Why Are Century-old German Automakers Failing at EVs?

On the 23rd, Japanese automakers Honda and Nissan were in talks to merge by 2026. Facing the threat from Chinese EV makers, these two long-dominant carmakers must unite to survive. In 2008, Japanese cars held a market share of 31% in China, but today their share has plummeted to just 14%.

Nissan President Makoto Uchida and his counterpart at Honda, Toshihiro Mibe, hold a joint news conference on their merger plans.

Beyond Japan, Volkswagen also stumbles in China as Germany’s auto giants struggle to compete in the EV race. The company planed to close plants in Germany, lay off tens of thousands of staff and downsize remaining plants in the country

Volkswagen workers protested potential plant closures and pay cuts as the company struggles with declining market share in China

In the era of renewable energy and electrification, it’s clear that German and Japanese automakers are trailing behind. How is it that new Chinese players—companies barely established—are excelling in EV production, while century-old German and Japanese firms are struggling?

The traditional industry model in Japan and Germany relies on a system where a few large companies support an entire domestic supply chain. These large companies sell products globally, feeding the domestic supply chain, where many of the companies are small in scale—often referred to as “hidden champions.” Though relatively small, they hold significant market share and form the backbone of the country’s economy.

Japan’s premiere clutch manufacturer, FCC has steadily expanded its business alongside the development of the auto industry.

China’s EV players, on the other hand, rely on a fully integrated and developed domestic supply chain, something those large Japanese and German automakers lack. This creates a dilemma:

First, relying on China’s supply chain allows them to produce competitive products, but it would lead to the bankruptcy of their own small domestic suppliers, shaking the national economy and causing a sharp decline in GDP.

Second, not relying on China’s supply chain would also lead these small companies to the same outcome, as the large companies experience a decline in sales and can no longer provide enough financial support for them.

Now, Japanese and German automakers face a critical choice: ensure their own survival or protect the national economy. When forced to decide, they would probably choose the former. However, the government is unlikely to allow such a choice, which is why we see a series of trade protection policies from the EU.

When forced to make a decision, self-preservation is likely to take precedence. However, governments are unlikely to allow companies to make such a choice, which is why we see a series of trade protection measures from the European Union.

While technology is certainly important, China’s dominance in the EV market is not just due to technological advantages, but also its supply chain. This is not merely about scale or, as some argue, labor cost. Let me give you an example: As a German company, if you have a new technology, product, or feature in an emerging industry, wouldn’t you need to go through a cycle of validation, application, feedback, and improvement? Where would you validate it? Where would you apply it? The answer is clear: the largest current and future market—China. You can’t exactly validate it in a small German town with fewer than 100,000 people, can you? Even if you consider the entire EU market, it may be large, but it is mature and lacks the vitality needed to foster a emerging industry.

In fact, since the third industrial revolution, no major industrial wave has originated from Europe. This is because Europe’s dominant industries have all been built upon the achievements of the second industrial revolution. These century-old companies largely rely on the advantage they established in the 19th century, along with their technological monopolies. As a result, they have little interest in investing in emerging industries.

Moreover, from a broader trend perspective, there is a shifting dynamic between China and the EU markets, with former gradually surpassing the latter in scale. When you come to China, you quickly realize how rapidly the market is evolving. If your R&D team is based in a small town in Germany, they will struggle to keep up with these fast-paced changes. Naturally, you would move your team to a more dynamic and expansive market—China. Moreover, China has well-developed infrastructure, a stable policy and economic environment, and a highly efficient supply chain. So, why not move all production to China? Why stay in a small German town, relying on outdated market analysis, working in isolation, and incurring high R&D and production costs to produce expensive products, only to be easily outpaced by competitors in China?

Some might ask, why not move production to Vietnam or India? Here is catch: even if you produce in Vietnam or India, you would still rely on China’s supply chain. Meanwhile, both Vietnam and India struggle just to maintain a stable power supply, let alone develop a significant EV market. Even if production is set up there, most of the products will still end up being sold in China. So why bother? This is why China’s supply chain advantage is not just a matter of technology—it’s an inevitable historical trend. It can’t be curbed by a few technologies, labor cost points, or a certain percentage of tariffs. China’s advantage stems from its scale and size, as well as the hardworking, innovative, and resilient spirit of its people.

In November, BYD became the first automaker to produce 10 million EVs.

Let me give you another example: Take high-speed rail. Over the past six decades, Japan has built only about 3,000 kilometers of high-speed rail. In contrast, China has constructed 46,000 kilometers in just over a decade, stretching from temperate to tropical regions, from plateaus and frozen soils to karst landscapes.

It is clear that which country has more experience and technology in construction. China’s high-speed rail system handles over 3 billion passengers annually, which is equivalent to 20 years of operations for Japan’s Shinkansen. So, it’s equally clear which country has gained more experience in operation and management. Here’s the thing: Compared to the EU countries, Japan has the largest economy, the largest population, and the second-largest land area.

In China, an emerging industry with around 5,000 companies competing fiercely for just one year may develop at a pace that would take an industry with only 50 companies in other countries two decades to reach. This is why, in the future, the only country that could challenge China is the United States. However, it would be the United States of the 20th century—the one that shaped the global industrial landscape—rather than the deindustrialized, protectionist, and isolationist version of the U.S. we see today.