Behind Japan’s auto industry’s ‘record profits’: supply chain clean-up reveals delays


Description: This commentary is published here in Japanese on 26 March, 2024.

With the weak yen increasing profits from sales abroad, Japanese automobile companies are expected to perform well this financial year. Toyota, Honda, and Suzuki are likely to report their highest profits in years come March. However,  an economist warns that Toyota’s current business model hinges on ‘residual profit.’ Moreover, the latest international auto makers’ evaluation rates Japanese companies against their intentional rivals and showing how they lag. 

The world is swiftly moving to clean and electrified everything, and Japanese companies need to position themselves for future competitiveness. If, like Toyota, they press their luck with business-as-usual and ignore cleaning up their operations and supply chain, they will keep falling behind internationally. According to experts, sooner rather than later Japanese automakers will face repeating the failures of the electrical and electronics industry since the 1990s, and more modern, nimble companies will take charge.

Chinese companies are rapidly building global businesses around electric vehicles (EVs) and positioning themselves to lead the global EV market. Meanwhile, Europe is planning to ban ICE vehicles from 2035, and the EU’s Carbon Border Adjustment Mechanism (CBAM), which applies an import tariff to carbon intensive productions such as iron and steel, cement, aluminium, electricity, fertilisers, hydrogen,  will be expanded to all industrial goods – including cars – by 2030. The US’s EV transition is accelerating with new standards finalised this month which assure. EVs play an essential role in combating climate change in the automotive sector and the global market is moving forward.

Each Japanese company lags far behind with regard to the EV transition. Toyota and Honda are both the slowest among the companies covered, with BEVs (battery EVs) accounting for just 1 percent of their vehicle sales. Nissan’s share is 7 percent (calculated based on the sales of R-N-M Alliance OEMs including Renault, Nissan and Mitsubishi), which is similar to that of Hyundai Motor in South Korea. In contrast, the proportion of BEVs at Guangzhou Automobile, BYD and SAIC stands at 60 percent, 48 percent and 33 percent respectively, shows that the shift to EVs is significantly advanced among Chinese manufacturers. As the global car market undergoes this major transformation, Japanese companies continue to hold back, betting on technologies guaranteed to suit only smaller and smaller markets. 

In its 2024 Leaderboard (evaluation ranking) , the international NGO network Lead the Charge analysed and ranked 18 of the world’s leading electric vehicle and car manufacturers in two key categories: ‘Fossil fuel-free sustainable supply chains (climate and environment)’ and ‘Responsible sourcing respecting human rights’. All three Japanese companies ranked this year were in the bottom half of the list with Toyota near last at #15, Honda in #14th and Nissan in 11th place. (See previous article for the overall ranking results.) 

Table1: Scores from the 2024 Edition of the Lead the Charge Leaderboard

Leaderboard consists of two main categories- fossil free and environmentally sustainable supply chains, and human rights and responsible sourcing

 Japanese car makers are failing to tackle the carbon emissions and other environmental impacts in their supply chains, with Toyota and Honda scoring  5 percent and 4 percent respectively. Nissan was the only one to score in double digits, with a 12 percent rating due to a new deal for lower emissions steel from Kobe Steel, though it remains well behind international competitors still. In fact,  this steel is still produced in blast furnaces that use coal, and so lacks the ambition of the green steel procurement agreements signed by other automakers.

The second score is for responsible procurement that respects human rights. Japanese automakers shown all score in the bottom half of the table. Their scores of 10-15% contrast with scores of 40-50% for the best performers.   Concrete measures and process disclosures are not clear and need to be improved. In other words, to make sure of the commitment, real actions are essential.   

Delays in the transition to EVs, failure to decarbonise supply chains,  and the lack of responsible sourcing with respect for human rights are critical issues for Japanese automakers. While they may enjoy short term profits for being among the last to move, they will reap long-term losses in market share as the global automotive industry rapidly transforms.

Now is the time for Japanese companies to work with their suppliers, including steel companies, to bring about change. Honda, for one, is starting to notice the change that is afoot, signing a Memorandum of Understanding with POSCO last year to cooperate in the EV battery material business, accelerating decarbonisation and electrification. Only a rapid transition to decarbonisation and greater sustainability will give Japanese carmakers and steel producers alike future opportunities.

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