Honda and Nissan are exploring deeper collaboration, including a potential merger, to address growing competition from Tesla and Chinese EV makers. The move could create the world's third-largest automaker, reshaping Japan's automotive industry.

Honda and Nissan are in discussions to strengthen ties, potentially through a merger, two sources revealed on Wednesday. This move highlights how Japan's auto industry is responding to challenges from Tesla and Chinese competitors.

A merged Honda-Nissan entity would become the world's third-largest automaker, with a market value of $54 billion and annual production of 7.4 million vehicles, trailing only Toyota and Volkswagen.

The two companies established a strategic partnership in March to collaborate on electric vehicle (EV) development. However, Nissan's mounting financial troubles have accelerated the need for closer cooperation.

Last month, Nissan announced a $2.6 billion cost-saving plan, including 9,000 job cuts and a 20% reduction in production capacity, following an 85% drop in second-quarter profits due to weak sales in China and the US.

“This seems like an effort to rescue Nissan, but Honda is also facing challenges,” said Sanshiro Fukao of the Itochu Research Institute. Honda expects weaker cash flow next year and struggles in its EV segment.

Nissan shares surged over 22% on Wednesday, while Honda shares dipped 2.3%.

Mitsubishi shares rose 13%. The talks aim to enhance technological collaboration and could lead to a holding company or even a full merger, sources said. Cooperation with Mitsubishi Motors, in which Nissan owns a 24% stake, is also being explored.

Neither company has announced a deal, though they have acknowledged exploring collaboration opportunities. 

“A Honda-Nissan merger could revitalise Japan's auto industry by providing competition to Toyota,” said Seiji Sugiura of Tokai Tokyo Intelligence Laboratory. However, integrating their differing corporate cultures and navigating US trade policies could pose challenges. 

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