Chinese firms such as CATL and BYD supply the majority of the world’s EV batteries. The country accounts for the largest share in the production and export of battery electric vehicles and plug-in hybrid electric vehicles.
Photo by Sosnxiu Laim MingNaingh/Wikimedia Commons
March 25, 2026
360info
By Ray Wills and Peter Newman
Japan’s slow-motion retreat from the car industry’s technological frontier is now impossible to ignore.
Honda’s recent decision to cancel three new battery-electric models for the US market — a massive write-down and refocus on hybrids — is not an isolated corporate mishap; it is a symptom of a deeper national problem. These are the classic hallmarks of late, cautious entry rather than bold experimentation.
A country that once re-engineered the global auto industry now risks watching the next era of mobility – and much of clean technology – being defined elsewhere, most obviously in China.
Meanwhile, China moved fast. Consider how empires and infrastructure work: Rome built 300,000 kilometres of roads, not as a vanity project, but as the backbone of an integrated economic system – standardised, centrally directed, and designed for scale. China (which has form in such things) is doing something similar in modern times with clean technology. It has built the factories, supply chains, standards and industrial policies that let it produce batteries, electric vehicles, solar panels and associated hardware at breathtaking volumes and increasingly competitive quality.
Scale is not a side-effect; it is the strategy. Once you can run a battery plant or an EV platform at volumes far beyond any competitor, learning curves and cost reductions become self-reinforcing. Standards – in charging, batteries, software, manufacturing processes – lock in these advantages and make it easier to export both products and systems. Besides, the ability to coordinate policy, infrastructure and finance around national objectives — whether that is cutting oil imports, dominating key supply chains, or exporting millions of vehicles a year — is a major advantage. So even as China spent the last decade paving battery “roads” across its economy, Japan kept surveying hydrogen aqueducts that never quite flowed.
Japan used to understand this logic. Its post-war rise in autos and electronics was built on long-term industrial strategy, export discipline and a tight loop between government and industry. But the institutions that once drove bold bets have ossified. Corporate governance still rewards consensus and stability over risk. Failure is stigmatised. Cash piles up on balance sheets instead of being deployed into high-risk innovation. That culture made it easy to keep funding incremental ICE, hybrid and hydrogen projects while repeatedly postponing the far larger capital commitments needed for dedicated battery‑electric platforms and software.
The result is what we now see in the car industry: impeccable refinement of the internal combustion engine, world-leading hybrids, flagship hydrogen projects – and hesitation, followed by late, half-hearted entries into battery-electric platforms.
Instead of betting big on battery‑electric architectures in the 2000s and 2010s, Japan doubled down on hybrids and hydrogen fuel‑cell cars, technologies that looked innovative but in practice extended the life of existing engines, suppliers and fuel infrastructure rather than disrupting them.
China, by contrast, has treated EVs and batteries as core strategic industries. It has thrown policy, subsidies, infrastructure and finance at the problem, and crucially, it has backed domestic firms that were willing to experiment, scale fast and accept failure along the way. China now dominates the EV supply chain, with Chinese firms such as CATL and BYD supplying the majority of the world’s EV batteries and China itself accounting for the largest share of global BEV and PHEV production and export.
The outcome is visible in export numbers and in the streets of Europe, Southeast Asia, the Middle East and Latin America (Figure 2). Chinese manufacturers now dominate global production of battery-electric and plug-in hybrid vehicles, while also turning out enormous volumes of conventional cars. Japan’s export lines, in contrast, have been flat or declining for years in all segments.
China is racing ahead in the production of battery-electric and plug-in hybrid vehicles.
This asymmetry matters. For Japan, autos have been one of the few big, tradable, high-productivity sectors anchoring its position in the world economy. Losing ground here is not simply an industrial reshuffle; it is a strategic diminishment. For countries like Australia (Figure 3) and New Zealand, it raises a different question: how long can we remain comfortable as markets where yesterday’s technologies were dumped because we were slow to set standards?
Both countries have spent the last decade debating whether we can “go too fast” on clean cars. The real risk now is being left behind. As more jurisdictions adopt strong efficiency and emissions standards – effectively making electric the default for new sales – automakers will prioritise those markets for their best products. That means China, Europe and parts of North America will see the newest, cheapest and most efficient EVs first, while slower movers wait longer and pay more for second‑tier models.
Laggards get the leftovers: older platforms, ICE, hydrogen showpieces and mild hybrids that cannot be sold elsewhere – and eventually, shrinking support as global supply chains retool around electric. This was predicted by the IPCC a decade ago, and has become even more predictable in the last few years, as successive assessment reports warned that late adopters of zero‑emissions technologies would face higher transition costs, stranded assets and reduced access to cutting‑edge low‑carbon options (see, for example, IPCC AR5 and AR6 mitigation reports).
Honda’s retreat is a warning. A company that now doubts its ability to compete on EVs is, bluntly, a company expressing doubt about its long-term relevance in the car market. If that mindset spreads across Japan Inc, we are watching a gradual exit from technological leadership, not just in vehicles but across clean technologies where similar dynamics apply: batteries, grid equipment, hydrogen for industry processing, and next-generation renewables.
Has Japan “forgotten how to innovate”? The engineering capacity is still there. What has been forgotten is how to take coordinated, empire-scale bets on the right future.
Japan did make a big, centrally backed bet – but it was on hydrogen and eking out extra decades for the combustion engine, with fuel‑cell pilots and hydrogen roadmaps standing in for a true electrification plan. China, at the same time, was using its own empire‑scale machinery to pour capital, policy and infrastructure into batteries, dedicated electric drivetrains and the high‑capacity grids needed to run them.
Empires are built — and rebuilt — on infrastructure, standards and the courage to move early at scale. In clean mobility and related tech, China now looks far more like Rome laying down roads than Japan does. Honda’s EV retreat is just one story, but together with hundreds of others, it points to a new centre of gravity – and a sobering question about who will own these next decades of transport.
About the authors and editor:
Professor Ray Wills is Adjunct Professor at The University of Western Australia, and Managing Director of Future Smart Strategies.
March 25, 2026
360info
By Ray Wills and Peter Newman
Japan’s slow-motion retreat from the car industry’s technological frontier is now impossible to ignore.
Honda’s recent decision to cancel three new battery-electric models for the US market — a massive write-down and refocus on hybrids — is not an isolated corporate mishap; it is a symptom of a deeper national problem. These are the classic hallmarks of late, cautious entry rather than bold experimentation.
A country that once re-engineered the global auto industry now risks watching the next era of mobility – and much of clean technology – being defined elsewhere, most obviously in China.
Data shows that when it comes to vehicle exports, China has surpassed Japan, and is set to define the future of mobility. Wills and Newman, 2025
This is not a story about engineering talent suddenly evaporating. Japan still turns out world-class engineers, batteries, components and robots. The problem is strategic: a system optimised for incremental improvement of yesterday’s technologies – internal combustion engines, conventional hybrids and even hydrogen fuel-cell vehicles – is colliding with a transition that rewards speed, scale and a willingness to cannibalise the old, underestimating how quickly BEV costs would fall and how strongly policy (China, EU) would tilt toward zero‑tailpipe vehicles.
Honda’s EV retreat simply puts that failure in the headlines.
Honda’s logic is revealing. Faced with long term pressure from the government to create Japanese hydrogen transport, recent pressure from the US on tariffs, and increasingly brutal competitive pressure from Chinese EV makers at home and abroad, Honda concluded it could not deliver electric models that offered value for money against the new wave of competitors, and has stayed with internal combustion engine and hybrid drivetrains.
Rather than doubling down on innovation, it has retreated to familiar ground – hybrids and efficient internal combustion engines with a bit of hydrogen as well – accepting a multi-billion-dollar loss in the process. The decision may protect its balance sheet in the short term. In the long term, it amounts to ceding the future profit pool of the industry.
This pattern is not unique to Honda. For more than a decade, Japan’s major carmakers have treated battery-electric vehicles as a niche, betting that hybrids, hydrogen and e-fuels would be “good enough” for most markets. In doing so, they aligned themselves with a policy framework that defined “electrified” vehicles broadly – counting hybrids and even future hydrogen options alongside true plug‑ins – and so dulled the incentive to build globally competitive battery‑electric models.
Long before the 2011 tsunami and Fukushima nuclear disaster, the Japanese government and industry had already anointed hydrogen as the fuel of the future, channeling subsidies and political capital into fuel-cell cars and refuelling stations that neatly preserved existing engine know-how and fossil-fuel supply chains.
Hydrogen became a comforting mirage: zero-emission driving without hard choices about grids, charging, or the role of oil and gas. This made it politically attractive, but it also diverted money, engineering effort and focus away from the lithium-ion batteries that were quietly racing down the cost curve.
Japanese carmakers were aided by governments – including Australia and New Zealand – that were slow to adopt strong fuel-efficiency and emissions standards. In those small but profitable markets, they used their political capital to argue for weaker rules and generous credit for hybrids and future hydrogen options, preserving sales of their existing line-ups.
This is not a story about engineering talent suddenly evaporating. Japan still turns out world-class engineers, batteries, components and robots. The problem is strategic: a system optimised for incremental improvement of yesterday’s technologies – internal combustion engines, conventional hybrids and even hydrogen fuel-cell vehicles – is colliding with a transition that rewards speed, scale and a willingness to cannibalise the old, underestimating how quickly BEV costs would fall and how strongly policy (China, EU) would tilt toward zero‑tailpipe vehicles.
Honda’s EV retreat simply puts that failure in the headlines.
Honda’s logic is revealing. Faced with long term pressure from the government to create Japanese hydrogen transport, recent pressure from the US on tariffs, and increasingly brutal competitive pressure from Chinese EV makers at home and abroad, Honda concluded it could not deliver electric models that offered value for money against the new wave of competitors, and has stayed with internal combustion engine and hybrid drivetrains.
Rather than doubling down on innovation, it has retreated to familiar ground – hybrids and efficient internal combustion engines with a bit of hydrogen as well – accepting a multi-billion-dollar loss in the process. The decision may protect its balance sheet in the short term. In the long term, it amounts to ceding the future profit pool of the industry.
This pattern is not unique to Honda. For more than a decade, Japan’s major carmakers have treated battery-electric vehicles as a niche, betting that hybrids, hydrogen and e-fuels would be “good enough” for most markets. In doing so, they aligned themselves with a policy framework that defined “electrified” vehicles broadly – counting hybrids and even future hydrogen options alongside true plug‑ins – and so dulled the incentive to build globally competitive battery‑electric models.
Long before the 2011 tsunami and Fukushima nuclear disaster, the Japanese government and industry had already anointed hydrogen as the fuel of the future, channeling subsidies and political capital into fuel-cell cars and refuelling stations that neatly preserved existing engine know-how and fossil-fuel supply chains.
Hydrogen became a comforting mirage: zero-emission driving without hard choices about grids, charging, or the role of oil and gas. This made it politically attractive, but it also diverted money, engineering effort and focus away from the lithium-ion batteries that were quietly racing down the cost curve.
Japanese carmakers were aided by governments – including Australia and New Zealand – that were slow to adopt strong fuel-efficiency and emissions standards. In those small but profitable markets, they used their political capital to argue for weaker rules and generous credit for hybrids and future hydrogen options, preserving sales of their existing line-ups.
That bought time, but it did not build capacity.
Meanwhile, China moved fast. Consider how empires and infrastructure work: Rome built 300,000 kilometres of roads, not as a vanity project, but as the backbone of an integrated economic system – standardised, centrally directed, and designed for scale. China (which has form in such things) is doing something similar in modern times with clean technology. It has built the factories, supply chains, standards and industrial policies that let it produce batteries, electric vehicles, solar panels and associated hardware at breathtaking volumes and increasingly competitive quality.
Scale is not a side-effect; it is the strategy. Once you can run a battery plant or an EV platform at volumes far beyond any competitor, learning curves and cost reductions become self-reinforcing. Standards – in charging, batteries, software, manufacturing processes – lock in these advantages and make it easier to export both products and systems. Besides, the ability to coordinate policy, infrastructure and finance around national objectives — whether that is cutting oil imports, dominating key supply chains, or exporting millions of vehicles a year — is a major advantage. So even as China spent the last decade paving battery “roads” across its economy, Japan kept surveying hydrogen aqueducts that never quite flowed.
Japan used to understand this logic. Its post-war rise in autos and electronics was built on long-term industrial strategy, export discipline and a tight loop between government and industry. But the institutions that once drove bold bets have ossified. Corporate governance still rewards consensus and stability over risk. Failure is stigmatised. Cash piles up on balance sheets instead of being deployed into high-risk innovation. That culture made it easy to keep funding incremental ICE, hybrid and hydrogen projects while repeatedly postponing the far larger capital commitments needed for dedicated battery‑electric platforms and software.
The result is what we now see in the car industry: impeccable refinement of the internal combustion engine, world-leading hybrids, flagship hydrogen projects – and hesitation, followed by late, half-hearted entries into battery-electric platforms.
Instead of betting big on battery‑electric architectures in the 2000s and 2010s, Japan doubled down on hybrids and hydrogen fuel‑cell cars, technologies that looked innovative but in practice extended the life of existing engines, suppliers and fuel infrastructure rather than disrupting them.
China, by contrast, has treated EVs and batteries as core strategic industries. It has thrown policy, subsidies, infrastructure and finance at the problem, and crucially, it has backed domestic firms that were willing to experiment, scale fast and accept failure along the way. China now dominates the EV supply chain, with Chinese firms such as CATL and BYD supplying the majority of the world’s EV batteries and China itself accounting for the largest share of global BEV and PHEV production and export.
The outcome is visible in export numbers and in the streets of Europe, Southeast Asia, the Middle East and Latin America (Figure 2). Chinese manufacturers now dominate global production of battery-electric and plug-in hybrid vehicles, while also turning out enormous volumes of conventional cars. Japan’s export lines, in contrast, have been flat or declining for years in all segments.
China is racing ahead in the production of battery-electric and plug-in hybrid vehicles.
This asymmetry matters. For Japan, autos have been one of the few big, tradable, high-productivity sectors anchoring its position in the world economy. Losing ground here is not simply an industrial reshuffle; it is a strategic diminishment. For countries like Australia (Figure 3) and New Zealand, it raises a different question: how long can we remain comfortable as markets where yesterday’s technologies were dumped because we were slow to set standards?
Both countries have spent the last decade debating whether we can “go too fast” on clean cars. The real risk now is being left behind. As more jurisdictions adopt strong efficiency and emissions standards – effectively making electric the default for new sales – automakers will prioritise those markets for their best products. That means China, Europe and parts of North America will see the newest, cheapest and most efficient EVs first, while slower movers wait longer and pay more for second‑tier models.
Laggards get the leftovers: older platforms, ICE, hydrogen showpieces and mild hybrids that cannot be sold elsewhere – and eventually, shrinking support as global supply chains retool around electric. This was predicted by the IPCC a decade ago, and has become even more predictable in the last few years, as successive assessment reports warned that late adopters of zero‑emissions technologies would face higher transition costs, stranded assets and reduced access to cutting‑edge low‑carbon options (see, for example, IPCC AR5 and AR6 mitigation reports).
Honda’s retreat is a warning. A company that now doubts its ability to compete on EVs is, bluntly, a company expressing doubt about its long-term relevance in the car market. If that mindset spreads across Japan Inc, we are watching a gradual exit from technological leadership, not just in vehicles but across clean technologies where similar dynamics apply: batteries, grid equipment, hydrogen for industry processing, and next-generation renewables.
Has Japan “forgotten how to innovate”? The engineering capacity is still there. What has been forgotten is how to take coordinated, empire-scale bets on the right future.
Japan did make a big, centrally backed bet – but it was on hydrogen and eking out extra decades for the combustion engine, with fuel‑cell pilots and hydrogen roadmaps standing in for a true electrification plan. China, at the same time, was using its own empire‑scale machinery to pour capital, policy and infrastructure into batteries, dedicated electric drivetrains and the high‑capacity grids needed to run them.
Empires are built — and rebuilt — on infrastructure, standards and the courage to move early at scale. In clean mobility and related tech, China now looks far more like Rome laying down roads than Japan does. Honda’s EV retreat is just one story, but together with hundreds of others, it points to a new centre of gravity – and a sobering question about who will own these next decades of transport.
About the authors and editor:
Professor Peter Newman AO is John Curtin Distinguished Professor of Sustainability, Curtin University.
Professor Ray Wills is Adjunct Professor at The University of Western Australia, and Managing Director of Future Smart Strategies.
