The Real Reason Why a Merger Between Honda and Nissan Won’t Fix Their Problems

This past week there was, well at least for me, a Honda-nostalgic moment when the boys from Minato City (Hondas HQ) announced the re-birth of the Prelude, a beastie they have not produced for some 25 years and one that evokes memories for me.

Okay so the new one will be a hybrid-electric but at least it would come with some neat features like a simulated gear shift and combustion engine noise to pacify us petrol heads.

The news though was drowned out by the cacophony of rumours about a much more seismic shift in the car makers’ future. One of the worst kept secrets in the car world right now is the possibility of a merger with Nissan, a floundering rival, a move that would create the world’s third largest manufacturing group behind Toyota and VW. 

But me thinks this will not entirely solve the problem of the much-needed modernisation that both companies need.

 Just about every car manufacturer is struggling at the moment with the arrival of cheap (read: subsidised) Chinese EVs and misguided government mandates to cease internal combustion engines leading to an unheard of need for capital investment. 

Then there is the small threat of a Trump inspired trade war as he attempts to shield American jobs from ‘unfair’ competition. Even if Honda and Nissan are already in a deal to develop EVs to rival the best of China, we may still find it to be to little too late.

Over at Nissan they are already perilously weak, profits have plunged 90% in the first six months of this year.  Its market share, particularly in the US has plunged and this was their biggest market. Sales in China are decelerating rapidly as well. 

The company has already laid off some 9000 workers which cut capacity by at least 20% but the market still remain uncertain about their strategy of Hybrids and not full EV cars. 

Honda themselves laid off 900 last year in China.

Creating a bigger group out of Honda and Nissan, and probably the forgotten sibling Mitsubishi who Nissan have a controlling stake in, should bring greater economies of scale meaning that there would be joint investment in technology allowing them to catch up. 

This news has been met with approval from shareholders of Nissan and Mitsubishi along with Renault which is currently a 36% shareholder in Nissan. Honda’s investors seem wary and their shares took a tumble on the news.

In Japan, restructuring is a bit of a dirty word. It leads to factory closures and job losses which they don’t like. Strangely though the ministry that overseas the car industry has viewed it as a positive development. This may be because the alternative is a foreign takeover which is far more unpalatable, and there are some foreigners who would salivate at the opportunity.

At the forefront of the rumours is Taiwan’s Foxconn, the guys that make the Apple iPhone. It is not such a dumb idea, after all, China’s Xiaomi has already done it. Taking on Nissan, Foxconn want to become as dominant in cars as they have in consumer electronics. 

With Nissan providing the chassis and suspension and Foxconn on the electrical gadgetry this could be a marriage made in heaven. It is rumoured that the two companies have been in discussions already.

Chinese companies may view a takeover of Nissan purely for their production facilities in the US of A.  This would allow them to avoid the punitive tariffs likely to be imposed by the incoming Trump administration.

It is possible that the talks with Foxconn have created a greater urgency between Honda and Nissan to get the deal done.  But I have to ask if such a deal would secure their future or simply lead to much more pain.

From my point of view the greatest advantage that Chinese manufacturers have, and this is apart from their cavalier approach to others intellectual property, is their speed to market and not the size of the company. 

In the Peoples Republic, new models take less than three years to come to fruition, which is about half the time it takes in Japan, or any where else for that matter.  It is safe to say that as of now NO established car maker has worked out how to match that speed of innovation. Japanese, European and American manufacturers simply cannot hit the target as it keeps moving (forward) and therein lies the real problem.

I have a deep sense of foreboding. Bringing together two lumbering Japanese Giants, who may well have their best years behind them, may accentuate the problem and not solve it unless they can shed a few pounds and get back to their ‘A’ Games that is.`