Reports indicate that two major Japanese automakers, Honda and Nissan, are discussing a merger. The two companies had previously signed a cooperation agreement in the electric and smart vehicle sectors.

However, the gap between them and Toyota continues to widen. If the merger materializes, the new entity is expected to become one of the top three automotive groups globally.

Unlike Toyota, Honda and Nissan have long relied on their leading market share in China to maintain a position in the global top 10. Honda China’s annual sales once approached 2 million vehicles, and the Chinese market remains Nissan's largest worldwide.

This merger can be seen as a last-ditch effort. Chinese automakers have managed to topple two key representatives of Japanese vehicles in one go, marking a significant victory in the competitive automotive market.

Declining Sales in China for Honda and Nissan

In 2023, Honda sold 3.98 million vehicles globally, a 6% increase year-over-year, ranking seventh worldwide. However, its sales in China reached only 1.23 million units, representing a 10% decline. From January to November 2024, Honda's cumulative sales in China plunged further to 740,000 units, down over 30% year-over-year.

Nissan's global sales in 2023 were 3.37 million vehicles, a 5% year-over-year increase, ranking eighth globally. However, its performance in China was dismal, with only 790,000 vehicles sold in 2023, down 24%. From January to November 2024, cumulative sales dropped further to 620,000 units, a 10% decline, marking two consecutive years of failing to reach 1 million units.

Despite their strong performance overseas, both brands face mounting challenges in China due to the rise of domestic automakers and a shift in consumer preferences toward electric and smart vehicles. Neither Honda nor Nissan has managed to reverse their declining fortunes in the Chinese market.

For Nissan, the situation is especially dire. The Sylphy sedan, crowned as the best-selling internal combustion engine (ICE) vehicle, is practically the only model keeping Dongfeng Nissan afloat. Innovations such as the e-POWER hybrid technology and new models like the Ariya and Terra have failed to boost its fortunes.

The situation for Nissan worsened after its internal conflicts within the Renault-Nissan-Mitsubishi alliance gained global attention. Nissan distanced itself from Renault, which had once saved it from bankruptcy. It also withdrew from the European market and declined to join Fiat-Chrysler's proposed merger. Meanwhile, Renault independently entered into a powertrain partnership with China’s Geely.

As Nissan’s ties with Renault weakened, its dependency on the Chinese market became more apparent. However, its sales began to decline after years of plateauing around 1 million units annually, resulting in the closure of its Changzhou plant and the repurposing of its Wuhan plant to produce vehicles for Lantu Motors.

Nissan’s Brand Decline and Honda’s Transition to Electrification

Nissan’s biggest challenge lies in its overreliance on aging models. The strategy of selling two generations of models simultaneously, such as the Sylphy Classic priced below ¥100,000, further erodes its profitability and damages its brand reputation.

In the first half of fiscal 2024 (April to September), Nissan's operating profit plunged 90.2% year-over-year, with its operating profit margin dropping from 5.6% to a mere 0.5%. Net profit fell by 93.5%. As a result, Nissan had to slash its full-year operating profit forecast from ¥600 billion to ¥150 billion.

Honda, on the other hand, remains more resilient and continues to fight for the Chinese market by introducing exclusive models like the e:N electric series and the Accord plug-in hybrid.

Some of these models are even being exported to overseas markets. Despite a sharp decline in sales, Honda’s brand equity remains strong, with models like the Accord, Odyssey, Civic, and CR-V maintaining high recognition.

Honda has announced it will cease introducing new ICE vehicles after 2027 and has begun closing older ICE plants to make way for new facilities with an annual capacity of 240,000 units focused on new energy vehicles (NEVs). It has also launched two dedicated NEV brands, "Ye" and "Lingxi," signaling its commitment to an electric future.

The company’s founder once expressed regret for naming the company after himself. Yet, Honda’s achievements in automotive and motorcycle engineering have left an indelible mark on Japanese industry.

Even with its sales slump, Honda’s influence in the Chinese market rivals that of Toyota, the world’s largest automaker.

A Strategic Merger for Survival

Nissan aligned itself with Renault and Mitsubishi, Honda partnered with General Motors, and Toyota consolidated its domestic dominance by incorporating Daihatsu, Subaru, Mazda, and Suzuki into its ecosystem. With its full-spectrum product lineup, Toyota stands as a global automotive powerhouse.

Amid fierce global competition, Nissan cannot survive alone. For Honda, the merger offers a chance to strengthen its North American dominance while addressing its challenges in China. By joining forces with Nissan and Mitsubishi, Honda could catapult itself into the ranks of the top three global automakers.

This merger is not only logical but also inevitable, especially as Japanese automakers aim to regain control of their destiny after shifting alliances with Renault and GM. Surprisingly, the Chinese market has become a key driver of this consolidation.

In China, Honda and Nissan can integrate their resources in economy vehicles and electric-smart cars, including hybrid technology, electric powertrains, and emerging EV products. This could position the alliance to compete with Toyota in both scale and technology.

Dongfeng Motor, which has joint ventures with both Honda and Nissan (Dongfeng Honda and Dongfeng Nissan), stands to benefit the most from the merger. It could optimize operations in R&D, procurement, and manufacturing to achieve market-leading efficiency.

Challenges and the Road Ahead

However, the merger faces significant challenges, particularly in Europe and China.In the hybrid market, Toyota maintains an overwhelming lead. Moreover, Toyota’s announcement of a next-generation engine optimized for hybrid vehicles, set to launch in 2026, underscores its continued dominance in the plug-in hybrid segment, a key battleground in China’s NEV market.

Meanwhile, Toyota is bolstering its high-end lineup in China with models like the Highlander, Land Cruiser, and Crown SUVs, further solidifying its influence. In contrast, Honda and Nissan appear to be struggling to maintain their foothold in the ICE market.

The potential domestic production of Lexus could also shake the alliance’s prospects. If Lexus begins local manufacturing in China, Honda and Nissan’s merger might lose much of its relevance.

As the world’s largest automotive market and the epicenter of electric vehicle innovation, China remains crucial for any automaker's survival. To secure a foothold globally, the Honda-Nissan-Mitsubishi alliance will need strong support from the Chinese market. Yet, achieving this will be an uphill battle.

Whether this collaboration takes the form of a capital alliance, technology partnership, or full-scale merger remains uncertain. However, full consolidation is likely the only viable path for the alliance to resist Toyota and succeed in China.

Capacity optimization and R&D integration will be key, likely leading to further plant closures and workforce reductions in China.

While the merger may not significantly disrupt Chinese automakers, its symbolic significance lies in whether the new entity might be named the "Japan Automobile Group."