For now Japanese automakers' trailblazing of technology in hybrid vehicles continues to mitigate a slow shift to electric vehicle production and sales. Hybrid electric vehicles (HEVs) comprise 10%-30% of their total unit sales. Given the transition to electric mobility is the primary trend in vehicles this decade and the varying pace of electrification in different markets, it is crucial that Japanese carmakers solve for how to flexibly meet demand for HEVs, battery electric vehicles (BEVs), and plug-in hybrid electric vehicles (PHEVs) in separate markets, in our view.

Solid Demand For HEVs Offers Temporary Relief, But EV Risk Remains

Major Japanese automakers' profitability and cash flows will remain stable over the next one to two years, in our view.   This is thanks to modest growth in global car sales and continued cost reduction efforts despite a challenging business environment (see chart 1). Also supporting their performance will be strong demand for hybrid vehicles in various countries. In 2023, hybrid car sales had annual growth of about 35%, matching that of EVs (BEVs and PHEVs) (see chart 2). HEVs accounted for about 7% of global sales in 2023, below the EV penetration rate of more than 15%, but up significantly from about 3% in 2019 before the pandemic.

Chart 1

Chart 2

We see solid demand for HEVs in 2024 and 2025.   After several years of rapid expansion in BEVs sales globally, we see growing hesitation among U.S. and Europe consumers. While EVs have been popular with early adopters, they have struggled to reach a broader customer base. This is because of a lack of low-cost models, compounded by rising concerns about insufficient charging infrastructure and low future residual values when owners replace them. Removal of government subsidies has also slowed sales in some markets (i.e., Germany). HEVs, which are more affordable than EVs, have risen in popularity recently as an option to achieve higher fuel efficiency without anxiety over how to charge them. Downward pressure on consumer purchasing power is also contributing to the shift in demand to HEVs as interest rates remain high. Pricing parity remains a goal for EVs in the second half of this decade.

Major Japanese automakers benefit from strong demand for HEVs compared with global peers.   Japan-based Toyota Motor Corp. and Honda Motor Co. Ltd. have dominated the HEV market, partly because they developed and produced hybrid cars earlier than global peers. They have maintained higher market shares in hybrid cars (see chart 3). Unlike Toyota Motor and Honda, Nissan Motor Co. Ltd. sells hybrid cars mainly in Japan and Europe. Since Nissan has limited presence in North America and China, we estimate the company will benefit much less from expansion of HEVs there. Meanwhile, Korea-based Hyundai Motor Co. and U.S.-based Ford Motor Co. are also increasing their focus on HEV development and production, which could expand the HEV market and intensify the competitive environment.

Chart 3

The emergence of strength in EV-related areas including batteries and software will be key in the next three to five years.   In our view, it is increasingly important to provide competitive HEVs, PHEVs, and BEVs that meet vagaries in demand, given the varying pace of electrification in different markets. While Toyota and Honda have a high market share of the HEV market, they each held less than a 2% share of the global EV (BEV and PHEV) market in 2023. One reason is that Japan's major automakers have a strong presence in regions where EV penetration is relatively low, such as the U.S., Japan, and Southeast Asia. On the other hand, in Europe and China, where EV penetration is over 20%, major Japanese automakers are behind competitors in expanding their EV model lineups based on market needs.

We are sticking to our forecast for firm, albeit bumpy, expansion of the EV market toward 2030 despite a recent slowdown in sales growth. Accordingly, in assessing the creditworthiness of Japanese automakers, we think it is becoming more important that they step up their presence in the global EV market by developing and launching new products with high performance and price competitiveness while maintaining profitability and financial soundness. Despite a likelihood of solid demand for HEVs in coming years, if Japanese automakers fail to catch rivals in the EV market and instead rely on their current product mix of internal combustion engine (ICE) vehicles and HEVs, downward pressure on creditworthiness will increase as the EV market expands.

Chinese Rivals Pose A Risk, But Japanese Automakers Will Maintain Strong Business Bases In Southeast Asia

We anticipate Japanese automakers will not recover lost market share in China over the next two years.   EV penetration in China has been increasing quickly, and price competition remains intense as producers race to gain market share amid slowing growth and increasing supply. As a result, rated Japanese automakers' combined share of China's auto market has fallen five percentage points, from about 20% to 15%, since 2020. While Toyota Motor has defended its market share thanks to competitiveness in HEVs, Honda's and Nissan's car sales have dropped. This raises the question of how they can manage local factory overcapacity. Failure by Japanese automakers to stabilize their competitive positions in China could weaken our assessment of business risk for highly rated Japanese companies such as Toyota and Honda. This is because China has been a historically important market for Japanese automakers and was the main region driving sales growth this decade.

Chart 4

Further advances in Southeast Asia by Chinese automakers would pressure Japanese automakers' market positions and profitability.   Chinese EV manufacturers are increasing sales in Southeast Asia. This is especially the case in Thailand, where EVs have spread rapidly, accounting for 10% of new car sales in 2023, due to government subsidies and the entry of Chinese EV giant BYD Co. Ltd. Rated Japanese automakers' aggregate market share in Southeast Asia, and that of Nissan in particular, has declined slightly since 2019. Toyota Motor and Honda, on the other hand, have maintained strong market shares in the region.

BYD and several other Chinese BEV manufacturers have unveiled their plans to open new factories in Thailand. Local production of Chinese EVs is set to go into operation from or after 2024. BYD also plans an EV plant in Indonesia, the other leading market in Southeast Asia. Chinese automakers are increasing exports to Southeast Asia and Europe as fierce price competition grips China's auto market against a backdrop of softening growth in domestic demand. As local EV production begins, particularly in Thailand, EV supply will increase further, and price competition could intensify.

For now, Japanese automakers will maintain strong business bases in Southeast Asia and generate stable cash flows there.   Compared with in the China market, in Southeast Asia the penetration rate of EVs and market share of Chinese manufacturers remains low. We think one of the big obstacles to widespread adoption of EVs in Southeast Asia is a lack of battery charging infrastructure. In addition, Japanese manufacturers entered the market early and localized production. This gave Toyota, Honda, and Mitsubishi Motors strong advantages in brand recognition for well-balanced price and quality, manufacturing efficiency based on local supply chains, and established sales networks. Japanese automakers are likely to continue to dominate fulfilment of demand for ICE vehicles and HEVs. Still, an accelerated shift to EVs remains the main risk in our scenario.

Chart 5

Benefits Of Teaming Up With Other Companies Will Take Time

A possible partnership between Honda and Nissan would take time to generate sufficient value to be relevant to our ratings on them.   Honda and Nissan have been exploring a strategic partnership in electrification and intelligent cars since early 2024. With combined sales of more than 7 million units, expanding the scope of their collaboration and pursuing joint development could ease investment burdens in new areas and enhance cost competitiveness. As the auto market shifts to EVs, automakers face heavy investment needs in battery procurement, software, and platforms. However, differences in corporate culture and development approaches mean partnerships and collaborations that do not give one side control are unlikely to be particularly in depth. We note that almost all automakers have failed to gain significant benefits from alliance or tie-ups with global rival automakers in the past.

Toyota Motor's partnership with domestic automakers will also take time to produce meaningful benefit.   Toyota Motor has formed business and capital alliances with equity-method affiliate Subaru Corp., Suzuki Motor Corp., and Mazda Motor Corp. The companies will not find it easy to broaden the scope of their collaborations quickly, in our view. This is because each operates its business based on its own independent strategy. We believe Toyota Motor would not be able to enhance its production efficiency and reduce its investment burden without sharing its automotive platform and software with other companies. Toyota Motor and Subaru have jointly developed an SUV-type BEV, but the share of Toyota Motor's total sales that it generates has been still very low. Suzuki plans to sell an EV jointly developed with Toyota Motor in India by 2025. Mazda has announced it is considering sharing its in-vehicle system with Toyota Motor in the late 2020s.

Related Research

• Global Auto Sales Forecasts: Slower EV Growth Offers Temporary Relief To Legacy Automakers, April 25, 2024
• Industry Credit Outlook 2024: Autos, Jan. 9, 2024
• Japan Autos: Prepared For Weaker Momentum And Secular Change? Oct. 19, 2023
• Most Rated Asian Automakers Should Steer Through Demand Volatility, EV Strains, Oct. 11, 2023