Circularity and the Automotive Sector Part 1

The Circular Economy is not just an environmental regulation, but is being promoted in many countries as a policy to change the very structure of the economy. How is Japan faring in this context? How does it look to those who, like investors, keep a close eye on economic trends and changes?

 In 'Talk Circular x Economy', Mr. Andre-Hottinguer, who has been involved in investments in global companies for more than 10 years and has travelled back and forth between Europe and Japan, gives his unique perspective on these topics, drawing on his background as an investor and as a foreigner.  Let's enjoy his 'way of seeing' and explore the 'Circularity x Economy

After examining the water sector in previous column, it is time to turn our attention to a sector that is not only central to Japan’s economy but also plays a pivotal role in advancing global circularity: the automotive industry.

To start, it is important to take a step back and consider mobility as a whole, since mobility patterns have a direct influence on circularity outcomes. Public transportation almost always results in lower CO2 emissions compared to private car usage. In this respect, Japan stands apart from most European countries due to its highly efficient and reliable public transport system, particularly its rail network. Nine of the world’s ten busiest train stations are located in Japan. This infrastructure enables high rates of public transit use and keeps transportation-related greenhouse gas emissions relatively low. While car ownership rates in Japan are similar to those in the United States, Tokyo’s car ownership is only half that of the national average, which means that the city boasts the lowest car usage among developed cities worldwide.

A major theme in circular economy discussions for the automotive industry is decarbonization. Over the past two decades, the sector has shifted from a reliance on internal combustion engines (ICE) to a variety of technologies. Some, like hybrid electric vehicles (HEVs) and electric vehicles (EVs), have already achieved significant scale, while others, such as hydrogen and fuel cell vehicles, remain in earlier stages of adoption. HEVs have arguably contributed most to decarbonization so far, given their widespread adoption and longevity on the roads, even as the rapid growth in battery electric vehicle (BEV) sales becomes a significant factor as well. HEVs are often associated with Toyota, for good reasons with the resounding success of the Prius, and now almost all major manufacturers offer some form of hybrid vehicle. Toyota estimates that its 27 million electrified vehicles sold since the Prius debuted in 1997 have prevented more than 176 million tons of CO2 emissions. HEVs are often viewed as a transitional technology, but given the long product cycles in the automotive industry, this transition may span several decades. Their flexibility and immediate compatibility with existing refueling infrastructure make them particularly practical.

While Toyota was instrumental in the rise of HEVs, Tesla is often seen as the pioneer in BEVs. However, the most significant recent development has been China’s entry into BEV manufacturing. The country has become the world’s EV manufacturing hub, accounting for over 70% of global production according to the International Energy Agency. At one point, China even had hundreds of BEV manufacturers but fierce competition and low margins have reduced this number to around 100. There are now more than 31 million new energy vehicles (NEVs) in use in China, and in 2024, nearly 13 million NEVs were produced and sold, representing over 40% of the market. A critical milestone for BEVs will be when average battery prices approach approximately US$80/kWh, a threshold at which BEVs could reach cost parity with gasoline vehicles even without subsidies.

Nevertheless, the decarbonization impact of EVs depends heavily on the source of electricity used. While power plants are generally more efficient than car engines, achieving true circularity will require EVs to be powered increasingly by renewable or circular energy sources.

As we conclude the first part of this column, which focused on decarbonization efforts in the automotive sector, the next installment will delve into how circularity extends beyond emissions. Part two will explore the critical role of battery recycling, the full lifecycle of vehicles, and the innovative production and business models shaping the future of mobility.

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