Digital and Green Transitions and Automotive Industry Reconfiguration: Evidence From Japan and China

Abstract

Digital and green transformations are causing a reconfiguration of the automotive industry. Exploring the factors that cause this is the first aim of this article. This is achieved by examining the evolving automotive industry in East Asia from three different perspectives, each of which offers insights into the implications of this reconfiguration for the states, industries, and companies involved. Having reviewed the debate on the role of institutions and factors affecting the global value chain (GVC) reconfiguration, a descriptive analysis of trends in the Japanese and Chinese new energy vehicle (NEV) industries and the related dynamics of the traditional automotive value chain is conducted. An in-depth analysis of Toyota and Honda shows how partnerships with Chinese information and communications technology and NEV firms contribute to the greening and hence reconfiguration of their industry. This analysis provides insight into how the state’s “external” role in the process of GVC formation is being challenged by economic security vulnerabilities related to the emerging NEV industry, thereby inviting further discussion on new dimensions of state–business co-operation.

Key Words:

• Automotive industry
• China
• digital and green transitions
• Japan
• new energy vehicles
• production networks

East Asia has emerged as the world’s leading automobile market, producer, and innovator. While the industry in the region is currently dominated by Japanese and South Korean manufacturers, the rise of Chinese automakers in the electric vehicle (EV) segment has prompted questions regarding the industry’s development in light of the ongoing green and digital transformations. Today, China not only serves as an assembler of final products and a producer of certain medium technology parts and components, it also plays an increasingly significant role as a global consumer and investor. China has also successfully developed innovative capabilities in green and energy technologies. In 2021, international patent applications under the Patent Co-operation Treaty in the field of electrical machinery, apparatus, and energy ranked in the top third position among the technical fields for which China filed the most patents (WIPO 2023). Moreover, the China Automotive Technology and Research Center holds a significant role in establishing international standards (Doner, Noble, and Ravenhill 2021, 83). This has been reflected in decisions such as Toyota’s 2019 joint venture with BYD, an established Chinese EV producer, to develop, research, and produce battery electric vehicles (BEVs). The newly formed entity named BYD Toyota EV Technology is not only dedicated to advancing Chinese-Japanese technology but also to promoting the adoption of environmentally friendly vehicles (Toyota 2020). This trend has been intensified by recent shocks, such as the COVID-19 pandemic and the Russia-Ukraine war, which have highlighted the over-dependence of automotive multinational corporations on global production networks (GPNs). At the same time, governments have pushed for greater usage of new energy vehicles (NEVs) and have emphasised economic and national security. All of these factors combine to create a complex phenomenon reshaping East Asian value chains in the automotive industry. Research on green and digital transformation of the automotive value chain in East Asia has been limited and primarily focused on the digital aspect (see, for example, Kern and Wolf 2019; Lüthje 2021, 2022). Researchers studying the reconfiguration of global value chains (GVCs) have produced a substantial body of research (see, for example, De Marchi et al. 2020; Kano, Tsang, and Yeung 2020; Elia et al. 2021). Yet, there is a need for more comprehensive empirical research to evaluate the social and economic implications of specific value chain reconfiguration. Gong and colleagues (2022) argue that to do so, researchers should incorporate more sophisticated theoretical and empirical concepts to understand how a variety of factors, such as COVID-19, geo-political tensions, and environmental pressures, are collectively shaping the global economy.

The article aims to explain emerging changes in the global automotive value chain driven by digital and green transitions, as well as security concerns of governments and firms, with focus on Japan and China. The co-operation between Japanese and Chinese companies in the automotive industry is an interesting case as it illustrates adaptation of established traditional automakers and emergence of new players. Japanese automakers Toyota and Honda, renowned for their innovation, reliability, safety, and efficient production processes are among the top ten global leaders in terms of revenue (Statista 2023). Simultaneously, China is the world’s largest car market and producer (OICA 2023). It is also the world’s largest NEV market with domestic NEV manufacturers such as BYD, GAC Aion, Li Auto, Xpeng, Nio, some of which are expanding sales in foreign markets, particularly in Europe. China also holds a key position in the EV supply chain due to its dominance in the production of EV batteries and its processing and refining capacity of essential materials (Wu 2023). Finally, Japan and China are examples of countries where the state plays a leading role in industrial development. Johnson (1982) coined the term “developmental state” in his seminal book on Japan’s industrial policy, referring to a system in which government, bureaucracy, and business collaborate to achieve developmental goals. In China, government intervenes in the economy through industrial policies, five-year plans, and its control over state-owned enterprises as well as its effective influence on major private enterprises.

Furthermore, recent political developments, such as the Inflation Reduction Act (IRA) introduced in the USA in 2022, have influenced the production capabilities and geographical considerations of lead firms and technology suppliers. The European Union’s (EU) Green Industrial Plan, announced in 2023, in response to the IRA, is another agenda that needs to be considered. These actions have placed several advanced economies, like Japan, in a difficult position as they seek to balance their relationships with key partners, including China, the USA, and the EU. Additionally, for Japanese companies operating in Asia, China has become the leading destination for expanding the production of high-value-added products (JETRO 2023, 18). The situation is dynamic and will require a fresh approach toward overseas business strategies.

The GVC and GPN perspectives both have lead firms as their defining feature and provide the theoretical foundations of “chain governance” and “network dynamics,” two concepts essential for understanding how these firms effectively co-ordinate spatially distributed value-added activities of numerous economic actors (see Neilson, Pritchard, and Yeung 2014). The GVC literature encompasses various approaches, such as the international economics view, which focuses on the geography of international trade and value creation, or the international business perspective, which examines how multinational companies leverage their firm-specific advantages and create value by organising production with partners across borders (see Kano, Tsang, and Yeung 2020). In this regard, the GVC concept separates states and markets, positioning the state and its policies as external to the formation of GVCs (Horner and Alford 2019; Glassman 2011). The concept of GPNs is frequently used in tandem with studies of GVCs. The construct of the GPN was developed by economic geographers in the late 1990s, with an emphasis on the networked nature of international production (Kano, Tsang, and Yeung 2020). The GPN framework acknowledges market embeddedness “in states and political processes” (Glassman 2011, 156). It focuses on multinational corporations and their key partners, including local institutions, such as governmental agencies and industrial associations, which distinguish the GPN from the GVC framework (Kano, Tsang, and Yeung 2020). More recent GVC studies, however, recognise the significance of the state’s role in GVCs and argue that it is one of the most critical areas of study in contemporary GVC research (see, for example, Horner and Alford 2019; De Marchi et al. 2020). Nonetheless, until now, both the GVC and GPN literature have yet to present a clear theoretical framework for comprehending the role of the state. Thus, for the purpose of this article, the focus is on incorporating the state into the theoretical discourse of the GVC and GPN through a strategic sector perspective, and the terms may be used interchangeably.

The theoretical framework used here applies a GVC perspective that combines macro, meso, and micro levels of analysis (Kano, Tsang, and Yeung 2020; Gong et al. 2022). The analytical framework considers industry transformation in relation to two external forces: climate and technological change, both of which involve the state’s pursuit of economic and national security. By combining GVC analysis with Hsueh’s (2012) sector’s strategic value framework this article examines the influence of the state and its policies on shaping and supporting the establishment of emerging industries and the development of nascent products.

The starting point is the twin green and digital transition occurring in the automotive industry in Japan and China, and its implications for the reconfiguration of automotive GVCs. In the automotive industry, conventional cars are currently being replaced with connected, autonomous, shared, and electric vehicles. An accelerating energy transition coupled with the digitalisation of energy systems has resulted in the emergence of new energy technologies and the diversification of carbon-neutral paths (UNESCAP 2021). As a consequence, the car industry has been undergoing a twin transition: “green,” dealing with electro-mobility, hydrogen fuel cells, and so on, and “digital,” at the centre of which is software, increasing connectivity, and improving autonomous driving technology (see Brown et al. 2021). Along with the development of connected and autonomous vehicles (CAVs), the information and communication technology (ICT) sector has gained importance, generating substantial value in the car industry (see Alonso Raposo et al. 2022). Major companies need to specialise in particular technologies such as electric powertrains, vehicle connectivity systems, and autonomous driving hardware and software, which leads to the emergence of “global specialists” and increases the role of “knowledge work” in the automotive industry (see Krzywdzinski 2021). This implies that to enhance their competitive advantage, automakers intensify their efforts to seek partners from ICT and key technology providers, such as battery and semiconductor manufacturers. Under those circumstances, the prevailing concept of GVCs that are shaped by the lead firms, as seen in Gereffi, Humphrey, and Sturgeon (2005), is being questioned. Until the mid-2020s, in producer-driven GVCs and GPNs such as in automobiles, technological advantages and economies of scale of multinational oligopolies have favoured lead firms in establishing connections between qualified local suppliers and the GPN. Lead firms formed an asymmetric power relationship in the car manufacturing sector, which hampered suppliers’ upgrading (Yeung 2019, 4). With the increasing importance of key technology suppliers in CAVs production, the shift in power dynamics is expected within GVCs, one toward more supplier-centric governance, driven also by regionalisation of NEV/CAV production (see Elia et al. 2021).

Recent GVC studies have highlighted: the significance of research explaining state–business relations in GVCs (Gereffi, Lim, and Lee 2021); or the potentially significant role that states can play in facilitating the emergence, development, and operation of GVCs (De Marchi et al. 2020). Indeed, Gereffi, Lim, and Lee (2021, 512) discuss a process of “disruptive realignment” in the automotive GVC caused by climate change, conflicts over global technological leadership, and the race for technological standards, combined with the weakening of international institutions and protectionism (Elia et al. 2021). The critical transition moment is likely to be seized by developmental states in East Asia to take the lead in emerging technology such as CAVs. Developmental states are characterised by a strong relationship between the state and business (Kalinowski 2021, 49). They are known for identifying potential industries with growth prospects, as seen in Japan in the 1960s with the automotive industry and in the 1970s with advanced electronics (see Johnson 1982). The policy provided incentives, protection from foreign competition, financial support, and, when necessary, it forced consolidation in the domestic market, effectively regulating intense competition (see Johnson 1982; Shim and Lee 2008). Unlike post-war twentieth-century developmental states, neo-developmental states lack the ability to implement macro-economic plans due to their lost dominant position relative to business. However, the overarching goal of economic development continues to be a consistent priority across these states (see Lim, Gomez, and Wong 2021). In particular, in niche areas such as green technologies, the state remains strong due to its supportive role in catching up to global leaders (Kalinowski 2021, 49). East Asian states perceive environmental goals as an opportunity to discover new approaches to address market failures related to the environment and reformulate the relationship between the state, industry, and society while pursuing “transformative economic and social goals” (Dent 2017, 2). Another feature of developmental states is their ability to expand technological capabilities, which enables them to be independent from foreign powers (see Amsden 1989). However, the “traditional” industrial policy approach has been criticised for its static perspective on the globalisation of East Asian firms and their respective domestic economies, as it fails to explain the activities and strategies employed by firms participating in international production networks (see, for example, Yeung 2014). The newly introduced concept of “GVC-oriented policies,” which describes industrial policies aimed at promoting advancements in production and technology through GVCs, with their direct connections to the global market, reliance on international production networks, and use of imported intermediates presents the state with novel roles (see Pietrobelli 2021). Yeung (2014) argues that the state–firm relationship in East Asian economies has evolved due to globalisation, with national firms to some extent de-coupling from their home country state–firm structures and becoming more closely aligned with lead firms in GPNs. This trend may be reversed as states intervene in the evolution and governance of supply chains, especially as technology becomes increasingly intertwined with security issues. Hsueh (2012, 38) introduced a sector’s strategic value framework, which measures an industry’s contribution to “the national technology base, application to national security, and contribution to the rest of the economy.” Hsueh (2012, 37–38) argues that the perceived strategic value of the sector significantly influences how the state establishes its objectives and methods, as well as who is responsible for industrial policy and the methods employed. Therefore, it is suggested that green and digital transitions create an opportunity for states to change the situation, influence, and nurture key technology suppliers. This can shift the power dynamics within a GVC, providing these key technology suppliers with more leverage over lead firms.

Industry Transformation and Emerging Technologies: Analytical Framework

As previously stated, the analytical framework views industry transformation in relation to emerging technologies as a result of the developments and pressures occurring at three levels: micro (firms), meso (industry/GVC/GNP), and macro (institutions), as depicted in Figure 1. The process of industry reconfiguration encounters various pressures, originating from two external forces, climate and technological change, and the state’s pursuit of economic and national security, national competitiveness, and technological advantage. The argument posits that within the context of the NEV industry, and drawing on Hsueh’s (2012) strategic value framework, the state adopts an emerging industry strategic value perspective. This perspective helps to co-ordinate industrial development in situations where there is a need for significant investment in learning through trial and error of complex and risky technology, particularly when dealing with highly specialised or unique services or products (Hsueh 2016, 6). This implies that the state will also engage in establishing new supply chains and increase its control over the existing GVC/GPN associated with the respective service or product.

Figure 1. Analytical framework

Source: Authors’ own elaboration.

De-carbonisation and Digitalisation in the Automotive Industry

Japan’s Economic and De-carbonisation Policies for the Automotive Sector

Clean electric vehicles (CEVs) have been in Japan’s policy documents since the 1970s. The Ministry of Economy, Trade and Industry, METI (Ministry of International Trade and Industry until 2001) formulated a fundamental plan for BEV market expansion in 1976, considering that this type of alternative vehicle could reduce both local emissions and dependence on oil (see Åhman 2006). The government provided subsidies for research and development (R&D), infrastructure, and market support under long-term strategic plans and played the role of a co-ordinator in the development process. It filled artificially created niche markets and removed obstacles for targeted technologies through standards and regulation (APEC 2017). Åhman (2006, 438) estimated that between 1976 and 1996, R&D, infrastructure, and market support received approximately equal funding. However, complete data on this support are not available. The release of Toyota’s Prius in 1997 resulted in including hybrid electric vehicles (HEVs) in CEVs introduction subsidies. Since the 1990s, METI’s R&D programmes focused on research on lithium batteries, polymer electrolyte fuel cells, and testing BEVs jointly with Intelligent Transportation Systems. However, in 1997 the objective shifted from developing the next generation of lithium-based batteries (with the capability to be utilised in both stationary and vehicle applications) to working on diverse hybrid vehicles with high energy efficiency (APEC 2017). Until 2007, HEVs received the majority of the car subsidies, while infrastructure support was aimed at refuelling stations for CEVs. In terms of market support, the government launched diverse leasing and purchasing incentive programmes. As an example of direct market support, starting in 2009, METI subsidised half of the additional cost of an EV compared to an equivalent internal combustion engine vehicle (APEC 2017). In subsequent policies, the government shifted its focus to the deployment of EVs and plug-in hybrid electric vehicles (PHEVs). Moreover, it set ambitious targets for the adoption of next-generation vehicles and integrated the development of CEVs with experimental smart communities. In 2009, METI initiated a model project known as the “EV/PHV Town Promotion Action Plan” for experimental trials aimed at the widespread adoption of EVs. Furthermore, in the “Next-Generation Automobile Strategy 2010” established in April 2010, the government set a goal of having 15% to 20% of new passenger car sales as EVs and PHEVs by 2020 (NIES 2016). Since 2014, fuel cell vehicles have been eligible for subsidies in addition to EVs, PHEVs, and clean diesel vehicles. It is worth noting that in 2016, subsidy amounts for EVs and PHEVs started to be adjusted based on the capacity of the onboard drive batteries, and the subsidies for promoting the introduction of CEVs were planned for five years (NeV 2017). As the pressure for EV adoption intensified, the supplementary budget for the fiscal year 2021 included increased conditional subsidies for EVs and fuel cell vehicles (see Table 1). In summary, the government successfully supported the development of technology related to hybrid vehicles and their implementation, considering EVs as a transitional technology and promoting fuel cell technology for the long term. This approach is characteristic of Japan and is prevalent even when the quickly developing market of the less costly BEVs and PHEVs, especially in China and with ongoing Japan-China business co-operation, might suggest that the key focus should be on EVs and the related infrastructure (see Dzienis and McCaleb 2024; Yeung 2019). Moreover, energy security issues that occurred as a consequence of the 2011 earthquake, and later, since the start of the war in Ukraine in 2022, have strengthened the political dimension of the industry, with more and more attention given to the aspects of economic security and geopolitics.

Table 1. Main policies in Japan regarding green and digital transformation

Policy document	Objectives for DX and GX	Socio-economic challenges
Comprehensive Economic Measures to Secure People’s Lives and Livelihoods towards Relief and Hope (2020)	Stimulating post-pandemic economic growth; Support for business; Accelerating DX; Fostering sustainability	Positive relationship between environmental measures and economic growth; Regional revitalisation; Social and political resistance; Long-term sustainability and adaptation
Green Growth Strategy Through Achieving Carbon Neutrality in 2050 (2021)	Carbon neutrality; Green innovation and technology development, support for 14 growth sectors (including automobiles, storage batteries, semiconductors); International collaboration	Technology development; Energy dependency; Infrastructure; Industrial transformation; International collaboration and climate diplomacy; Private–public collaboration
National Budget 2021 – Electric vehicles and fuel cell vehicles	Subsidies for the purchase of NEVs, if the buyer’s home or office is supplied with 100% renewable electricity, storage batteries, infrastructure	De-carbonisation of lifestyles
The 6th Strategic Energy Plan (2022)	46% greenhouse gas reduction target by 2030; S + 3E	Energy efficiency and conservation; Rise in renewable energy sources utilisation
Basic Policy on Economic and Fiscal Management and Reform (2022) under the “New Capitalism” vision (2021)	Investment in batteries, support for vehicle purchase and infrastructure, hydrogen and ammonia, carbon capture, utilisation and storage (CCUS)/carbon recycling, nuclear power, nuclear fusion, etc.; Standardisation for DX in transport and logistics: self-driving cars, flying cars, mobility as a service (MaaS), etc.	Increasing prices of resources; Sustainability and environmental protection; Declining and ageing population, stagnant economic growth; Regional disparities, depopulation; Public participation

Notes: DX = Digital transformation; GX = Green transformation.

Source: Various press releases by Japan’s governmental agencies.

In 2020, Japanese Prime Minister Yoshihide Suga declared a two trillion yen (approximately US$19.2 billion) fund dedicated to supporting companies engaged in ambitious innovations. The fund emphasised advancing hydrogen as a key energy source with the aim of enhancing energy security. Furthermore, the prime minister emphasised the significance of storage batteries in the electrification process, recognising them as a crucial element in achieving de-carbonisation. As a result, Japan has committed to developing systems and regulations to promote the use of NEVs (Kantei 2020). In late 2020 METI formulated the “Green Growth Strategy Through Achieving Carbon Neutrality in 2050,” which specifies current challenges and future efforts, including a wide range of policies regarding budgets, taxes, regulatory reforms/standardisation, and international co-operation (METI 2020). The strategy outlines 14 “key industrial fields” aimed at advancing the transition toward a more environmentally sustainable society. The commitment concerning the automotive and storage battery sectors is twofold: to achieve carbon-neutrality throughout the lifecycle of automobiles by the year 2050; and to enhance the competitiveness of the battery storage industry (METI 2020). In addition, following the revised strategy introduced by METI in June 2021, there is a target for the complete replacement of all passenger car sales with BEVs and other EVs by 2035.

Furthermore, in Japan’s second supplementary budget for the fiscal year 2022, more than one trillion yen was earmarked to enhance manufacturing and increase reserves for products deemed strategically vital. This budget included 331.6 billion yen for storage batteries and 368.6 billion yen for semiconductors. In the latest subsidy allocation, METI provided a maximum of 184.6 billion yen for storage batteries and up to 56.4 billion yen for semiconductors from the budget (Nikkei Asia, April 29, 2023). Finally, according to the Ministry of Finance, the budget for the fiscal year 2023 introduces further initiatives aimed at promoting the development of innovative technologies and the adoption of CEVs in alignment with the 2050 Carbon Neutral Goal. A total of 0.5 trillion yen has been allocated to the Special Account for energy-related measures. When combined with the 1.1 trillion yen from the supplementary budget for the fiscal year 2022, this support amounts to 1.6 trillion yen.

Japan’s De-carbonisation Policies Driven by Economic Security Concerns

When Japan signed the Paris Agreement at COP21 in 2015, the country’s standing in global climate change collaboration was declining (Incerti and Lipscy 2018, 609). Nevertheless, during the pandemic, the government focused on building a strategy that would support transitioning and adapting to the post-COVID-19 economic structure based on three pillars: counter-COVID measures, economic security, and de-carbonisation (METI 2021). These elements are interconnected, but digitalisation and “greening of society” are the plan’s key catchwords.

In October 2020, Prime Minister Suga declared that Japan’s objective is to achieve a carbon-neutral society by 2050, with a focus on establishing a virtuous cycle between the economy and the environment as a fundamental element of its growth strategy (Okina 2020). The announcement was an unexpected move and some commentary claimed a paradigm shift within METI (Nikkei Asia, April 27, 2021). Subsequently, in December 2020, the government decided on “Comprehensive Economic Measures to Secure People’s Lives and Livelihoods towards Relief and Hope.” It confirmed that the de-carbonisation technology development fund and business restructuring subsidies would constitute a key element of the post-pandemic economic growth strategy. At the same time, it gave a clear signal that environmental measures are no longer seen as any kind of impediment to economic growth (Mizuho Insight, December 23, 2020). In other words, the government has explicitly incorporated environment-related international issues into its policy-making, marking a turning point for domestic policy.

Furthermore, in line with the Green Growth Strategy, METI released the 6th Strategic Energy Plan, which lays out the government’s medium to long-term energy outlook. The Plan adopted the S + 3E approach (Safety + Energy security + Economic efficiency + Environmental sustainability), prioritising stable energy supply, cost-effectiveness through improved efficiency, and safety. Meanwhile, Fumio Kishida, after becoming prime minister in 2021, introduced his vision of “New Capitalism,” aimed to redefine the prevailing economic model to align it with evolving social and environmental imperatives (Kantei 2021). It promotes government intervention as a means of establishing fair competition, facilitating entrepreneurship, fostering innovation, and ensuring that economic activities contribute to the overall well-being of society. Questions arise, however, as to the effectiveness of such an intervention, given the challenges that governments face in anticipating and navigating intricate economic dynamics, resulting in unanticipated outcomes and inefficiencies. For example, the escalating economic tensions between the USA and China, during Donald Trump’s presidency, along with the subsequent sanctions imposed on Chinese high-tech communication and semi-conductor sector firms, led to disruptions in the trade with Taiwan Semiconductor Manufacturing Company (TSMC), which also affected Japan. In response to the mounting concerns regarding the unstable global situation, Japan enacted the Economic Security Promotion Law in May 2022. The law aims to formulate economic policies that enhance the country’s “self-reliance, secure advantages and indispensability in technology and other areas” (METI 2023a). It does this by aligning industrial policies with national security objectives. In particular, it introduces a certification process for business plans that align with METI’s goals for goods designated by the government as “specific important goods” or “specific important technologies.” Therefore, it enables the implementation of trade restrictions on these products and offers financial support for their domestic development and production. These categories include products such as semiconductors, storage batteries, and critical materials which are essential for the production of CAVs, EVs, and HEVs. The case of Japan shows that the dual challenges posed by environmental and digital pressures could potentially overturn the trend that Yeung (2014) argued for, which involved a shift from state influence toward more firm-controlled GPNs.

Japan’s Challenges in Integrating Economic Security into GPNs

The re-organisation of the industrial structure is implicated not solely by the imperative of de-carbonising the industry, but also by issues pertinent to a sector’s economic security. The term “international strategic goods” which includes semiconductors, assumes a pivotal role in the context of digitalisation, with specific relevance to NEVs and CAVs, serving as a key instrument in the realisation of post-COVID-19 economic policies.

Remarkably, Japan currently depends on imports to meet more than 60% of its semiconductor requirements, primarily sourced from Taiwan and China. To mitigate this reliance, Japan is engaging in collaboration with the USA to establish a robust semiconductor supply network. In response to geo-economic realignments, the country is also attempting to attract advanced semiconductor manufacturing to its territory. This move extends beyond R&D and seeks to establish a manufacturing hub within Japan. Moreover, the necessity for foreign partnerships becomes apparent, as Japanese companies acknowledge their deficit in “cutting-edge know-how” (Nikkei, June 18, 2021). Starting from 2021, the government has made substantial investments in the semiconductor sector, with the budget surpassing one trillion yen by June 2023, which marked the announcement of the revised “Semiconductor and Digital Industry Strategy” by METI (2023b). A domestic project, Rapidus, which aims to mass-produce state-of-the-art semiconductors, is an example of these investments (Nikkei, June 29, 2023). Furthermore, METI has put forth a budget of 3.355 trillion yen for the fiscal year 2023, allocating funds for initiatives strengthening the semiconductor industry. More precisely, the ministry is offering potential financial assistance of up to 900 billion yen for TSMC’s planned second factory in Kumamoto, which is intended to supply the Sony Group. Similarly, Intel is anticipated to secure 50 billion yen in subsidies for semiconductor post-processing. Finally, approximately 100 billion yen is set for semiconductor circuit R&D in the automotive and AI sectors (Nikkei, October 12, 2023). Nevertheless, as of 2023 Japan still lacks globally competitive semiconductor fabrication plants, and this can be attributed to the country’s past endeavours to attain self-reliance (Nikkei, April 29, 2023).

Undeniably, Japan, characterised by shrinking domestic consumption and a conservative societal milieu, remains contingent on external markets and foreign consumers in both trade and investment. This reliance extends to the development of capabilities for technological innovation. Kamakura (2022) stresses that Japanese semiconductor manufacturers must focus on expanding and developing their presence in Asian countries, given their declining global market share and limited capacity for producing advanced semiconductors. This is essential to cater to their primary customer base, which consists of manufacturers situated in the same region.

Similarly, as the significance of the EV supply chain grows, Japan is investing in expanding its domestic battery manufacturing capacity. In June 2023, METI unveiled plans to offer subsidies up to 127.6 billion yen for seven projects dedicated to advancing battery technology, related materials, and facility investments (Nikkan Jidosha Shimbun, June 17, 2023). The government provided subsidies to companies like Toyota, Honda, and GS Yuasa to uphold Japan’s industrial competitiveness. Additionally, AESC Japan, a battery manufacturer acquired by the Chinese company Envision Group in 2019, is investing in a new facility in Ibaraki Prefecture. The company, in which Envision is holding an 80% stake and Nissan retaining 20%, has been the primary battery supplier for Nissan’s electric vehicle, the Leaf, since its launch in 2010. AESC’s objective is to achieve full-scale operations at the new facility in 2024, with plans to become one of Japan’s largest battery factories, producing batteries for 70,000 EVs each year (Nikkei, August 28, 2023). Despite this, Japanese companies, including industry leaders Panasonic Holdings and AESC, collectively hold only a 10% share of the global market (Nikkei, May 1, 2023). Starting in 2024, AESC aims to extend its battery supply to include Honda and is also working toward further expanding its production capacity to reach 200,000 vehicles annually. This increased capacity is expected to be enough to also meet Mazda’s requirements (Nikkei, August 28, 2023).

China: A Global Leader in the NEV and its GVC

China’s rapid economic growth since the start of its openness and reforms in 1978 has been at the great expense of its environment. The severity of environmental pollution has caused social protests (Deng and Yang 2013). According to Zhong and Hwang (2016, 217), such protests even possibly threatened the regime. NEVs are one means to reduce the country’s reliance on fossil fuels, ease the impact of air pollution in cities, and obtain international leadership in this emerging industry (see Liu and Kokko 2013; McCaleb 2015; Schwabe 2020). This emerging industry is nurtured as an increasingly important driver of the country’s economic growth. The Chinese government seeks to establish dominance in the EV value chain by developing core technologies and materials production, which contributes to the industry’s independence from foreign core component suppliers and supports the country’s aim of achieving economic security. The government is actively working to establish new standards, particularly in emerging sectors like EVs, and aims to persuade foreign automakers to adopt them. It plays a crucial role in enhancing standards and testing, fostering exploration of next-generation challenges, and promoting collaboration with universities, research institutes, affiliated industries, and suppliers (Doner, Noble, and Ravenhill 2021, 267).

The global agenda for combating climate change aligns with China’s goal of becoming a global leader in emerging industries such as NEVs. The government has been one of the first to support the development of the NEV market, doing so since 2001, through the so-called 863 Program for strategic technology development (see Liu and Kokko 2013; Schwabe 2020). The Energy-saving and New Energy Vehicle Industry Development Plan (2012–2020) was aimed at developing key components that would meet the technical standards and production scale required by the domestic market and at the construction of charging facilities adequate to the scale of production and sales of NEVs (Table 2). The NEV Plan (2012–2020) had some successes (Gov.cn 2020). These included the emergence of EV manufacturers, namely BYD, SAIC, Geely, Nio, and Xpeng, as well as battery producers with leaders being BYD and CATL. Following this, the New Energy Vehicle Industry Development Plan (2021–2035) put forward a more ambitious goal, stating that advancing NEV technology is a way for China to become a powerful automotive country. It is noteworthy that the Plan highlights the other side of the automotive transition, which, besides being green, is equally digital, treating the new vehicles as intelligent, mobile terminals. The document describes the NEV technology development as “three verticals and three horizontals” (san zong san heng). The “three verticals” represent NEV technology types: pure electric, plug-in hybrid (including extended-range), and fuel cell vehicles (FCVs). The “three horizontals” encompass core technologies and components: the battery and its management system, the drive motor and power electronics, plus the digital component, i.e. networking and intelligent technology. The Plan aims to continue attracting foreign firms into the Chinese NEV industry. It also expects domestic firms to expand abroad to strengthen international co-operation and actively participate in international competition. The Plan further emphasises the goal of deep integration into global value chains.

Table 2. Main policies in China regarding green and digital transformation

Policy document	Objectives for DX and GX	Socio-economic challenges
Energy-saving and New Energy Vehicle Industry Development Plan (2012–2020)	Reaching technical level and production scale of key components that meet domestic demand; Construction of charging facilities; Developing core technologies; Support for domestic firms producing: batteries, key materials, drive motors, high-efficiency transmissions, automotive electronics, cascade utilisation and recycling of batteries; Creation of independent intellectual property rights; International co-operation.	Driver of economic growth; Easing air pollution in the cities; Reduction of reliance on imports of fossil fuels; Technological independence.
New Energy Vehicle Industry Development Plan (2021–2035)	Development of NEV types: pure electric, plug-in hybrid, FCVs; Digitalisation of vehicles; Development of core technologies and components, incl. automotive electronics, cascade utilisation, recycling of batteries; Active participation in the establishment of international rules and standards related to the NEV market; Development of hydrogen supply system; Deep integration into the GVC; International co-operation and competition; Developing specialised talents in core technology fields.	Driver of economic growth; Easing air pollution in the cities; Energy security, less dependence on fossil fuels; Reduction of carbon dioxide emissions as stipulated by the Paris Agreement.

Notes: DX = Digital transformation; GX = Green transformation.

Source: Various press releases by Gov.cn (2012; 2020).

Digitalisation in the Japanese Automotive Industry

Japan’s approach to digital transformation (DX) may be characterised by the phrase “Minotake ni atta keiei” which can be translated as “Cut your coat according to your cloth.” Simply put, the country’s digital transformation is shaped for a specific purpose (Kitamura 2023, 52). This can be observed in the idea of Society 5.0, which is a framework for shaping DX development and its implementation to achieve socially positive effects, catering specifically to the needs of Japan (Keidanren 2020). For example, CAVs have the potential to enable access to transportation for elderly people living in rural areas, who in Japan account for almost 5.5% of the total number of residents (Nikkei Asia, September 13, 2016). The government believes that Japan’s automobile industry can lead the world in the field of automated driving and contribute to resolving such social issues.

Three critical factors influence the deployment of CAVs: regulatory support, enabling infrastructure, and a favourable market environment (SMMT n.d.). In terms of regulation, Japan has succeeded in implementing AV development and testing welcoming policies but still has shortcomings with commercialisation of the technology. As a result, Japan is ranked sixth by the CAV deployment index, after the UK, USA, Germany, Netherlands, and South Korea, but ahead of France and China (SMMT 2019).

According to another indicator, the Autonomous Vehicles Readiness Index (AVRI), Japan in 2020 ranked 11th, while China was 20th. The index consists of four pillars: policy and legislation, technology and innovation, infrastructure, and consumer acceptance (KPMG 2020). Based on that report, Japan is third on the technology and innovation pillar of the AVRI and has the highest number of AV-related patents (both in absolute numbers and when scaled by population) among the countries included in the research. However, in the introduction of 5G mobile coverage, Japan has lagged its counterparts including South Korea. Additionally, the road network in Japan is characterised by numerous tunnels, multi-level highways, and narrow and hard-to-reach urban streets, which pose major challenges for AV navigation (KPMG 2020). Another problem is the low consumer acceptance of AVs. According to the report by KPMG (2020, 59) people in Finland, China, and Singapore are most likely to use ride-hailing services, while those in Italy and Japan are the least likely to have done so.

Nonetheless, actions such as those by Toyota Motor President Akio Toyoda, who has invested 5 billion yen of his own money into a smart city dominated by self-driving vehicles, can change the social acceptance of CAVs (Nikkei Asia, June 26, 2021). Meanwhile, the “Traffic Jam Pilot” developed by Honda Motor Company has made Japan a pioneer of Level 3 autonomous driving on public roads (Nikkei Asia, February 24, 2021). Home-grown innovators have a good chance to persuade the Japanese people to be more accepting of cutting-edge technology.

Digitalisation in the Chinese Automotive Industry

The Chinese government sees digitalisation as a driver for achieving high-quality development necessary for maintaining its economic growth rate in light of rising wages and an ageing society. On March 27, 2022, Yu Xiaohui, President and Deputy Secretary of the Party Committee of the China Academy of Information and Communications Technology said, “for us … the main battlefield of digital transformation or digital economy is the digital development and digital transformation of each industry in our traditional economic sector” (Gasgoo, March 31 2022).

China’s 14th Five-Year Plan (2021–2025) sets the target of accelerating the construction of a digital economy, digital society, and digital government while driving the transformation of production methods, lifestyles, and governance methods through digital transformation. The Plan proposes creating new advantages in the digital economy, developing new industries and new models to strengthen new engines of economic growth (Gov.cn 2021). The 14th Digital Economy Development Plan issued in January 2022 states that the digital economy is the next stage after the agricultural and industrial economy, reshaping the global economic structure and changing global competition (Gov.cn 2022). China sees digitalisation as an opportunity to take world leadership. The Plan states that China will push the development of 6G, big data centres, integrated circuits, and artificial intelligence. The National Development and Reform Commission emphasises the need to develop independent technologies and basic brands to create “China’s independent and controllable standardised automotive technology system and architecture system to solve various bottleneck problems such as chips, software and hardware, and system components” (Xinhua, July 30, 2021).

In recent years there has been considerable impetus for the development and commercialisation of CAVs (Gasgoo, March 31, 2022). Since 2019, China’s government has been making it easier to test AVs on public roads to accelerate the commercialisation of self-driving technology (KPMG 2020; Global Times, January 18, 2022). It wants vehicles with at least partial self-driving functions to amount to 50% of new auto sales by 2025 (Nikkei Asia, February 26, 2021). By early 2022, all of China’s 27 provinces and municipalities had introduced regulations on self-driving vehicles and 16 autonomous driving demonstration zones were established and there were more than 3,500 kilometres of testing roads (Global Times, January 18, 2022). In November 2021, Baidu and self-driving start-up Pony.ai obtained approval to launch driverless “robotaxi” services in Beijing’s Yizhuang suburb, with 100 autonomous vehicles put to commercial use. Shanghai’s government is also promoting the development of self-driving technology, including its commercialisation, by supporting pilot programmes, trial operations, and exploring innovative business models like intelligent public transport, unmanned sanitation, and distribution services such as supplies in hospitals. Chinese AV companies are also actively exploring opportunities in overseas markets to export their technologies (Global Times, January 18, 2022).

In KPMG’s AVRI, China ranked 20th behind Austria and France, but ahead of Belgium, Spain, and Italy. One advantage for Chinese AV uptake is that Chinese people, and especially the young, are receptive to using such vehicles (KPMG 2020). Regarding CAVs, it was estimated in 2020 that they would amount to 28 million in China by 2025, which would make it the largest smart/connected car market in the world, with the global market estimated to be 74 million in 2025 (CBIES Automotive 2020).

Summing up, the de-carbonisation policies of the Japanese automotive sector are driven by the innovative nature of the green transition, with uncertainty regarding the ultimate direction of prevailing technologies. They involve navigating uncertainty and incomplete information through learning, and policy experimentation, which is accomplished through structured collaboration to achieve specific objectives, a concept termed the new industrial innovation policy by Pietrobelli (2021, 439). In the case of China, the approach of achieving structural transformation through open competition in international markets, while accessing foreign knowledge through co-operation with foreign partners, also aligns with the concept. This strategy is distinct from the developmental state approach, which focuses solely on developing new industries through co-operation among domestic firms. Moreover, recent policy measures described in Tables 1 and 2 fit well into Pietrobelli’s (2021) typology of GVC-oriented policy interventions, encompassing both horizontal and vertical aspects. Crafted to facilitate the specialisation of both firms and the nation in specific segments of the value chain, these policies aim to develop robust competencies in targeted areas such as batteries and semiconductors (Pietrobelli 2021).

Reorganising the Japanese Car Industry: Toyota, Honda and the Role of Chinese Companies

In 2021 Honda announced that all new car sales will be replaced with electrified vehicles by 2040 globally (Honda 2021). Meanwhile Toyota established a goal of achieving a 3.5 million unit share of EVs in its global sales annually by 2030 (Toyota 2021). As ambitious plans regarding EV development, autonomous driving, and connectivity require substantial investments, new alliances and cases of company reorganisation have developed. Concurrently, the role of the state has also been growing in importance. As a result, both Toyota and Honda are set to receive subsidies for investing in lithium-ion batteries for EVs in Japan, with Toyota receiving 120 billion yen and Honda 158.7 billion yen, respectively (Nikkei Asia, June 16, 2023). In particular, Honda’s partnership with the Japanese government departs from its traditional commitment to independence and underscores the company’s recognition of the urgency brought about by the shift to EVs (Nikkei, May 1 and June 15, 2023). There are three main areas of co-operation in terms of NEV/CAV development: electrification and in-vehicle batteries, autonomous driving technology, and semiconductors.

Battery Suppliers: Shifting to Key Technology Source

In 2023, China’s Ningde Era New Energy Technology (also known as CATL), China’s BYD, and Korea’s LG Energy Solution (LGES) dominated the EV battery market. In 2022, their shares in in-vehicle supplies accounted for 37%, 13.6%, and 13.6% respectively (AsiaBiz Nikkei, August 18, 2023). Nevertheless, Japanese producers have not withdrawn from the battle for market share and, for example, Prime Planet Energy & Solutions (PPES), a joint venture of Toyota and Panasonic, declared that it would build a factory in China that would be competitive with CATL and BYD (xTECH Nikkei, March 30, 2022). However, to meet the increasing demand, the lithium-ion batteries used in the Toyota bZ4X model released in 2022 were supplied by both CATL and PPES (xTECH Nikkei, March 30, 2022). The aim of Toyota’s collaboration with CATL and BYD was to have its own battery production line at the partner’s facility. Toyota Chief Production Officer Masamichi Okada said that “capital investment will be made by the manufacturer [Toyota]” and that: “It’s like setting up a Toyota line in a CATL factory and making it in-house” (xTECH Nikkei, March 18, 2022). In the past, Toyota has developed its core technologies in-house or within the Toyota Group (Hatani 2020, 217). Such a partnership can be seen as an evolution of this approach, brought about not only by the time-consuming and costly advancement of new technologies but also by the lack of relevant talent. Toyota names its strategy toward crucial technology acquisition tenouchi-ka or keeping technology competency within the company even when components are sourced from suppliers (see Table 3).

Table 3. Toyota Motor Corporation – Examples of NEV partnerships

Partner company	Date of partnership	Name of a new entity (if available)	Goal of partnership
Didi	Announced in July 2019		Mobility services in China; vehicle-related services for ride-sharing drivers
Pony.ai	Announced in August 2019		Integration of Toyota’s vehicles and Pony’s autonomous driving system; robotaxis in China
BYD	Announced in 2019		Development of EV batteries
CATL	Announced in July 2019		Battery supply; new technology development; reuse/recycling
Momenta	2020		Camera-based automated mapping
Panasonic	April 2020	Prime Planet Energy & Solutions (PPES)	Battery joint venture; NMC811 as a next-generation product around 2025
Denso	April 2020	Mirise Technologies	Development of the in-vehicle semiconductors SoC (system-on-a-chip); reorganisation/consolidation of semiconductors and electronics research
Softbank	February 2019	Monet Technologies	MaaS (mobility as a service); mobility; solving various social issues, creating new value
Other battery supply chain companies	April 2022	Battery Association for Supply Chain (BASC)

Source: Various press articles by Nikkei Asia, Nikkei, xTECH Nikkei, and companies’ websites.

The situation, however, is dynamic. On July 17, 2019, CATL, the most influential of Toyota’s battery suppliers, revealed that it began studying not only battery supply but also a wide range of fields such as new technology development, energy storage solutions, integrated intelligent chassis production, and battery reuse/recycling (xTECH Nikkei, July 22, 2019). This reorientation means that the bargaining power of such technology suppliers will intensify as the rapid development of EVs shifts the bargaining power to the battery makers. CATL, which is aiming to become a “mega supplier,” delivers batteries to more than 40 automakers, mostly in Europe and China (xTECH Nikkei, July 5, 2019). Toyota’s strategy of in-house battery production addresses the need to be prepared for changes in the power relationship between car manufacturers and battery producers. Toyota believes that in-house production would allow it to gain a certain level of bargaining power without relying too much on battery manufacturers (xTECH Nikkei, March 18, 2022). Nevertheless, amid recent geo-political shifts, Toyota’s approach to technology acquisition is not without its challenges. Because of the USA’s IRA, adopted in 2022, which established incentives for EV manufacturing under the domestic content requirements, and with a potential surge in EV sales, Toyota may not be able to rely on internally acquired technology. Other models of sourcing key technologies may emerge, involving multiple-partner networks in different regions, depending on the shifting technology trends. One example is Toyota’s contract with LGES signed in October 2023 for lithium-ion batteries for their EV factory in the USA. Additionally, as (Nikkei, October 12, 2023) reports, the supply volume under this contract is the largest single supply agreement for LGES, aside from their joint venture contracts.

Meanwhile, as a part of its vertical integration strategy, Toyota will invest in the production of in-vehicle batteries in Japan. The investment received government support in the second supplementary budget for the fiscal year 2022, as this aligns with technologies designated as critical for economic security. It includes PPES factory in Hyogo Prefecture and Prime Earth EV Energy, another partnership of Toyota and Panasonic, in Shizuoka Prefecture (Nikkei, June 15, 2023).

Honda, on the other hand, used to depend on Western “mega suppliers.” This was the company’s strategy in 2012, which eventually proved unsuccessful with Honda returning to its affiliated suppliers (xTECH Nikkei, January 11, 2021). Since 2019, its mega supplier has been Hitachi Automotive Systems (Hitachi Astemo from 2020), a group consisting of Honda’s sub-contractors (see Table 4). The company’s president Brice Koch said, “the new company will be a global No. 1 in electrification” and its goal is to become a new global mega supplier by 2025 (Automotive News Europe, October 30, 2019). In addition, looking ahead to the forthcoming EV era, Honda joined forces with the Japanese government in a “partnership that would have been unthinkable for Honda in the past” (Nikkei, May 1, 2023). This is noteworthy considering that Honda’s founder, Soichiro Honda, opposed METI intervention in the 1960s and advocated free competition for fostering the industry (Ohno 2018, 141, 147). With support from METI, and in a joint venture with GS Yuasa, Honda will advance lithium-ion battery production technology and establish a domestic factory for mass production, creating a pioneering EV supply network in Japan. Honda’s new domestic investment, along with the company’s increased stake in Hitachi AS, may indeed indicate the company’s organisational shift toward direct involvement with suppliers for EV production (Nikkei, May 1, 2023). Meanwhile, Honda, which focuses on North America, decided to develop an EV-dedicated platform specifically for China. This seems to go against the general trend in the industry, as other companies tend to integrate EV-dedicated platforms to improve efficiency. Instead, Honda chose to adopt an architecture optimised for China to quickly launch a highly competitive EV for that market, with battery supplies from Chinese partners (xTECH Nikkei, January 11, 2021). Moreover, Honda, having a strategic alliance with CATL, may hope that a new battery manufacturing plant in Germany would be able to “deal with the lifecycle assessment production regulated by the EU” (Nikkei Asia, May 18, 2021).

Table 4. Honda Motor Company – Examples of NEV partnerships

Partner company	Date of partnership	Name of a new entity (if available)	Goal of partnership
MONET Technologies (Toyota, Mazda, Suzuki, Subaru, Daihatsu, Isuzu, Honda, Hino)	Announced in 2019		Supply MONET with vehicles used for mobile services
Hitachi Automotive Systems combined with: Hitachi, Keihin, Showa, and Nissin Kogyo	October 2019	Hitachi Automotive Systems	Manufacturing of motors, electrified vehicle drivetrains, electronic control units and chassis parts, electrical systems, engine components, shock absorbers, brakes and steering systems
Hitachi Automotive	2020	Hitachi Astemo (Hitachi 66.6%, Honda 33.4%)	Strengthening global competitiveness in the field of connected, autonomous, shared and electrified (CASE); competing with mega suppliers Bosch, Continental, and Denso
CATL	Announced in July 2020		Battery procurement and EV development, mainly for China
General Motors	Announced April 2022		Development of EV for mass-market price and worldwide sales; promotion of the standardisation of EV platforms; production of several million units by both companies after 2027
Sony	Announced in March 2022		Joint development and sales of high-value-added EVs; commercialisation with the provision of mobility services
Dongfeng Honda	Further expansion		e: NS1 EV model development and release in 2022; EV-only factory in China in 2024; exports
Guangqi Honda	Further expansion		e: NP1 EV model development and release in 2022; EV-only factory in China in 2024; exports

Source: Various press articles by Nikkei Asia, Nikkei, xTECH Nikkei, and companies’ websites.

Growing state involvement in strategic sectors, notably with subsidies provided by programmes like the IRA, seems to be pushing automotive firms to follow Honda’s lead and differentiate vehicle production based on key markets or regions. The subsequent US-Japan Critical Minerals Agreement signed in April 2023 may benefit Japan’s emerging EV supply chain, as EVs produced in the USA with materials imported from Japan will be eligible for tax reductions under the IRA. Nevertheless, increasing investments in Canada and the USA by battery suppliers, mostly of US and Korean origin, will further deepen the divide in EV manufacturing between China and the USA. However, as critical minerals, particularly nickel and cobalt, are concentrated in politically unpredictable countries, the already difficult task of risk mitigation may become an even greater challenge for these manufacturers in the USA.

Technological Change and New Competitors in the NEVs Industry

New-generation automobiles make it attractive for non-automotive firms to enter the automobile industry. ICT players such as the Chinese companies Baidu and Xiaomi, which make cars a function of their digital ecosystem, and Taiwan’s Hon Hai Precision (also known as Foxconn), the world’s largest group of companies in electronics manufacturing services, have begun EV manufacturing. This means the beginning of a new competition with players having different ideas about and approaches to the industry (xTECH Nikkei, June 3, 2021).

Since 2018 and through the pandemic period, partnerships and investments between Japanese and Chinese firms have been established in AV technology. In June 2018, Didi Mobility Japan was established by SoftBank and Didi, China’s ride-hailing company. Under this agreement, both companies seek to scale up their services in China for more efficient and high-quality ride-hailing and to expand a range of connected services through Toyota’s Mobility Service Platform, covering vehicle management, maintenance, insurance, finance, catering to preferences of Chinese customers and drivers (jidounten-lab.com, January 9, 2023). In February 2020, Toyota invested in Pony.ai, a major Chinese startup in autonomous driving, the operator of China’s first autonomous taxi pilot programme, and the following month invested in Momenta, another Chinese autonomous-driving startup, expanding the Japanese automaker’s infrastructure in China (Nikkei Asia, March 20, 2021). In response to the technology-related tensions between the USA and China, Toyota is establishing distinct development frameworks for self-driving technology in each country (Nikkei Asia, March 20, 2021). As with in-vehicle batteries, Toyota’s strategy is the internalisation of software and connected technology. The companies in China form new business models and acquire know-how faster than in Japan, the USA, and Europe, mostly due to lax legislation and less careful handling of personal data (Fujishiro 2018, 4). For Japanese companies collaborating with Chinese firms, access to information helps business expansion overseas while Chinese-Japanese joint ventures make it easier for them to accumulate know-how (Fujishiro 2018, 4).

Collaboration among Japanese companies has also intensified. On April 1, 2022, Sony Group announced that it had established a new company, Sony Mobility Inc, which would deal with EV and robotics-related businesses such as EV platforms and in-house developed drones (Nikkei, April 1, 2022). To that end, Sony is collaborating with Honda (see Table 4). In their alliance, Honda will bring vehicle development and manufacturing technology and after-sales service, while Sony will bring image sensors, communications, networks, and various entertainment technologies to “create completely new value” (Toshihiro Mibe, Honda President, cited in xTECH Nikkei, March 14, 2022). The new company will oversee EV planning, design, development, sales, and so on, but will not own manufacturing equipment and Honda will be responsible for car manufacturing. Sony will be in charge of developing a platform for mobility services and will provide it to the new company (xTECH Nikkei, March 14, 2022).

The president and CEO of Monet Technologies, a partnership initially set up by Softbank and Toyota to collaborate on MaaS technology, said, “I want to build an all-Japan system to further collect vehicle and driving data and optimise society as a whole,” inviting domestic car manufacturers to join. As a result, “The Monet Consortium” was established to promote collaboration in Monet’s MaaS, and it was revealed that 88 companies joined this initiative (xTECH Nikkei, March 28, 2019).

The Growing Power of Semiconductor Suppliers

Among Japanese companies, Sony has strong technological capabilities in image sensors. However, neither Sony nor Honda have the high-performance semiconductors required for autonomous driving, a critical component in the ever-evolving landscape of automotive technology (xTECH Nikkei, March 14, 2022). To address this challenge, in April 2023, Honda announced a strategic partnership with Taiwan’s TSMC, the world’s leading semiconductor manufacturer. The move reflects Honda’s efforts to enhance supply chain stability through the consolidation of semiconductor procurement. This includes the chips that were conventionally acquired through component manufacturers. President Mibu, in an interview with Toyokeizai (May 16, 2023), described these efforts as “building a loosely, vertically integrated supply chain.”

Until now, the advanced development of semiconductors has been carried out separately by Toyota and Denso. However, to accelerate the development of in-vehicle semiconductors and prepare for new competitors, the two companies have established a new joint venture named Mirise Technologies (see Table 3). There are three main fields that the new entity will develop: SoC (system-on-a-chip), power electronics, and sensing. These also constitute the three most important factors in the CAV era. The conventional technology for in-vehicle semiconductors is IGBT (insulated gate bipolar transistor), which uses silicon, but the next generation is SiC (silicon carbide technology), which has good performance but a high cost. Reducing the manufacturing cost of SiC is, therefore, one of the most important tasks of Mirise Technologies (Yoshifumi Kato, MT President, cited in xTECH Nikkei, April 24, 2020). Meanwhile, long loyal semiconductor suppliers, such as Renesas to its key customer Toyota, have gained some independence. The company, in which both Denso and Toyota hold stakes, is expanding its non-automotive business due to the growing demand for semiconductors (Diamond Online, March 15, 2021). Undoubtedly, such moves increase suppliers’ leverage in their relationship with automotive firms. However, despite continuing capital investment in advanced technology industries, Japanese semiconductor-related firms face challenges in separating themselves from the Asian production network, primarily because of the contracting domestic market (see Kamakura 2022, 273). Indeed, Japanese companies’ expertise in semiconductors for autonomous driving is attractive to Chinese firms, who struggle with the development of their own advanced chips.

The Chinese government has also been supporting the development of the semiconductor industry since the beginning of the 2000s. Despite these efforts, China is not yet able to produce advanced semiconductors and is only able to supply 5% of the automotive chips it requires (Chinaventure.com.cn, August 1, 2023). A greater push for the development of this part of the industry is marked by numerous plans issued in 2017 and 2020, particularly targeting IGBT-type and smart vehicle semiconductors. As a result, some domestic leaders in automotive semiconductors emerged including SMIC, Hua Hong Semiconductors Limited, JCET Group, and BYD Semiconductor. The US export controls on advanced technologies and equipment imposed in October 2022, which the EU and Japan were pressured to impose as well, only intensified efforts in China to become self-sufficient in semiconductors production. Some integrated device manufacturers have added production lines for IGBT microchips with, for example, Silan Microelectronics, Star Power, Times Electric, and China Resources Microelectronics, and several Chinese automobile manufacturers declaring a start to developing their own semiconductors (Luo 2023). In September 2023, the Ministry of Industry and Information Technology guided Chinese automakers including Dongfeng Motor, SAIC, Nio, Geely, and others, to establish an alliance aimed at developing automotive electronics, particularly microchips (DIGITIMES Asia, October 3, 2023). In January 2024, it urged the industry to develop technical standards for at least 30 key automotive semiconductors by 2025 and at least 70 by 2030 (Nikkei Asia, January 22, 2024).

In emerging semiconductor regionalisation, Japanese automakers seem to aim to secure access to microchips in the Chinese market through broader co-operation with their Chinese counterparts. Another new phenomenon that speaks for such a strategy is the necessity for close co-operation between car companies and semiconductor producers as the latter require greater involvement from the former in chip development cost and risk sharing. Chinese car producers that also produce microchips or alliances of car and semiconductor producers will allow partnering Japanese automakers to secure access to microchips. This co-operation might be a wise long-term decision regarding operations in the Chinese market, as China aims to gradually ban imports of chips from the EU, the USA, and Japan (DIGITIMES Asia, October 3, 2023).

Twin Transition: Automotive GVC/GPN Reconfiguration and the Role of the State

The analysis in this article demonstrates that the role of the state in establishing emerging industries and developing emerging products is crucial. At the very least, there is a “dynamic interaction and co-evolution” between industry-targeted policies, firm strategies, and GVC/GPN configurations over time (Gereffi, Lim, and Lee 2021, 518). A close examination of the process of new technologies appearing in automotive GVCs/GPNs, reveals that institutions may indeed use their power to influence the reconfiguration and development of GVCs/GPNs through particular policies and funds or by creating a relevant ecosystem necessary for the production of strategic products. This action strengthens economic security through access to resources, innovation, and technological diversification. GVCs/GPNs are exposed to fast digital transformation, require substantial investment (also in infrastructure), are subject to regulations imposed by supra-national organisations, and generate complex impacts on surrounding societies and the environment (see Kano, Tsang, and Yeung 2020; De Marchi et al. 2020).

While Ponte (2021) elucidates the emergence of orchestrated governance to address environmental concerns, establish standards, and promote transparency and accountability in environmental sustainability efforts, it is evident that GVCs/GPNs are increasingly susceptible to the influence of states and their policies, especially in industries categorised as strategic. An ideal approach to address the complexities of GVCs is through co-ordination and collaboration among governments, policymakers, firms, suppliers, service providers, and other stakeholders. This concerted effort should be aimed at facilitating linkages and interactions within the value chains, fostering knowledge sharing, promoting innovation, and driving efficiency improvements (see Pietrobelli 2021). However, given the rapid pace of change, the automotive industry’s strategic sectors, such as semiconductors, in-vehicle batteries, and autonomous driving technology, are characterised by costly processes and inherent uncertainties. In light of these challenges, state intervention becomes imperative to ensure the establishment of robust and reliable value chains.

What is more, in the realm of strategic emerging sectors, state involvement carries global implications for strategy and corporate expansion. Specifically, China’s prominence in green technologies, such as energy storage batteries, has prompted the USA to intensify state intervention, culminating in the IRA. As the polarisation between the USA and China intensifies, a sense of uncertainty increases, compelling other stakeholders to make strategic adjustments. In these circumstances, the role of a state is akin to that of a manager or strategist. Due to the IRA subsidy initiative, certain battery manufacturers, notably Korean firms, are expanding their investments in the USA and Canada, reinforcing their positions within the critical supply chains of the US market. Japanese automotive producers will inevitably require external battery suppliers, potentially resulting in closer collaboration with their Korean counterparts in the USA. This situation will leave companies from both countries reliant on imports of critical materials. Simultaneously, as Japan endeavours to strike a delicate balance between its relationships with China and the USA, the nation may seek new partnerships to diversify its battery supply chain. European car manufacturers in particular, given their reliance on Chinese battery suppliers, may present opportunities for Japan to deepen its integration within the European market and further expand its storage battery manufacturing capabilities.

At the level of industry stakeholders, the growing bargaining power of key technology suppliers is expected to trigger significant shifts in power dynamics within GVCs (see, for example, Ponte et al. 2019; Hess 2021). A prominent example illustrating this trend is the case of CATL, which indicates a shift toward a more supplier-centric governance model in the automotive industry. This shift has the potential to affect various aspects of production networks, including incumbents’ quality standards, leading to increased interdependencies among companies and the emergence of new geo-political dependencies, particularly in strategic industries. Consequently, it is anticipated to influence modes of collaboration and partnerships among industry actors. Notably, Bair and Mahutga (2023) emphasise a broader transformation occurring in GVCs, characterised by a transition from market-based governance approaches to hierarchical and hybrid modes. This shift is driven by a combination of factors, including technological advancements, evolving power dynamics, and policy interventions. As a result, it necessitates a re-evaluation of governance structures and practices within GVCs to effectively navigate the changing landscape of the industry, encompassing considerations related to legislation, data handling, and other pertinent issues.

There are both challenges and opportunities in this situation. GVCs/GPNs risk being trapped in protectionist policies and involved in the interests of individual states. However, since what De Marchi and colleagues (2020, 8) identify as “the social and environmental aspects of GVCs are strongly complementary,” through a win-win state–business co-operation firms can engage in the implementation of perhaps less profit-focused but more sustainable activities aimed at the development of products that, for example, enable the addressing of social needs in host and home economies (see Figure 2). This new perspective is even more appealing when it is realised that the economic and social expenses linked to a transition toward de-carbonisation will be substantial and should be a primary focus for the government (see Fouquet and Hippe 2022). Finally, the various processes are also vulnerable to geo-political tensions so their aggregate impact on the reconfiguration of GVCs/GPNs is far from an easy investigation (see Gong et al. 2022).

Figure 2. Conceptual model of state/institutions influence on society through industry and firms under the paradigm shift in the automotive industry

Source: Authors’ own elaboration.

Twin Transition: Factors Driving Chinese and Japanese Automotive Industry Collaboration

China’s domination in certain areas is fuelled by government support and huge domestic demand. However, China’s supremacy in the battery supply chain, due to its control of mining and refining of raw materials in the strategic emerging industry, is also part of a wider political scheme. Japan is being pulled by the Chinese technological capability but Japanese regulations, management know-how, and the quality of its infrastructure remain more reliable than in China. Japan is seeking to join the supply chain with its input as a regulator while also pursuing technological advantage as the next-generation technology setter, which is an important goal within its national (de-carbonisation) policy. This strategy, as suggested by Costantini and Mazzanti (2012), is deemed to help maintain Japan’s competitiveness as investments in low-carbon technologies can enable advanced economies to restore their national competitiveness. Being part of China’s NEV/CAV market offers fast access to the data necessary for product development, knowledge about new business models, and ideas that may be extended to other markets (Fujishiro 2018, 4–5).

The twin transition in the automotive sector in China may result in Chinese NEV companies setting industry standards that will be applied in foreign markets and, through expansion, provide global leadership in this industry. The Association of Southeast Asian Nations seems to be the first market for such expansion. The success of NEVs would provide the high-quality growth necessary for maintaining China’s economic growth rate, and thus a continuous improvement in the quality of life of the Chinese people, which guarantees legitimacy for the ruling party. Meanwhile, such growth provides resources for the growing number of retirees and policies aimed at people who face the threat of poverty. As for Japan, NEV/CAV technology serves social needs such as a decrease in traffic accidents, mobility of the elderly and people living in rural areas, and mitigating skill shortages. This shows that NEV firms need to adjust their green and digital strategies to society’s traits in terms of its technological advancement and social characteristics, such as the ageing society in Japan. The ageing population is a challenge for Japan as it will be for China and the EU.

Conclusions

This article aimed to identify changes in the global automotive GVC/GPN structure and security concerns of governments and firms, with a particular focus on Japan and China. The macro perspective reveals that the COVID-19 pandemic made governments look for new sources of economic growth. The vision of a de-carbonised society is a target that may generate such growth. It implies shifts toward NEVs and CAVs, thus necessitating changes in the established automotive industry production networks, as EV production requires fewer parts suppliers and more software. Additionally, it increases government participation in establishing and governing proprietary standards for new green and digital solutions as a part of state strategy. In light of technological competition with the USA, for China, the ability to introduce international standards based on its intellectual property is crucial from an economic security standpoint. In this regard, collaboration between Chinese and Japanese firms in the automotive sector may lead to Sino-Japanese co-operation in introducing and negotiating the adoption of jointly developed standards on the international stage. Thus, the path toward zero-carbon transportation extends far beyond this industry. Strategically, it involves political factors such as energy policy, digital transformation, and international standards and regulations, all of which require government support. Electrification of the automotive industry and its economic security vulnerabilities make the emerging industry of NEVs/CAVs, and thus its production network, a substantial part of the state’s policy. This provides governments with an argument for intervention in the production networks and, consequently, questions the process of their “de-coupling” from state influence to greater dominance by lead firms in GPNs. At the same time, the growing importance of foreign suppliers in automotive production networks poses new challenges for state involvement, necessitating a fresh industrial policy approach for both traditional and strategic emerging industries. A higher degree of uncertainty, increasing competition, and sensitive technology add a new dimension to collaboration and co-ordination in the pursuit of industrial policy targets.

Despite its contributions, this study has several limitations which should be acknowledged. Firstly, the findings and conclusions derived from this research may not be directly applicable to other industries or countries due to the unique contextual factors present in the automotive industry of Japan and China. The dynamics and influences impacting GVCs/GPNs can vary significantly across different industries and geographical regions. Secondly, the study is constrained by data limitations and the intricacy of the factors involved in green and digital transformations. Future research could address these limitations by aiming for broader industry and geographical coverage. Additionally, it could consider conducting comparative analyses that incorporate states’ approaches to emerging industries in other countries. This would provide a more comprehensive understanding of GVCs/GPNs within the context of green and digital transitions.

Acknowledgments

We sincerely thank the editor for his consistent support during the refinement of this article. Furthermore, we express our gratitude for the invaluable and insightful remarks and guidance from the reviewers, as their contributions have significantly enhanced the quality and depth of this work.

Declaration of Interest

The authors report there are no competing interests to declare.

Additional information

Funding

Financed by the Minister of Science under the “Regional Excellence Initiative” Programme'.