The ambitious plans for an amalgamation between Honda and Nissan, aimed at establishing the world's third-largest automotive group, have recently crumbled just 52 days after the signing of a crucial Memorandum of Understanding (MoU). On February 13, both companies held board meetings where they made the significant decision to withdraw from the MoU established on December 23, 2024, effectively ending discussions regarding operational integrationIn addition, their collaborative ventures with Mitsubishi Motors were also terminated.

The negotiations had been touted as a lifeline for the ailing Japanese automotive industry in the face of fierce competition from rising electric vehicle (EV) manufacturers like BYD and Tesla, particularly during a time when both companies were grappling with declining sales and profitsThe initial optimism that surrounded these discussions, however, quickly dissipatedFormer Renault CEO Carlos Ghosn famously criticized the merger effort as a "last-ditch gamble that lacks practicality."

Hints of discord had surfaced early in the discussionsHonda's leadership emphasized that the success of the merger hinged on Nissan's ability to return to profitability, a challenging task given the precarious financial and operational situation at NissanThe company had forecasted a staggering net loss of approximately 80 billion yen for the fiscal year 2024. Despite the potential benefits of collaboration, Honda’s CEO, Toshihiro Mibe, indicated that the viability of the merger was jeopardized by Nissan's struggle to restructure and improve its financial outcomes.

Reports from insiders revealed that Honda perceived itself as the stronger partner in the negotiationsBy early February, Honda had expressed concerns over the slow pace of Nissan’s restructuring efforts and even proposed organizational changes that would position Nissan as a subsidiary under Honda’s controlThis suggestion was met with vigorous opposition from Nissan's leadership, which ultimately precipitated a breakdown in dialogue following Nissan’s board meeting on February 6.

Despite the negotiations collapsing, the responses from the executives of both companies reflected starkly different perspectives

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Mibe expressed regret over the failed merger but maintained that the two companies could continue collaborating in other areasConversely, Nissan’s CEO, Makoto Uchida, voiced worry about the future, emphasizing that without a strong partner, Nissan's survival prospects would be dire.

The nature of the proposed partnership had already hinted at challenges from the startNissan's statement on February 13 highlighted the initial focus on establishing a joint holding company in which Honda would dominate the board with a majority of members and hold a controlling stakeConversely, Nissan’s Uchida rejected the framework of Honda as the parent company, contending it could not harness Nissan's full potentialThis disagreement led to heightened tensions between the two companies.

Signs of disarray within the alliance became increasingly clear post-MoU signingThough both companies recognized the significant potential for collaboration, Mibe acknowledged that actualizing this potential would necessitate difficult and potentially painful decisions for both sidesNotably, Honda insisted that their union was not meant to bail Nissan out but rather that Nissan needed to confront the necessity of regaining profitability before any merger could be effectively pursuedDuring a press conference in January, Mibe stated that Nissan needed to triple its operating profit by the 2026 fiscal year to fulfill their merger plans.

This challenge placed immense pressure on Nissan, which had reported an operating profit of merely 31.1 billion yen for the third quarter of the 2024 fiscal year, resulting in a profit margin of just 1.0%. In stark contrast, Honda reported an impressive operating profit of 113.99 billion yen, yielding a margin of 7.0%.

Both corporate giants were evidently reluctant to yield in negotiationsGhosn echoed this sentiment, positing that Honda's strengths were evident, while Nissan clung proudly to its technological heritageThe resulting struggle involved contentious discussions regarding which technologies would define the new alliance.

Analysts suggested that Nissan's pride and reluctance to accept the gravity of its situation, combined with Honda’s abrupt shift in negotiation terms, rapidly destabilized discussions, leading to a breakdown of negotiations within a month

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Julie Bot, a senior analyst at Pelham Smithers Associates, emphasized that Nissan’s challenges stemmed from management issues, wherein they seemingly overestimated their market position and ability to revitalize the business.

Honda had expressed aspirations for Nissan to reduce production output, attributing the slow progression of Nissan's management restructuring as a significant factor hindering merger discussionsInsiders claimed that Honda pressured Nissan to cut down on employees and production capacityConversely, Nissan argued that it could recover without shutting down factories by implementing internal adjustmentsRecently, on January 22, Nissan announced plans for a new battery production facility in Fukuoka Prefecture, which it considers essential for its future EV strategies.

After the collapse of talks, Uchida indicated in a media interview that Nissan would persist with its strategy of independent transformation and unveil a detailed plan over the following monthSubsequently, Nissan expressed intentions to continue collaborating with Honda in the EV sector and to jointly develop fundamental technologies for next-generation software-defined vehicles (SDVs).

The faltering merger negotiations exacerbated Nissan’s already tumultuous circumstancesAccording to Shinya Naruse, a senior analyst from Okasan Securities, Nissan needed to merge with Honda to remain competitive; otherwise, restructuring alone would prove much more arduousOn the same day that merger talks fell apart, Nissan downgraded its annual performance forecast for the third time, projecting net revenue of 12.5 trillion yen and an operating profit of 120 billion yen, while predicting a net loss of 80 billion yen chiefly due to restructuring costs approximating 100 billion yenThis level of loss is reminiscent of its 2020 fiscal year, which recorded a staggering loss of 448.7 billion yen.

Nissan's perplexing sales figures also contribute to its current plight

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The company has seen a sharp decline in market performance in China, alongside facing substantial challenges in the U.S. marketFor the fiscal year 2024, Nissan's sales in China plummeted by 12.2% to 697,000 units—the lowest since 2008. Meanwhile, in the U.S. market, sales rose marginally by 2.8%, reaching 924,000 units during the same period.

Nissan seems to be lagging behind the electric revolution occurring in the Chinese market and has misjudged the demand for hybrid vehicles in the U.SIn China, Nissan finds itself virtually absent from the booming electric vehicle segment, with no standout electric models to showcase, primarily relying on traditional fuel productsIn the U.S., a lack of hybrid models has hampered performance, leading to diminished overall sales impact.

In a bid to rectify these shortcomings, Nissan introduced a restructuring plan in November 2024, aimed at addressing the dire circumstances through optimizing production, cutting costs, and adjusting its global capacityThis plan includes laying off around 9,000 employees, reducing production capacity by 20%, divesting its 10% stake in Mitsubishi Motors, and implementing salary reductions among management in hopes of stabilizing financesThe company's aim is to sell one million electric vehicles annually by 2027, contingent on successful restructuring.

The cessation of merger discussions has thrown Nissan into an atmosphere of uncertaintyUchida reiterated that without a strong collaborative partner, Nissan's future would likely be fraught with challenges.

As the company grapples with its ongoing crisis, Nissan appears to be exploring new alliance opportunities, with Foxconn expressing interestReports suggest that Foxconn executives held negotiations with Nissan around February 7 regarding potential collaborations, eyeing acquisition of Renault’s shares in NissanFollowing these discussions, Foxconn's chairman, Liu Yangwei, affirmed his intention to foster collaboration with Nissan rather than pursue an acquisition, promising an announcement regarding cooperative agreements with either Nissan or Renault within a couple of months.

Despite the collapse of merger talks, Honda is not in the clear from tumultuous challenges of its own

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