As the automotive industry shifts towards electrification and innovation, two of Japan's automotive giants, Honda and Nissan, have decided to come together in the face of mounting pressure and competitionTheir collaboration, announced on December 23, 2023, marks the beginning of formal merger negotiations aimed at creating a new joint holding company that will oversee operations for both brands, alongside Mitsubishi Motors, which is also considering its participation in this transformative endeavor.

The memorandum of understanding (MoU) unveils plans for the new hold company to act as a parent entity for Honda and NissanSources indicate both companies aim to finalize their integration strategy by the end of January 2025, with a view to signing an agreement by June 2025, leading to a planned listing on the Tokyo Stock Exchange in August 2026. Notably, Honda is set to hold the controlling majority in the new entity, a strategic decision aiming to ensure stability and direction amid disruptive changes facing the auto industry.

The collaboration reflects a broader struggle within the Japanese automobile sector

Historically, Japanese automakers have been slower to transition to electric vehicles (EVs) compared to their international counterpartsAccording to data from research firm MarkLines, Nissan's sales of pure electric vehicles stood at only 34,000 units in Q3 2024, while Honda's numbers were even lower at 20,000 unitsIn stark contrast, industry leaders BYD and Tesla reported impressive sales of 424,000 and 432,000 units, respectively, during the same periodThe data underscores a widening gap in the market, with Honda and Nissan grappling with stagnant performance and an urgent need to enhance their competitive position in an evolving landscape.

Both auto manufacturers have struggled with financial pressures in recent yearsHonda finds itself in a "vicious circle" where revenues rise without corresponding profits, while Nissan has faced a dire operational crisis, with substantial losses reported in its latest quarterly results

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Nissan's net profit plummeted 104.9% YoY as it wrestled with dwindling market share and increasing expenses, further compounding the urgency for strategic changes to restore profitability.

Notably, Honda's CEO, Toshihiro Mibe, highlighted that the success of their negotiations hinges on Nissan's ability to reverse its financial decline, emphasizing the need for joint investment in EV technology and cutting-edge automation in the automotive sectorEchoing this sentiment, Makoto Uchida, the CEO of Nissan, expressed optimism about the partnership's potential to enhance their competitive capabilities, paving a path for prosperity through collaboration.

Plans for the merger emerged earlier this year when Honda and Nissan initially signed a separate MoU in March, focusing on shared efforts in the EV space, particularly in vehicle software and critical components that support electric mobility

The alliance's expansion in August to include Mitsubishi signals their commitment to a unified approach towards smart and electric vehicle frameworksThe integration of resources from these three major players heralds a potential collaborative advantage that neither could achieve independently in today's challenging market.

The automotive industry currently faces unprecedented transformation driven by rapid technological advancements and shifting consumer preferences towards sustainable optionsMibe's shift from a previously cautious strategy to an aggressive push for electrification in May 2021 exemplifies Honda's recognition of the pressing need for changeHe set ambitious goals for Honda to cease production of purely internal combustion engine vehicles by 2040, aligning with global climate aspirations for carbon neutrality.

Similarly, Nissan laid out its "Nissan 2030 Vision," targeting the release of 23 electrified models by the fiscal year 2030 and aiming for more than 50% of its product line to be electric vehicles, thus affirming its commitment to sustainability over the coming decades

Yet, despite these initiatives, both companies have struggled to gain traction in critical markets like the United States and China, where they have seen substantial declines in market share and sales.

In China, the pressures have become particularly pronouncedBetween 2022 and 2023, Nissan's sales dropped significantly by over 24%, while Honda faced similar challenges with declines in the range of 11-12%. The competitive landscape in China is rapidly evolving, with local EV manufacturers gaining substantial market penetration — pushing Honda and Nissan to confront the limitations of their current offersThe penetration of the electric vehicle market has soared above 50%, contrasting sharply with Honda's lackluster performance in the segment.

Moreover, Honda's drive for increased revenue has often not translated into profitability, a common theme in the company's recent financial disclosures

Although it reported a revenue rebound of 16.2% during fiscal year 2022, net profits and operating profits saw declinesNissan's trajectory appears even grimmer, as the company cut its fiscal year 2024 profit forecast dramatically, responding to suboptimal performance in the first half of the fiscal year.

As both automakers grapple with the realities of an evolving industry, their decision to merge signals a strategic pivot aimed at preserving their legacy brands while pooling resources to tackle pressing challenges head-onThis merger is not merely a rescue operation for Nissan; it represents a bold response to the seismic shifts occurring within the industry.

Looking ahead, Mitsubishi — a significant shareholder in Nissan — also contemplates its position in this unfolding narrativeThe company is expected to make a decisive statement regarding its involvement by the end of January 2025, with industry observers keenly watching how this potential partnership might influence the automotive landscape.

A successful merger could lead to the formation of the third-largest automotive group globally, trailing only Toyota and Volkswagen

Estimates suggest combined revenues could exceed ¥30 trillion, with operating profits potentially exceeding ¥3 trillion and annual vehicle sales surpassing 8 million unitsIf successfully executed, this merger would be one of the most significant transactions in automotive history, akin to the creation of Stellantis in 2021 from the merger of FCA and PSA.

However, the path forward is not without skepticismFormer Renault CEO Carlos Ghosn characterized the merger as a "gamble" rather than a practical solution, while industry analysts express concerns regarding the realignment of overlapping product lines that could lead to inefficiencies and internal competition post-mergerMany urge the leaders of both corporations to focus on localized innovation and technological advancements, particularly within the competitive Chinese market, rather than relying purely on collaborative mechanisms.

As Honda and Nissan embark on this merger process, the industry watches closely