By Paul Allen in strategic leverage — 11 Nov 2025

Honda’s Real Challenge Is China’s EV System, Not Tariffs or Chip Shortages

Honda faces a mounting competitive threat not primarily from geopolitical tariffs or global semiconductor shortages, but from the rise of Chinese electric vehicle (EV) manufacturers. According to a Reuters report published recently, Honda executives emphasize that the rapid growth and system-level integration of Chinese EV makers constitute the biggest strategic risk for the Japanese automaker in the coming years.

Honda, a legacy automaker making revenue primarily from vehicle sales and manufacturing services, has grappled with supply constraints in chips and parts amid global disruptions since 2021. Yet the company’s leadership increasingly views these as short-term tactical problems, dwarfed by the long-term system-level advantage that Chinese companies are building. The article does not disclose specific internal sales figures or investment spending, but public data shows that Chinese EV firms like BYD, NIO, and XPeng have surged to account for approximately 60% of Asia’s EV sales in 2024, with BYD alone surpassing 1.86 million EV deliveries in the first nine months of 2025.

Chinese EV Makers Leverage Vertical Integration and Software Ecosystems

The threat from Chinese EV manufacturers lies in their systemic control over key parts of the EV value chain, not just in vehicle design or pricing. For instance, BYD integrates battery production in-house, manufacturing over 100 GWh of lithium-ion cells annually, along with vehicle assembly. This reduces cost and supply dependencies that companies like Honda must navigate through multi-tier suppliers. Additionally, Chinese EV firms embed proprietary software ecosystems that control vehicle operation, user interaction, and energy consumption. NIO uses its NIO OS platform to continuously push software updates, enhancing vehicle performance remotely, akin to Tesla’s Over-The-Air (OTA) system, but often at a lower incremental cost due to domestic infrastructure and data accessibility advantages in China.

This vertical integration and software-driven model shifts the competitive constraint from hardware sourcing and manufacturing — which Honda traditionally competes on — to software innovation, user data integration, and supply chain control. The effect is a durable advantage Chinese companies hold: their systems reduce reliance on external chip suppliers, automate cost controls, and enable rapid new feature deployment without physical fleet recalls or upgrades.

Honda’s Legacy Supplier Network Limits Agile Responses

Unlike Chinese EV startups, Honda operates with a legacy supplier network optimized for internal combustion engine vehicles transitioning gradually to EVs. This network relies heavily on external semiconductor suppliers and does not provide the same end-to-end control over batteries or software platforms. The reported global chip shortages of 2021-2023 exposed this vulnerability, forcing Honda to slow production in some regions. Meanwhile, Chinese firms leverage local chip manufacturers prioritized by government investment and policy support.

Honda’s attempt to supplement its supply chain resilience via partnerships or chip stockpiling improves tactical availability but does not solve the strategic problem: the shifted industry constraint. The constraint moved from intermittent shortages to owning and controlling critical software and battery production systems. Honda’s slower ability to iterate on vehicle software remotely and integrate user feedback compounds the problem, impacting customer retention and lifecycle monetization.

Not Tariffs or Chips, But Systemic Ecosystem Control Redefines Competition

Markets often fixate on tariffs or chip bottlenecks as the main disadvantages for global automakers. However, the Reuters article surfaces what automotive operators need to internalize: Honda’s real structural risk is losing control over the differentiated system designs that Chinese firms create through ownership of batteries, proprietary software, and data-enabled customer engagement.

This system design includes:

Battery manufacturing at scale that drops cost per kWh by 20-30% compared to outsourced suppliers.
OTA software updates that improve vehicle functionality post-sale without incurring recall costs affecting hundreds of thousands of units.
Integration with localized digital ecosystems (e.g., payments, navigation, energy management) that increase customer lock-in and lifetime value.

This structural ownership shifts the industry constraint away from physical production towards *system-level control over value chain and user experience.* Honda’s existing supply chain and software development processes were never designed to compete here, meaning any speed or cost improvement they can squeeze pales in comparison to the advantage unlocked by Chinese competitors.

Alternatives Honda Didn’t Choose: Build vs. Buy vs. Partner

Honda has pursued partnerships with suppliers and tech firms globally, but without fully verticalizing battery or software control. For example, it uses Panasonic batteries but lacks the scale or direct control that BYD leverages by owning battery cell production. Honda also lags Tesla in OTA capabilities. Instead of doubling down on fully integrated ownership, Honda’s moves aim to maintain modular supplier relationships while incrementally upgrading software platforms — a hybrid path that sacrifices speed of iteration and scale benefits.

By contrast, Chinese EV makers adopted a simultaneously aggressive build and integrate strategy early, supported by Chinese government investment in rare earth minerals, battery tech, and local semiconductor production. This multi-pronged system approach creates compounding advantages:

Downward cost pressure: Vertical battery production cuts per-unit costs hard to replicate without billion-dollar investments and years.
Rapid feature deployment: OTA updates and data-driven design boost customer satisfaction and lock-in.
Policy alignment: Favorable local regulation lowers risk and enables aggressive innovation.

Honda’s current approach risks being outpaced by these systemic advantages long before tariffs or chip availability recover to normalize.

Implications for Operators Navigating Supply Chain and Innovation Constraints

Honda’s example crystallizes a key strategic insight for operators: the critical constraint in EV competition is no longer raw materials or tariffs. Instead, it is owning the software- and supply chain-driven system that controls cost, innovation velocity, and customer ecosystem integration. Operators clinging to legacy supplier networks and external chip dependencies face a growing structural disadvantage.

Companies must identify whether their core constraint resides in external factors (like chip supply) or internal system control (like battery ownership and software platforms). Honda’s challenge reveals that the most powerful leverage mechanisms come from shifting control over fundamental value chain nodes and embedding recurring revenue drivers beyond initial hardware sales.

This dynamic echoes lessons explored in how software companies redefine constraints and how to automate business processes for maximum leverage. Without embracing integrated systems combining hardware, software, and data, automotive incumbents risk being permanently outflanked by ecosystem owners that can innovate faster and manufacture cheaper.

As Honda faces systemic challenges in manufacturing efficiency and supply chain integration, manufacturers looking to optimize production and inventory management can benefit greatly from platforms like MrPeasy. Whether transitioning to EV components or scaling operations, effective manufacturing ERP software offers the leverage needed to stay competitive in a rapidly evolving industry. Learn more about MrPeasy →

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Frequently Asked Questions

What is the main competitive threat to traditional automakers like Honda in the EV market?

The primary competitive threat to traditional automakers like Honda is not geopolitical tariffs or chip shortages but the rise of Chinese EV manufacturers who leverage vertical integration and proprietary software ecosystems, giving them systemic control over the EV value chain.

How do Chinese EV makers like BYD reduce production costs?

Chinese EV makers like BYD reduce production costs by vertically integrating battery production, manufacturing over 100 GWh of lithium-ion cells annually, which cuts battery cost per kWh by 20-30% compared to outsourced suppliers.

What advantages do OTA software updates provide to Chinese EV manufacturers?

OTA (Over-The-Air) software updates allow Chinese EV manufacturers to remotely improve vehicle functionality post-sale without costly recalls; for example, NIO uses its NIO OS platform to continuously push updates at lower incremental costs due to robust domestic infrastructure.

Why does Honda face strategic challenges despite tackling chip shortages?

Honda's strategic challenges stem from its legacy supplier network reliant on external semiconductor suppliers and limited vertical integration in batteries and software, hindering its speed of innovation and control compared to Chinese EV firms with end-to-end system control.

How does system-level control redefine competition in the EV industry?

System-level control redefines competition by shifting the critical constraint from hardware production to owning and integrating batteries, proprietary software, and customer data, which drives cost efficiency, innovation velocity, and customer ecosystem lock-in.

What strategic approaches have Chinese EV manufacturers used to gain market advantage?

Chinese EV manufacturers have aggressively built and integrated battery production, software platforms, and local semiconductor supply chains supported by government policies, enabling downward cost pressure and rapid feature deployment impossible to replicate quickly.

What risks does Honda face by not fully integrating battery and software control?

Honda risks being permanently outpaced by Chinese competitors due to slower software iteration, less supply chain control, and missed scale benefits, undermining customer retention and lifecycle revenue beyond hardware sales.

Chinese EV firms such as BYD, NIO, and XPeng account for approximately 60% of Asia's EV sales in 2024, with BYD alone delivering over 1.86 million EVs in the first nine months of 2025.