Japan’s iconic automotive industry is going through a rough patch and two of its biggest companies are now merging to fight for survival.
Nissan and Honda are close to negotiating a potential merger, according to multiple reports on Tuesday, as they are considering joining forces to avoid the growing risk from Tesla and Chinese EV makers.
It comes after the two companies and major rival Toyota reported slumping profits in their most recent earnings, as they grapple with ferocious competition in China and a bumpy transition to electric vehicles.
Nissan said it would cut 9,000 jobs amid falling sales, while Honda reported a 15% drop in second-quarter operating profit.
Toyota, the world’s largest automaker, saw profits for the quarter ending in September drop to 573.7 billion yen ($3.7 billion), down from nearly 1.28 trillion yen ($8.3 billion) over the same period last year.
All three corporations face a similar problem; They can’t sell enough cars in China.
Toyota’s sales in China fell just over 10% in the first nine months of the year, with the company blaming “challenging market conditions” such as “intensifying price competition. “
Still, a Toyota spokesperson told Business Insider that the drop in its profits not only attributable to China; it has also experienced weakness in Japan and North America.
Honda flagged a decline in sales in China in its most recent quarter, dragging down its total group sales. While Nissan reported a drop of over 5% in retail sales in China in the first half of the fiscal year — the largest drop of any of its regions.
Like other foreign automakers, Japan’s car giants are being squeezed in China by local rivals. These rivals have rapidly gained market share by offering a range of affordable but high-tech EVs and hybrids.
BYD, Zeekr, and Nio have reported bumper sales recently, as European automakers like Mercedes-Benz and BMW are being squeezed in this region.
Many of China’s EV champions are now expanding overseas, something Felipe Munoz, an automotive analyst at JATO Dynamics, told BI puts corporations like Toyota and Honda under increasing pressure.
“The real war is in emerging markets. And that’s precisely where Japanese automakers are suffering the most,” Munoz said, pointing to the immediate expansion of corporations like BYD in Southeast Asia and Latin America.
“Japanese automakers have a presence in Southeast Asia. And Southeast Asia is a hot market for Chinese cars lately,” he said.
Japanese automakers have taken a broadly cautious approach to the transition to EVs, focusing instead on hybrid vehicles.
This strategy has largely paid off as demand for electric vehicles has slowed, with Toyota reporting one-off profits thanks to strong U. S. hybrid sales earlier this year.
However, Munoz said that while the hybrid-first strategy would have possibly worked in the U. S. and Europe, it created disruption for Japanese automakers in China, leaving them without a robust lineup of electric cars capable of competing with local brands that would possibly charge less. $10,000.
“China is definitely going all-electric. And that leaves out all the automakers competing with their electric cars,” Muñoz said.
He added that Toyota, Honda and Nissan risk becoming too reliant on the U. S. and European markets, which are experiencing stagnant expansion while wasting ground in expanding markets like China.
“Ultimately, the hybrid strategy worked in Japan, the United States and Europe, but it worked in China,” he added.
There are signs that Japan’s auto giants are changing their strategies.
Nissan has pledged to boost the arrival of new electric vehicles in China and hybrid vehicles in the United States, while Toyota is reportedly expanding production in China as part of its attempts to compete with local companies.
A Nissan spokesperson told BI that the company is taking measures to meet the needs of the market and visitors by introducing new products.
They added that the United States remains a priority market for Nissan and that the company expects an increase in sales of new models.
Shares of the automaker rose on news of a possible merger with Honda, rising as much as 24% in early trading Wednesday. Nissan shares have fallen about 25% this year.
Japanese automakers will most likely face demanding new situations in the coming years, especially after Donald Trump’s victory in the US presidential election.
In a conference call in November, Honda Executive Vice President Shinji Aoyama warned that Trump’s proposed price lists for cars imported from Mexico could have a big impact on Japanese automakers, many of which have factories in the country.
Honda did not respond to a request for comment, sent outside normal working hours.
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