In a significant move that could reshape the automotive landscape both in Japan and globally, Honda and Nissan, the country’s second and third largest car manufacturers respectively, have announced the initiation of discussions regarding a potential mergerThis development comes as Japanese automakers face increasing pressure from electric vehicle (EV) leaders like Tesla and BYD, leading many to question if this alliance could bolster their competitiveness in a rapidly evolving market.

The discussions, made public on the 23rd of this month, reveal that Mitsubishi Motors, which forms an alliance with Nissan, will make a decision on joining this endeavor in early 2024. Should Mitsubishi come on board, the newly formed consortium could achieve an annual vehicle sales figure of approximately 8 million unitsThis would position them as the third largest automotive group worldwide, trailing only Toyota, which sold 11.23 million vehicles, and the Volkswagen Group with 9.23 million units in the previous year.

The leaders of the three companies conveyed their plans to the Japanese Ministry of Economy, Trade, and Industry, as well as the Ministry of Land, Infrastructure, Transport, and Tourism, before addressing the media

According to a memorandum signed at the meeting, Honda and Nissan intend to finalize the agreement by June 2025, with a new holding company set to be publicly listed on the Tokyo Stock ExchangeAdditionally, both Honda and Nissan are expected to undergo privatization processes by August 2026. Honda plans to appoint most of the board members for this merged entity, with projected revenue reaching an astonishing ¥30 trillion and operating profit surpassing ¥3 trillion.

Experts are analyzing the implications of this merger, with Chen Yan, director of the Japan Enterprise (China) Research Institute, asserting that the primary motivation behind this collaboration is the formidable competition posed by Tesla and BYD in the EV sector“Electric vehicles are the future,” he remarked, pointing out that although both manufacturers have developed their own electric vehicles, sales have been subpar

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Thus, this alliance could be seen more as a ‘mutual reinforcement of weaknesses’ rather than a conventional merger of strengths.

Chen also highlighted Nissan's struggling sales figures globally, particularly in the crucial U.Smarket, where the company has faced challenges due to a lack of hybrid models on offerConsequently, they resorted to slashing prices with the help of government subsidies to maintain profitabilityConversely, Honda seems to be looking to rely on Nissan and Mitsubishi's electric vehicle technologies as a pathway to enhancement in this sector.

Moreover, the consolidated efforts of Honda and Nissan are intertwined with broader market dynamics, particularly with companies like Foxconn looking to cut ties with Nissan in favor of partnering with Renault, potentially leading to a shift in equity ownershipThis has prompted the Japanese government to advocate for domestic collaborations to prevent foreign entities from gaining control over vital industries.

While the intention behind this merger seems promising on the surface, the sentiments expressed by Nissan’s former CEO, Carlos Ghosn, are far from optimistic

He argues that this merger does not signify a genuine integration of two iconic Japanese brands, but rather a desperate move influenced by governmental strategyGhosn emphasizes the lack of synergy and complementary qualities between the two companies, as they operate within the same markets, offering nearly identical products.

Chen further elaborates that for this alliance to emerge as a significant competitor to Toyota, they must excel in hybrid vehicles and ensure Nissan’s electric strategy is on par with industry leaders“Currently, both Honda and Nissan lag behind Toyota in battery development, particularly in solid-state technologies,” he stated, indicating that Toyota maintains a firm grip on its reputation within the Japanese automotive sector.

As the negative trajectory for Nissan continues, recent financial reports unveil a staggering 94% drop in their net profits during the first half of the fiscal year 2024. The measures taken to mitigate this financial decline—including a proposed 20% reduction in global production capacity and job cuts—highlight the urgency of the situation

Meanwhile, other leading Japanese automakers, such as Toyota and Honda, are also grappling with drastic declines in their net profits during the same reporting period, raising concerns over the health of the Japanese automotive industry and its implications for the country’s economic stability.

The Japan Automobile Manufacturers Association (JAMA) indicates that the automotive sector represents around 20% of Japan's manufacturing output, while research and development expenses account for nearly 30%, the highest in the manufacturing sectorCollectively, the automotive industry and its related sectors employ over 5.5 million individuals in Japan.

Developments in late 2022, when a scandal erupted surrounding Daihatsu, a member of the Toyota Group, saw the halting of several vehicle models and is viewed as a contributing factor to the decline in Japan’s GDP in the first quarter of the current year.

Since the influx of Nissan’s health crisis, the impact of workforce reductions alone could resonate significantly across Japan’s economy, according to Chen

Projections from the Oxford Economic Institute suggest that Japan's economy will see moderate growth by 2025, with inflation rates anticipated to reach approximately 1.5% in mid-2025, eventually climbing to 2% by the end of the fiscal year.

Chen notes the Japanese government’s current strategy aims to leverage Honda’s capabilities to preserve Nissan’s technology and jobs, but he insists that market forces will ultimately dictate the outcomes“If the new alliance cannot deliver value in the electric vehicle segment, it will falter against Tesla and BYD; if they struggle in producing gasoline vehicles, they will fall short against Toyota; and without advancements in hybrids, they lag as well,” he warns.

According to Aoyama Satoru from Fitch Ratings, the potential “new alliance” among Honda, Nissan, and Mitsubishi signals a significant shift in their approach to electric vehicle operations, likely eclipsing previous collaborations between Renault, Nissan, and Mitsubishi