Editor’s Note: The following is an edited and condensed version of Morningstar DBRS’s publicly released comments on the proposed merger. Morningstar is the world’s fourth largest credit ratings agency.
Several factors help sparked the potential merger to create world’s third largest OEM behind only Toyota and Volkswagen
New York—Honda Motor Co., Ltd. and Nissan Motor Co., Ltd. announced on Dec. 23 that the companies have agreed to begin discussions to consider an eventual merger, currently anticipated to occur in H2 2026. Mitsubishi Motors also announced that it may also be involved in the merger, with the company aiming to decide within January 2025 as to whether it will be formally involved in the merger discussions.
Renault S.A., Nissan’s largest shareholder, also noted it has indicated that it is exploring all options in its own best interests while remaining committed to projects already launched within the Renault-Nissan-Mitsubishi Alliance.
Potential Merger Follows Nissan’s Weak Results, Ongoing Emergence of Chinese Auto Manufacturers
The announcement of the prospective merger follows Nissan’s notably weak recent financial results, which announced a net loss in Q2 in fiscal 2024, prompting the company to revise its F2024 outlook markedly downward while also concurrently announcing planned restructuring activities that included, among other items, a targeted 20% decrease in global production capacity in addition to planned head count reductions of approximately 9,000 staff.
The prospective merger announcement also follows the ongoing progress of the Chinese new energy vehicle (NEV) manufacturers that now collectively represent the majority of the Chinese automotive market. As such, regional earnings from China, which historically represented a key market for both Honda and Nissan, are unlikely to revert to historical norms at any point over the foreseeable future.
Moreover, Chinese original equipment manufacturers (OEMs) continue to make inroads into other regional markets, with Chinese automotive exports likely to approximate six million units in 2024, compared with roughly one million units in 2020. Specifically, regarding electric vehicles (EVs), Chinese OEMs currently command significantly more than 50% of the global market.
Scale Efficiencies and Associated Cost Synergies Represent Key Outcomes of Eventual Merger
On a combined basis, the current annual production of Honda and Nissan would exceed seven million units, which would rank third globally, only behind Toyota Motor Corporation and Volkswagen AG. Morningstar notes that scale efficiencies and associated cost synergies represent the most obvious benefits of a potential merger, bolstered by the standardization of the companies’ vehicle platforms across various product segments with improved investment efficiencies also likely resulting from harmonized production processes.
Additionally, the combination of research and development (R&D) functions and likely efficiencies resulting from the integration of the companies’ respective purchasing functions across the supply base represent additional readily visible opportunities for efficiency gains.
From a business profile perspective, however, Morningstar states that Honda and Nissan share several commonalities. These include the companies’ approximate sales breakdown by geography, with both Honda and Nissan being highly dependent on the United States and (historically) China while enjoying solid positions in their native Japanese market; both companies also have a modest regional sales exposure to Europe.
Moreover, the companies’ respective global production footprints are also largely similar across geographies. Finally, Morningstar notes further that the product portfolio of Honda and Nissan are also quite closely matched with both companies substantially exposed to the mainstream automotive space, with neither company having a strong position in the premium vehicle segment. Accordingly, while these similarities again present clear opportunities in terms of fixed cost reductions, the diversification benefits resulting from a merger are markedly less obvious.
Electrification Strategy to Be Further Developed, with Both Honda and Nissan Currently Underperforming in EVs
Morningstar states that both Honda and Nissan are currently underperforming in the EV space, with an articulated electrification strategy being key in solidifying the long-term competitive positions of both companies.
Regarding Nissan, while it was a relatively early entrant in the EV space through its Leaf model (the first generation of which was launched as early as 2010), this has not resulted in a strong current position in EVs, with Nissan being a nominal EV player globally. While Honda is a late entrant into the EV space, the company has benefitted from solid sales of its hybrid models (which have grown in popularity recently amid some uncertainty in the near-term transition toward EVs), which have bolstered its financial results. This is in direct contrast to Nissan, whose weaker H1 F2024 earnings were significantly a function of a lack of hybrid vehicle offerings in the key U.S. market.
Morningstar also observes that scale itself is not necessarily a precursor to success in the EV space. VW represents a notable example of this, with the company being among the world’s largest automotive OEMs and having dedicated substantial resources to EV development.
Despite this, VW encountered notable challenges in software development, which resulted in frequent and protracted delays in the launch of several new EV models, ultimately causing VW to make an investment of up to EUR 5 billion into Rivian Automotive, Inc. to help expedite its software development and transition to EVs.
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