Diabetic nephropathy (DN) is the most important chronic kidney disease. We previously reported that Smad1 transcriptionally regulates the expression of extracellular matrix in DN. Phenotypic change in mesangial cells (MCs) is a key pathologic event in the progression of DN. The aim of this study is to investigate a novel mechanism underlying chondrogenic phenotypic change in MCs that results in the development of DN. MCs showed chondrogenic potential in a micromass culture, and BMP4 induced the expression of chondrocyte markers (SRY-related HMG Box 9 (SOX9) and type II collagen (COL2)). Advanced glycation end products induced the expression of chondrocyte marker proteins downstream from the BMP4-Smad1 signaling pathway in MCs. In addition, hypoxia also induced the expression of BMP4, hypoxia-inducible factor-1 alpha (HIF-1 alpha), and chondrocyte markers. Overexpression of SOX9 caused ectopic expression of proteoglycans and COL2 in MCs. Furthermore, forced expression of Smad1 induced chondrocyte markers as well. Dorsomorphin inhibited these inductions. Glomerular expressions of HIF-1 alpha, BMP4, and chondrocyte markers were observed in diabetic nephropathy mice. These positive stainings were observed in mesangial sclerotic lesions. SOX9 was partially colocalized with HIF-1 alpha and BMP4 in diabetic glomeruli. BMP4 knock-in transgenic mice showed not only similar pathological lesions to DN, but also the induction of chondrocyte markers in the sclerotic lesions. Here we demonstrate that HIF-1 alpha and BMP4 induce SOX9 expression and subsequent chondrogenic phenotype change in DN. The results suggested that the transdifferentiation of MCs into chondrocyte-like cells in chronic hypoxic stress may result in irreversible structural change in DN.