Honda and Nissan have announced the start of merger talks to create the world's third-largest carmaker

Japanese automakers Honda and Nissan announced they have signed a memorandum of understanding to formally start merger talks to address the existential challenges of the global auto industry's rapid transition from traditional internal combustion engines to electric and hybrid drives.

According to a joint statement issued by the two companies on Monday (December 23), Honda and Nissan plan to set up a holding company to integrate their businesses and expect to complete the listing by August 2026.

Honda also announced it would buy back Y1.1tn worth of its own shares. Honda will nominate a majority of the holding company's board members. Separately, Nissan, which owns 24.5 per cent of Mitsubishi Motors, announced that Mitsubishi had signed a memorandum of understanding agreeing to join the integrated group.

The consolidation plan would create the world's third-largest automaker, competing not only with Toyota Motor Corp. in Japan, but also with Chinese automakers such as BYD and Geely in international markets.

Toyota has built a strong brand matrix with stakes in Subaru, Suzuki and Mazda, and gained market advantage with excellent credit ratings.

All three Japanese carmakers have been hit by the accelerating transformation of the global auto industry. The shift from traditional internal combustion engines to electric and hybrid drives is forcing these companies to re-examine their market strategies.

In the Chinese market, Honda and Nissan are in trouble due to fierce competition in the electric car market and the rise of domestic cars, and generally face overcapacity problems, and eventually have to lay off staff and reduce production scale, and Mitsubishi has almost completely withdrawn from the Chinese market.

Meanwhile, sales of hybrid models have rebounded in North America, putting Nissan at a competitive disadvantage to Toyota. Toyota has benefited from its leading hybrid technology, while Nissan has missed out on market opportunities due to its outdated and unattractive hybrid and electric models.

For Nissan, a merger with Honda is seen as an important opportunity to resolve the crisis. In recent years, Nissan's sales in the United States and China have been sluggish, revenue has fallen significantly, and it has been forced to cut jobs and production capacity, and even cut its annual profit forecast by 70%.