The potential impact of a Nissan-Honda merger on the auto industry.

• Nissan Motor and Honda Motor are reportedly considering a massive merger as they strive to remain competitive in the race towards complete electrification.
• According to Citi, the potential partnership could result in the world's third-largest automotive group with an annual sales volume of 8 million vehicles.
• The merger report emerges amidst intense competition from larger EV manufacturers, including Tesla and BYD, which are gaining ground globally.

Nissan Motor and Honda Motor are reportedly considering a massive merger, causing ripples in the global automotive sector as they strive to remain competitive while transitioning to full electrification.

According to Nikkei, Nissan and Honda are planning to negotiate a merger, with sources indicating that a memorandum of understanding is expected to be signed soon.

If the prospective tie-up is successful, Nissan-Honda-Mitsubishi will become the world's third-largest auto group by annual vehicle sales, with 8 million units sold, according to Citi. This would place them behind Toyota Motor and Volkswagen in terms of sales.

Neither Nissan nor Honda confirmed or denied the Nikkei report.

The merger report emerges amidst intense competition from larger electric vehicle manufacturers, including Tesla and BYD, who are facing challenges from global automakers.

In March, Nissan and Honda formed a strategic partnership to work together on producing essential components for electric vehicles.

Despite the anticipation of a mega-merger, several obstacles are expected, including political scrutiny in Japan and potential job cuts. Additionally, the unwinding of Nissan's alliance with Renault is crucial to the process.

The merger between Nissan and Honda, as described by Peter Wells, a professor of business and sustainability at Cardiff Business School's Centre for Automotive Industry Research, is a "really important" development that could help the two companies pool their assets, save money on costs, and create the technologies they need for the future.

Nissan has been facing challenges in balancing its relationship with Renault over the past year, according to a report by CNBC's "Street Signs Europe" on Wednesday.

"Nissan has been struggling in the market and at home, and its product line-up is not right. There are numerous warning signs and red flags surrounding Nissan at present, and something had to happen. Whether this is the solution remains uncertain."

On Wednesday, Nissan's shares surged 23.7%, marking the company's best trading day in at least 40 years, according to FactSet. Despite this, the Tokyo-listed stock price of the firm is still approximately 25% lower year-to-date.

In New York, Honda experienced a 3.2% decline in pre-market trading.

Barriers to a possible merger

Could a traditional solution, such as consolidation between Nissan and Honda, be a good recourse to combat competition from Chinese EV carmakers? Cardiff Business School's Wells believes so.

Wells expressed his concerns about the company's tardiness, lack of current technology and setup, and inadequate product to compete effectively in their key markets.

The major concern for Nissan is being out of step with the U.S. market, which they cannot fix quickly, according to him.

Akira Kishimoto believes that the obstacles to a Nissan-Honda merger would be significant.

Kishimoto stated in a research note published Wednesday that Nissan must clarify the outcome of its complex capital relationship with Renault, which involves the French government, and provide details on the restructuring proposal it announced.

Kishimoto stated that it is necessary for Honda to demonstrate its management of major battery electric vehicles and battery investments in Canada.

JPMorgan stated that it must now await any specific declarations from either corporation.

'Full-scale transformation of the auto industry'

Lucinda Guthrie, executive editor at Mergermarket, stated on CNBC's "Street Signs Europe" on Wednesday that the tie-up was not entirely unexpected because they had announced their partnership earlier this year.

"I've seen some reports suggesting that this occurred due to Foxconn's approach to Nissan. However, I'm unsure whether this transaction will result in a full-blown merger or a more partnership-based arrangement," she stated.

Nissan was approached by Foxconn, an Apple supplier, about taking a stake, according to a report by Bloomberg on Wednesday. Foxconn has been investing heavily in EVs recently. CNBC reached out to Foxconn for comment.

Recently, Honda tested the waters of a partnership with General Motors but ultimately decided to walk away.

Guthrie said that speculation about consolidation between Honda and Nissan could follow a similar path.

Guthrie stated that the Japanese government's approval is necessary for this to happen, as there is a possibility of workforce reductions. However, how can Japanese automakers remain competitive against low-cost vehicles from China?

Arifumi Yoshida of Citi stated that a merger would negatively affect Honda but positively impact Nissan and Mitsubishi.

According to Yoshida's research note published Wednesday, Honda's competitiveness in motorcycles and hybrid electric vehicles, as well as the strength of its brand, make it well-positioned to compete with rivals for the next 5-10 years.

Despite his reservations, Yoshida stated that the decision could be perceived as a proactive move in preparation for the complete transformation of the automotive industry.