Potential Honda-Nissan merger could be the first of many as carmakers try to challenge China
Reports of proposed deal come as Chinese EV industry puts the squeeze on foreign rivals
Japanese carmakers Honda and Nissan are reportedly considering a merger — a sign that major global manufacturers are joining forces to compete against their mighty Chinese competitors as the auto world goes electric.
The two companies — which, if merged, would become the world's third-largest auto manufacturer by sale units — could meet as soon as Monday to move forward on the talks, according to Japanese newspaper Nikkei. Both firms have denied reports of a merger.
Together, Honda and Nissan would bring "collective muscle and size and scale to meet the challenges of the Chinese automakers like BYD, and Tesla, the other big electric player in the marketplace," said Peter Frise, a professor of engineering at the University of Windsor.
They would also have a stronger edge against traditional automakers who are developing their own EV programs, including their Japanese rival Toyota, which is far larger than the companies sometimes referred to as its little brothers.
Their North American plants are also facing the threat of U.S. president-elect Donald Trump's promise to slash consumer incentives for EVs, a $7,500 US tax credit introduced by the Biden administration to boost sales.
China's auto sector has seen an explosion of exports in the last several years, with its electric-vehicle sector aided by generous government subsidies that help to keep prices low. This year, for the first time ever, hybrid and electric vehicles accounted for more than half of all cars sold in China, the world's largest auto market.
A potential partnership between Honda and Nissan indicates that "the Japanese are not immune to what's happening out of China," said Flavio Volpe, the president of Canada's Automotive Parts Manufacturers' Association.
"A consolidation play, the economies of scale that come from that — the shared distribution, the shared platforms, maybe shared battery and software development — [that's] how they think they're going to be able to compete with Chinese players."
Those working in the auto industry are also anticipating a "massive Chinese consolidation" behind a company like Shanghai Auto, Volpe added. If Japanese manufacturers are joining forces to compete with China, "you can imagine that the Europeans and the Americans are not that far behind."
Possible effects of a merger
A merger won't necessarily mean lower prices for car buyers — but it could bring more advanced vehicles to the market.
"Typically, a consumer is going to win when companies like this come together in good times," added Volpe.
Honda and Nissan might eventually bring Nissan ally and subsidiary Mitsubishi into the fold, according to the Nikkei report. The three companies announced a strategic partnership earlier this year to "jointly discuss a framework for further intelligence and electrification of automobiles."
Nissan is navigating a financial crisis that saw it lose roughly $62 million US in the second quarter, a disastrous result that compelled the company to restructure and cut back on production. Its alliance with French manufacturer Renault ended last year, with each manufacturer seeking more independence and flexibility to pursue their own interests in the EV race.
Last year, the Renault-Nissan-Mitsubishi alliance sold just over six million vehicles, while Honda sold 2.77 million units. Together, they wouldn't be far behind Toyota, which sold more than 9.6 million units in 2023, and Germany's Volkswagen, which sold 9.2 million units.
If the deal materializes, it "could reduce [Nissan's] financial strain. Honda's immediate benefits may be limited," said Tatsuo Yoshida, a senior industry analyst at Bloomberg who specializes in the Japanese automotive sector.
The stock market told that story this week, with Nissan's stock jumping by more than 25 per cent, while Honda's dipped by 5.43 per cent. It's an indication of where they each stand in the marketplace: Honda having a strong reputation in the industry and at the retail level for building high-quality, durable vehicles, while Nissan operates at a lower echelon despite its innovation.
"A deal could address the challenges of the battery-EV business, such as [research and development] manpower, low profitability and market uncertainty. Adding Mitsubishi to negotiations might lead to an even greater competitive moat against Toyota," Yoshida wrote in a client note.
'Who's our best dance partner?'
Even the world's largest auto companies have fallen behind in developing new motors, controllers, batteries and charging systems that can be re-engineered into a viable electric vehicle product, according to Frise, the engineering professor.
Smaller companies have always struggled with "shouldering the burden of developing these incredibly expensive programs to bring electric vehicles forward," said Frise. "So there are a lot of partnerships in the auto industry that people don't know about." For example, Ford and General Motors worked together years ago to build an automatic transmission, he said.
Honda being the likely "senior partner" in a merger with Nissan is good news for Canadian manufacturing, added Frise, because of Honda Canada's high standing within the company's global operations: "I think we can feel reasonably good that the Honda Canada operations will do well within this merged company if it does come to pass."
The Japanese government showed its own concern for the future of its domestic car manufacturing industry back in 2019, when the Financial Times reported that it was trying to nudge Honda and Nissan together as the electric vehicle sector expanded.
Nearly six years later, China's manufacturing strength has become a global threat, to the point that a Honda-Nissan merger could be the first of its kind, but certainly not the last, according to Volpe.
"There isn't one company whose executive team didn't look at this news yesterday and say, 'Whoa, well, if they do this — who's our best dance partner?'"
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