The automotive industry is currently undergoing a seismic shift, particularly as Japanese automakers reassess their strategic direction amidst the electric vehicle (EV) revolutionThis transformation took a significant turn on December 23, when two of Japan's largest car manufacturers, Honda and Nissan, announced that they were entering merger negotiationsThe goal of this collaboration is to create a new company that integrates their research and development (R&D) efforts, as well as their production operations, in order to accelerate their transitions to more intelligent and electric vehicles.

The newly formed company is projected to launch publicly in August 2026, at which point both Honda and Nissan will delist their shares and become wholly-owned subsidiaries of the new entityThere is also a decision pending regarding Mitsubishi, a subsidiary of Nissan, as to whether it will join this new alliance by the end of January 2025. The automotive world is poised to witness the birth of what could become the world's third-largest automobile group.

Reactions from the capital markets have been immediate and revealing

Honda's stock surged by 14% at one point, while Nissan's shares initially fell by 7%. This scenario suggests a classic "big fish eats small fish" narrative; however, in reality, the underlying motivations reflect a need for both firms to consolidate and support one another in the face of an evolving marketplace shaped by electric and autonomous vehicle technologies.

Nissan has been facing severe financial difficultiesIn the first half of the year, its net profits plummeted by 99% compared to the previous year, and its losses for the third quarter totaled 93 billion yenAs of the end of the third quarter, the company reported a free cash flow deficit of 145.6 billion yenThe company has been forced to implement significant cost-cutting measures, such as workforce reductions and production capacity cuts, as well as selling off 10% of its stake in Mitsubishi Motors.

Honda is not immune to the pressures of the market either

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In the first three quarters of this year, the company reported a staggering 61% drop in net profit year-over-year, with global production levels plummeting to just 91% of their totals from the same period last year, and production in China has seen even steeper declines, down to a mere 66%.

In terms of sales volume, the combined global sales of Nissan, Honda, and Mitsubishi in the first half of the year did not exceed four million units, falling short of Toyota's standalone sales total of 5.16 million unitsThis situation highlights a growing crisis for Japan's automakers, especially as they sold significantly fewer electric vehicles than their competitorsIn 2023, Toyota achieved sales of only 100,000 new energy vehicles globally, while Nissan and Honda sold even fewerTo put this into perspective, in 2023, China alone witnessed a staggering 9.5 million electric vehicles sold, with Tesla accounting for 650,000 of those sales.

Recognizing the urgent need for adaptation, Honda and Nissan have explicitly stated that this merger will assist them in keeping pace with competitors like Tesla and emerging Chinese electric vehicle firms.

The Korean automotive industry is feeling similar pressures

Hyundai Motor Group, which includes both the Hyundai and Kia brands, posted total global sales of approximately 7.34 million vehicles in 2023, while their pure electric vehicle sales barely reached around 400,000 units.

In both Southeast Asia and the Middle East, Chinese automakers are rapidly encroaching on the traditional market shares held by Japanese and Korean companies, effectively reshaping the competitive landscape across these regions.

In essence, the core automotive market is quickly leaning towards electric vehicles as the market share of fossil fuel-powered cars continues to dwindleJapanese and Korean automakers have not reacted swiftly enough to this change, and their traditional automotive empires built in the previous era are beginning to show signs of stressHence, the potential for further alliances or mergers among Japan's automakers may be on the horizon.

The Chinese market, which has historically been a key battlefield for Japanese and Korean car manufacturers, is now witnessing a significant decline in their market shares

The peak for Japanese cars in China was back in 2008, when they reached sales of 1.56 million units, commanding a 30% market share that remains unbeaten to this dayMeanwhile, Korean manufacturers did not break into the Chinese market until later, yet they peaked in 2016 with nearly 1.8 million units sold, ranking third overall.

It’s clear that both Japanese and Korean brands are now facing considerable challenges in ChinaFrom 2020 onward, shares of Japanese and Korean vehicles have been steadily declining, with Japanese automakers seeing a decrease of between 1% to 4% annuallyBy mid-2023, Japanese manufacturers' market share had plummeted to 12.4%, while Korean manufacturers had dwindled even further to 0.8%. In stark contrast, local brands have surged to capture a record-high share of 60% of the market.

The sales figures tell a more vivid storyFor the first 11 months of this year, the sales total for Japan’s three major carmakers (Toyota, Honda, Nissan) was just 2.76 million units in China—less than what BYD alone managed with 3.75 million units

Similarly, Korean brands recorded cumulative sales of only 180,000 units during the same period, less than half of BYD’s October sales alone.

When examining the performance of Japanese and Korean companies in the Chinese new energy market, it becomes more pronounced that no Japanese or Korean brand made the list of the top ten selling new energy models in 2024. Even amid ongoing price wars, the sales figures for these three Japanese companies remain unimpressive.

Toyota, while less affected than its counterparts, still relies heavily on hybrid models, accounting for approximately 41% of its sales in China’s marketThe top-selling electric vehicle crafted by Toyota in China, the bZ3, developed in collaboration with BYD, saw sales of 47,191 units in the first eleven months of 2024.

Nissan, recognized as a pioneer in the development of pure electric vehicles with its Ariya model, has only seen sales of 2,074 units in China this year

Consequently, to drive sales, Nissan has been compelled to cut prices on its widely popular gasoline model, the Sylphy.

Honda, for its part, has experienced better performance in the Chinese market with the Honda CR-V, achieving cumulative sales of 160,000 units from January to NovemberThis model has both gasoline and hybrid versions, with 20% being hybrid variantsSince entering the pure electric vehicle segment in 2022, Honda has released four models (e:NP2, e:NP1, e:NS2, e:NS1), all with limited salesThe best performer of these, the e:NP2, has managed to secure only 1,518 units sold over the same eleven-month period.

The narrative for Korean vehicles reflects a similar trend, remaining dependent on gasoline modelsHyundai's sales figures in China have hovered around 250,000 units for both 2022 and 2023, with only 134,000 units reported in the first ten months of this year

Notably, Hyundai has ceased the production of all previously offered new energy models in 2024, reverting its offerings solely to gasoline vehiclesPrevious electric models like the Elantra EV have not gained traction, and the specifics of the IONIQ 5 N's sales figures remain undisclosed.

In summary, Japanese and Korean automakers face a common challenge in the Chinese market, where gasoline cars struggle to sell and their electric counterparts are lacklusterIn a market where new energy vehicles exceed a 50% penetration rate, these brands are finding it challenging to compete, unable to produce compelling electric models that can rival those from Western counterparts or agile Chinese manufacturers.

In the markets of North America and Europe, the landscape is equally tenuousBoth regions represent vital new frontiers where Japanese and Korean brands must exert effort if they are to offset losses in China

The United States, during the oil crisis of the 1980s, provided a lucrative stepping stone for Japanese car manufacturers seeking to penetrate the global marketHowever, this new era of electric vehicles presents a whole different set of challenges.

In the American market today, despite Toyota and Hyundai-Kia maintaining competitive rankings, Tesla dominates the electric vehicle sector, forcing traditional manufacturers to scramble in the face of rapid electrificationThe market penetration of new energy vehicles stands at 9.5%, significantly lower than in China, but there is a clear commitment to increasing electric vehicle sales significantly in the near future.

In the first three quarters of 2023, electric vehicle sales in the U.Sreached 873,000 vehicles, with Nissan selling only 15,000 units and Toyota a mere 6,486 unitsHyundai and Kia achieved respective sales of 41,000 and 23,000 units, illustrating a disparity in performance

Despite some strides, it’s clear that Japanese and Korean firms are currently lagging in the critical EV space.

Europe presents a particularly complex battlefield for these automakersThe European market is the third largest in the world, with annual sales around 13 million unitsThe push for zero-emission vehicles is a driving force, and new energy vehicles currently hold a 22% market shareJapanese and Korean firms are accelerating their electrification efforts, but they face fierce competition not just from local giants but also aggressive new entrants, including brands from China.

In the first half of this year, none of the top-selling electric vehicles in Europe came from Japanese brandsInstead, the list was dominated by Chinese-produced vehicles, showcasing the level of competition facedAs both Japanese and Korean firms ramp up their efforts, they are encountering obstacles at every turn.

The markets of Southeast Asia and the Middle East represent critical spheres of influence for Japanese and Korean manufacturers

Although these regions have traditionally favored their brands, the rise of electric vehicles from Chinese companies has begun to erode their dominanceIn markets like Indonesia, Thailand, and Malaysia, Chinese electric vehicles, notably BYD, are capturing significant market shares.

Despite the robust brand loyalty towards Japanese and Korean vehicles and their established supply chains, their recent electrification efforts have lagged behindIn contrast, Chinese manufacturers are rapidly gaining ground in these vital territories.

In the broader context, as automotive giants assess their long-term strategies and realign their operations, digital and electrification efforts will be paramountThe collaboration between Honda and Nissan hints at a larger trend where alliances may become necessary to stay competitive in this rapidly changing landscape.

As Japanese and Korean car manufacturers face the prospect of heightened competition from established competitors and nimble startups alike, the future of the automotive industry will likely require more collaboration than competition, with companies pooling their resources, technology, and expertise to navigate the challenges ahead.

As China's position has evolved from having only a single domestically manufactured vehicle in the global top ten in 2014, to now effectively commanding the market amid a wave of new energy vehicles, Japanese and Korean brands must recalibrate their strategies accordingly

The mandate for these firms will be to bolster their presence on the global stage while ensuring that their innovations are aligned with the shifting demands of consumers worldwide.

Ultimately, while the electric vehicle revolution presents a historical opportunity for Chinese firms, emerging market complexities mean that Japanese and Korean brands, with established legacies, will not easily yield their territoriesAround the globe—including in key markets like India, Australia, Brazil, and Mexico—competition will intensify as Chinese new energy vehicles steadily encroach upon traditional bastions of automotive strength.

As these industries grapple with this transformation, the continued viability of Japanese and Korean companies will come down not just to ingenuity, but to strategic partnerships and agilityThe emergence of collaborative ventures, such as the Honda-Nissan tiered governance structure, could indeed shape a sustainable path forward for these legacy automakers.