(Bloomberg) -- In the world of gasoline cars, Japan’s automakers are king. Toyota Motor Corp. has held the title of the world’s No. 1 car company for the past three years, while Honda Motor Co. and Nissan Motor Co. remain global best sellers. 

But as the transition to electric vehicles accelerates, the Japanese giants are facing stiffer competition from EV upstarts like Tesla Inc. and BYD Co. Nowhere is the threat more apparent than in China — the world’s largest auto market and where one in four cars sold last year was electric. EV sales are forecast to climb to 9 million in 2023, reaching market penetration of 35%.  

Honda and Nissan sales in China have been falling for at least two years, while Toyota’s sales last year declined for the first time in a decade. Although chip shortages, Covid lockdowns and the related supply chain snarls played their part, a growing issue is the lack of attractive electric-car offerings from the trio. 

China is providing a window into a future where these Japanese titans — which did more to bring cars to the masses than any other automakers — fall from their pedestal, potentially upending the global auto-making landscape for good. Tesla is the world’s top EV maker by vehicles sold, followed by companies including China’s BYD and Volkswagen AG, according to Bloomberg Intelligence. No Japanese carmaker makes the top 20, leaving them on the sidelines of the auto industry’s fastest-growing sector. 

“If the Japanese automakers continue a conservative and indecisive approach to their EV strategies, it’s only a matter of time before they fail in the global market,” said Yale Zhang, managing director of Shanghai-based consultancy Automotive Foresight.

Read more: World’s Love Affair With Japanese Cars Sours Over EV Blunders

In China, Japanese cars are mostly produced and sold through joint ventures with local partners. Guangzhou Automobile Group Co. has partnerships with Toyota and Honda, while state-backed Dongfeng Motor Group Co. has ventures with Honda and Nissan. 

The ventures have long excelled with good value, reliable gasoline vehicles in the mid-range category — cars priced between 100,000 yuan to 300,000 yuan ($14,000 to 43,000). Nissan’s compact Sylphy sedan, the Toyota Corolla and Honda’s Civic are known in China as the “three musketeers” of popular Japanese cars. Sylphy was the second-best selling model in China last year, with deliveries of 393,500 units. Coralla was No. 10 at 191,610.

But starting in 2020, when Tesla’s entry supercharged China’s EV market, the Japanese trio started to be squeezed at both ends of the market. Tesla and local EV companies like Nio Inc. and Xpeng Inc. began to make inroads at the top end, while budget cars like the Hongguang Mini EV from General Motors Co. and its Chinese partners became popular with first-time buyers, and was the top-selling model in 2022.  

Now, BYD is staking a claim to the mid-market where the Japanese companies operate, with a line up of electric models such as the crossover SUV Song PLUS, starting from 140,000 yuan. This and other popular models propelled BYD to be the top-selling domestic brand in 2022, shipping over 1.85 million vehicles. 

“The Japanese joint ventures should be feeling more threatened,” said Yang Jing, the director of China Corporate Research at Fitch Ratings. “Some Japanese carmakers have announced big steps in their strategic realignment. One reason is that the China market’s electrification has happened quicker than they expected,” she said.

Japanese companies should better promote their hybrid offerings to gain an edge in China, said Cui Dongshu, secretary general of the China Passenger Car Association. The benefits of hybrids — popular elsewhere among those anxious of making the full electric leap — haven’t been effectively promoted in China, he said.

“We think there’s still room for growth for Japanese car brands in China,” Cui said.

Still, Nissan last month lowered its electrification target in China to 35% of sales from 40% in fiscal 2026, even as it said 98% of sales in Europe will be hybrid or fully electric by then.  

Chief Operating Officer Ashwani Gupta said that’s because local brands are “leading the way” in China. With only two EVS on offer in China — the Ariya and an electric version of the Sylphy — the category accounted for just 1% of Nissan’s sales there in the third-quarter last year. While the company plans to launch 19 battery-electric vehicles and 35 hybrid models by 2030, the next electric SUV won’t come until 2024. 

A spokesperson for Honda said that Chinese companies have an advantage over Japanese carmakers in procuring chips and other parts, saying the drop in sales is an “issue of production” rather than its cars being unattractive to Chinese consumers.

Toyota’s latest EV for China’s market, the bZ3, is produced in partnership with BYD, which provides the batteries. The car was launched March 6 with a starting price of 169,800 yuan ($24,500). The Japanese carmaker has about 10 hybrids and four BEVs on offer in the country.

Read more: Toyota Swaps CEO as Tesla-Led EV Shift Threatens Dominance 

A spokesperson for Toyota said that while there is concern over trade friction between the US and China, the automaker expects to “achieve stable growth” in China.

The three Japanese carmakers and their joint venture partners are also embroiled in a price war that started with Tesla slashing prices in January, pressuring rivals in the China market to follow suit. The Dongfeng Honda brand has offered discounts of up to 50,000 yuan on models such as the CR-V EV, while Toyota’s bZ4X EV SUV had its price cut by up to 60,000 yuan.

Despite everything, Toyota still has fans in China, like Shenzhen resident Alfred Wu, who has driven a Toyota Reiz sedan for six years. He’s on the lookout for his next car and if the Reiz hadn’t been discontinued in 2017, he would have bought a new one, Wu said. He’s waiting to try the Lexus TX SUV, set to debut later this year with Toyota’s 2.4 liter inline-four engine. 

“I just prefer the feeling of driving gasoline cars,” said Wu, adding that he doesn’t like EVs because he thinks the technology isn’t yet reliable and the batteries will degrade. He also makes several 2,800 kilometer (1,740 mile) round trips to his hometown each year, and is concerned about battery range.

But Wu said that his needs aren’t common among car owners in China and he sees that EVs, which are more affordable and have a wide array of features, are “picking off Toyota models such as the Corolla like snipers.”

(Adds discounts in 18th paragraph.)

©2023 Bloomberg L.P.