Honda and Nissan, two of Japan's largest car manufacturers, are reported to be in exploratory talks about a potential merger, aiming to bolster their position in the competitive electric vehicle (EV) market, particularly in China.

The news follows a March 2024 agreement between the two companies to explore a strategic partnership in EV production, as well as a deepened collaboration in August focusing on batteries and other technologies.

The Shift to EVs and Growing Pressure

The automotive industry is rapidly transitioning from petrol and diesel vehicles to electric models, with Chinese manufacturers dominating the global EV market. In November, China accounted for nearly 70% of global EV sales, forcing traditional carmakers like Honda and Nissan to reassess their strategies.

Both companies have been losing market share in China and struggling to compete with cheaper EV producers like BYD, which outpaced Tesla in quarterly revenues for the first time in October.

Merger Considerations and Potential Challenges

While a merger between Honda and Nissan could pool resources and expertise, the process is expected to face significant hurdles, including:

• Political Scrutiny: A merger may lead to job losses, a politically sensitive issue in Japan.
• Renault Alliance: Nissan may need to unwind its long-standing alliance with French carmaker Renault.
• Mitsubishi's Role: As Nissan's largest shareholder, Mitsubishi could potentially be included in any partnership, adding complexity to negotiations.

Market Reactions and Analyst Opinions

Following the news, Nissan shares surged by over 20% in Tokyo trading, while Honda shares dropped 2%, and Mitsubishi saw a 13% rise.

However, analysts remain cautious. Jessica Caldwell from Edmunds remarked that smaller carmakers must collaborate to survive in the current landscape. Yet, Jesper Koll from Monex Group questioned whether the merger could make Honda and Nissan globally competitive, calling it a potential "rearranging of deck chairs on the Titanic."

Next Steps and Future Outlook

Both Honda and Nissan have issued identical statements, confirming ongoing discussions but emphasizing that no decision has been made. They added that updates would be shared "at the appropriate time."

The potential merger reflects broader challenges faced by legacy automakers adapting to the EV era. Whether this collaboration can turn Honda and Nissan into stronger competitors remains to be seen.