Honda and Nissan's Potential Merger

Overview

By David Dolan
TOKYO (Reuters) – Honda (NYSE:HMC) and Nissan (OTC:NSANY) expect significant advantages from their proposed merger to create the world's third-largest auto group. However, intense competition from China raises questions about the feasibility of the merger.

The Japanese automakers announced Monday their intention to begin formal discussions about merging. Although the outcome is uncertain—partly depending on Nissan's turnaround progress—they aim to finalize the deal by August 2026.

Nissan’s junior partner, Mitsubishi Motors (OTC:MMTOF), will decide next month whether it plans to partake in the merger.

Financial Goals

Both companies are targeting over 1 trillion yen ($6.4 billion) in synergies by utilizing a common platform, shared research and development (R&D), and joint procurement. Their operating profit target exceeds 3 trillion yen, reflecting a 54% increase over last year's combined results.

However, Honda's CEO Toshihiro Mibe stated that the full impact of these synergies might not be realized until after 2030. He emphasized that they need to enhance capabilities to compete against Chinese rivals within this timeframe or risk being "beaten."

Analysts doubt whether they have enough time to execute these changes effectively.

Challenges Ahead

A significant immediate challenge for both automakers is their current model line-up, especially in the electric vehicle (EV) sector. Although Nissan pioneered the EV market with the Leaf, it has faced challenges with the Ariya, which aimed to rival Tesla's Model Y but encountered production issues. Honda, focusing more on hybrids, does not currently offer the same EV models in the United States, where demand is rising.

Vincent Sun, a senior analyst at Morningstar, noted that both companies lack compelling EV offerings, and the combined entity would still struggle with developing a new EV model pipeline and R&D. While a standardized vehicle platform might yield cost synergies, developing it will also require time.

Lost Ground in China

Chinese automakers have surged ahead in the move to electrified vehicles, emphasizing software-driven features and in-car digital experiences, areas where they excel compared to Honda and Nissan. Both companies have lost market share in China, the largest auto market globally.

Honda reported a 15% decline in quarterly profit last month and has begun reducing its workforce in China, whereas Nissan announced plans to cut 9,000 jobs globally and reduce manufacturing capacity by 20% due to declining sales.

Dean Enjo, a senior analyst at Moody's, cautioned that revamping their operations in China will involve "significant execution risk."

Market Focus

While Honda and Nissan are also considering the U.S. and Japan markets, the significant overlap may mean the merger won't offer substantial benefits in geographic diversity. However, integration could help them cope with any impact from potential import tariffs under the incoming U.S. administration.

The Merger's Scale

Honda ranks as Japan's second-largest automaker, with Nissan following as the third. Together, they would create the world's third-largest auto group by vehicle sales, trailing only Toyota (NYSE:TM) and Volkswagen (ETR:VOWG_p).

The merger represents a significant shift in the global auto landscape, marking the most extensive restructuring since the 2021 amalgamation of Fiat Chrysler Automobiles and PSA to form Stellantis (NYSE:STLA) in a $52 billion deal.

This initiative underscores the gravity of competition from Chinese rivals, particularly in regions like Southeast Asia, where Japanese manufacturers were previously dominant. Given that Japan's auto industry is linked to its economic core, failure to adapt poses a threat to the country's economic stability, especially as its influence in other critical sectors like consumer electronics and semiconductor industries has diminished over time.

Analysts at Morgan Stanley highlighted that legacy automotive firms that fail to secure new partnerships risk becoming smaller with increased capital expenditure and R&D costs per vehicle. There may be further consolidation in the industry shortly.

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