Honda and Nissan plan to merge, forming the world’s third-largest automaker, as Japan’s car giants accelerate efforts to lead the shift to electric and autonomous vehicles.

Japanese car manufacturers Honda and Nissan have revealed plans to merge, positioning themselves as the world's third-largest automaker by sales. The move comes as the automotive industry undergoes significant transformation amidst the shift away from fossil fuels.

The two companies signed a memorandum of understanding on Monday, with Nissan's smaller alliance partner, Mitsubishi Motors, also agreeing to participate in discussions about integrating their operations.

Japanese automakers have been slower than their global competitors in adopting electric vehicle (EV) technologies. The merger aims to streamline costs and accelerate their transition to electrification.

Speculation about a potential merger emerged earlier this month, with reports suggesting the talks were partly influenced by Taiwanese electronics giant Foxconn’s interest in a collaboration with Nissan. Nissan currently has an alliance with France's Renault SA and Mitsubishi Motors.

In August, Nissan, Honda, and Mitsubishi announced plans to share EV components such as batteries and collaborate on autonomous driving software development. These initiatives followed a preliminary agreement between Nissan and Honda in March.

Nissan has faced challenges recently, with Fitch Ratings downgrading its credit outlook to "negative," citing reduced profitability due to price cuts in the North American market. However, the company retains a robust financial foundation, with $9.4 billion in cash reserves.

Despite financial difficulties, Nissan's share price has shown resilience, with Monday's Tokyo trading seeing a 1.6% increase. Shares surged by over 20% last week following news of the potential merger.

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