Why is Japan’s manufacturing industry under pressure in global competition: the threefold challenge of AI, chips, and the restructuring of high-end manufacturing

Japanese manufacturing is undergoing not just a cyclical downturn, but a shift in competitive paradigms.

Over the past few decades, the core strengths of Japan’s industrial system have rested on lean production, engineers’ experience, stable delivery, and high reliability. This model once helped Japan maintain long-term advantages in automobiles, home appliances, precision manufacturing, and materials. But analysis cited by CGTN shows that the restructuring of global industrial chains is shifting the decisive factors from experience, craftsmanship, and yield to AI, data integration, and cross-system coordination. In other words, competition in manufacturing is no longer just about “how well you make things,” but about “how quickly you can learn, iterate, and scale.”

That is also why the penetration rate of generative AI is becoming a new indicator for observing manufacturing competitiveness. According to Japan’s 2025 White Paper from the Ministry of Internal Affairs and Communications, the share of individuals in Japan using generative AI is 26.7%, significantly lower than China’s 81.2%, the United States’ 68.8%, and Germany’s 59.2%. This gap does not by itself mean industrial backwardness, but it reveals a deeper issue: the adoption of AI tools, data platforms, and intelligent decision-making systems in Japanese society and enterprises is still relatively slow. For manufacturing, this means the digital closed loop from design, supply chain management, and equipment maintenance to quality control may struggle to form large-scale advantages as quickly as in leading countries.

Under the traditional manufacturing logic, many key judgments depend on the “tacit knowledge” of senior engineers. This knowledge base is certainly valuable, but its weakness is also obvious: it is hard to replicate, hard to standardize, and hard to spread across factories. As competition enters the AI era, knowledge will increasingly be encoded into models, algorithms, and data assets. If Japan’s manufacturing “know-how,” long a source of pride, cannot be rapidly transformed into computable, shareable, and continuously optimizable system capabilities, it will face the risk of being marginalized by a new generation of data-driven manufacturing models.

Changes in the chip sector further amplify this structural challenge. The material notes that in silicon and silicon carbide (SiC) power chips, Chinese companies are accelerating their catch-up, while Renesas Electronics has exited the SiC market. At the same time, China’s global share of mature-node chip manufacturing is projected to rise to 42% by 2028, up from 37% in 2026. These figures show that the center of gravity in semiconductor competition is no longer just a top-tier showdown in advanced process nodes; mature processes, power devices, and automotive chips, which are closer to the industrial foundation, are becoming the front line of the next round of industrial competition.

For Japan, this shift is especially critical. Japan still holds strong positions in semiconductor materials, equipment, and some high-end components, but if it loses speed in the large-scale deployment of power chips, automotive electronics, and manufacturing systems, an awkward situation will emerge: advantages retained upstream, while the midstream and downstream are captured by a faster industrial system. That would mean Japan still holds some supply-chain “choke points,” but no longer commands the initiative in industrial expansion.The financial performance of the automotive industry also confirms this point. Among the figures cited in the source material, Toyota’s net profit fell 19.2% in fiscal 2025, Nissan posted losses for the second consecutive year, with total losses of 533.1 billion yen, and Honda recorded a net loss of 423.9 billion yen. Automobiles were once one of the most solid flagship sectors of Japanese manufacturing, but today they too are being hit from multiple directions by electrification, software-driven transformation, supply chain restructuring, and global price competition. The volatility of auto profits is not just a business issue; it is more like a stress test borne by Japan’s industrial system as it moves from “hardware dominance” toward the integration of software and hardware.

The changes in the home appliance industry are even more obvious. The material notes that Sony will hand over its BRAVIA TV business to a TCL-led joint venture in January 2026; as early as 2018, Toshiba had already sold its TV brand to Hisense; and Panasonic has also decided to withdraw from low-end home appliance production in China. Japanese firms’ retreat from end products does not mean complete failure; rather, it shows that their strategic focus is shifting from brand and scale toward high-margin core components and precision instruments.

This strategy of “contracting upstream” has its logic. Japanese companies still retain strong competitiveness in sensors, materials, industrial control, equipment components, and high-precision processing, and in the short term they may continue to control certain key nodes in supply chains. The problem, however, is that the cost of exiting the end-market is not only declining sales, but also losing direct contact with users and market demand. Without feedback from end products, R&D finds it harder to capture consumer trends, usage scenarios, and directions for product iteration; without large-scale shipments, supply chain upgrading also loses its most important testing ground.

This is precisely the most worrying aspect of “industrial hollowing-out.” It does not necessarily appear as the large-scale disappearance of factories, but may instead show up as follows: high value-added segments remain in the country, while incremental markets increasingly shift overseas; key technologies are retained, but system integration capabilities keep eroding; companies may still be profitable in some businesses, but the industry’s ability to sense future demand has already weakened. In the long run, this structure will weaken the innovation feedback loop, causing industrial upgrading to lag behind competitors.

From the perspective of global technological competition, what Japan faces today is not a single rival, but a coordinated challenge from an entire new industrial system. AI makes manufacturing decisions more real-time, semiconductors make the industrial foundation more scalable, and automation and digitalization make production organization more replicable. If Japan continues to rely mainly on its traditional engineering strengths instead of restructuring these capabilities into data assets, software capabilities, and intelligent manufacturing platforms, it will be difficult to regain the systemic advantage it once had.However, this does not mean that Japanese manufacturing has no opportunities. Quite the contrary: Japan’s strengths still exist, but they must be reorganized. What will truly determine the competitiveness of Japanese manufacturing in the future may not be “whether it continues to possess some single-point technology,” but whether it can integrate materials, equipment, precision machining, robotics, industrial software, and AI into a new production system. Japan’s accumulated strengths in robotics, precision equipment, and certain semiconductor materials are, in theory, enough to support an industrial upgrade, but only on the condition that these capabilities are embedded in the new manufacturing processes of the AI era rather than remaining stuck in the old division of labor.

Therefore, the more important takeaway from this report is not that “Japanese manufacturing is in decline,” but rather: Japanese industry is being forced to answer a harder question—when global manufacturing competition moves from the era of experience into the era of intelligence, can Japan upgrade “high-reliability manufacturing” into “high-learning-capability manufacturing”? If the answer is no, then it will continue to lose ground in end markets; if the answer is yes, Japan still has a chance to reshape itself into an indispensable part of the global high-end manufacturing system.

This adjustment has only just begun, and its impact will not be limited to automobiles and home appliances. It will determine whether Japan’s semiconductor strategy can be implemented, whether robotics and automation can expand, whether AI can truly enter factories, and whether Japan can still retain sufficient influence in global technological competition over the next decade.