Moody’s Japan K.K. says that the push toward alternative-fuel vehicles—battery electric vehicles, hybrids, plug-in hybrids and fuel-cell vehicles—poses a credit challenge for multiple sectors in Japan, with the large auto sector and sectors such as steel and refining most affected.

Over the next decade, Japanese auto manufacturers and associated industries will make sizeable upfront investments in alternative-fuel vehicle technologies while bearing the risk that these vehicles may ultimately not be taken up by the market. In addition to the direct impact on the auto, steel and refining sectors, electrification—and the resultant drop in gasoline consumption—will also reduce a meaningful source of government tax revenue, which funds road construction and public works programs.

—Motoki Yanase, a Moody’s Vice President and Senior Credit Officer

Moody’s conclusions are included in its just-released report “Cross-sector: Push for alternative-fuel vehicles presents challenges for Japan Inc.”

Moody’s report highlights that tightening emission requirements, changing consumer preferences amid growing concerns around climate change, and technological innovation are driving the push for alternative-fuel vehicles.

Moody’s estimates alternative-fuel vehicles could account for around 35% of new vehicle sales globally by 2030, compared to less than 5% in 2017. At the same time, one of the biggest risks is of the uncertainty in the forecasting itself, which makes it very challenging for automakers to adopt a strategy that ensures they remain competitive and profitable.

For automakers, the rising R&D costs and capital investments needed for the shift to alternative-fuel vehicles could squeeze their already thin margins. In addition, the entry of new carmakers will increase competition, while emerging technologies will take automakers beyond their core competencies and toward new business models.

Similarly, steelmakers will face increased competition from aluminum and carbon fiber as automakers seek lighter-weight options to offset the weight of an electric battery, while refiners will see demand for gasoline fall both as a result of increasingly fuel-efficient vehicles and a decrease in Japan’s driving population.

However, the push for alternative-fuel vehicles is credit positive for some sectors, with rising demand for electronics, chemicals and integrated-utility companies.

Specifically, chemical companies that manufacture components used in lithium-ion batteries will benefit from increased demand. And incremental demand for electricity to charge vehicles will partly mitigate declining demand from a shrinking population, energy conservation and customer losses from regulation.

The impact for auto-parts suppliers will be mixed, according to Moody’s, with demand to fall for suppliers of parts related to conventional gasoline engines, but limited impact on companies that provide essential parts to leading global automakers, such as glass, tires and air-conditioning units.