Written by David Dolan
TOKYO (Reuters) – Honda (NYSE:) and Nissan (OTC:) expect big benefits from their potential merger to create the world's third-largest auto group, but intense competition from China raises questions about whether they can make it work in time.
The Japanese automakers said on Monday that they had agreed to begin formal talks on a merger. While the outcome is uncertain and will depend in part on struggling Nissan making progress on its turnaround, it aims to finalize the deal by August 2026.
Nissan's junior partner, Mitsubishi Motors Co. (OTC:), will decide by next month whether it plans to participate.
The automakers aim to achieve cooperation exceeding 1 trillion yen ($6.4 billion) by leveraging a common platform, joint research and development and joint procurement.
The operating profit target of more than 3 trillion yen represents a 54% increase from their consolidated results last year.
But the full impact of the synergy is unlikely to be felt until after 2030, Honda CEO Toshihiro Mebe said at a joint news conference on Monday. He added that companies need to build their capabilities to overcome Chinese competitors by then, or face “defeat.”
Analysts wonder if they have that much time.
Perhaps the biggest immediate hurdle for both is their model lineup. Not particularly strong in electric vehicles. Nissan, although it was an early leader with the LEAF, later faltered. The new electric car, the Ariya, was supposed to challenge Tesla's (NASDAQ:) Model Y but production problems have held it back.
Honda has focused more on hybrid cars and, unlike Nissan, offers models in the United States, where demand for cars has increased.
“Both companies lack compelling electric vehicle offerings, and the combined entity will still face the challenge of a new pipeline of electric vehicle models and technology R&D,” said Vincent Sun, a senior analyst at Morningstar.
A unified vehicle platform would lead to cost synergies, but developing that too would take time.
Sun said fixing the matter “may take longer than expected.”
Lost land
In China, the shift to electric vehicles has focused consumer attention on software-driven features and the digital in-car experience, areas where Chinese manufacturers excel.
BYD (SZ:) and other homegrown brands have outpaced legacy automakers, rolling out electric and hybrid vehicles loaded with innovative software. Both Honda and Nissan declined in China, the world's largest car market.
Honda reported a 15% drop in its quarterly profits last month and cut its workforce in China. Nissan has already announced plans to cut 9,000 jobs globally and manufacturing capacity by 20% due to declining sales in both China and the United States.
Converting their large operations in China would involve “significant execution risk,” Dean Ingo, a senior analyst at Moody's (NYSE:) ratings agency, wrote in a note to clients.
Both automakers are also focusing on the US and Japan. This “significant overlap” means the merger will not deliver significant benefits in terms of geographic diversification, Ingo said.
However, Ngo said integration could help them overcome any potential impact from import tariffs under incoming US President Donald Trump.
Big deal
Honda is the second largest automaker in Japan, while Nissan is the No. 3 company in the country. Combined, they will become the world's third-largest car group in terms of car sales thereafter Toyota (NYSE:) and Volkswagen (ETR:).
The merger would also be the largest reshaping of the global auto industry since then Fiat (BIT:) Chrysler Automobiles and PSA merged in 2021 to create Stellantis (NYSE:) in a $52 billion deal.
The size of the deal highlights the seriousness of the threat posed by Chinese competitors, especially as they make inroads in regions such as Southeast Asia, where Japanese automakers were once dominant.
For Japan, the threat to the auto industry is a threat to its economic lifeline, as the country's influence in once-key industries such as consumer electronics and chips has waned over the years.
The technological challenge means that older car companies that can't find new partners risk potentially becoming smaller companies with higher capital spending and higher research and development costs per car, analysts at Morgan Stanley (NYSE:) in a note earlier this month, when reports of the potential connection first emerged.
“Given the dynamism of the industry, there may be more consolidation in the future,” they said.
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