By Maki Shiraki and Norihiko Shirouzu
TOKYO (Reuters) -Honda and Nissan are in talks to deepen ties, two people said on Wednesday, including a possible merger, the clearest sign yet of how Japan’s once seemingly unbeatable auto industry is being reshaped by challenges from Tesla and Chinese rivals.
A combined Honda and Nissan would create a $54 billion company with annual production of 7.4 million vehicles, making it the world’s third-largest auto group by car sales after Toyota and Volkswagen.
The two companies forged a strategic partnership in March to collaborate on electric vehicle development, but Nissan’s mounting financial and strategic problems in recent months have increased the urgency for closer cooperation with bigger rival Honda.
Nissan last month announced a $2.6 billion cost-cutting plan that includes cutting 9,000 jobs and cutting 20% of global production capacity, as slumping sales in China and the United States led to a decline in profits in the second quarter by 85%.
“This deal seems to be more about saving Nissan, but Honda itself is not resting on its laurels,” said Sanshiro Fukao, executive fellow at the Itochu Research Institute. “Honda’s cash flow is likely to deteriorate next year and its electric cars are not doing so well.”
Nissan shares closed nearly 24% higher in Tokyo trading on Wednesday, while shares of Honda, whose $43 billion market value is more than four times Nissan’s, fell 3%. Shares of Mitsubishi Motors, in which Nissan is the largest shareholder with a 24% stake, rose by almost 20%.
Automakers have faced challenges from EV makers, especially in China, where BYD and others have taken a big lead.
Newly elected US President Donald Trump is also threatening hefty tariffs on vehicles shipped from Canada and Mexico to the US, further increasing pressure on companies. Honda and Nissan both produce cars in Mexico for export to the United States.
The talks between Honda and Nissan, first reported by the Nikkei newspaper, could allow the companies to collaborate more on technology and help them create a more formidable domestic rival to Toyota.
The discussions are aimed at finding ways to strengthen cooperation and include the possibility of creating a holding company, said the people, who declined to be identified because the information has not been made public.
The companies are also discussing the possibility of a full merger and looking at ways to work with Mitsubishi, according to one of the people.
Honda, Nissan and Mitsubishi said none of the companies had announced a deal, although Nissan and Mitsubishi noted that the three automakers had previously said they were considering opportunities for future cooperation.
French carmaker Renault, Nissan’s largest shareholder, is open to a deal in principle and would explore all implications of a partnership, two people familiar with the matter said.
A Renault spokesperson declined to comment.
Renault shares rose 6.7% at 1352 GMT, marking the best day in just under 2.5 years.
The three Japanese automakers are expected to hold a joint press conference in Tokyo on Monday, according to a source familiar with the matter.
Taiwan’s Foxconn, which produces Apple’s iPhones and is looking to expand its nascent EV contract manufacturing business, approached Nissan with a bid but it was rejected by the Japanese company, two separate sources familiar with the matter said.
Bloomberg News reported earlier on Wednesday that Foxconn had approached Nissan about taking a controlling stake.
Foxconn did not immediately respond to a request for comment, while a Nissan spokesperson declined to comment on Foxconn.
CHANGING LANDSCAPE
Any merger would face significant US criticism after Trump vowed to take a tough stance on imported vehicles. He could seek concessions from Honda and Nissan to approve a deal, auto industry officials said.
Over the past year, an EV price war launched by Tesla and BYD has increased pressure on automakers who are losing money on next-generation vehicles. That has pushed companies like Honda and Nissan to look for ways to reduce costs and speed up vehicle development, and mergers are an important step in that direction.
“In the medium to long term, this is good for the Japanese auto industry because it creates a second axis against Toyota,” said Seiji Sugiura, senior analyst at Tokai Tokyo Intelligence Laboratory.
“Constructive rivalry with Toyota is positive for Japan’s rather stagnant auto industry as it competes with Chinese automakers, Tesla and others.”
S&P Global Ratings said it would take some time for the synergies from a potential merger to boost the companies’ creditworthiness.
Differences in corporate culture and strategies can mean that a merger that does not give control to one side is unlikely to produce meaningful results.
“In our view, there have been few instances where mergers and alliances between major automakers have led to significant benefits,” the report said.
Honda and Nissan would also have to figure out how to integrate their different corporate cultures if they go ahead with a merger, analysts said.
“Honda has a unique technology-oriented culture with strengths in powertrains, so there should be some internal resistance to merging with Nissan, a competitor with a different culture that is now faltering,” said Tang Jin, senior researcher at Mizuho Bank. .
(Reporting by Maki Shiraki in Tokyo and Norihiko Shirouzu in Austin, Texas; additional reporting by Kantaro Komiya and Yoshifumi Takemoto in Tokyo, Zhang Yan in Shanghai, Ben Blanchard in Taipei and Gilles Guillaume and Mathieu Rosemain in Paris, Nick Carey and Josephine Mason in London. Writing by David Dolan and Miyoung Kim. Editing by Jamie Freed and Mark Potter.
