The dream of a merger between Honda and Nissan, touted as a potential formation of the world's third-largest automotive group, has ended abruptly, 52 days after the signing of a memorandum of understanding on December 23, 2024. On February 13, both companies held board meetings where they decided to withdraw from negotiations and to terminate any plans for operational integration.

This merger was seen as a self-rescue effort for Japanese automakers amid rising competition from electric vehicle giants like BYD and Tesla. Their initial decision to unite came at a time when both faced a crisis marked by declining market shares and profits. However, skepticism surrounded the collaboration from the outset. Carlos Ghosn, the former CEO of Renault, characterized the merger as a desperate gamble rather than a practical business engagement.

Signals of discord emerged early in the negotiations. Honda made its stance clear: the success of any merger hinged primarily on Nissan's ability to return to profitability. Unfortunately, Nissan was grappling with significant financial troubles, predicting a net loss of 80 billion yen for the fiscal year 2024. As reported by Reuters, Honda viewed Nissan less as an equal partner and more as a company in need of support, leading to friction over strategic direction and control.

The CEO of Honda, Toshihiro Mibe, acknowledged the disappointment caused by the negotiations' collapse but indicated a desire for continued collaboration in other areas. Conversely, Nissan’s CEO, Makoto Uchida, expressed concern over the company’s future without a strong partner, emphasizing the critical need for optimism amid growing industry challenges.

The initial memorandum of understanding proposed establishing a joint holding company, with Honda slated to have a majority stake and control over more than half of the board members. Such a proposal was met with notable resistance from Nissan’s leadership, who felt it did not align with their vision for potential growth and innovation. As a result, the discussion remained fraught with tension, ultimately leading to the termination of talks.

If the merger had materialized, it could have provided Nissan with much-needed leverage, especially given its weakened performance in recent markets. For instance, Nissan reported a combined operating profit of just 31.1 billion yen for the third quarter of the fiscal year 2024, significantly below market expectations and indicative of deeper issues. In contrast, Honda managed a healthy operating profit of 113.99 billion yen, demonstrating their contrasting operational health and strategy.

Both automakers remain fiercely independent and proud of their respective heritages—Honda's robust reputation in engineering and Nissan's technological capabilities have led to a hesitance from either side to concede or compromise during this merger process. Analysts highlighted how both corporations overestimated their market positions and capabilities to overcome their financial hurdles, with some attributing the negotiation failures to a lack of mutual understanding and respect for business operations across the board.

In the wake of the unsuccessful negotiations, Nissan's situation has only become more precarious. They are now facing a daunting restructuring pathway, intending to cut around 9,000 jobs globally while reducing production capacity by 20% in a bid to return to profitability. With a projected net loss exacerbated by excessive restructuring costs, Nissan's priorities now shift to survival rather than expansion or innovation.

Moreover, the struggles of these two auto manufacturers are echoed in their performance in key markets. For example, in China, Nissan's sales have plummeted, with a 12.2% decline marking significant losses for a company that once thrived in that territory. Similarly, in the U.S., sales growth was only marginal, underscoring the urgent need for revised strategies in the face of rising competition from electric vehicles. The situation in China has been particularly dire, with Nissan struggling to keep pace in the electric vehicle sector, lacking compelling models to draw customers while still significantly tied to combustion-engine vehicles.

The turmoil has prompted Nissan to re-evaluate its strategic position and partnerships. Recently, Foxconn, a major player in electronics, has signaled interest in pursuing a partnership with Nissan, potentially easing some of the financial pressures. The intent expressed by Foxconn was to collaborate rather than acquire, which could be beneficial for Nissan as it seeks to broaden its technological capabilities and efficiency.

As both companies navigate their future, Honda faces its own challenges. The dissolution of the merger talks does not automatically translate into a problem-free existence. Honda’s automotive sector profit margins have dwindled, calling for strategic planning and restructuring of its business model. The automotive sector is increasingly under pressure, and despite efforts, Honda's profit margins remain below their motorcycle division, which has historically performed better.

The envisioned merger was not just a lifeboat for Nissan but also a proactive strategy by Honda to pool resources against formidable challengers like Tesla and BYD. Both companies are now facing diminished sales numbers, with Honda's global volume decreasing by 4.6% and Nissan's marginally retreating by 0.8% year-on-year.

Moving forward, the landscape for both companies is fraught with challenges as they endeavor to remain relevant amid a rapidly evolving automotive sector. For Nissan, the looming threat of insolvency without genuine partnerships could hinder its comeback in the fragmented auto market. Both automakers must now strategize effectively to operationalize their visions and ensure sustainable profitability while navigating the complexities of evolving consumer preferences.