Honda and Nissan officially began merger talks to establish the world's third-largest automaker

Honda and Nissan have formally committed to negotiating a potential merger over the course of the next six months. The transaction would make Honda the third-largest carmaker in the world and provide them with additional resources to contend with the rising challenge posed by Chinese automakers.

To formally start negotiations to strengthen a relationship that started this year, Honda and Nissan signed a memorandum of understanding on Monday. With a target completion date of August 2026, the firms will talk about merging under a holding company over the course of the following six months.

The negotiations will also involve Mitsubishi, a third, smaller Japanese carmaker that currently has a partnership with Nissan. In terms of worldwide sales, the merged business, if it were formed, would lag behind just Volkswagen and Toyota (TM).

At a conference in Tokyo on Monday, Honda CEO Toshihiro Mibe stated that the company and Nissan have determined that they can manage research and development and new investments more effectively as a team in order to manage the transition.

“Current business models are being upended. It is not going to take 10 to 20 years for that to happen — it will come much faster,” Mr. Mibe said. “We need to have the right artillery in order to be competitive on that battlefield so we’re starting today.”

Nissan and Honda claimed that by merging their companies, they would be able to standardize the fundamental components of automobiles and boost output. By taking those actions, each corporation would spend less on car development, freeing up funds for other projects like the development of new software.

The Tokyo Stock Exchange would list the combined Honda and Nissan's new parent company. A president would be chosen from among the majority of the new company's directors that Honda would recommend. Nissan's longtime partner and smaller Japanese carmaker Mitsubishi Motors stated that it would also think about joining the new entity.

The combination would be worth over $50 billion based on the automakers' current market values.

During the first half of the current fiscal year, Nissan's operational profit fell 90 percent to $214 million as a result of its difficulties in China. Since Nissan announced last month that it will drastically reduce its worldwide operations, a number of organizations, including activist investors, have been following the company.

Honda is still in a strong financial position when compared to Nissan. Due to sluggish sales in China and increased R&D expenses, Honda's $1.8 billion profit for the July–September quarter was 15% less than it was a year earlier.

“Nissan’s current decline could very well be Honda’s tomorrow,” said Mr. Nakanishi, the industry consultant. That is something Honda recognizes. “It realizes its best shot is to combine with Nissan, share a common destiny and try to overcome the impending crisis together,” he said.