The third largest car maker in the world? China is on its mind, and Nissan and Honda are talking about merging to stay relevant

Nissan and Honda announced Monday that they are in talks to merge with the aim of creating the world’s third-largest automaker by sales. The unprecedented merger is seen as a direct response to their diminishing market position in China, the world’s largest auto market, where Japanese automakers are rapidly losing ground to local giants such as BYD.

In a press conference, Honda CEO Toshihiro Mebe stressed the need to expand competition in emerging technologies such as electric vehicles and intelligent driving. “Business integration would give companies an advantage that would not be possible under the current cooperation framework,” Meby said. The combined entity is expected to generate annual revenues of JPY30 trillion (US$191.4 billion) and operating profits exceeding JPY3 trillion.

China’s dominance in electric vehicle manufacturing has forced Japanese automakers into a corner. BYD and other local players have eroded the once-powerful position of companies like Nissan and Honda, leaving them with excess capacity at plants originally built to meet growing demand.

Both Honda and Nissan have announced major cuts in their production in China, with Honda planning to reduce capacity by 20%, while Nissan’s production in China has fallen to half its peak levels.

James Hong, an analyst at Macquarie Securities, highlighted the key challenge: “Honda and Nissan have been losing the market for some time. They must enact significant capacity cuts to address fixed cost burdens in China.

The proposed transaction would create a holding company listed on the Tokyo Stock Exchange, with Honda taking a leading role in the management structure. While full integration is not expected before 2030, the two companies aim to combine resources to achieve economies of scale, share advanced technology and remain competitive against global electric vehicle powers.

Nissan CEO Makoto Uchida addressed concerns about the company’s struggles, assuring stakeholders that the merger is aimed at ensuring future growth. “It’s not about giving up on transformation,” Uchida said. “It’s about looking at ultimate scale and growth through partnerships.”

While a merger could solve overlapping challenges, experts remain cautious. Nissan’s poor performance – characterized by a declining market value and aging product lines – made it a potential takeover target. The recent interest from Taiwan’s Foxconn underscores Nissan’s precarious position. In addition, analysts point out that integration will require significant restructuring, including more plant closures and capacity cuts.

This merger reflects a broader trend in the industry, as automakers around the world join forces to survive in a rapidly evolving market.