In 2024, the Japanese automobile brands faced significant challenges in the Chinese market, marking a sharp decline in their performance compared to previous yearsThis comes at a time when the Chinese automotive industry thrives following government incentives to trade old cars for new onesThe domestic sales of narrow passenger vehicles reached an impressive 2.261 million units in October alone—a year-on-year increase of 11.3% and a sizable month-on-month growth of 8.1%, thereby setting a new record for October sales in nearly five years.

However, the prosperity of the automotive market seems particular to China’s indigenously-produced brands, contrasting sharply with the Japanese brands, which saw their market share tumble by 4.8%. This decline is particularly stark when compared to the modest 2.3% drop experienced by German brands, underlining a unique predicament that Japanese automakers find themselves in.

The challenges faced by Japanese automakers extend beyond just decreasing sales figures; they also grapple with flawed product structures

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For instance, Nissan's popular model, the Sylphy (or Xuan Yi in Chinese), has been primarily a low-cost A-class fuel vehicle that hasn’t changed significantly since 2018, indicating a stagnation in innovation and adaptation in meeting evolving consumer preferencesMeanwhile, Honda's sales in China have dwindled for eight consecutive months, showcasing a nostalgic attachment to past designs without significant updates.

In the face of this adversity, traditional strengths that once defined Japanese automakers, such as their commitment to craftsmanship and reliability, are now being questioned as these companies struggle to transition into the booming new energy vehicle (NEV) marketGlobal contenders in the fuel vehicle sector are faltering in the Chinese NEV landscape, signifying a need for Japanese companies to reevaluate their strategies and abandon outdated methodologies.

Remarkably, as 2024 approaches its conclusion, two major players in the Japanese automotive industry are moving toward an unprecedented merger, which represents their first step toward entering a new era of cooperation and adaptation

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On December 23, 2024, Nissan and Honda signed a memorandum of understanding to commence discussions on merging, with the intention of finalizing a merger agreement by June 2025, and Mitsubishi Motors has also shown interest in potentially joining these talks.

When examining the fundamentals, Honda is generally seen as undervalued; however, the merger is accompanied by concerns regarding the negative implications it may have on Honda’s business operationsIn stark contrast, Nissan’s performance is already at a low ebbTherefore, the anticipation for a successful merger could put even more pressure on Honda’s stock price.

Despite the marked differences in their operational performances and market expectations, the two companies have opted for this merger to bolster their chances of survival amid the intensifying competition within the global automotive industry.

1. For Survival

Both Honda's CEO, Toshihiro Mibe, and Nissan's CEO, Makoto Uchida, were present at the signing of the memorandum, emphasizing the gravity of the discussions at hand

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However, the ambiance at the press conference suggested hesitation, with the three executives appearing apprehensive about the merger prospectsThis uneasy atmosphere highlighted doubts about the feasibility of merging three struggling Japanese automakers, particularly given their inability to capture significant market shares in the Chinese automotive market.

Adding to this complexity is the fact that Nissan currently faces the most uncertainty among the trioThe primary challenges for Nissan stem from a chaotic management system and a steadfast commitment to outdated strategies in the Chinese market, complicating their recovery efforts.

Financial reports for the first half of the 2024 fiscal year revealed a decline in both revenue and profits for Nissan

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The sales figures illustrate the dire situation, particularly in China, where from January to November 2024, Nissan's cumulative sales plummeted by 10.53% to just 621,713 vehicles.

Nissan's market standings have also suffered domestically, where they ranked lower than competitorsWhile not excusable for the struggles against growing NEV brands in China, it is particularly shameful to lose market share in their home country.

In addition to competition from rivals like BYD, Nissan is plagued by internal issues, notably corruption problems that have surfaced repeatedly throughout its history.

The root of Nissan's current predicament can be traced back to its shared history with Renault

In 1999, Renault acquired a 36.8% stake in Nissan, appointing Carlos Ghosn as CEO, a move that brought the two companies closer together.

However, Ghosn’s fall from grace in 2018, following serious allegations of financial misconduct, including embezzlement, set off a chain reaction within NissanHis successor, Hiroto Saikawa, was also forced to resign after reports of his improper compensation surfaced shortly thereafter.

In March 2024, Nissan faced even more scrutiny as allegations surfaced regarding its management engaging in kickback schemes.

These escalating corruption scandals led the company to form a new leadership structure known as the "three-pillar system,” comprised of CEO Uchida, COO Ashwani Gupta, and vice-COO Jun Seki to better govern and mitigate against further missteps.

Despite the urgent attempts to stabilize their leadership, shortly after the reforms were put in place, key figures like Gupta resigned, showcasing the internal unrest that continues to haunt Nissan.

In the second quarter of this year, Nissan's sales revenue dropped to ¥2.99 trillion, a decline of 5.08% year-on-year, with operating profit plummeting by a staggering 84.67%, leading to a net loss of ¥93.4 billion.

Between April and September 2024, Nissan experienced the steepest sales decline in China and a global sales drop of 4%, indicating a widespread collapse.

The sales structure reveals that the Sylphy model alone accounted for nearly half of Nissan's car sales in China—a stark statistic illustrating its over-dependence on a single model in an increasingly competitive landscape.

The repercussions are dire, as global markets shift towards electric vehicles and hybrids, showcasing Nissan's product line as outdated and overly reliant on traditional gasoline vehicles, showcasing a clear vulnerability to complete market collapse.

Despite the often grim outlook, Nissan has expressed commitment to sustaining operations within China, even planning to export more vehicles from the region

Yet, the brand has garnered a perception of stagnation and a lack of innovation among consumers, posing further challenges against regaining lost market share.

Honda, likewise, has witnessed a steady decline in sales in China, though the impact has been somewhat less severe than that of NissanFrom January to November 2024, Honda sold 740,399 units, reflecting a year-on-year drop of 30.7%. In contrast, Honda's market share in Japan has climbed to second place, overtaking Nissan's struggling performance.

Honda's revenue from its four-wheeler business in China remains substantial, yet continued declines in sales indicate a risk lurking for the brand's future performance.

However, there are indications of offsetting factors, particularly with consistent growth in markets such as the United States and stability in the Japanese market, which may mitigate the adverse impacts from declining Chinese sales.

Honda is well-positioned in the American market with several HEV models popular among consumers, which will play a crucial role in sustaining its competitive edge

Following this trajectory, Honda could emerge as a smaller version of Toyota, leveraging its prominence in the high-margin U.Smarket to offset challenges faced in China and driving overall profit growth.

In terms of growth potential and foundational strengths, Honda stands tall over Nissan; in this latest merger, Honda is poised to take on the role of leading the combined entity.

Nonetheless, despite Nissan's tumultuous position, it remains the third-largest automaker in Japan, and should the merger proceed successfully, it will signify the emergence of a new automotive giant—potentially the third-largest in the world behind Toyota and Volkswagen.

2. The Emergence of a Global Third Automobile Group

With Honda ranked as the second-largest automaker in Japan and Nissan as the third, their merger would establish them as a formidable group—second only to Toyota and Volkswagen on a global scale.

According to the memorandum, the new holding company established by Honda and Nissan aims for a Tokyo Stock Exchange listing by August 2026, while both companies will withdraw from public markets

Honda will retain a controlling stake of over 50% in this new entity.

By March 2024, Honda's operating profit stood at ¥1.382 trillion, while Nissan reported ¥568.7 billion, with the merged company targeting annual sales surpassing ¥30 trillion (around $191.4 billion) and annual operating profits exceeding ¥3 trillion.

Projected total value after the merger could near $54 billion, with Honda contributing a substantial $43 billion to this new entity's valuation.

Currently, Honda is valued at ¥8.1 trillion (approximately $51.7 billion), while Nissan's market cap stands at ¥1.78 trillion ($11.4 billion), indicating that the combined company's projected market cap may fall short of a simple addition of the two due to anticipated effectiveness not meeting the expected synergy.

Historical examples of automaker mergers in the global industry abound—Stellantis, created from the merger of Peugeot and Fiat Chrysler, reached annual sales of 6 million vehicles, ranking fourth globally; while Hyundai and Kia's merger saw their sales surpass 7 million, placing them third in global rankings.

Notably, recent performances of Stellantis and Hyundai Kia diverged significantly.

The merger of Peugeot and Fiat Chrysler faced setbacks as both companies lacked significant electrification efforts, leading Stellantis to struggle with product offerings and pricing strategies in Europe, resulting in a notable loss of market share—one-third over the past three years.

Contrarily, Hyundai and Kia have successfully expanded their electrification initiatives, positioning themselves as major players within domestic and global markets post-merger.

Kia emerged as the second-largest battery producer globally, effectively monopolizing the domestic market which has facilitated Hyundai’s ability to penetrate other international markets confidently.

Drawing implications from these precedents, if Honda and Nissan accomplish their merger, it is plausible to anticipate a blend of both Hyundai and Stellantis' trajectories

They may attain dominant positions in the domestic market but struggle with electrification, positioning them disadvantageously compared to competitors.

Recent discussions indicate that Honda and Nissan are exploring various collaborative endeavors, including mutual production agreements and hybrid model sharingSpecifically, Honda plans to offer its hybrid vehicles to Nissan in the U.Sto leverage their collective strengths.

A faster route to market may involve Nissan assembling Honda vehicles under different branding, a process that could be executed in a matter of months, though it raises questions about Nissan's brand independence in the long run.

Looking forward, Honda's HEV model sales in the U.S

have comprised just 20% of its total sales thus far this yearThis comes as traditional fuel brands like Passport continue to decline while Honda's electrification transition remains in its infancy.

As negotiations progress toward a merger and formal corporate structure, anticipated efficiencies may not materialize until 2030 and the holding company won’t officially list until 2026.

Nonetheless, from an investment perspective, there remain avenues for opportunity amid the uncertainties surrounding such a merger.

3. Short-term for Nissan, Long-term for Honda

Adopting quicker branding strategies to stabilize and eventually grow Nissan's sales could yield more favorable stock performance in the short term compared to Honda's investments.

Given Nissan's current cash flow challenges—facing an impending operational crunch, projecting just 12 to 14 months' worth of cash reserves—the possibility of Honda providing financial support post-merger becomes plausible.

Upon the announcement of a merger, Nissan's shares surged by over 40%, compared to Honda's less impressive rise of approximately 20%. Market expectations reflect a broader timeliness in operational integration and shared resource allocation while bolstering development efficiencies for the merged entity.

It's critical to manage expectations across both automakers in light of the merger

In parallel with maintaining share value for Nissan, investors should actively watch Honda’s progress through systematic monitoring of their operational integration.

While Honda's developments can hold considerable promise, any negative fallout stemming from Nissan's performance could detract from Honda's overall valuation.

My investment advice leading up to the June 2025 merger is to buy Honda stocks during periods of stagnation and to consider buying Nissan stocks during times of successful integration announcements.

Conclusion

The global economic landscape has prompted numerous large corporations to consider mergers as a pathway to resilience in uncertain times

While the A-share market reflects various “restructuring opportunities” that highlight asset cleanout rather than strong partnerships, Honda and Nissan's merger represents a uniquely challenging example.

Honda and Nissan’s consolidation doesn’t signify a robust bilateral relationship; rather, it beckons questions about whether Nissan can endure into the next fiscal yearConcurrently, while Honda's fortunes remain relatively better, they too could significantly suffer amidst lengthy restructuring proceedingsNevertheless, for astute investors, these uncertainties pave the way for diversified investment opportunities.

Yet, Nissan's substantial share price gain following the proposed merger indicates that market dynamics largely accounted for already anticipated positives