Japanese automotive companies are positioning themselves for the age of electric vehicles

The shift to electric vehicles is revolutionising the automotive sector.  As the era of connected, autonomous and shared electrical vehicles (CASE) approaches, the space between the companies succeeding in adapting to the changing market, and those failing to do so, is only broadening. The Japanese automotive market is one of the most influential in the world, and is ideally positioned to take advantage of the bourgeoning markets in India and other SEA countries.

The COVID-19 pandemic caused a boom in battery-powered electric vehicles (BEV) sales across the world, pulling the peak and eventual decline of internal combustion engine vehicles forward, and production of electric vehicles is only set to accelerate in the long run. Japanese manufacturers in particular are aiming to catch up to the new market, with Toyota, Honda and Nissan all leading the charge in the coming years. This involves innovative new techniques of vehicle production.

The auto parts supply chain will be heavily impacted by the shift from internal combustion engines to electric vehicles, and the auto part suppliers with the greatest exposure are at risk of facing a decline in profits. This can be seen in the price to book ratio of auto parts and tires, which is generally on the decline due to limited expected growth of these markets, while the auto sector in general is looking more robust should it adapt to the coming EV changes. Engine and drivetrain parts suppliers, which are significantly impacted by the EV shift, will need to accelerate business restructuring and consolidation in order to survive.

These changes have been widely foreseen, and corporate restructuring to accommodate it is well underway utilising M&A to ensure corporate survival. In the short term however, engine parts offer a residual income and method to buy time and grow new business.

The differentiation between companies that are taking advantage of the upcoming shift and those that are not, is clear, and can be seen in companies such as Denso, Aisin, TPR, Ahresty, UNIPRES, and Tokai Rika.

M&A is a valuable tool in the arsenal of companies looking to adapt to and take advantage of the coming EV shift to the automotive sector, and Japanese companies in particular serve as stand out examples of what can be gained by proactively consolidating in anticipation of market trends.

“We expect to see further acceleration of M&A activities in the Japanese automotive supply chain, in mid-term,” says Masahiro Akita, automotive expert based in CFI Japan’s Tokyo office.

“Amid the global shift towards electric vehicles, cross-border M&A deals in the automotive sector are expected to increase. As markets evolve and companies aim to strengthen their positions, we anticipate collaborative ventures between Japanese and German automotive entities. This collaboration will leverage their respective strengths to drive innovation, streamline production, and secure a competitive edge in the electrified automotive landscape,” commented Thilo Herbertz of CFI Germany.

“In the US, EV sales are following a different trend as consumer demand has waned slightly due to factors that include the relative cost of an EV and the inconsistent infrastructure necessary to fully support the transition. EV vehicles are expensive and many of the materials needed to produce them are not readily available or inherent to US mineral supply. US OEMs have invested billions in the form of product development, facilities, and resource development to prepare for the shift to EV from ICE vehicles and weaker than anticipated consumer demand is causing them to slow their investments and reformulate their strategies,” says Ellen Clark of CFI USA.

Read more about the Japanese market’s response to these trends in the presentation below.