The landscape of the Japanese automotive industry is undergoing a seismic shift.

As the Japanese stock market opened today, stocks for Nissan and Mitsubishi saw a dramatic surge, with Nissan's shares rocketing up by 24%, hitting the upper trading limit within sessionThe significant catalyst fueling this uptrend was reports revealing that Nissan Motor Corporation and Honda Motor Company are initiating discussions on a potential merger to better navigate the rapidly evolving global automotive environmentAdditionally, the two manufacturers are contemplating the integration of Mitsubishi Motors into the holding company.

Analysts are predicting that if the merger between Honda and Nissan proceeds successfully, it will forge a formidable auto giant capable of rivaling Toyota, effectively splitting the Japanese automotive industry into two major factions

This consolidation could provide Honda and Nissan with the resources necessary to compete more effectively with larger adversaries in the global marketplace.

A Sudden Surge

On December 18, as the Japanese stock exchange opened, stocks of Nissan and Mitsubishi soared significantly; Nissan achieved a remarkable increase of 24%, reaching the day’s trading ceilingBy around 10 AM, Nissan and Mitsubishi stocks surged 22.1% and 14.3%, respectively.

According to reports, the discussions indicate a potential merger that could value the newly formed entity at approximately $52 billion (about 3.8 trillion yen), potentially positioning it as the third largest automaker in terms of global sales.

The firms are considering a structure that would involve operating through a holding company, with intentions to establish a memorandum of understanding (MoU) shortly

• Interest Rate Spreads Drive Forex Arbitrage
• Japan, South Korea Take Bold Economic Steps
• Building a Diversified Investment Portfolio
• Hedging Market Downside Risks with Options
• Micron Technology's Sudden Plunge!

Furthermore, plans are in place to eventually incorporate Mitsubishi Motors under this holding structure, with Nissan being Mitsubishi's largest shareholder, possessing a 24% stake.

Both companies emphasize that these reports do not reflect any official announcement from either partyThey issued statements via email clarifying that, “the content regarding the discussions has not been officially released by either companyAs we communicated earlier this year in March, Honda and Nissan are exploring various possibilities for future cooperation to leverage each other’s strengthsWe will inform stakeholders when appropriate updates are available.”

If this merger is successfully finalized, it would mark one of the largest consolidations in the automotive sector globally since the Fiat Chrysler merger with PSA Group established Stellantis back in January 2021.

The merger would lead to the development of an automotive powerhouse that could rival Toyota, thereby restructuring the Japanese auto industry into two distinct factions, affording Honda and Nissan greater resources for the competitiveness against larger global challengers.

Estimates from Visible Alpha project that by 2026, the combined sales of Nissan and Honda could reach nearly 6 million vehicles, potentially allowing them to lessen expenses related to management, procurement, manufacturing, and research and development due to overlapping markets.

What Led to This?

As the second and third largest automobile makers in Japan, Honda and Nissan have experienced a rapid erosion in their market shares.

In the first half of this year, Honda, Nissan, and Mitsubishi collectively sold around 4 million vehicles globally, while Toyota achieved a staggering 5.2 million units.

In August, Nissan and Honda had already reached a strategic cooperation agreement regarding shared automotive parts and software

During that discussion, Honda CEO Toshihiro Mibe hinted at the potential for a capital collaboration with Nissan.

Industry experts in Japan have also voiced calls for Nissan and Honda to pursue mergers to share costs, hoping to better respond to the aggressive expansion of Chinese car manufacturers and the formidable competition posed by American electric vehicle leader Tesla.

Using Nissan's performance in the Chinese market as a case point, the company's sales nosedived by 22.1% to 1.0452 million vehicles in 2022. This downward trend continued in 2023, plummeting by another 24% to just 793,800 unitsThe cumulative sales for the first ten months this year stood at only 558,000 units, reflecting a year-on-year decline of 9.98%.

At the same time, Nissan is accelerating its restructuring efforts to cope with stagnating revenue growth and declining profits

According to Nissan's latest financial report, for the first half of the fiscal year 2024 (April–September of this year), operating revenue fell to 5.98 trillion yen, down 1.3% year-on-year, and operating profit plummeted by 90.2% to 32.9 billion yen, with net profit much lower at only 19.2 billion yen, down a stunning 93.5%. The operating profit margin has dropped to a mere 0.5%, significantly down from 5.6% in the same period last year.

Nissan has also downgraded its full-year sales forecasts, adjusting the sales revenue target from 14 trillion yen to 12.7 trillion yen, and slashing the operating profit estimate from 500 billion yen to only 150 billion yenThe global sales goal was similarly cut from 3.65 million units to 3.4 million units.

The disappointing performance of Nissan is closely tied to its declining sales in both the Chinese and American markets.

Additionally, the company faces mounting pressure from activist shareholders and concerning debt levels, causing speculation in the credit markets regarding its investment ratings.

Moody's has revised Nissan's outlook from "stable" to "negative," maintaining a BAA3 rating

Similarly, Fitch has also lowered Nissan's outlook to "negative," affirming a "BBB-" rating.

In response to the challenging market conditions, Nissan has been forced to implement several restructuring measures, which include reducing global capacity and workforce layoffsThe company plans to decrease its global production capacity by 20%, resulting in the layoff of 9,000 employees worldwideFurthermore, executives at Nissan have also opted for salary reductions as a response to the company’s financial challengesNissan CEO Makoto Uchida has announced a voluntary 50% salary cut starting this month, with other senior members following suit.

The effectiveness of these cost-cutting and efficiency-enhancing measures in reversing Nissan's downward spiral remains to be seen