Honda slips into red as Nissan rebounds, reviving merger talk speculation

Honda Motor Co. and Nissan Motor Co. have essentially traded places since plans to combine the two companies collapsed dramatically last year.

Back then, Nissan’s financial position was deteriorating rapidly, and Honda was seen as a white knight. But a prospective tie-up fell apart over Nissan’s resistance to demands from Honda, including that it become a wholly owned subsidiary.

A year later, Nissan managed to post an annual operating profit while Honda had slid into the red, setting the stage for what some see as a potential restart of talks on more even terms.

“They’ll have to try it again,” said Seiji Sugiura, senior analyst at Tokai Tokyo Intelligence Laboratory Co.

Honda’s losses and Nissan’s early signs of recovery have narrowed the imbalance that derailed their failed merger talks, even as they struggle against Chinese rivals, rising development costs and the industry’s shift toward electrification and automation.

A renewed tie-up would test whether scale and shared investment can outweigh the risks of combining two weakened carmakers with overlapping products and markets.

This week, Honda reported a ¥414.3 billion ($2.6 billion) operating shortfall for the year ended in March — the company’s first annual loss since it was founded in the late 1940s — following a ¥2.5 trillion writedown for a misplaced bet on electric vehicles in the US.

Honda’s five consecutive quarters of losses in its automotive business is a distress signal from its core business — and in more ways than just poorly timed EVs. The manufacturer is suffering from an ageing car lineup in key markets such as the US and China.

And while its lucrative motorcycle unit continues to thrive, Honda is racing to catch up in areas where it once led — including gas-electric hybrid vehicles.

Similarly, Nissan squandered its once-promising lead in EVs and has faced falling retail sales in the US and China due to uninspired product offerings. That has forced it to slash 20,000 jobs and shutter seven factories, shrinking production volumes and revenue.

They’re also losing momentum in emerging battlegrounds such as India and Mexico due to inroads by Chinese carmakers such as BYD Co. and SAIC Motor Corp.’s MG brand.

“Both companies face systemic problems,” Sugiura said. “In other words, they’re both no longer able to make good cars.”

Honda and Nissan executives say their worst days are behind them, forecasting a profit for the current fiscal year, which started in April. But those best-case scenarios come at a time when the auto industry is beset with challenges ranging from soaring materials costs and trade wars to increasingly price-sensitive buyers and rapidly shifting technology.

Merging two struggling carmakers competing in the same markets with similar products could raise questions in the minds of some investors about the potential upside and ultimate purpose. But it would create one of the biggest carmakers in the world by volume, providing Nissan and Honda with scale economies for everything from shipping logistics to parts procurement.

Beyond that, staying competitive will require large-scale investments in popular powertrains like hybrids and cutting-edge software for features such as semi- and fully-autonomous driving. Combining forces would allow the two Japanese automakers to pool their engineering and financial resources, putting them in a better position vis-à-vis domestic and overseas peers.

Ivan Espinosa, who was appointed as Nissan’s chief executive officer a year ago, indicated earlier this week that the door is open for more intense talks with Honda. “The discussions continue actively with them,” he told reporters on May 13. “We continue exploring opportunities for collaboration and as soon as we have something to share, we will be sharing with you.”

Honda CEO Toshihiro Mibe, architect of the company’s failed EV initiative, has said little about resuming negotiations with Nissan as he seeks to manage a strategic pirouette.

A tie-up between them would divide Japan’s automotive industry into two camps: Honda, Nissan and junior partner Mitsubishi Motors Corp. on one side, Toyota Motor Corp. and its roster of smaller carmakers on the other. Longstanding rivalry made that inconceivable a decade ago, but it reflects the current reality with the rise of China’s auto industry.

When talks between the two companies kicked off in late 2024, Honda insisted that Nissan regain some level of stability before any strategic alliance could materialise. Today, that condition arguably has been met, even as Honda’s own financial standing has weakened in the intervening months.

“Honda isn’t in as bad of a position as Nissan was a year and a half ago, but they do need to take a very hard look at their automotive business,” said Christopher Richter, a senior analyst at CLSA Securities Japan.

That may mean Honda needs to consider undertaking the kind of restructuring it once demanded of Nissan, but that CEO Mibe so far has been unwilling to contemplate.

Under its previous management team, Nissan had insisted it didn’t need to close any factories to repair its sinking business. It changed its tune under Espinosa, who took over a year ago and is betting on a slimmed-down global presence. That seems to be working and could put Nissan in the driver’s seat for a deal.

If renewed negotiations do get underway between the two carmakers, it could be Honda’s hubris that stifles a compromise this time.

“Honda’s pride wouldn’t allow them to go down this route right now,” Richter said. “That means there would be no company in the driver’s seat, and mergers of equals usually fail miserably.”