-minute charging capability.

Toyota and Honda want to strengthen their EV supply chain, especially in North America. Toyota plans to launch a three-row electric SUV in the USA in 2025, now postponed to 2026. This SUV will be the company’s first electric car assembled locally. Toyota invested US$8 billion in its Princeton, Indiana facility to support production and added a new battery pack assembly line. The company has also invested considerably in preparing its facility in Kentucky for another three-seater electric SUV manufacturing.

In the European market, Toyota is looking to release six electric models by 2026 amidst the increasing demand. As its sales are shrinking in China, Toyota plans to launch an EV with autonomous driving technology in 2025. In Thailand, Toyota is set to launch an electric pickup truck in 2024.

In January 2024, Honda announced an investment of US$14 billion to build an electric car and battery plant in Ontario, Canada. The carmaker also announced an investment of US$700 million to start EV production in Ohio, USA. Honda said it would invest nearly US$65 billion in EVs till 2030. It plans to sell two million BEVs by 2030 and aims to make 40% of the vehicle sales either EV or FCEV by the same year.

Nissan, another giant Japanese carmaker, plans to achieve 40% of global offerings as EVs by 2026. However, Nissan’s EV strategy is largely unclear compared to Toyota and Honda. As Nissan struggles to counter the EV dominance, the company has increasingly leveraged partnerships with carmakers such as Mitsubishi and Renault to bolster its EV supply chain and production. In March 2024, Nissan and Honda did a joint feasibility study on vehicle electrification. Together, the companies look to develop automotive software platforms, core components related to EVs, and other electrification components.

Suzuki Motor has also announced its plans to invest approximately US$35 billion by 2030 in BEVs. The company plans to introduce BEVs in Europe, Japan, and India over the next few years.

Some smaller automakers, such as Subaru, Mazda, and Mitsubishi Motors, are still unclear about their EV transition and face daunting challenges in rolling out EVs.

EOS Perspective

Japanese automakers are realizing their difficult position and plan to bolster their EV manufacturing and technological capabilities. However, it requires significant efforts, and the road to EV transition will not be easy.

One of the critical factors affecting Japan’s EV adoption is the supply chain constraints. Japan does not possess the minerals necessary to make batteries for EVs. The country primarily depends on its rival, China, for approximately 60% of its rare earth requirements. Globally, China refines 90% of critical minerals, including 60% to 70% of lithium and cobalt, needed to make EV batteries. The Japanese government is looking to diversify its EV manufacturing supplies to reduce its reliance on China. The country has taken significant strides to develop critical mineral resources with other countries such as the USA, Indonesia, and Australia. Inevitably, all these efforts would take a lot of time and money.

Japanese automakers are also less proficient in vehicle software development, an aspect that EVs require to a great extent. To address this challenge, leading Japanese automakers have partnered with other automotive companies to develop software for EVs. In August 2024, Honda, Mitsubishi Motors, and Nissan announced a collaboration to develop software-defined vehicles (SDV), to standardize battery technology, and to reduce EV production costs.

Mass-producing EVs at a competitive price is one of the other significant challenges for Japanese automakers. Currently, China-based BYD and CATL supply 50% of the batteries for EVs globally. These companies spent years perfecting the cost-effective battery technology using lithium iron phosphate (LFP) cathodes. They have strong expertise in efficiently transferring innovations from R&D into large-scale production.

However, unlike China, Japan still depends on lithium-ion batteries using NMC cathodes, which involve lithium, nickel, manganese, and cobalt. These batteries are cost-intensive in comparison to China’s LFP batteries. BYD and CATL produce batteries at lower capital costs (below US$60 million per gigawatt hour). In comparison, Japan’s Panasonic produces batteries at US$103 million per gigawatt hour. It would take years for Japan to perfect the battery technology and mass-produce EVs at affordable prices.

Japan has also not yet established comprehensive policies and strategies to push EV adoption. Stringent regulations have hampered the expansion of EV charging infrastructure in the country. On the other hand, since the 2010s, countries such as the USA, China, and Norway have started implementing measures such as EV purchase subsidies, tax rebates, and procurement contracts to promote EV sales. China invested over US$29 billion between 2009 and 2022 in promoting EVs. If Japan does not take similar measures soon, its ability to foster an EV-friendly environment will be significantly compromised.

22/02/2013by EOS Intelligence EOS Intelligence No Comments

Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

Part II of our Automotive MIST series brings us to Asia – Indonesia, now the second largest South-east Asian automotive market.

Indonesia, South-east Asia’s biggest economy, is now set to become the region’s largest automotive market as well. While Indonesia sold more vehicles than Thailand for the first time in 2011, the land of white elephants made a strong recovery in 2012 and regained its status as the biggest automotive market in the region. This, however, wasn’t enough to take the sheen off the performance of Indonesia’s automotive market in 2012. The country crossed the 1 million mark (vehicles sold in a calendar year) for the first time, surpassing expectations and beating all forecasts. This is the third consecutive year of record sales and represents something of a gold rush for automotive OEMs.

Indonesia achieved GDP growth of 6.2% in 2012 only slightly lower than the 6.5% it clocked in 2011. Over the past decade, its GDP growth has averaged 5.7%, highlighting a positive domestic economic environment. Rising average income levels has created a burgeoning middle class (half of its population of 240 million). Low borrowing costs, rising purchasing power, cheap subsidized fuel, reduced inflation and currency stability have positively influenced the automotive sector. Huge construction projects and mining investment drove the demand for commercial vehicles.

It is no surprise, then, that car-makers are lining up to increase output, with both incumbents and new entrants making large investments to improve their production capacity in the country. The market is currently dominated by Japanese OEMs, with a share of almost 90%. Toyota (along with its affiliate Daihatsu) accounts for almost half of domestic sales, while Mitsubishi, Suzuki, Honda and Nissan are the other important players (in that order).

The Japanese automotive OEMs are on a massive expansion drive in Indonesia – major automotive OEMs and over 50 automotive component makers from Japan committed an investment of about USD 2.4 billion in 2012 to boost production capacity. Car production is expected to increasefrom 900,000 units in 2012 to 1.5 million units in 2015.

Toyota Motor Manufacturing Indonesia (TMMI) is building two manufacturing plants at a combined cost of USD 534.4 million to double its annual production capacity to 240,000 units.
Suzuki Indomobil Motor, a joint venture between Suzuki Motor and Indomobil Sukses Internasional plans to spend USD 782.6 million to double its annual production capacity to 200,000 units.
Nissan Motor plans to invest USD 400 million to increase production capacity from 150,000 to 250,000.
Honda Motor is building an automotive plant that would triple its production capacity to 180,000 per year. The plant is expected to be operational by 2014 and create 2,000-5,000 jobs.
Astra Daihatsu Motor, a joint venture between Daihatsu Motor and Astra International is spending USD 233.1 million to boost capacity from 330,000 to 430,000 units.
Isuzu Astra Motor Indonesia (joint venture of Isuzu Motors and Astra International) and Krama Yudha Tiga Berlian Motors (subsidiary of Mitsubishi Motors) are investing USD 111.1 million and USD 27.8 million, respectively to expand their production capacities.

Other fringe players such as GM, Ford and BMW are also expanding their presence while Tata Motors also recently entered the market.

In August 2011, GM announced that it would be resuming operations at its plant in West Java which has been shut since 2005. The company is investing USD 150 million and the plant is expected to be operational by this year.
BMW also recently doubled its production capacity through an investment of USD 11.15 million.

The next step up for Indonesia is to come out of Thailand’s shadow and establish itself as an export hub. In 2012, exports accounted for 45% of Thailand’s automotive industry while the corresponding figure was only 16% for Indonesia. After the floods in Thailand in 2011, automotive OEMs are keen on diversifying production and Indonesia has emerged as the manufacturing hub at about the right time for them. Consequently, OEMs have committed over USD 2 billion to expand their production capacities in Indonesia.

Underlying Growth Potential

Vehicle ownership levels in Indonesia are very low at 32 per 1,000 people, compared to 123 cars per 1,000 people in Thailand, 300 cars per 1,000 people in Malaysia and around 460 cars per 1,000 people in developed countries. Hypothetically, to reach the same penetration rate as its neighbouring countries, Indonesia would require additional 108 million cars on the road. Given that Indonesia is the fourth most populous country in the world, the potential is obvious and these statistics fuel belief that despite the record sales, there is significant scope for continued rise in sales. Industry experts forecast annual sales of 2 million cars by the end of the decade and by then the country would have long since overtaken Thailand as the region’s biggest automotive market.
In 2013, the Indonesian government announced the ‘Low Carbon Emission (LEC)’ program to spur the development of eco-friendly vehicles to include hybrid cars, electric cars and ‘Low Cost Green Cars (LCGC)’ – vehicles with efficient fuel consumption. With the automotive industry ready to commit USD 4.5 billion on the project, Indonesia has the potential to be a major player in the LCGC market if the government goes ahead with its promise to provide tax incentives and other support for the production of these LEC vehicles. The project will completely change Indonesia’s position in the global automotive industry and may also transform the landscape of the domestic industry by boosting car sales in the long term. With bigger volumes generated from LCGC program, manufacturers operating in Indonesia could also catch up with Thailand by exporting to new markets, particularly other developing economies.
Over the years, automobile manufacturers have been notorious for their penchant to establish production set-ups close to component suppliers – to the extent possible. Indonesia has now reached a stage where it has a substantial base of local component suppliers, making the country an even more attractive destination for vehicle production, and with OEMs now planning production expansion in the country, this should further stimulate growth of the components industry.

The Challenges

The success story is not without its woes though. The economic meltdown in Europe and critical challenges in the domestic market will potentially slow down growth if not addressed timely and properly.

Fuel Subsidy – The Indonesian government wants to reduce the fuel subsidy to free up funds to invest in the development of the country’s infrastructure. The government had planned to increase the fuel prices but the proposal was shot down by the parliament in March 2012. The price increase is, however, inevitable and once the proposal does go through, it increases the total cost of vehicle ownership and maintenance, thereby reducing purchasing power of vehicle buyers. (Read our Perspectives on India’s fuel subsidy struggles: India – Reducing Reliance on Diesel)
Enforcement of Minimum Down-payment – To prevent the risk of a ‘car loan bubble’ the government reduced the Loan-to-value ratio (LTV) to 70% when borrowing from banks to buy cars – essentially forcing buyers to pay more down-payment than before. Loans account for 70% of all new car purchases in Indonesia and although it did not affect vehicle sale in 2012 it is expected to have an impact on sales in 2013.
Dependence on Japanese OEMs – With Japanese OEMs accounting for almost 90% of the Indonesian automotive market, Indonesia is overly reliant on Japan. This became evident during the 2011 earthquake in Japan, when disruptions in supply chain were felt across ASEAN, including Indonesia. Although automotive sales in Indonesia did witness impressive growth, such dependence acts as a hindrance and might hold the country’s automotive industry back from fulfilling its potential in the long run.

So, is the upswing in the Indonesian automotive market for real or is it tempting to deceive again? After sticking with the country as other companies bailed out during one of its periodic meltdowns, Japanese auto OEMs are now benefiting from the consecutive years of record vehicle sales in Indonesia. And the extremely low vehicle penetration rate highlights the huge underlying potential. However, critical challenges remain and the country must tackle them effectively if it wants to become the preferred manufacturing hub in the ASEAN region.

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We study the South Korean automotive market in our next discussion. Being the most developed automotive sector amongst the MIST countries, we try and understand the underlying growth potential in this Asian giant and evaluate the challenges faced by OEMs and component suppliers.

Mexico – The Next Automotive Production Powerhouse? – read the first part of our MIST series.

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