Honda-Nissan merger talks highlight threat of Chinese EVs to Japan's auto industry

Tokyo, Japan

The fact that Honda and Nissan, Japan's second- and third-largest automakers, are teetering on the brink of becoming a marriage speaks volumes about an existential threat growing from Chinese electric vehicles (EVs) to Japan's car manufacturing industry as dominant as it once was.

The two automakers have begun talks aimed at strengthening their collaboration, with sources familiar with the matter saying that a possible holding company or merger could even be on the table. The move follows a surge in Chinese EV brands, notably BYD, who have been winning over market share in China, the world's top automotive market, with the innovative electric vehicles and software.

Slumping sales in China contributed to Honda's recent 15 percent drop in quarterly profit because the company has laid off workers in China. And for Nissan, which has struggled with sales, it has announced plans to reduce capacity by 20% and cut 9,000 jobs worldwide. These challenges highlight tough competition from Chinese firms which are catching up to automotive stalwarts with cutting edge EV technology.

But experts like Sanshiro Fukao, executive fellow at the Itochu Research Institute in Tokyo, warned that even companies Honda and Nissan have very little time to maintain competitiveness. He stressed the urgent and transformational such shifts in the industry, and that the era of 'churning out profits through economies of scale' is over.

For Japan in particular, the automotive sector has long constituted the lifeblood of the economy. The auto industry is one of the main pillars for Japan’s manufacturing dominance, so anything anywhere near significant decline here could have far reaching effects. Throughout Japanese manufacturing, Takumi Tsunoda, senior economist at the Shinkin Central Bank Research Institute, predicts that "The whole of Japanese manufacturing will not get better if the auto industry doesn't."

As the talks unfold, the future of Honda and Nissan — and Japan’s automotive industry at large — hinges on their ability to respond to the sweeping changes driven by Chinese EV innovation.