Auto merger in Japan: Nissan and Honda are planning an alliance against VW and Toyota – Mitsubishi may join in

Japanese carmakers Nissan Motor and Honda Motor confirmed on Wednesday that they are discussing closer cooperation. However, they contradicted reports that they had already decided on a merger.

Nissan’s share price rose more than 22 percent after media reported, citing unnamed sources, that the company and Honda could form the world’s third-largest car group, behind Toyota and VW and ahead of Hyundai. Honda’s paper came easy.

Trading in Nissan shares was suspended but then resumed after the companies issued a statement saying they were “considering various opportunities for future collaboration but have not yet made any decisions.”

Nissan has so far formed an alliance with the French car manufacturer Renault, which is currently being reviewed. The company recently announced it would cut 9,000 jobs and cut its global production by a fifth due to weaker sales in China and the US.

Honda, Japan’s second-largest automaker, and Nissan, the third-largest, agreed to a smaller cooperation in March: They wanted to explore a strategic partnership for the production of electric vehicles. A full merger would help the two companies achieve scale to better compete with market leaders Toyota and Volkswagen.

Honda is considering several options, including a merger, a capital tie-up or the creation of a holding company, top manager Shinji Aoyama said on Wednesday. Aoyama declined to elaborate on when a possible decision will be made. However, the companies could make an announcement on December 23, TBS reported.

The two companies have already held initial discussions about a merger, said people who did not want to be identified. One option being considered is the creation of a new holding company under which the combined companies would operate. The alliance could also be expanded to include Mitsubishi Motors, which is already linked to Nissan. Mitsubishi shares rose 17 percent.

The talks are at an early stage and may not lead to an agreement, it said.

A deal would split the Japanese auto industry into two main camps: one controlled by Honda, Nissan and Mitsubishi, and another made up of Toyota Group companies. It would also give them more resources to compete with larger competitors worldwide after largely abandoning their longstanding partnerships with other automakers. Nissan has loosened its ties with Renault and Honda has parted ways with General Motors.

The move toward a merger would follow a decision by the two companies earlier this year to collaborate on batteries and software for electric vehicles. At that time, Honda’s CEO, Toshihiro Mibe, raised the possibility of an equity tie-up with Nissan. “If the merger actually goes through, it would ease Nissan’s financial difficulties in the short term,” said Tatsuo Yoshida, senior auto analyst at Bloomberg Intelligence.

Such a deal would be a defensive merger of the weaker Japanese car brands. Honda, Nissan and Mitsubishi collectively sold about four million vehicles worldwide in the first six months of the year, far fewer than the 5.2 million sold by Toyota alone. An alliance would allow the two companies to stand up to arch-rival Toyota at home and abroad. Toyota has invested in Subaru, Suzuki and Mazda.

“While this would be good news for Nissan given its weakened state, the two companies would have a lot of overlap and other issues to deal with,” said Julie Boote, a senior analyst at Pelham Smithers. Toyota could increase its shares in Subaru, Suzuki and Mazda sooner rather than later in response to stronger Japanese competition.

Honda’s value was 6.8 trillion yen ($44.4 billion) at market close on Tuesday, well above Nissan’s market capitalization of 1.3 trillion yen. But even their combined value is dwarfed by Toyota’s 42.2 trillion yen.

Honda has long struggled to keep pace with better-capitalized rivals when it comes to investing in new technologies. The company has been backing down on gas-electric hybrid vehicles lately while spending billions of dollars on all-electric models. At the same time, the partnership between Honda and GM is ailing. At the beginning of December, a partnership for a self-driving car was ended. GM has instead expanded ties with South Korean manufacturer Hyundai Motor.

Nissan, on the other hand, needs a partner who can put the company back on a stronger financial footing. Nissan is in the midst of a corporate restructuring to deal with stalling sales growth and lower profits. The company is under pressure from an activist shareholder and a huge debt load that has led to speculation in credit markets about its creditworthiness.

The Yokohama-based group has partially dissolved its complex, 25-year strategic partnership with Renault, which former CEO Carlos Ghosn was fixated on. Rivalries and mutual distrust grew over the years and came to a head when Ghosn openly considered a merger, contributing to his downfall.

The former CEO, who sued his former company after it was fired in 2018, warned of a “covert takeover” of Nissan by Honda in an interview with Automotive News back in August.