Shares of Japanese automaker Nissan soared nearly 24% on Wednesday following reports that the automaker is in talks with larger rival Honda about a potential merger.
A merger between Honda and Nissan would create a company worth $54 billion with an annual output of 7.4 million vehicles, making it the world's third-largest auto group after Toyota and Volkswagen.
The automakers' talk of a merger is the clearest sign yet of how Japan's once seemingly invincible auto industry is being reshaped by challenges from Tesla and Chinese rivals.
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The two companies are seeking to deepen ties and look at ways to strengthen cooperation, including the possibility of establishing a holding company, sources told Reuters.
The two companies are also discussing the possibility of a full merger and looking at ways to partner with Mitsubishi Motors, Nissan's largest shareholder, a person familiar with the matter said.
Japanese newspaper “Nikkei” Be the first to report a potential merger.
Honda, Nissan and Mitsubishi said no deal had been announced by any company, although Nissan and Mitsubishi noted that the three automakers had previously said they were considering opportunities to collaborate in the future.
French automaker Renault, Nissan's largest shareholder, is open to a deal in principle and will study all implications of a tie-up, two people familiar with the matter said.
“Bailout Nissan”
Legacy automaker Nissan is in a particularly tough spot. Second-quarter profits plunged 85% as it failed to boost sales in China and the United States.
Last month, the automaker announced a $2.6 billion cost-saving plan that included cutting 9,000 jobs and 20% of global production capacity.
“This deal seems to be more about bailing out Nissan,” said Sanshiro Fukao, an executive researcher at Itochu Research Institute.
This sentiment was also evident in the Japanese market, with Nissan Motor rising 23.70% on the day and Honda Motor falling 3.04%.
While Japanese auto stocks rose broadly, investors were hawkish on Honda. Mitsubishi Motors rose 19.65% and Mazda Motors rose 5.54%.
Meanwhile, Renault performed well in the European market, rising 6%.
The challenge of electric vehicles
Honda and Nissan formed a strategic partnership in March to collaborate on electric vehicle development, an area where Japan's traditional automakers have struggled.
Itochu Research Institute's Fukao noted that a potential merger would also benefit Honda, given that the company's “cash flow will deteriorate next year and its electric vehicle development is not going well.”
Japanese automakers have struggled particularly hard in China, once their biggest export market, where rivals such as BYD have made strides with cheap but high-quality electric vehicles.
In addition, the electric vehicle price war launched by Tesla and BYD has increased pressure on automakers to lose money on next-generation vehicles.
At a time like this, a merger would allow Honda and Nissan to cut costs, speed up vehicle development, collaborate more on technology and create a stronger domestic rival than Toyota.
“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 competition with Toyota is a positive factor for the rather stagnant Japanese auto industry when it has to compete with Chinese automakers, Tesla and others.”
Potential speed bumps
But analysts say Honda and Nissan will have to figure out how to integrate their different corporate cultures if they go ahead with the merger.
Tang Jin, a senior researcher at Mizuho Bank, said: “Honda has a unique, technology-focused culture and has advantages in powertrains, so the merger with Nissan should encounter some internal resistance. Nissan is a competitor with a different culture. The opponent is currently faltering.
S&P Global Ratings also warned that it would take some time for synergies from a potential merger to improve the company's creditworthiness.
Differences in corporate culture and strategy may mean that a merger that does not give one party control is unlikely to produce meaningful results.
“We believe mergers and alliances between major automakers rarely deliver significant benefits,” the company said in a note.
Any merger would face intense scrutiny in the United States, where President-elect Donald Trump has vowed to take a tough stance on imported cars.
Auto industry officials said Trump would likely seek concessions from Honda and Nissan to approve any deal. Honda and Nissan both build cars in Mexico and export them to the United States.
- Reuters, with additional editing and input by Vishakha Saxena
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