Dragoman Digest

Japan’s automakers unite on chip strategy to counter Chinese rivals

Chip consortium is sign of growing and once unthinkable collaboration between rival automakers to close cost and technology gap

Japan’s automakers have formed a chip consortium – ASRA – to counter Chinese dominance in smart vehicle technology. The alliance, which includes Toyota, Nissan, and Honda, is developing standardised “chiplet” semiconductor components for vehicles. These modular chips can be combined in different configurations, enabling faster development cycles and reduced manufacturing cost. The initiative targets 2029 delivery and is backed by 41 billion yen (US$286 million) in government funding.

Japan’s chiplet strategy is part of a broader effort to confront its weak software capabilities. In Gartner’s 2024 Digital Automaker Index, Toyota ranked 20th among 22 companies, with other Japanese manufacturers similarly lagging. Japanese firms remain at least 2-3 years behind Chinese peers in developing so-called software-defined vehicles. Japanese automakers have traditionally adopted a “hardware first” development method prioritising vehicle mechanics before considering software and the relevant semiconductors. This is the inverse of Chinese manufacturers’ software-centric approach where digital features and capabilities take precedence. European automakers face similar challenges but have instead responded by forming direct partnerships with Chinese firms for technology access. Volkswagen’s US$700 million joint software investment with Chinese EV maker Xpeng marks a considerable role reversal given VW’s long history of technology transfer to Chinese partners.

ASRA also addresses specific semiconductor supply challenges facing the automotive industry. With vehicle applications representing just 12.7 percent of global chip demand versus 32.9 percent for data processing, automakers have diminishing influence with semiconductor manufacturers. Standardisation thus creates economies of scale for Japanese firms and gives them more bargaining power with chip industry leaders like TSMC. ASRA follows the earlier attempt at deeper integration through the failed Honda-Nissan-Mitsubishi merger. Chinese manufacturers are not sitting still, demonstrating remarkable innovation prowess in other technologies, particularly batteries. CATL’s new cells offer a 520km range from just five minutes of charging, surpassing Chinese rival BYD’s feat from only a month earlier that provided 470km in the same timeframe.

Chinese EV companies grapple with fragmented Southeast Asian market

Low rates of car ownership and local protectionism impede progress

Facing insurmountable barriers in the US and tariffs in the EU and India, Chinese electric vehicle (EV) manufacturers have pivoted towards Southeast Asia. On face value, ASEAN presents itself as a highly promising target market, home to over 600 million people and a rising middle class. Chinese automakers who have invested in Southeast Asia include BYD, which has opened (or made plans to open) factories in Thailand, Cambodia and Indonesia – whilst exploring options for an auto plant in Vietnam. However, Chinese automakers have encountered early reality checks in what remains a highly heterogenous region. Despite all major ASEAN countries having local automotive industries, car penetration continues to be remarkably low. There are just five million cars on the road compared to some 250 million motorcycles – a product of dense urban environments and still limited disposable incomes.

Across the region, EV adoption remains sluggish. Indonesia saw only 43,188 EV sales in 2024 against a backdrop of 860,000 total passenger car sales. In Thailand, EV sales dropped 9.3 percent in 2024 and nearly eight percent in January 2025, despite sustained government subsidies. Chinese companies who piled into Thailand had hoped to use it as a regional export hub. Now, they are being forced to contend with trade barriers in other ASEAN countries pursuing their own domestic EV industries.

Vietnam provides several starkexamples of the types of trade barriers presented by local automotive aspirations. More than 87,000 of the 91,500 EVs sold in Vietnam last year were models from local automobile company VinFast. Concurrently, Chinese EV giant BYD is struggling to fill its showrooms. VinFast benefits from an expanding network of proprietary charging stations which are incompatible – and likely intentionally so – with Chinese EVs. Parochial Vietnamese consumers have also demurred at the prospect of buying cars made in their giant northern neighbour. By comparison to Asian markets, when it comes to scale and market maturity, there is no substitute for the US and EU.

AI application startups thrive while foundation model ecosystem faces geopolitical and competitive headwinds

The flexibility to choose between foundational models has helped start-ups navigate a highly fluid field

AI startups building practical applications on top of large language models (LLMs) are experiencing unprecedented growth. LLMs are powerful AI systems that generate text, code, and information based on vast amounts of training data. Primarily US-based startups developing AI-based tools for coding (Cursor, Codeium), document analysis (Hebbia), and customer service (Sierra) attracted a record US$8.2 billion in funding during 2024 – a 110 percent increase year-over-year.

This growth contrasts with the challenges faced elsewhere in the AI stack. At the hardware level, US export controls have forced Nvidia to take an anticipated US$5.5 billion earnings hit after President Trump restricted sales of its H20 chips to Chinese customers. Chinese alternatives like Huawei’s AI chip systems cost nearly three times their Nvidia equivalents, reflecting the premium paid when cut off from Western technology. Meanwhile, competition among foundation model providers like OpenAI, Anthropic, DeepSeek, and Baidu has intensified. Despite these headwinds, capital continues to flow to leading companies. Last year, xAI raised US$6 billion (exceeding French competitor Mistral’s entire valuation) and is now seeking a further US$20 billion. Rivals OpenAI and Anthropic have both closed funding rounds in the tens of billions.

The application layer’s resilience stems from its inherent adaptability. As Sierra co-founder Bret Taylor notes, “We have changed the models that we use at least five or six times in our short history”. This flexibility has fuelled growing valuations, with Perplexity AI’s valuation set to double to US$18 billion. Rather than being hindered by foundation model competition, application companies benefit from the resulting price and performance improvement. However, investors worry these startups may ultimately become obsolete if model providers integrate comparable features directly. The application layer’s freedom from direct geopolitical pressure may also prove temporary as regulators expand oversight beyond hardware.

Foreign and domestic firms face mounting retrospective tax pressures in India

Aggressive taxation undermines India’s business-friendly image and “China+1” aspirations

Retrospective tax and customs audit demands are proving to be a major irritant for foreign businesses operating in India. Across February and March this year, companies such as Volkswagen, Kia, and Samsung have been issued tax notices totalling more than US$2 billion. Volkswagen is specifically embroiled in a US$1.4 billion legal battle concerning its classification of car parts over a 12-year period. Indian customs authorities have accused Volkswagen of misclassifying components as individual parts – rather than knock-down kits – to avoid higher duties. Samsung is facing US$600 million in backdated levies and fines on imported telecoms equipment. Local companies are not immune, with companies including IndiGo and Tata Consumer Products facing fines. Businesspeople have argued that India’s tax laws are opaque, poorly written and subject to multiple interpretations, whilst also accusing New Delhi as using the investigations to plug India’s growing budget deficit.

Some in the business community have argued that the actions of India’s tax and customs authorities are inimical to Prime Minister Narendra Modi's stated objective of improving the ease of doing business in India. India’s ability to position itself as a viable alternative to China through “China +1 strategies”, also evidently requires companies to be able to import components not readily available in India. New Delhi has a history of levying retrospective taxes, such as the US$2.9 billion claim contested by Vodafone in 2012, which Vodafone eventually won through international arbitration. Indian authorities have nonetheless shown some receptivity to business complaints. Indian Finance Minister, Nirmala Sitharaman, has pushed for reforms to cut half of the 500,000-word 1961 income tax manual. New Delhi has also pushed to finalise outstanding customs audits within the year. Some foreign investors remembering Modi’s promise to make India’s tax regime more predictable in 2021, may be once bitten twice shy.

LG Energy Solutions backs out of major Indonesia battery supply chain deal

Nickel demand slowing as EV manufacturers preference lithium iron phosphate (LFP) batteries

On April 21, LG Energy Solutions withdrew from a US$8.42 billion project in Indonesia which would have established an end-to-end domestic EV battery supply chain. LG and Hyundai’s battery plant, which was inaugurated last year in West Java, will not be impacted. LG’s cancelled project was a critical pillar in Indonesia’s ambitions to achieve self-sufficiency across the EV and battery supply chain. The project would have involved mining, raw materials processing, cathode production and an assembly plant. Indonesia started this push in 2020 with its decision to ban unprocessed nickel exports. This ban stimulated the growth of numerous nickel smelters, predominantly backed by Chinese companies.

Indonesia remains hopeful that China’s Huayou Cobalt will step in as the project’s new leader, but broader questions around the viability of Indonesia’s ambitions remain. One of the reasons that caused LG to exit its project was Indonesia’s decision in December 2023 to make tariff generous exemptions for predominately Chinese automakers promising to invest in Indonesian production plants. Hyundai, which has begun manufacturing its IQNIQ 5 model in Indonesia and would have served as LG’s principal customer, was left blindsided by this decision. Another, potentially more serious problem is the EV sector’s shift towards alternative battery chemistries, namely LFP batteries popularised by BYD and other Chinese companies. These cheaper batteries do not contain nickel and are supplanting Nickel Manganese Cobalt (NMC) batteries. Consumers are increasingly seeking lower-priced EVs, and these models invariably utilise LFP batteries. Where this leaves Indonesia’s EV dream is highly uncertain.