Reenacting the "Nissan Rescue," this time it's Honda's turn

Are major mergers of traditional car manufacturers about to happen again?

On December 23, Japan's two major car manufacturers, Nissan and Honda, officially announced that they have entered the formal negotiation stage for a merger.

In a statement, the two companies indicated that the goal of merging is to achieve total sales of 30 trillion yen (USD 191 billion) and over 3 trillion yen in operating profit.

They plan to complete negotiations around June 2025 and establish a holding company before August 2026, at which point both companies' stocks will be delisted. Nissan's partner, Mitsubishi Motors, will decide by the end of January 2025 whether to join the merger.

If the merger of the two major car manufacturers is successful, it will become the largest restructuring case in the global automotive industry since the merger of Fiat Chrysler Automobiles and PSA Group to form Stellantis for USD 52 billion in 2021.

Nissan Awaits Rescue

Regarding the reasons for the merger of the two Japanese automotive brands, many analysts believe it is a result of Nissan's poor financial performance. This mainly focuses on two dimensions: reduced profits and tight cash flow.

From Nissan's sales performance alone, it does not seem too bad. Data shows that global sales in the first three quarters reached 2.505 million vehicles, a slight increase of 0.4% year-on-year; in the third quarter alone, Nissan's global sales were 809,000 vehicles, down 2.8% year-on-year; in the third quarter, Nissan's sales in China were 172,000 vehicles, down 12.5% year-on-year. Sales in North America and Europe fell by 0.2% and 5%, respectively, in the third quarter.

Aside from the significant decline in the Chinese market, Nissan's sales in other markets did not drop significantly. But why is there a level of "seeking rescue"?

According to Nissan's financial report, in the first half of this year, Nissan's net profit fell by 94% year-on-year, from 128.6 billion yen to 9.95 billion yen; in the third quarter, Nissan's revenue was 2.9858 trillion yen, down 5.1% year-on-year, while net profit turned from a profit of 190.7 billion yen in the same period last year to a net loss of 9.3 billion yen.

At the same time, Nissan has also lowered its full-year expectations: operating revenue has been revised down from 14 trillion yen (approximately 655.1 billion yuan) to 12.7 trillion yen (approximately 594.2 billion yuan), and operating profit has been cut by 70% from the original 500 billion yen (23.4 billion yuan) to 150 billion yen (approximately 7 billion yuan).

According to the Financial Times, at least two unnamed Nissan executives have confirmed that the brand is seeking new investors. One executive stated, "We have 12 to 14 months left to survive. We need Japan and the U.S. to secure cash flow."

If this is true, then Nissan has transformed from a path of success to a desperate plea for help.

In fact, Nissan has long been aware of its current situation. Four years ago, Nissan launched a transformation plan called Nissan Next. In May 2020, just six months into his tenure, Nissan CEO Makoto Uchida announced a four-year corporate transformation plan "Nissan NEXT" at the company's headquarters in Yokohama, Japan Makoto Uchida joined Nissan in 2003 and served as the CEO of Nissan before that, he was already a member of Nissan's Executive Committee, Senior Vice President, Chairman of Nissan China Management Committee, and President of Dongfeng Motor Co., Ltd.

According to the goals of Nissan Next, by 2023, Nissan aims to launch 8 electric vehicles and expand the application of the e-Power series hybrid vehicles to the compact and sub-compact segments in various regions, achieving sales of 1 million new energy vehicles by March 2024. The penetration rate targets for new energy vehicles are 60% in Japan, 50% in Europe, and 23% in China.

March 31, 2024, is the last day of Nissan Next, but the final results are not satisfactory.

Excluding models produced by joint ventures in China, Nissan only has five electric vehicle models globally: the Leaf hatchback, Ariya crossover, Sakura microcar, Townstar van, and Clipper small van.

In the Chinese market, Nissan's electric vehicle lineup consists only of the Ariya, with a new energy penetration rate of just 6%. The penetration rates in Japan and Europe also fell short, at 52% and 45%, respectively.

The transformation has not been successful, and financial challenges have intensified, prompting Nissan to initiate a series of self-rescue actions. In November, Nissan announced it would cut global production capacity by 20%. Fixed costs will be reduced by approximately 300 billion yen, and 9,000 jobs will be cut worldwide.

Does merging with Honda mean Nissan is giving up on self-rescue? Nissan CEO Makoto Uchida stated that the discussions about integration "do not mean we are giving up on turning the situation around," but rather to ensure the company's future competitiveness. "After taking corrective measures for future development and growth, we need to consider the ultimate scale and growth. This growth will be achieved through cooperation," he added.

At the same time, Honda Motor CEO Toshihiro Mibe also confirmed, "This is not a rescue plan." He emphasized that one condition for the merger is that Nissan completes its so-called "turnaround plan."

Delays and Misjudgments

What exactly has led to Nissan's current predicament?

Many analysts believe that this outcome stems from Makoto Uchida's misjudgment of the product demand in the main sales market. According to foreign media reports, Uchida himself rated his performance over the past four years as a "B."

In the Chinese market, Nissan faces fierce competition from local brands and rapid changes in consumer preferences. Especially in the field of new energy vehicles, Nissan's product line is relatively limited and cannot meet the diverse needs of consumers.

According to October sales data, Nissan's total sales were 57,000 vehicles, with the Sylphy series accounting for 32,000 vehicles, making up half of Nissan's sales in China. Prior to this, Nissan had many competitive models in China The X-Trail was once Nissan's best-selling SUV model, with monthly sales reaching tens of thousands. However, after the launch of the fourth-generation X-Trail equipped with a three-cylinder engine in 2021, sales plummeted.

Cui Dongshu, Secretary-General of the Passenger Car Association, stated in an article after Nissan and Honda entered merger negotiations that many joint venture car companies are heading downhill due to missteps in energy conservation and emissions reduction. In an effort to reduce fuel consumption, they stubbornly implemented three-cylinder engines, but the results were not significant, and consumers did not accept it. Domestic brands' new energy strategies easily achieved a balance in dual credits and technological breakthroughs. Around 2016, there were calls to accelerate the introduction of Nissan's range-extended hybrid technology, e-POWER, but the actual pace was too slow.

Zhou Feng, Deputy General Manager of Dongfeng Nissan, also admitted in a recent interview that Dongfeng Nissan misjudged the development trend of the new energy market, leading to a missed optimal window period. Especially in the competition for intelligence and electrification, Dongfeng Nissan not only faces blockades from Tesla in the global market but also encounters fierce challenges from emerging domestic brands in China.

In another major market—the United States, Nissan failed to timely launch hybrid models, resulting in a significant decline in market competitiveness amid a slowdown in pure electric vehicle sales.

KPMG's report titled "American Perspective Survey" shows that only 20% of respondents indicated they would choose electric vehicles to help achieve a low-carbon economic transition. The largest proportion of respondents (38%) stated they would still purchase pure gasoline vehicles, while 34% said they would opt for hybrid vehicles.

In March of this year, the U.S. lowered the target for the proliferation of electric vehicles proposed to meet automotive exhaust emission regulations, while acknowledging that hybrid and plug-in hybrid models could play a role in achieving emission limits.

However, currently, Nissan only sells fuel vehicles and pure electric vehicles in North America. It wasn't until March of this year that Nissan announced it would launch models equipped with e-POWER in North America by 2026.

How the delayed hybrid models will perform remains uncertain, but at least the hybrid market in the U.S. is currently dominated by Toyota and Honda. Statistics from U.S. research firm Cox Automotive show that in the first quarter of this year, Toyota and Honda together accounted for 70% of the U.S. hybrid vehicle market share.

Regarding the U.S. market, Makoto Uchida admitted to misjudging market demand, as other competitors quickly launched new hybrid models and technologies, while Nissan continued to promote fuel and pure electric vehicles, failing to meet the strong growth demand for hybrids in the U.S., leading to a noticeable decline in sales.

What is needed is speed, not scale

History is always remarkably similar.

Today's merger between Nissan and Honda inevitably reminds one of the "Nissan Rescue" initiated by Renault in 1999.

In 1998, Nissan found itself deep in debt due to mismanagement, and both Ford and Daimler were interested in acquiring Nissan but hesitated due to its debt crisis. After eight consecutive years of losses, Nissan ultimately sought help from Renault Finally, the French company Renault stepped in, acquiring a 36.8% stake in Nissan for $5.4 billion, becoming Nissan's largest shareholder and establishing the Renault-Nissan Alliance.

In 2000, Carlos Ghosn, then Vice President of Renault, became CEO of Nissan and proposed the "Nissan Revival Plan." Through various measures, including cost-cutting, Ghosn pulled Nissan back from the brink of death and earned himself the title of "cost killer."

In 2016, the Renault-Nissan Alliance continued to expand, with Nissan acquiring 34% of Mitsubishi Motors, forming the Nissan-Renault-Mitsubishi mega alliance.

However, by 2018, the global financial crisis erupted, and internal conflicts within Nissan and with Ghosn gradually escalated. In November of that year, Carlos Ghosn was arrested by the Tokyo District Public Prosecutors Office for allegedly underreporting his compensation by about 100 million yen and was taken away voluntarily. In the same month, Mitsubishi Motors removed Ghosn from his position as chairman. In December, the Tokyo prosecutors formally charged Carlos Ghosn and arrested him again. On December 31, 2019, Ghosn escaped from Japan and settled in Lebanon.

From alliance to merger, can this time pull Nissan out of the ICU?

Mitsuhiko Yamashita stated at the merger press conference that the business integration will bring advantages "that are impossible to achieve under the existing cooperation framework" for both companies. The deal aims to share intelligence and resources, achieve economies of scale and synergies, while protecting both brands.

However, Ghosn, the former chairman of Nissan, is not optimistic about this. In an interview with the media on Monday, he expressed disbelief that the alliance between Honda and Nissan would succeed, stating that the two automakers are not complementary. Both are in the same market, producing the same products, and their brands are very, very similar.

Additionally, he noted that Honda is an engineering organization that is very strong in engineering. Nissan takes great pride in its engineering technology. Therefore, the struggle here is to determine which technologies the new company or new alliance will adopt. "This will be very difficult."

Cui Dongshu also cited Ghosn's viewpoint in his writing and provided the same judgment. He stated that he personally is not optimistic about the merger between Nissan and Honda. Both Honda and Nissan need technological innovation and to upgrade their own technologies, rather than simply achieving scale synergies to reduce manufacturing costs.

The Economist, in its analysis article, stated that resource sharing would be helpful. However, the biggest advantage of Chinese companies is not scale, but speed. The development time for new models is three years or less, which is half the time required by foreign companies. The speed of software updates is fleeting. Japanese, American, or European automakers have yet to find a way to keep up with the innovation speed of Chinese automakers. Merging two cumbersome Japanese giants is unlikely to be the answer, as their golden age may have already passed.

The reason for such an unoptimistic prediction is mainly that Honda is also not having a good time currently. Data shows that Honda's profit reached a historic high of 22.6 billion yen in the first quarter of 2024, but it directly shrank to 12 billion yen in the second quarter Honda's sales in China from January to November 2024 reached 740,000 units, a year-on-year decrease of 30.7%.

Industry analysis indicates that although Japanese companies have a global presence, the profit share from the Chinese market far exceeds that of other markets. The sluggishness of the Chinese market will inevitably have a significant impact on the global operations of these companies, although this impact will appear relatively delayed in financial reports. A more direct manifestation is the tightening of cash flow and the onset of personnel turmoil at the executive level.

Moreover, the Stellantis Group, formed by the merger of Fiat Chrysler Automobiles and PSA Group, is currently mired in a complex predicament. In the third quarter, net income fell by 27% year-on-year to €33 billion; global consolidated deliveries decreased by 20% year-on-year, with Europe down 17% and North America plummeting by 36%.

In June of this year, then-CEO of Stellantis, Carlos Tavares, publicly acknowledged the failure of the group's high-priced marketing strategy, while competitors quickly eroded market share through price reductions, leading to a sharp decline in market share for Stellantis's American brands (Chrysler, Jeep, Ram, and Dodge).

Although Tavares brought impressive short-term profits to Stellantis through aggressive cost-cutting strategies, he failed to address the fundamental issues facing the group in its long-term development. On December 1, Stellantis announced the acceptance of Tavares's resignation, with his responsibilities temporarily taken over by an interim executive committee responsible for overseeing the group's operational direction and business until a new successor is appointed next year.

In the face of a new round of major reshuffling in the global automotive market, the merger of Nissan and Honda may still involve many uncertainties.

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