Outlook for the automotive supplier industry

The Japanese automotive industry is undergoing a once-in-a-century transformation driven by electrification, softwarisation and tighter environmental regulations. In particular, electrification represents a major turning point, with a transition expected from conventional internal combustion engine vehicles to hybrid electric vehicles (HEVs) and plug-in hybrid electric vehicles (PHEVs), followed by a full-scale shift to battery electric vehicles (BEVs), which is expected to take place in due course. As a result, the dynamics between automakers (OEMs) and suppliers, as well as the structure of the required value chain, are expected to change significantly. At the same time, the global business environment remains unstable due to US trade policies and the emergence of geopolitical risks, and global production volumes of Japanese OEMs have been declining since peaking in 2019. Under these challenging conditions, Japanese suppliers are being compelled to reassess their traditional business models and take measures to maintain and enhance their competitiveness (Figure 1).

Figure 1: Evolution of challenges in the automotive industry

This report analyses the challenges facing the automotive supplier industry* and provides recommendations for future actions, based on a survey of Japanese automotive suppliers (number of respondents: 157 companies) and the latest industry trends. The survey identifies gaps between issues that suppliers recognise as important and their current actions across three timeframes: short term (the next 1–2 years), medium term (the next 3–5 years) and long term (the next 10–15 years). It also examines perceptions of alliances (inter-company collaboration) and the factors hindering them, and considers specific measures that suppliers could take to address these challenges. In addition, the report focuses on how suppliers’ strategies and approaches to alliances differ across technology domains, including internal combustion engine (ICE) vehicles, battery electric vehicles (BEVs) and software-defined vehicles (SDVs).

^{* In this report, the automotive supplier industry includes (i) companies that develop, manufacture and supply various components, modules and systems to original equipment manufacturers (OEMs) for use in automobiles, and (ii) engineering service providers that support product development through activities such as design, analysis and prototyping of vehicles and components.}

Suppliers recognise a wide range of issues as important, from short-term to long-term challenges, but significant gaps were observed in the actions they are currently taking. For example, the largest gaps were identified in ‘speed of response to technological innovation’ for short-term challenges, ‘ensuring the quality and quantity of the workforce’ for medium-term challenges and ‘investment in innovative technologies’ for long-term challenges (Figure 2).

Figure 2: Items with the largest gaps between issue recognition and current actions

Amid these challenges, alliances are attracting attention as an important strategic lever, with approximately 80% of suppliers indicating that alliances are necessary to address future challenges. However, about 76% perceive the current industry environment as not conducive to alliances. The survey also highlights key barriers to collaboration, including a lack of talent to drive M&A and partnerships (43%) and barriers arising from keiretsu (corporate group structures) (32%) (Figure 3).

Figure 3: Alliances recognised as necessary but not considered easy to implement in the current environment

Based on an analysis of the gaps in key challenges identified through the survey and the current state of alliances in the industry, this report presents three key actions and additional considerations by PwC Advisory LLC. These actions are structured by linking the key challenges identified in the survey, namely adaptation to technological change, human resources and organisation, and global readiness, with corresponding alliance strategies (Figure 4).

Figure 4: Recommendations from PwC Advisory LLC

Through these actions, suppliers are expected to complement each other’s capabilities, particularly in areas such as technology and talent, which tend to be insufficient on their own, and to achieve innovation and business expansion that would be difficult to realise independently. In particular, by sharing risks and investment burdens across companies and mutually complementing each other’s know-how, suppliers can strengthen their competitiveness to navigate this period of transformation while pursuing economies of scale.

For Japanese automotive suppliers to achieve sustainable growth, it is essential for both management and employees to share a commitment to transformation and translate it into concrete action. With the rapid advancement of AI and environmental initiatives, as well as the rise of Chinese competitors, the industry has entered an era in which competitiveness can no longer be maintained by simply continuing conventional approaches.

The three recommendations in this report represent the fundamental steps for putting transformation into action. By complementing internal gaps in expertise and resources through alliances and M&A, suppliers can respond effectively to the pace of change.

Now is the time to move beyond traditional frameworks and evolve into mobility industry solution providers. The PwC Advisory LLC Auto Sector team hopes that this report will support your transformation efforts and contribute to the development of the industry as a whole and the enhancement of corporate value.

Survey period: from 22 October to 28 November 2025

Number of respondents: 157 companies

Methodology: Online survey

Eligibility criteria:

• Automotive suppliers based in Japan
• Companies with annual revenue of JPY3.0bn or above