Honda and Nissan: merging to survive

Honda and Nissan have confirmed they are in early talks about a merger, which could also take in Mitsubishi Motors. Japan’s carmakers face a costly shift to electric vehicles and fierce competition from much larger Chinese rivals. Combining is a bid for global scale.

The talks build on months of cautious courtship. In March the two companies agreed to study co-operation on electric vehicles, and in August they expanded that into joint work on software and batteries, with Mitsubishi, in which Nissan holds a large stake, joining in. A full merger would create the world's third-largest carmaker by sales, behind Toyota and Volkswagen. It would also be the biggest shake-up of Japan's car industry in a generation.

Too small to go alone

Building new software and proprietary battery chemistries costs tens of billions a year, and self-driving technology adds more. Mid-sized carmakers cannot pay that on their own. Chinese manufacturers led by BYD are turning out good EVs at half the cost, and are taking market share from the Japanese across Asia. For Honda and Nissan, merging is a matter of staying in business.

The economics are unforgiving. The cost of developing a new vehicle platform, an operating system or a battery line is largely fixed, so the carmaker that spreads it across the most vehicles has the lowest cost per car. BYD makes many of its own batteries and chips and sells in enormous volumes at home, which lets it undercut rivals on price while still earning a profit. Honda and Nissan, each selling a fraction of Toyota's volume, cannot match that alone.

South-East Asia shows how fast the ground is shifting. Thailand has for decades been a manufacturing base and a near-captive market for Japanese brands, but Chinese carmakers have been winning share there with cheaper electric models, and BYD opened its own Thai factory this year. Losing ground in a region where they once faced little competition would hurt Honda and Nissan's profits long before any change in Europe or America.

Nissan's weak hand

The two partners are not coming to the table as equals. Nissan has been in trouble for years. Its alliance with Renault never fully recovered from the arrest of its former chairman, Carlos Ghosn, in 2018, and the two companies restructured their cross-shareholdings last year, loosening the tie. In November Nissan reported a collapse in profits, cut its full-year forecast and announced 9,000 job cuts and a 20 per cent reduction in global production capacity. Its model line-up is ageing, and it has lost ground in both China and America.

Honda is in better shape, helped by a profitable motorcycle business and solid demand for its hybrids. For Honda, a deal offers scale, access to Nissan's experience in electric cars and a way to keep a struggling domestic rival out of foreign hands. For Nissan, it offers a stronger partner and a route out of a slow decline.

What history suggests

Car mergers have a mixed record. The union of Daimler and Chrysler in 1998 was billed as a merger of equals, foundered on culture and strategy, and was unwound in 2007. The combination of Fiat Chrysler and PSA into Stellantis in 2021 has delivered the promised cost savings, though its sales have since slipped. Renault's rescue of Nissan in 1999 worked for many years, until governance disputes pulled the alliance apart. The common thread is that savings come from shared platforms and purchasing, and that they take years to arrive.

The case against a merger

There are serious doubts. Combining two companies that are both losing share does not automatically produce a winner, and the integration of engineering teams, factories and dealer networks could distract management for years, just as the industry is changing fastest. Japan already has too many car plants for its shrinking home market, and a merger would require closures that are politically sensitive. Honda's shareholders may also wonder why they should take on Nissan's problems.

A further argument is that the shift to electric cars is proving slower than expected in America and Europe, and that hybrids, where Japanese firms are strong, will remain important for years. Toyota, which has bet heavily on hybrids, has done well from that slowdown. The argument has merit for the next few years, but the competition from Chinese electric cars in Asia is already here, and it is eroding the markets where Japanese carmakers have long been dominant.

Who gains and who pays

Suppliers of parts to both companies face a consolidation that would squeeze their prices and cut duplicated contracts. Workers in overlapping plants, particularly at Nissan, would bear most of the job losses. Shareholders of Nissan, whose market value has fallen sharply, stand to gain from a deal struck at a premium. Mitsubishi's future depends on whether it joins or is left to find another partner.

What to watch

The first milestone is a formal agreement setting out how the companies would combine, reportedly under a shared holding company. Next come the terms: the ratio at which shares are exchanged, the make-up of the board and whether Honda insists on a Nissan turnaround plan as a condition. Any sign of a rival suitor for Nissan would also change the dynamics.

The Honda-Nissan talks are a defensive move by two carmakers too small to fund the EV transition alone. If they fail to pool their capital, both will probably keep losing ground in Asia to BYD over the next few years. Even if they succeed, expect the savings to take several years to show, with Nissan's workers and suppliers paying the early price and Chinese rivals continuing to take share in South-East Asia in the meantime.