Nissan and Honda are strengthening their relationship, according to sources, and may even merge

Nissan (7201.T), opens new tab, and Honda (7267.T), opens new tab, are in negotiations to strengthen their relationship, including a potential merger, according to two sources on Wednesday. This is the most obvious indication yet that Tesla and Chinese competitors are changing Japan’s once-invincible auto sector.

Combining Honda and Nissan would result in a $54 billion business with an annual production of 7.4 million cars, ranking third globally in terms of vehicle sales behind Volkswagen (VOWG_p.DE) and Toyota (7203.T).

In March, the two companies established a strategic alliance to work together on the development of electric vehicles. However, Nissan’s increasing financial and strategic difficulties in recent months have made closer cooperation with larger rival Honda even more urgent.

Last month, when its second-quarter profit fell 85% due to declining sales in China and the US, Nissan unveiled a $2.6 billion cost-cutting plan that includes 9,000 job cuts and a 20% reduction in its global production capacity.

Executive fellow Sanshiro Fukao of the Itochu Research Institute stated, “This deal seems to be more about bailing out Nissan, but Honda itself is not resting on its laurels.” “Honda’s cash flow is set to deteriorate next year and its EVs haven’t been going so well.”

Nissan’s stock ended Wednesday’s Tokyo trading session about 24% higher, while Honda’s stock, which is worth $43 billion, more than four times Nissan’s, fell 3%. Nissan, the largest shareholder with a 24% interest in Mitsubishi Motors (7211.T), saw an almost 20% increase in its shares.

Automakers have been facing competition from electric vehicle manufacturers, especially in China, where BYD (002594.SZ) and other companies have risen to prominence.

Additional pressure on the companies comes from the potential of high tariffs by U.S. President-elect Donald Trump on automobiles coming into the country from Canada and Mexico. Both Nissan and Honda manufacture automobiles in Mexico that are exported to the US.

The Nikkei newspaper originally reported on Honda and Nissan’s discussions, which may lead to more technological cooperation and the development of a more powerful local competitor for Toyota.

Those who wished to remain anonymous because the information has not been made public stated that the talks are centered on methods to strengthen cooperation and include the potential for establishing a holding company.

According to one of the sources, the corporations are also exploring methods to collaborate with Mitsubishi and talking about the potential for a full merger.

No agreement has been declared by any of the three automakers, according to Honda, Nissan, and Mitsubishi. However, Nissan and Mitsubishi pointed out that the three automakers have previously stated that they were looking into potential future partnerships.

Nissan’s biggest shareholder, the French automaker Renault (RENA.PA), is open to a deal in principle and would consider all the ramifications of a partnership, according to two people with knowledge of the situation.
A Renault representative chose not to respond.

Renault’s shares were up 6.7% at 1352 GMT, marking the company’s highest day in less than two and a half years.

As per a source with knowledge of the situation, the three Japanese automakers are anticipated to have a combined news conference in Tokyo on Monday.

Taiwan’s Foxconn (2317.TW), which produces Apple’s (AAPL.O) new tab iPhones and has been looking to grow its fledgling EV contract manufacturing business, approached Nissan about a bid, but the Japanese company turned it down, according to two different people familiar with the situation.

Earlier Wednesday, Foxconn had approached Nissan to acquire a majority interest, according to a report by Bloomberg News.

A Nissan representative declined to comment on Foxconn, and Foxconn did not immediately reply to a request for comment.

According to data on global auto sales through September, four of the top 17 automakers in the world are Chinese.

According to data on global auto sales through September, four of the top 17 automakers in the world are Chinese.

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Given Trump’s pledge to adopt a tough stance on foreign automobiles, any combination would be closely watched by the United States. Auto industry officials stated that he could ask Honda and Nissan to make concessions in order to approve any merger.

BYD and Tesla (TSLA.O) have increased pressure on any manufacturers who are losing money on next-generation vehicles during the past year due to an EV price war. Because of this, businesses like Honda and Nissan are looking for ways to reduce expenses and expedite the development of new vehicles, and mergers represent a significant step in that direction.

Tokai Tokyo Intelligence Laboratory senior analyst Seiji Sugiura stated, “This is good for the Japanese car industry in the mid- to long-term as it creates a second axis against Toyota.”

“Constructive rivalry with Toyota is a positive for the rather stagnating Japanese car industry when it must compete with Chinese automakers, Tesla and others.”

It would take time for the synergies from a possible merger to improve the creditworthiness of the companies, according to S&P Global Ratings.

Due to differences in business culture and tactics, a merger that does not grant one party power is unlikely to produce significant outcomes.

“In our view, there have been few instances where mergers and alliances between major automakers have led to significant benefits,” the note read.

According to analysts, Honda and Nissan would also need to figure out how to reconcile their disparate corporate cultures if they move forward with a combination.

“Honda has a unique, technology-centric culture with strengths in powertrains, so there should be some internal resistance to the merger with Nissan, a competitor with a different culture that is now faltering,” Tang Jin, a senior researcher with Mizuho Bank, said