Honda and Nissan aim to merge as global competition bears down

TOKYO — Honda Motor Co. and Nissan Motor Corp. are exploring a merger to create one of the world’s largest auto groups as they seek to better position themselves for the expensive technological transition reshaping the automotive industry.

On Monday, Honda and Nissan signed a memorandum of understanding to formally begin talks aimed at deepening a partnership that began this year. Over the next six months, the companies will discuss combining their operations under a holding company, with the goal of completing the merger in August 2026.

Honda and Nissan, Japan’s second- and third-largest automakers, would join a growing number of legacy auto giants, including General Motors and Volkswagen, that are deepening ties to share the financial burden of developing next-generation vehicles. The deal is seen as a lifeline in particular for Nissan, which has been slashing jobs and production amid faltering sales.

Unlike the gasoline-powered cars that have defined the industry for most of the past century, more vehicles today are being equipped with batteries, electric motors and advanced software that enables features such as autonomous driving.

To navigate the change, Honda and Nissan have decided they can better handle research and development and new investments as a combined force, Honda CEO Toshihiro Mibe said at a briefing in Tokyo on Monday.

“Current business models are being upended. It is not going to take 10 to 20 years for that to happen — it will come much faster,” Mibe said. “We need to have the right artillery in order to be competitive on that battlefield so we’re starting today.”

In recent years, automakers across Japan, the United States and Europe have invested billions of dollars into electric vehicle development — efforts that, for the most part, have yet to generate profits. These investments are being financed by sales of higher-margin gasoline and hybrid models, which also require continuous investment.

With electric vehicle sales growth slowing and President-elect Donald Trump gearing up to eliminate EV tax incentives in the United States, automakers must figure out how to sustain investments in gasoline and battery-powered cars for an extended period, said Takaki Nakanishi, head of the automotive consulting firm Nakanishi Research Institute in Tokyo.

“To sustain these dual investments, automakers need scale and the operational efficiencies that come with it,” Nakanishi said. “If Nissan and Honda are not able to achieve this, they will not survive,” he said. “Times are truly that tough.”

Nissan sells more than 3 million vehicles a year, while Honda sells nearly 4 million. A merger would position them as the world’s third-largest automaker group, behind Toyota, whose brands sold 11 million vehicles last year, and Volkswagen, which sold 9 million. Honda and Nissan together employ about 325,000 people.

Nissan and Honda said integrating their businesses would enable them to standardize the basic makeup of vehicles and increase production. Those steps would reduce how much each company spends on developing vehicles, freeing up cash to spend on things like creating new software.

The key question is whether even large, combined entities like Honda and Nissan can keep up with newer competitors. American company Tesla and China’s BYD have established a commanding lead in electric vehicles and car technologies that can be updated over the air like smartphones.

The new parent company of a merged Honda and Nissan would be listed on the Tokyo Stock Exchange. Honda would nominate a majority of the new company’s directors, from among which a president would be selected. Mitsubishi Motors, a smaller Japanese automaker and longtime partner of Nissan’s, said it would also consider joining the new group.

Under the automakers’ current market valuations, the combination would be worth more than $50 billion.

The deal is part of a wave of consolidation, which some argue is long overdue, in the Japanese car industry. This year, there has been $10 billion in mergers and acquisitions in the sector, up 163% from a year earlier, according to Mergermarket, a data provider.

Even with expanded scale, the Japanese automakers would need to prove that their partnership could speed their development of new vehicles, said Tang Jin, a senior researcher at Mizuho Bank. If they cannot create some kind of “chemical reaction” of new value by coming together, he said, “their merging will simply become a gathering of the weak.”

Already in China, the world’s largest car market, it may be too late for Honda, Nissan and many Western automakers to make up ground lost to cost-competitive and technologically advanced local rivals. For the fiscal year ending March 31, Nissan has projected a 13% drop in its sales in China, while Honda expects an even steeper decline.

Nissan’s struggles in China contributed to a 90% plunge in its operating profit to $214 million during the first half of the current fiscal year. Last month, Nissan said it would make deep cuts to its global operations, and in the weeks since, it has been circled by a number of groups including activist investors.

Compared with Nissan, Honda’s financial position remains healthy. Honda turned a $1.8 billion profit in the July-to-September quarter, but that was down 15% from a year earlier because of higher research-and-development costs and weak sales in China.

“Nissan’s current decline could very well be Honda’s tomorrow,” Nakanishi said. That is something Honda recognizes. “It realizes its best shot is to combine with Nissan, share a common destiny and try to overcome the impending crisis together,” he said.

This article originally appeared in The New York Times.

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