The reported merger talks between Honda and Nissan could divide the Japanese car-making industry into two powerful entities.

Neither Honda nor Nissan has confirmed plans for a merger, first reported on 17 December by the Japanese newspaper Nikkei. However, the pair agreed to work together on software and EVs in August.

A merger would create an automotive force with sales of more than seven million cars annually, based on last year’s figures for both companies.

That would have the new company vying for third place in the global automotive sales charts, along with Hyundai Group, which last year sold 7.3 million cars.

Mitsubishi could also join the new company, according to Nikkei, adding another million sales and taking the combined entity closer to the Volkswagen Group.

Japan is already home to the world's biggest car maker in Toyota, which sold 11.2 million cars last year. It also owns Daihatsu and has formed financial and technical alliances with Mazda, Subaru and Suzuki.

A potential merger would come to the aid of Nissan, whose struggles this year forced it to announce plans for 9000 job costs and a cut in production capacity by a fifth.

Nissan is facing many of the same problems that forced it into an alliance with Renault in 1999. The company’s operating profit dropped 90% in the six months to the end of September, dragging it perilously close to its first loss since Covid-hit 2020.

Honda’s results were better in the same period, with operating profit down 15%, but the two companies are facing similar problems and together could pool resources to come up with solutions. 

Probably the biggest concern weighing both Honda and Nissan is China, once a huge market for both but where buyers are now rapidly turning away from their largely ICE line-ups towards locally developed EVs and PHEVs. 

Both companies are rapidly trying to develop their own plug-in models to cater more for Chinese tastes, but they're both saddled with too many factories building too few cars in the country.

Both Nissan and Honda are also deeply embedded in the US, and while they have assembly plants in the country, both face the same issue potential tariffs on vehicles imported from key plants in Mexico. 

However, in the US, Honda has the upper hand in its range of hybrids – something Nissan lacks. Honda’s profits are still holding up in the US, whereas Nissan is being forced to discount amid buyer apathy.

“Our core models are not selling as much as we expected, nor are they generating the profit that we expected,” Nissan CEO Makoto Uchida told investors earlier in December.

Nissan is a far bigger force in Europe than Honda, but the region is small for both marques. Nissan might have the sales edge over the two, at just under 160,000 cars in the six-month period compared with 48,000 for Honda, but Nissan loses money in Europe. The region is still profitable for Honda, but its income fell 72% in the six-month period, even as revenue increased. 

For both brands, their European presence is heavily weighted toward the UK, where the ZEV mandate has forced them to discount their very limited range of electric cars in a scramble to hit targets.

Honda closed its Swindon plant in 2021, but Nissan still builds its key European models at Sunderland. Any merger between the two could open up Sunderland to Honda vehicles, giving production there a much-needed boost after falling away from its peak of more than 500,000 a decade ago.

Nissan’s immediate problems would force concessions from Honda. “It would likely be premised on early restructuring at Nissan,” Kohei Takahashi, an analyst at the bank UBS, wrote in a note. “Rapid cost cuts would need to be implemented quickly prior to integration.”

Other problems remain. “Two very different corporate cultures to bring together, and this will be a huge hurdle,” former Nissan executive Andy Palmer wrote on X.

Nissan’s share price is low enough that merger at current share prices for both companies would give Honda shareholders 84% of the new company, the bank Jefferies has calculated. 

That has implications for Renault, whose 36% stake in Nissan would translate to 5.8% stake in a possible new company.

Renault is open to a possible merger, Bloomberg reported on 18 December, citing sources who said that the French company would be interested in any outcome that strengthened the future of its alliance partner and bolster the value of its shares. 

Also reported to be throwing its hat into the ring is Foxconn, the Taiwanese contract manufacturer that is most famous for building the iPhone but keen to enter the automotive space.

Foxconn is seeking to take a controlling stake in Nissan, Japan's NHK newspaper reported.

Honda has been independent since its foundation in 1948. However, despite the rivalries between local brands, Japan has traditionally nurtured its own industry as it successfully grew globally. It could be that Honda will see saving Nissan as its patriotic duty.