Honda-Nissan merger: What you need to know

New Delhi

Honda and Nissan, Japan's second and third largest automakers, are inching closer to a historic merger. This news has ignited discussions across the board on the feasibility of this acquisition and who stands to gain or lose from this arrangement.

Key highlights of the merger

It is anticipated that the firms will finalise a corporate integration agreement, including the share transfer plan, by June 2025, and that the share transfer will take place by August 2026. According to Mitsubishi, it is considering its role in the merger and plans to make a decision by January 2025.

Nissan's Chief Executive, Makoto Uchida, at a press conference said, “Although it is a simple calculation, the total sales scale of the two companies is more than 30 trillion yen ($191.3 billion). The total number of four-wheeled vehicles will be 7.5 million, and if the business integration is realised, it will make the company one of the largest among global automakers.” 

What it means for both companies & the broader market

Honda and Nissan will try to consolidate their activities under a joint holding company, according to Toshihiro Mibe, President of Honda. The new management will be led by Honda, who will uphold each company's values and brands. According to him, they want to finalise the deal and list the holding company on the Tokyo Stock Exchange by August 2026, with a formal merger agreement expected by June.

Mibe also warned of the looming 'China' angle. He said, "There is a rise of Chinese power and emerging forces (in the automobile industry), and the structure of the automobile industry is changing. What this means is that, I believe that the value itself in terms of automobiles and mobility will change.”

According to Sam Fiorani, vice president of AutoForecast Solutions, Nissan offers huge SUVs with truck-based body-on-frame models, such the Armada and Infiniti QX80, that Honda does not have. These vehicles have good off-road performance and large towing capacity. He added that Nissan's years of experience in producing electric cars, batteries, and gas-electric hybrid powertrains may aid Honda in creating its own EVs and the next generation of hybrids. According to automotive industry analyst Sam Abuelsamid, who works in the Detroit area, "Nissan does have some product segments where Honda doesn't currently play," which a merger or alliance may help with. 

The 2 companies will join a long list of legacy automakers teaming up to enable next-gen vehicles that require collaboration & pooling of resources to gain competitive advantage.  Mergers have occurred ever since General Motors (GM) was established in the first decade of the 20th century through the acquisition of several brands. However, they may struggle to successfully bring disparate partners together. In 1998, the German carmaker Daimler-Benz consented to purchase Chrysler Corp., but ten years later, the merged company was divided. Within two years, the newly independent Chrysler went bankrupt and needed a federal rescue. In the past year, Chrysler's most recent merger, with Europe's PSA Group in 2001 to establish Stellantis, has had its own set of issues, including declining sales and earnings. 

Impact on US markets

US-listed shares of Honda Motor reacted positively to the merger news. Analysts believe it would indicate the auto industry's much-needed consolidation. Honda's stock surged over 16 per cent, marking the largest one-day percentage gain since the record 19.6 per cent run-up on October 28, 2008.

Investor optimism was boosted by Honda's announcement that it would buy back up to $7 billion (1.1 trillion yen) of its own shares in order to increase shareholder returns. This, along with implementing a flexible capital strategy, and improving the "efficiency of its capital structure," which fueled the stock jump. The buybacks would start on January 6, 2025, and continue for the majority of the following year.

In a recent note to clients, UBS analyst Joseph Spak stated that in order to increase capital efficiency, the industry's rapid changes necessitate consolidation, partnerships, or other actions.

Impact on Indian markets

Given their separate large production setups and the fact that Nissan has an alliance partner in France, the Japanese companies Honda and Nissan's plans to combine operations in response to difficult business challenges could have a significant impact on both their global operations and their ability to operate in India. The entire plan is further complicated by the almost nonexistent activities of Mitsubishi in India, another party to the proposed Honda-Nissan merger. In India, Mitsubishi is sold in collaboration with the C K Birla group; however, the latter has since partnered with the French PSA group to produce Citroen automobiles.  

Take into account how complicated Nissan and Honda's operations are in India: Nissan now operates in India through a manufacturing joint venture with its global alliance partner Renault, having previously had a joint venture with Ashok Leyland. The alliance in India, which is estimated to have a joint installed capacity of 4 lakh units at the Oragadam factory outside Chennai, has been having trouble with sales.

In India, Nissan and Renault have both had sporadic success and have not taken advantage of any promising leads. With an export-oriented business model, Nissan specifically attempted to balance operations, but even this has proven difficult. If Renault does not participate in the Nissan-Honda global deal, it is still unclear what will happen to the Chennai factory. As the situation develops, it will be necessary to find out on what terms the Nissan or, for that matter, Renault vehicles would be manufactured at the Chennai plant.

Honda, one of the larger participants in the proposed global merger, is having a very difficult time. Although the company was once thought to be a powerful force, it has failed to live up to its reputation and has been losing market share to more established competitors like Hyundai, Toyota, Maruti Suzuki, and even regional brands like Tata Motors and Mahindra & Mahindra. This year, Honda anticipates almost negligible growth in sales in India (approximately 87,000 units). Due to low demand, the company's Greater Noida manufacturing facility has been closed for many years. 

Industry reactions

Industry reactions to this news have been mixed. While some tout the merger idea as a 'game-changer', former Nissan CEO Carlos Ghosn, who fled to Japan in 2019 following corruption allegations, questioned whether a possible Honda-Nissan merger would succeed, stating that the latter's plans "do not make sense." He said, "The first thing that you look at when you want to envision an alliance or a partnership is a complementarity between the two partners. Well, I look at the complementarity between Honda and Nissan and I see none. There is no complementarity. The two companies are two Japanese companies. They are strong in the same fields. They are weak in the same fields. Both of them have very developed technologies. Again, from an industrial point of view, there is duplication everywhere. So, industrially, for me, that doesn't make sense."

As the merger talks progress and new information is revealed, the global auto industry is bracing for a major shift.