Honda, Nissan, Mitsubishi: A Potential Merger?

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In a move that could reshape the automotive industry’s competitive landscape, two of Japan's automotive giants—Honda and Nissan—are reportedly preparing for negotiations regarding a potential mergerAccording to the Nikkei Asian Review on Wednesday, the two companies are not only looking to combine their operations but also planning to include Mitsubishi Motors under a new holding companyCurrently, Nissan is the largest stakeholder in Mitsubishi, owning 24% of the shares.

The motivation behind this potential merger is quite straightforward, as the global automotive market intensifies its competition, bringing forth significant challenges amid an ongoing transition towards electric vehicles (EVs). The pivot from traditional gasoline vehicles to hybrid and fully electric models requires billions of dollars in investment, making scale and cost-efficiency crucial for survival in this evolving landscape.

At present, Nissan is grappling with serious financial issues, with reports indicating that it has only 12 to 14 months of cash reserves remaining

Similarly, Honda has faced a downturn in its financial health, recently revising its performance and delivery forecasts downward, indicating that both companies are under increasing pressure.

This prospective merger would create a holding company that includes Honda, Nissan, and Mitsubishi Motors, marking it as the largest restructuring move in the automotive sector since the establishment of Stellantis in 2021. The combined annual sales for this new entity are projected to exceed 8 million vehicles, positioning it to challenge industry behemoths like Toyota and Volkswagen, whose sales in 2023 were 11.2 million and 9.2 million vehicles, respectively.

Following the merger news, Mitsubishi's stock saw an increase of up to 17%, while Nissan's stock had not yet begun trading but had already hit the upper limit on bidding ordersOn the other hand, Honda's shares dipped by 2%. In contrast, Nissan’s stock in the U.S

surged by 11.5%, closing at $5.10, with Honda’s share slightly increasing to $25.26.

Nissan's challenges are particularly pronouncedEarlier this year, the company reported a staggering 99% decline in operating profit within the North American marketKey issues facing Nissan include soaring vehicle prices that drive consumers to competitors, declining reliability as customer trust wanes in critical models, and fierce competition from established players like Toyota, Hyundai, and Kia that dominate their respective segments.

Possibly the most alarming aspect of Nissan's predicament is its limited cash reserves, which analysts estimate could last only a yearThe company also faces pressure from activist investors and bears a heavy debt load, leading to skepticism in the credit markets regarding its investment-grade ratingIn response, Nissan has ramped up promotional activities, offering 0% financing and low lease deals on popular models like the Rogue, Altima, and Pathfinder, a trend likely to persist through 2025.

Conversely, Honda has also revised its earnings guidance downward, now anticipating a more pronounced decline in net profit, moving from a previously estimated 9.7% decrease to 14%. Originally projecting sales of 3.9 million vehicles for the financial year, Honda has revised that figure down to 3.8 million, with a reported 8% drop in group vehicle sales to 1.78 million during the first half of the year

While the company did see a revenue increase of 12% in the six months ending September 30, this growth was insufficient to meet market expectations.

As of now, Nissan’s stock has plummeted about 39% year to date, giving it a market capitalization of approximately $8 billionMeanwhile, Honda's shares have fallen around 18%, leaving it with a market value of around $40 billion.

Also noteworthy is that Mitsubishi Motors, a partner of Nissan, might be weaving itself into this potential merger equationNissan currently holds a 34% stake in Mitsubishi and has plans to reduce its ownership to 24% as part of measures to return to profitability.

Industry analysts have pointed out that Mitsubishi holds competitive advantages in the Southeast Asian market and has advanced plug-in hybrid technologyRepresentatives from Mitsubishi have previously stated, “We are exploring all possibilities and are eager to cooperate in areas where we can leverage our strengths.”

This merger, if it comes to fruition, could give rise to a formidable challenge to Toyota Motor Corporation, leading to a significant restructuring of Japan's automotive industry into two primary camps

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With both Honda and Nissan reducing their long-standing global partnerships with other automakers—Nissan with Renault and Honda with General Motors—this merger could afford them greater resources to compete against larger rivals.

Furthermore, the amalgamation would place these two manufacturers in a better position to compete with EV contenders such as Tesla and Chinese automotive manufacturers, enhancing their competitive stance against the world's largest car manufacturer, Toyota.

Toyota, having invested in companies like Subaru, Suzuki, and Mazda, continues to build a formidable brand coalition fortified by its excellent credit ratingIn the first half of this year, Honda, Nissan, and Mitsubishi combined managed to sell roughly 4 million vehicles globally, a far cry from Toyota's impressive 5.2 million sales figures.

This seismic shift in the automotive industry may not only alter the market dynamics in Japan but can also have a broader impact globally, redefining alliances and competition in a rapidly evolving landscape