Nissan and Honda announce merger plans to create world’s no. 3 car manufacturer

New York (CNN) — Honda and Nissan have formally agreed to hold talks over the next six months about a possible merger, a deal that would create the world’s third-largest automaker and give them more resources to compete with a growing threat from Chinese automakers.

A third, smaller Japanese carmaker, Mitsubishi, which is already in an alliance with Nissan, will also take part in the talks. The combined company, if created, would trail only Toyota ( TM ) and Volkswagen in global sales.

Mergers in the automotive industry are nothing new. They have occurred since the acquisition of various brands formed General Motors (GM) in the first decade of the 20th century. But they sometimes have trouble bringing different partners together.

German automaker Daimler-Benz agreed to buy Chrysler Corp. in 1998, only for the combined group to split up a decade later. The newly independent Chrysler went bankrupt and required a federal bailout within two years.

Chrysler’s recent merger with Europe’s PSA Group in 2001 to form Stellantis has had its own problems in the past year, with declining sales and profits. And Nissan’s alliance with Renault, although not a formal merger, ended up collapsing after the arrest of Nissan CEO Carlos Ghosn in Japan on charges of “significant” financial misconduct. He fled the country before a trial could take place.

But with the costs and challenges of the industry’s efforts to shift from gasoline-powered cars and trucks to electric vehicles, and with increasing competition from Chinese automakers, which have moved past most Western automakers in these efforts, Honda and Nissan had to combine resources to to remain competitive.

“Today is a defining moment,” Nissan CEO Makoto Uchida said in a statement declaration announces the negotiations. “Together we can create a unique way for (customers) to enjoy cars that neither company could achieve alone.”

Nissan has struggled since the collapse of its alliance with Renault, and faces serious financial problems that leave it in desperate need of a major merger partner.

Profits in the six months ended September fell 94% compared with the same period in 2023 as the company lost money on car operations and reported only a narrow profit due to its finance business. In response, Nissan announced that it would cut its manufacturing output by 20%, laying off 9,000 workers as a result. It also cut its full-year operating profit forecast by 70%.

Some analysts had speculated that Nissan could face bankruptcy as early as 2026, when it has a huge amount of debt maturing.

The Honda-Nissan tie-up could lead to even more mergers in the industry in the future, Adam Jonas, auto analyst at Morgan Stanley, said in a note last week when news of the talks broke appeared.

“Legacy auto companies that don’t find new partners face the prospect of being smaller companies with higher capital expenditures and research and development costs per (each vehicle sold),” he wrote.

“Furthermore, in the midst of a potentially broader era of consolidation, those who chose not to participate were effective ‘become smaller.’ We are entering a new phase of the automotive industry, where the strategies for scale and cost management focus on collaboration and potential changes in scope.”