The automotive industry is currently undergoing a transformational wave, prompting major industry players to strategize for survival and growth. In an unexpected but significant development, two of Japan's largest automotive manufacturers, Honda and Nissan, have decided to combine forces in a bid to address pressing challenges posed by evolving market dynamics. This strategic alliance signifies a new chapter for both companies as they explore the potential benefits of a merger in a landscape defined by rapid electrification and technological advancements.

On December 23rd, Honda and Nissan made formal announcements regarding the commencement of merger negotiations. The two companies, along with Mitsubishi Motors, which has signed a memorandum of understanding expressing its intent to explore involvement in the merger, aim to create a joint holding company that would serve as the parent entity to Honda and Nissan. This newly established entity is set to lay the groundwork for the companies' united efforts, with plans to establish strategic directions by the end of January 2025, culminating in a final agreement by June 2025, and eventual public listing in Tokyo by August 2026.

While the merging process will result in shared leadership significantly tilted in favor of Honda, with over half of the new board members nominated by Honda, this partnership is largely driven by the pressing need to adapt to the rapidly changing automotive landscape. Honda intends to maintain a majority stake in the new holding company, taking a leadership role in steering the joint operations as the two companies seek to enhance their market competitiveness.

Both automakers have acknowledged the urgency of collaboration in the face of the electric vehicle (EV) revolution. Traditionally lagging behind competitors such as Tesla and BYD, Honda and Nissan have suffered disappointing sales figures, with Nissan's pure electric vehicle sales reaching only 34,000 units and Honda's falling to 20,000 units in Q3 of 2024. These figures starkly contrast the impressive performances of EV pioneers Tesla and BYD who achieved sales of 432,000 and 424,000 units, respectively, during the same period.

Additionally, both automakers have struggled with profitability in recent years. Honda's revenue growth has not translated into improved earnings, resulting in a peculiar quandary of increasing income but declining profits. Similarly, Nissan has faced a crisis with a staggering 104.9% drop in net profit in Q3 compared to the previous year, reflecting the ongoing challenges it faces within the automotive sector.

Honda's CEO, Toshihiro Mibe, emphasized that success in the merger hinges on Nissan's ability to return to profitability. Mibe highlighted the critical need for both companies to invest in developing electric vehicles and smart driving technologies as they forge a future-centric partnership. Meanwhile, Nissan's CEO, Makoto Uchida, expressed optimism regarding the collaboration, indicating a focus on achieving scale and exploring growth opportunities through sustainable partnerships.

This merger represents a climax of ongoing discussions and mutual interests that have developed steadily over recent months. The preliminary steps towards cooperation began in March when Honda and Nissan signed a memorandum of understanding to collaborate in EVs, sharing software platforms and essential components. By August, Mitsubishi joined the alliance, further bolstering their collaborative efforts in the areas of smart and electrified vehicle development.

The call for deep business integration arises as the automotive sector grapples with unprecedented change. Mibe pointed out that the partnership aims to share resources and intelligence to achieve economies of scale while safeguarding the brand identities of both Honda and Nissan. As industry dynamics push for a convergence towards electrification, both companies recognize the imperative of adapting to market conditions to maintain competitiveness.

Beyond just market share concerns, Honda and Nissan are acutely aware of the aggressive competition posed by emerging EV manufacturers, particularly in key markets like the U.S. and China. Nissan has seen over a 25% decrease in market share in America over the last five years, while Honda's share increased only slightly by 1.3% in 2023. The situation is even more daunting in the Chinese market, where Nissan faced declines of 22.1% and 24% in consecutive years, while Honda saw decreases of 12.1% and 11%. The pressing need to recover lost ground in China, a rapidly growing market for electric vehicles, further underscores the urgency of their collaborative initiatives.

In light of these challenges, Honda's previous explorations for alliances signal a search for strategic partnerships to navigate the EV frontier. From a pivotal interview in April 2021 where Mibe indicated a willingness to consider alliances and co-development, to a previously announced collaboration with General Motors to develop cost-effective electric vehicles, the partnership with Nissan now represents a critical step due to the unmet goals resulting from prior engagements.

As both automakers pursue their ambitions, characterized by Honda's electrification targets set to phase out internal combustion engines by 2040, and Nissan's “Nissan 2030 Vision” outlining commitments to revolutionize their offerings, the focus now shifts towards meaningful collaboration. With anticipated total annual sales of over eight million vehicles, the merger would position the new entity as one of the industry's largest and most influential players—trailing only Toyota and Volkswagen.

This consolidation raises questions about the industry’s trajectory, especially as participants grapple with electric vehicle adoption, market reallocation, and supply chain management. Many analysts speculate that the merger will lead to a significant recalibration of Japan's automotive landscape, bifurcating into factions led by Toyota's alliance and the newly formed Honda-Nissan-Mitsubishi coalition. As competition in electrification and technology intensifies, the ramifications of this merger will likely reverberate across the global automotive stage.

Despite the initial enthusiasm for the merger, skepticism endures among industry experts. Critics like former Renault CEO Carlos Ghosn have labeled the merger as a desperate gamble rather than a calculated strategic move. Comments from market experts accentuate concerns about the redundancy in overlapping product lines and the internal conflicts that may arise, undermining intended efficiencies and synergies.

As the automotive sector confronts a multitude of challenges, the merger between Honda and Nissan signifies a pivotal moment. This shift may catalyze a broader reckoning for the industry as it seeks to redefine itself amid technological upheavals and consumer demands for sustainable solutions. The pursuit of partnership and collaboration stems from an acute awareness that, in a rapidly transforming landscape, unity may indeed be the key to survival. The world watches closely as Honda and Nissan begin this new chapter in their storied history, hoping to emerge as resilient leaders amidst the ongoing evolution of the automotive industry.