BYD has breached the outer defenses of Japanese automakers, but competing in the middle and inner circles will be tougher and more critical.
On January 11, 2023, a BYD model at an auto expo in Greater Noida, India. Photo by AFP
Text by Liu Ding, Gu Lingyu, Liu Sang, Lan Jiangfeng from Caijing, edited by Yin Lu and Mark.
BYD, which aggressively expanded overseas in the second half of 2022, faced headwinds in 2023.
In March, Japanese media reported that BYD's bus components contained hexavalent chromium, violating Japan Automobile Manufacturers Association standards.
In April, UK media reported that BYD cars might have security risks such as monitoring owner behavior.
In June, unidentified individuals splashed red paint on BYD's Hong Kong stores, and one store was rammed by a vehicle. Hong Kong police arrested eight people; four were charged with criminal damage, three were released on bail pending investigation, and one remained in custody.
In June, Toyota led Japanese automakers in a collective boycott of pure electric vehicles (EVs) in dealer channels, training staff to emphasize EV disadvantages.
In June, GAC Honda posted a poster in a 4S store reading 'Autonomous brand—hands-free,' which netizens interpreted as belittling Chinese brands.
In June, Bloomberg reported that the EU Commission's trade defense unit, led by Denis Redonnet, was assessing possible anti-dumping and anti-subsidy investigations into new energy vehicles.
These incidents reflect how Chinese automakers, led by BYD, are reshaping the global auto market.
In 2022, China became the second-largest car exporter after Japan. In Q1 2023, China surpassed Japan to become the top exporter, and is expected to maintain the lead for the year.
What challenges does BYD face? Can it weather the storm?
BYD's Overseas Expansion Hits Japanese Automakers Hardest
BYD has shown remarkable efficiency in expanding its overseas passenger car market.
'The revolution will be over in three to five years. Even if exhausted, I must personally lead the battle,' said BYD Chairman Wang Chuanfu at a shareholder meeting in June 2023, noting that the founding team is on the front lines.
Before 2022, BYD had photovoltaic, electric bus/truck, and lithium battery operations overseas but had not entered passenger cars. This was due to limited capacity and reliance on sales channels, branding, and overseas production that BYD's existing overseas network couldn't support.
But from 2021 to 2022, the situation changed dramatically. With the pandemic impacting overseas automakers, rising competitiveness of Chinese cars, and the new four automotive trends, China's car exports surged by over a million units annually starting 2021. As the NEV market grew, traditional auto empires began to crack, offering unprecedented opportunities for Chinese automakers.
In 2022, Great Wall Motors' overseas profit share reached 27% and sales share 16%; Geely's overseas sales share hit 14%. However, BYD, the standout performer in China, had virtually no export activity until the first half of 2022.
In August 2022, BYD began its push. Overseas business teams flew worldwide, holding brand launches in Thailand, Japan, Norway, Israel, and Australia, announcing entry into local passenger car markets. From September to December, BYD announced vehicle rollout plans for Europe, India, Mexico, and Brazil.
In November 2022, BYD Vice President and North America President Stella Li held a press conference in São Paulo, Brazil, marking the initial completion of BYD's global market layout.
BYD's major overseas markets include Southeast Asia, the Middle East, South America, Australia, and Europe. Current overseas sales are concentrated in Israel, Australia, Thailand, and Europe, with a strategic focus on Japan. These destinations heavily overlap with Japanese automakers' overseas deployments.
European automakers' overseas deployments are concentrated in the US, China, and Ukraine, with a limited presence in Southeast Asia. US automakers focus on Europe and China; Korean automakers target North America, Europe, Oceania, and the Middle East—each somewhat different from Japan's deployments.
Only Chinese automakers' overseas market layouts closely coincide with Japanese automakers'. Chinese NEVs' strong competitiveness is causing significant trouble for Japanese automakers.
China, the US, and Europe are all pushing NEV adoption, and their domestic automakers have strong NEV product lines, with Chinese automakers being the biggest beneficiaries of the NEV wave.
Japanese Auto Empire: Outer, Middle, and Inner Circles
Japan currently produces about 8 million cars annually, sells 4 million domestically, and exports the other half. In Q1 2023, China surpassed Japan in car exports (99.4 million vs. 95.4 million), ending Japan's reign as the top exporter.
But Japan's true automotive might lies overseas: Japanese automakers produce over 16 million vehicles abroad annually, equivalent to two Japan's domestic output. As of 2021, Japanese automakers had 179 overseas vehicle and parts bases.
Japan also leads in auto export logistics, with about 40% of global roll-on/roll-off ship capacity, ranking first.
Behind Japanese automakers stand Japanese trading companies (sogo shosha), providing global logistics, sales channels, intelligence networks, and local political and business relations. The five major sogo shosha are Mitsubishi Corporation, Itochu, Mitsui & Co., Sumitomo Corporation, and Marubeni Corporation.
These trading companies have global branches and personnel, deeply cultivating local markets to help Japanese products find sales abroad.
'Due to historical and cultural ties, sogo shosha and manufacturers have long-term exclusive partnerships with high loyalty,' said Tōyama Shinichi of Sumitomo Corporation, who spent 20 years in an Asian country, often traveling with Japanese staff to visit clients and expand sales.
BYD's authorized dealer in Japan, Sojitz Corporation, is a 160-year-old trading company formed by the merger of Nichimen and Nissho Iwai. It handles assembly, retail, and wholesale of cars in Asia, Latin America, the US, and Japan, including selling Subaru in Ukraine and operating Geely's 4S stores in the Philippines.
On the other hand, trading companies accumulate local political and business resources to facilitate Japanese firms' overseas investment and operations.
Itochu was the first Japanese trading company designated as friendly by China, later playing a positive role in Japan-China relations. In 1964, it invited high school students from eight Southeast Asian countries and 16 newspaper reporters to the Tokyo Olympics. In 1971, it brokered a comprehensive cooperation agreement between Isuzu Motors and General Motors.
Since the oil crisis of the 1970s, Japanese automakers, aided by the global sogo shosha network, have built three concentric circles of influence, forming a vast automotive empire.
The outer circle includes Europe, the US, South America, the Middle East, Australia, and China, where Japanese cars have high market share and good government relations but face strong local brands and intense competition.
The middle circle comprises Southeast Asia and India, where Japanese cars hold a monopoly with deep political and business ties, even influencing local auto policies. In 2020, the new chairman of the Indian Automotive Industry Association was Kenichi Takigawa, CEO of Suzuki Motor's Indian subsidiary. In Indonesia, Japanese cars held over 90% retail share from January to April 2023.
The innermost fortress is the Japanese home market, where despite zero import tariffs, foreign cars—European, American, or Chinese—have failed to make inroads; Japanese cars maintain over 90% market share.
However, the empire is shaking. In the outer circle (Americas, China, Europe), Japanese cars are declining in both exports and local production. In the middle circle (Southeast Asia), competition with Chinese cars is intensifying: BYD is building a factory in Thailand, and the Indonesian government has wooed BYD.
In Japan, BYD opened its first 22 stores in early 2023, aiming to expand to 100 by 2025.
Overall, Japanese auto production and sales have declined notably. While Toyota (including Daihatsu and Hino) still sells about 10 million vehicles globally, other Japanese automakers and parts suppliers are struggling.
Outer Circle: Chinese Automakers Gaining Ground
In Europe, the Middle East, Australia, and South America—the outer defensive lines of the Japanese auto empire—Chinese automakers have broken through.
Since 2021, Chen Xiaoli, director of the Israeli Business Alliance Development, has received many inquiries from local auto distributors seeking to represent Chinese EV companies in Israel. 'There's great enthusiasm, willing to invest and build storefronts in large malls to meet Chinese automakers' requirements,' Chen told Caijing. In Israel, the shift from Japanese to Chinese cars is clear.
Israel is BYD's top overseas market. BYD is not only the EV sales leader but ranks high in the overall passenger car market. In the first five months of 2023, BYD sold 8,497 vehicles, ranking fifth after Hyundai (25,000), Kia (18,000), Toyota (14,000), and Mazda (9,000). Chery sold 7,165, followed closely, and Geely sold 4,091, also ranking well.
In the Middle East, interest extends beyond Chinese cars to Chinese automakers themselves. In early June, Saudi Arabia's Ministry of Investment signed a $5.6 billion deal with Human Horizons to introduce HiPhi cars to Saudi Arabia for local assembly and sales. On June 20, Abu Dhabi's sovereign wealth fund invested $1.1 billion in NIO. The Middle East is becoming a key bridgehead for Chinese automakers' overseas expansion.
Among developed markets, Australia, with about 1 million annual sales, is a prime target for BYD and other Chinese automakers. Australia offers fertile ground: high income levels, and many of the top-selling models are outdated, giving Chinese cars a comparative advantage. For example, compact sedans like the Toyota Corolla and Hyundai i30 are a decade behind in design, interior, and performance compared to Chinese ICE and EVs.
However, due to Australia's sparse population, mild hybrids outsell pure EVs, and practical pickup trucks are more popular. Chinese automakers should tailor their models accordingly.
In Brazil, with 1.6 million passenger car sales annually, BYD is committed to building production capacity. Chery already ranks among the top ten. Japanese cars face less resistance here; top sellers are US and European models.
BYD has a decade of experience in Brazil. Its first bus factory was built in São Paulo in 2016, a solar panel factory in 2017, and a battery plant in 2020. In October 2022, BYD signed a letter of intent with Bahia state to build a new auto factory in an industrial park previously occupied by Ford, involving $565 million investment. BYD also partnered with Didi's Brazilian subsidiary to promote EVs.
In Europe, a huge market with 13 million annual sales, strong rule of law, and good business environment, the shift from Japanese to Chinese cars is evident. In recent years, Chinese car exports to Europe have surged, making Europe China's largest export destination.
In June, a Volkswagen insider traveling from Beijing to Germany told Caijing he was surprised by the density of BYD cars in Wolfsburg, a traditional German auto hub. 'Besides Tesla, the only electric cars are BYD. Near Volkswagen's headquarters, about one in ten cars is a BYD.' Meanwhile, Japanese cars are rapidly declining in Europe.
Before the Russia-Ukraine conflict, Japanese car exports to Europe fell from nearly 1 million in 2018 to 590,000 in 2021—a drop of about 400,000. Meanwhile, Chinese-made cars (including Tesla exported from Shanghai) reached 523,000 in 2021, up 350,000 from 2020.
Japanese production in Europe also fell from 1.86 million in 2018 to 1.23 million in 2021. This shift is largely due to electrification: the EU's pure EV penetration reached 12% in 2022, with combined EV, plug-in hybrid, and mild hybrid share at 44%.
Tesla has also succeeded in Europe, capturing 2.6% of new car market share. Traditional automakers like Volkswagen and Citroën are struggling, not just Japanese ones.
The Russia-Ukraine war caused Japanese cars to almost exit the Russian market, replaced by surging Chinese car sales.
For the US market, most Chinese automakers are steering clear. In June 2023, Stella Li said BYD has no plans for the US due to the Inflation Reduction Act. Geely takes a flexible approach, using Volvo and Polestar brands to enter the US.
The US market is critical for Japanese automakers, with 15 production bases, second only to China. Japan exports about 1.3 million vehicles annually to the US, over 30% of its total exports, making the US the largest single export destination, far ahead of second-place Australia (about 350,000).
However, Japanese cars are sliding in the US. In 2022, Toyota, Honda, and Nissan sales in the US fell 9.6%, 32.9%, and 25.4%, respectively. In California, the price of a Tesla Model 3 after subsidies now rivals the Toyota Camry.
South America is where Chinese automakers first ventured, with a solid foundation. BYD's investment in Brazil is a plus, and with Chery's experience to draw on, BYD has a good chance of success.
In the Middle East, Australia, and Europe, Chinese cars are rapidly eroding Japanese market share. BYD is quickly opening up space in these regions, especially in Europe, where Chinese cars are the biggest beneficiaries of electrification. The US.