Sources say Honda and Nissan are moving to deepen ties, including a possible merger

Written by Maki Shiraki and Norihiko Shirozu

TOKYO (Reuters) – Honda and Nissan are in talks to deepen ties, including a possible merger, two sources said on Wednesday, the clearest sign yet of how a Japanese auto industry that once seemed unbeatable is being reshaped by the challenges it poses. Tesla company. Nasdaq:) and Chinese competitors.

The discussions, first reported by the newspaper, would allow companies to collaborate more on technology and assistance Honda (NYSE:), the nation’s second-largest automaker, and Nissan, the third-largest, create a more powerful domestic competitor to Toyota (New York Stock Exchange:).

The sources said that the talks focused on finding ways to enhance cooperation and included the possibility of establishing a holding company.

The two companies were also discussing the possibility of a full merger, according to one of the people, as well as looking for ways to collaborate with Mitsubishi Motors (OTC:), of which Nissan is the largest shareholder with a 24% stake.

The people refused to reveal their identity because the information has not been published.

Honda, Nissan and Mitsubishi said no deal had been announced by any of the companies, although Nissan noted that the three automakers had previously said they were examining opportunities for future cooperation.

The combined Honda-Nissan group will become the third largest car group in the world in terms of car sales after Toyota and Volkswagen (ETR:) and will remain in this position if Mitsubishi is also included.

“In the medium to long term, this is a good thing for the Japanese auto industry because it creates a second axis against Toyota,” said Seiji Sugiura, senior analyst at Tokai Tokyo Intelligence Laboratory. “Competing constructively with Toyota is a positive thing for the Japanese auto industry, which is somewhat stagnant, while having to compete with Chinese automakers, Tesla and others.”

Nissan shares rose more than 22% in Tokyo trading on Wednesday, while Honda shares fell 2.3%. Mitsubishi shares rose 13%.

Honda’s market value is about $44 billion, while Nissan’s market value is about $10 billion after prices rose on Wednesday, which means that the full merger will be larger than the giant deal worth $52 billion between the two parties. Fiat (BIT:) Chrysler and Peugeot Citroen in 2021 to create Stellantis (NYSE:).

Change of scenery

Honda and Nissan have forged ties in recent months as they grapple with the changing landscape of electric vehicles, and are considering a strategic partnership to collaborate on the production of key components for electric vehicles and artificial intelligence in automotive software platforms.

Over the past year, an electric vehicle price war unleashed by Tesla and Chinese automaker BYD (SZ:) has intensified pressure on any company losing money on next-generation vehicles. This has put pressure on companies like Honda and Nissan to look for ways to cut costs and speed up vehicle development, and mergers are a major step in this direction.

In addition to intense competition, automakers are also facing slowing demand in Europe and the United States

Nissan, in particular, is struggling and announced a plan last month to cut 9,000 jobs and 20% of its global production capacity to cut costs by $2.6 billion in the current fiscal year ending in March.

“This deal seems to be more about saving Nissan, but Honda itself is not resting on its laurels,” said Sanshiro Fukao, an executive fellow at the Itochu Research Institute. “Honda’s cash flow is expected to deteriorate next year, and its electric vehicles have not been faring well.”

French car manufacturer Renault The Environmental Protection Agency, a major shareholder in Nissan, said it had no information and declined to comment.