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Strategy

Honda and Nissan need more than a $58bn merger to compete with Chinese EVs

Published 22 January 2025 in Strategy • 8 min read

Facing mounting competition from Tesla and BYD, Honda and Nissan’s big bet on a merger might not be enough to close the gap. Survival may depend on thinking beyond traditional boundaries.

 

The automotive industry is undergoing big shifts, and two of Japan’s automotive stalwarts, Honda and Nissan, have announced plans to merge by 2026. The $58bn move, designed to counter the increasing dominance of Chinese electric vehicle (EV) makers like BYD, has sparked intense debate over its feasibility and potential impact. 

While pooling resources to tackle the financial and technological demands of the EV revolution makes sense, the potentially multi-billion-dollar merger’s inherent risks, from overlapping markets and technologies to cultural incompatibilities, threaten its success. 

A bolder strategy for the automotive industry may lie in forging partnerships with companies from entirely different sectors, embracing complementary strengths rather than compounding shared weaknesses.

Chinese automakers are now rapidly penetrating markets in the EU

Competitive pressures drive the merger

China has cemented its place as the world’s largest EV producer, with heavy production subsidies handed out by the state. Brands like BYD, Geely, and Nio have leveraged their home market dominance to expand abroad, offering competitively priced vehicles, equipped with advanced digital and software capabilities. 

Chinese automakers are now rapidly penetrating markets in the EU – which has announced big increases in tariffs on EVs from China, set to rise from 10% to 45% for the next five years – and beyond. Ratings agency S&P Global expects Chinese brands to capture a 10% share of the European market by 2034, up from just 2.5% in 2023.

For legacy automakers like Honda and Nissan, this presents a formidable challenge. Nissan was once an industry leader in EV innovation with its Leaf electric model. Launched in 2010, the Leaf was one of the first mass-produced electric vehicles globally. But Nissan has struggled in recent years, announcing 9,000 job cuts in November and slashing global production by 20%. 

Honda, despite pledging to spend $65bn over the next decade on electrification, remains reliant on traditional combustion engines for most of its revenue, and its sales tumbled by more than 30% in China last year. Together, these companies face mounting pressure to keep pace with industry leaders like US company Tesla and cheaper Chinese EVs. Honda’s CEO Toshihiro Mibe said the deal was a way to “fight back” against “the rise of Chinese power,” or the two firms risk being “beaten” by rivals.

Pooling resources: A risky step

On paper, the Honda-Nissan merger makes sense. Combining resources could help both companies navigate the high costs associated with EV development, primarily through increased research and development heft, and greater efficiencies through joined-up purchasing and production.

Honda’s electrification roadmap could benefit from Nissan’s early expertise with EVs and the rich data sets from its Leaf model, while Nissan’s financial struggles might be mitigated by Honda’s relative stability. If Mitsubishi, a Nissan affiliate, joins the partnership as expected, the combined entity could rival Toyota and Volkswagen as one of the world’s largest carmakers.

However, the merger’s success is far from guaranteed. The companies’ similarities – both are heavily reliant on the Japanese and US markets, have faced difficulties in previous international partnerships, and are struggling to transition to EVs – raise concerns about whether their combined efforts will yield meaningful innovation. 

Nissan’s long-standing alliance with France’s Renault has been fraught with governance issues and strategic disagreements, particularly after former Nissan CEO Carlos Ghosn’s spectacular arrest in Japan in 2018.

The overlap in technology and market presence, meanwhile, risks creating redundancies rather than synergies, while cultural differences and historical rivalries may further complicate any potential post-merger integration.

“The convergence of hardware and software has created manifold opportunities for automotive companies to leverage their collective expertise in AI, data analytics, and digital platforms.”

Lessons from past partnerships

The history of the automotive industry offers cautionary tales about the challenges of merging similar entities. Honda’s collaboration with America’s General Motors on affordable EVs, for example, has faltered. In 2022, the two firms announced a strategic partnership to co-develop affordable EVs. But a year later, the companies announced the $5bn plan would be scrapped. 

These examples highlight the difficulties of aligning strategies, cultures, and priorities, even among ostensibly compatible partners.

The risks of the Honda-Nissan merger are compounded by Japan’s broader automotive landscape. Unlike Toyota, which has invested in a mix of hybrids, hydrogen-powered cars, and electric vehicles, Nissan has mainly focused on going fully electric, while Honda is taking a slower path by using hybrids as a step toward electrification.

This narrow focus makes them more vulnerable to market fluctuations – such as the global slowdown in EV sales – and leaves them ill-prepared to address emerging trends in digitalization and consumer behavior.

Complementarity over compatibility

Rather than doubling down on existing competencies, the automotive industry should look outward for inspiration and innovation. Partnerships with companies from other industries – such as technology, telecommunications, or energy – offer the potential to drive advancements in connectivity and innovation, changing how vehicles are designed, powered, and experienced. Such collaborations can bring fresh perspectives, access to complementary assets, and the opportunity to co-create solutions.

Examples of successful cross-industry partnerships abound. Toyota’s collaboration with NTT, Japan’s leading telecommunications provider, to develop “smartphones on wheels” underscores the value of integrating connectivity and mobility solutions. 

Toyota and NTT teamed up in 2017 to push the boundaries of connected car tech and smart city infrastructure. Initially, the duo focused on data processing platforms for connected cars. By 2020, they took it up a notch, expanding their alliance to build smart cities, syncing with government frameworks to reimagine urban living.

Meanwhile, in 2022, Honda and Sony teamed up to create Sony Honda Mobility Inc., a partnership built to flip the script on the auto industry. Their mission? “Move people through innovation” – a lofty promise to merge Sony’s tech wizardry with Honda’s automotive know-how.

This year, they delivered on that ambition, rolling out their first Afeela-branded cars. These vehicles are where sleek design and smart tech combine to redefine what we expect from a car. It’s a bold move, showing what happens when two powerhouses think outside the box and hit the accelerator on innovation.

The convergence of hardware and software has created manifold opportunities for automotive companies to leverage their collective expertise in AI, data analytics, and digital platforms.

Porsche, for example, teamed up with Rimac Automobili to revive the legendary Bugatti brand, creating the Bugatti Tourbillon – a high-performance EV that aims to hit an eye-popping 500 km/h when it debuts in 2026. Beyond speed, Rimac brings AI expertise to the table. Its driver coaching system leverages nine cameras and in-seat sensors to collect a staggering 6TB of data per hour. The data is turned into real-time coaching to make drivers better – a software marvel for hardware enthusiasts.

In Europe, the Honda-Nissan merger may serve as a cautionary tale for legacy carmakers struggling to adapt to the rise of Chinese automakers.

Global impact of the Honda-Nissan merger

If successful, the Honda-Nissan merger could have major implications for the global automotive industry. By creating a stronger, more competitive player, the partnership could help counter the growing momentum of Chinese EV makers and provide a viable alternative to the market power of Tesla, led by Elon Musk. 

However, failure to deliver on the deal’s promises could undermine confidence in Japanese automakers’ ability to navigate the industry’s transition to electrification and accelerate the decline of legacy dominance. 

In Europe, the Honda-Nissan merger may serve as a cautionary tale for legacy carmakers struggling to adapt to the rise of Chinese automakers. German brands like Volkswagen, BMW, and Mercedes face similar challenges in balancing their heritage with the need for innovation. 

Volkswagen’s bold transition to electric vehicles has faced setbacks from production delays, software issues, and internal management struggles, underscoring the challenges of adapting to a fast-changing market where Tesla’s agility and innovation set the pace.

Ultimately, the Honda-Nissan merger represents both an opportunity and a risk. While pooling resources could help the companies address the financial and technological challenges of the EV era, their similarities, and overlapping markets raise questions about their ability to deliver true innovation. 

The broader lesson for the automotive industry is clear: success in a disrupted market requires thinking beyond traditional boundaries and embracing partnerships that combine complementary strengths. By forging ties with companies from different sectors, automakers can unlock new possibilities.

A blueprint for the future

To navigate the upheaval in the automotive industry, car manufacturers should embrace a more open and collaborative approach to innovation. This means:

  1. Exploring diverse partnerships: Scouting companies from a wide range of geographies and industries that offer both compatibility and complementarity.
  2. Building relational capabilities: Ensuring that organizations have the skills and structures needed to foster collaboration and manage cultural differences.
  3. Adopting a beginner’s mindset: Approaching partnerships with a willingness to learn and adapt, rather than seeking to impose existing models.
  4. Focusing on the future: Prioritizing transformative opportunities over incremental improvements, to shape new markets and ecosystems.
  5. Orchestrating bold moves: Taking decisive action to align strategies and investments, while remaining agile enough to pivot as needed.

Authors

Patrick Reinmoeller - IMD Professor

Patrick Reinmoeller

Professor of Strategy and Innovation at IMD

Patrick Reinmoeller has led public programs on breakthrough strategic thinking and strategic leadership for senior executives, and custom programs for leading multinationals in fast moving consumer goods, telecommunications, pharmaceuticals, healthcare, and energy on developing strategic priorities, implementing strategic initiatives, and managing change. More recently, his work has focused on helping senior executives and company leaders to build capabilities to set and drive strategic priorities.

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