Source: Titanium Media
Author: Han Jingxian

On December 23, the two major auto manufacturers in Japan $Nissan Motor (ADR) (NSANY.US)$ and $Honda Motor (HMC.US)$ officially announced that both sides have entered the formal negotiation stage for the merger.

The two companies stated in a declaration that the goal of merging the two companies is to achieve a total sales volume of 30 trillion yen (191 billion USD) and an operating profit of over 3 trillion yen.

They plan to complete negotiations around June 2025 and then establish a holding company by August 2026, at which point both companies' stocks will be (Delisted). Nissan's partner.$Mitsubishi Motors (7211.JP)$Will decide whether to join the merger by the end of January 2025.

Once the integration of the two major auto manufacturers is successful, it will become the largest restructuring case in the global auto industry since the merger of Fiat Chrysler Automobiles and PSA Group for 52 billion USD in 2021. $Stellantis NV (STLA.US)$ In the meantime, the automotive industry is witnessing major restructuring.

Nissan is waiting for rescue.

Many analysts believe that the merger of the two major Japanese automotive brands is the result of Nissan's poor financial performance. This mainly focuses on two dimensions: reduced profit and tight cash flow.

From the perspective of Nissan's sales performance alone, it does not seem to be very terrible. Data shows that global sales in the first three quarters were 2.505 million vehicles, a slight increase of 0.4% year-on-year; in the third quarter alone, Nissan's global sales were 0.809 million vehicles, a year-on-year decrease of 2.8%; in the third quarter, Nissan's sales in China were 0.172 million vehicles, down 12.5% year-on-year. Sales in the North American and European markets fell by 0.2% and 5% respectively in the third quarter.

Aside from the significant decline in the Chinese market, Nissan's sales in other markets did not see a large decrease.

But why is there a degree of 'seeking rescue'?

According to the Earnings Reports released by Nissan, in the first half of this year,$Nissan Motor (7201.JP)$net income decreased by 94% year-on-year, dropping from 128.6 billion yen to 0.995 billion yen; in the third quarter, Nissan's revenue was 2985.8 billion yen, a decline of 5.1% year-on-year, while net income directly turned from a profit of 190.7 billion yen in the same period last year to a net loss of 9.3 billion yen.

At the same time, Nissan also lowered its full-year expectations: revenue was downgraded from 14 trillion yen (approximately 655.1 billion yuan) to 12.7 trillion yen (approximately 594.2 billion yuan), and operating profit was reduced by 70% from the original 500 billion yen (23.4 billion yuan) to 150 billion yen (approximately 7 billion yuan).

According to the Financial Times in the United Kingdom, at least two unnamed executives of NISSAN MOTOR CO have confirmed that the brand is looking for new investors. One executive stated, "We have 12 to 14 months left to survive. We need Japan and the USA to ensure cash flow."

If this is true, then NISSAN MOTOR CO has transformed from a smooth sailing globally to a plea for help before death.

In fact, NISSAN MOTOR CO has long been aware of its current situation. As early as four years ago, NISSAN MOTOR CO launched a transformation plan called Nissan Next. In May 2020, Makoto Uchida, who had just taken office as the CEO of NISSAN MOTOR CO six months earlier, announced a four-year corporate transformation plan called "Nissan NEXT" at the company's headquarters in Yokohama, Japan.

Makoto Uchida joined NISSAN MOTOR CO in 2003 and before becoming the CEO, he had already served as a member of the executive committee, senior vice president, chairman of NISSAN MOTOR CO's China management committee, and president of Dongfeng Automobile.

According to the goals of Nissan Next, by 2023, NISSAN MOTOR CO aims to launch eight electric vehicles and expand the application of the e-Power hybrid vehicles to the compact and super compact market segments in various regions, achieving sales of 1 million units of Electric Vehicles by March 2024. The target for domestic new energy penetration in Japan is 60%, Europe 50%, and China 23%.

March 31, 2024, is the last day of Nissan Next; however, the final results are not satisfactory.

Excluding models produced by joint ventures in China, NISSAN MOTOR CO only has five electric models globally: Leaf hatchback, Arrow Electronics Inc Ariya crossover, Sakura microcar, Townstar van, and Clipper small van.

In the Chinese market, NISSAN MOTOR CO has only one electric vehicle, the Ariya Arrow Electronics Inc, with a new energy penetration rate of only 6%. The penetration rates in Japan and Europe have also not met the standard, at 52% and 45% respectively.

The transformation has not been successful, financial challenges are intensifying, and NISSAN MOTOR CO has started a series of self-rescue actions. In November, NISSAN MOTOR CO announced a global reduction of 20% in production capacity. Fixed costs will be reduced by about 300 billion yen, and 9,000 employees will be laid off worldwide.

As early as June this year, NISSAN MOTOR CO announced the official closure of its Passenger Vehicle factory in Changzhou, Jiangsu, which is a joint venture with Dongfeng Automobile, with an annual capacity of about 0.13 million vehicles. The production work of this factory will be transferred to other factories of Dongfeng NISSAN.

Does merging with Honda Motor mean NISSAN MOTOR CO will give up on self-rescue? NISSAN MOTOR CO CEO Makoto Uchida stated that the discussion of integration "does not mean we have given up on turning the situation around," but rather aims to ensure the company's future competitiveness. "After taking measures to turn around for future development and growth, we need to consider the final scale and growth. This growth will be achieved through cooperation," he added.

At the same time,$Honda Motor (HMC.US)$CEO Toshihiro Mibe also confirmed, "This is not a bailout plan." He emphasized that one condition for the merger is that NISSAN MOTOR CO completes the so-called "profit turnaround plan."

Delay and misjudgment

What exactly has led to NISSAN MOTOR CO's current predicament?

Many Analysts believe that this result is due to Uchida Makoto's incorrect judgment regarding the demand products in the main sales market. According to foreign media reports, Uchida himself rated his performance over the past four years as a 'B'.

In the Chinese market, NISSAN MOTOR CO faces intense competition from local brands and rapid changes in Consumer preferences. Especially in the field of Electric Vehicles, but NISSAN's product line is relatively singular and cannot meet the diverse demands of consumers.

According to the sales data from October, NISSAN's total sales were 0.057 million units, with the Sylphy series contributing 0.032 million units, accounting for half of NISSAN's market in China. Prior to this, NISSAN had quite a few competitive models in China. The X-Trail was once NISSAN's best-selling SUV model, with monthly sales reaching over ten thousand units. However, after the launch of the fourth-generation X-Trail, which featured a three-cylinder engine, sales plummeted.

Cui Dongshu, Secretary-General of the Passenger Car Association, stated in an article after NISSAN and Honda began merger negotiations that many joint venture car companies have declined due to missteps in energy-saving and emission-reduction strategies. In order to lower fuel consumption, they stubbornly implemented three-cylinder engine fuel-saving measures, which had little effect, and consumers did not accept it. The new energy strategy of domestic brands has easily achieved a balance between dual credits and technological breakthroughs. Around 2016, there were calls to accelerate the introduction of NISSAN's range-extended hybrid technology, e-POWER, but the actual speed was too slow.

Zhou Feng, deputy general manager of Dongfeng Nissan, also admitted in a recent interview that Dongfeng Nissan misjudged the development trend of the new energy market, resulting in missed the best window period. Especially in the competition of intelligent and electrification, Dongfeng Nissan not only faces$Tesla (TSLA.US)$blockades in the global market but also encounters fierce challenges from emerging local brands in China.

In another major market—the USA, NISSAN failed to timely launch hybrid models, leading to a significant decrease in market competitiveness as sales of pure electric vehicles slowed.

According to a report by KPMG titled "American Perspective Survey", only 20% of respondents indicated they would choose Electric Vehicles to help achieve a low-carbon economy transition. The largest proportion of respondents (38%) indicated they would still purchase pure gasoline vehicles, while 34% would opt for hybrid cars.

In March of this year, the USA lowered its target for the adoption of pure Electric Vehicles to meet automotive exhaust emissions regulations, while acknowledging that hybrids and plug-in hybrid models can play a role in achieving emission regulations.

However, currently NISSAN MOTOR CO only sells RBOB Gasoline vehicles and pure Electric Vehicles in North America. It was only in March of this year that NISSAN announced it would launch models equipped with e-power technology in North America in 2026.

How the delayed hybrid models will perform remains uncertain, but at least for now, the hybrid market in the USA is dominated by Toyota and Honda Motor. Statistics from USA research firm Cox Automotive indicate that in the first quarter of this year, Toyota and Honda together controlled 70% of the USA hybrid vehicle market share.

Regarding the USA, Uchida Makoto admitted his misjudgment of market demand, as NISSAN was still promoting RBOB Gasoline and pure Electric Vehicles while other competitors rapidly launched new hybrid models and technologies, leading to an inability to meet the strong growth in hybrid vehicle demand in the USA, resulting in a significant decline in sales.

What is needed is speed, not scale.

History is always remarkably similar.

Today's merger of NISSAN and Honda cannot help but remind one of the "Nissan Rescue" initiated by Renault in 1999.

In 1998, Nissan fell into a debt crisis due to poor management. $Ford Motor (F.US)$ Daimler also intended to acquire Nissan but hesitated due to its debt crisis, and Nissan, which had been losing money for eight consecutive years, ultimately sought help from Renault.

The French company Renault ultimately intervened, acquiring 36.8% of Nissan's shares for 5.4 billion USD, becoming Nissan's largest shareholder, and forming the Renault-Nissan Alliance with Nissan.

In 2000, Carlos Ghosn, who was then Vice President of Renault, became Nissan's CEO and proposed the "Nissan Revival Plan." Through various measures, including cost cuts, Ghosn pulled Nissan back from the brink of death and earned himself the title of "cost killer."

In 2016, the Renault-Nissan Alliance continued to expand, with Nissan acquiring 34% of Mitsubishi Motors' shares, establishing the Nissan-Renault-Mitsubishi giant alliance.

However, by 2018, the global financial crisis erupted, and internal conflicts within Nissan and Ghosn gradually escalated. In November of that year, Carlos Ghosn was arrested by the Tokyo District Prosecutor's Special Investigation Unit for reportedly underreporting his compensation by about 0.1 billion yen and was taken away voluntarily. The same month, Mitsubishi Motors dismissed Ghosn from his position as chairman. In December, the Tokyo prosecutors formally charged Carlos Ghosn and arrested him again. On December 31, 2019, Ghosn escaped from Japan and settled in Lebanon.

Can this move from alliance to merger pull Nissan back from the ICU again?

Hiroshi Yoshino stated at the press conference for this merger that the business integration will bring "advantages that are impossible to achieve under the existing cooperation framework" for both companies. The transaction aims to share intelligence and resources, achieve economies of scale and synergies, while protecting both brands.

However, Carlos Ghosn, the former chairman of Nissan, is not optimistic about this. In an interview with the media on Monday, he stated that he does not believe the alliance between Honda and Nissan will be successful and mentioned that the two auto manufacturers are not complementary. Both operate in the same market, producing the same products, and their brands are very similar.

Additionally, he stated that Honda is an engineering organization that is very strong in engineering. Nissan takes great pride in its engineering technology. Therefore, the struggle here is to determine which technologies the new company or new alliance will adopt. "This will be very difficult."

Choi Dong-shu also quoted Ghosn's perspective in his writings and provided the same judgment. He stated that he is personally not optimistic about the merger between Nissan and Honda. Both Honda and Nissan need technological innovation and to upgrade their own technologies, rather than simply achieving economies of scale to reduce manufacturing costs.

The Economist, in its analytical article, indicated that resource sharing would be helpful. However, the greatest advantage of Chinese companies is not scale but speed. The development time for new models is three years or less, which is half the time required by foreign companies. The speed of software updates is fleeting. Japanese, American, or European auto manufacturers have yet to find ways to keep pace with the innovative speed of Chinese auto manufacturers. Merging two bulky Japanese giants is unlikely to be the answer, as their golden era might be over.

The reason for such an optimistic forecast lies primarily in the fact that Honda is currently not doing well. Data shows that in the first quarter of 2024, Honda's profit just reached a historic high of 22.6 billion yuan, but in the second quarter, it directly shrank to 12 billion yuan. Honda's sales in China from January to November 2024 were 0.74 million units, a year-on-year decline of 30.7%.

Some industry analysts pointed out that although Japanese companies have a global layout, the profit share from the Chinese market far exceeds that of other markets. The sluggishness of the Chinese market will inevitably have a significant impact on the global operations of the companies, but this impact will appear relatively delayed in the Earnings Reports. A more direct manifestation is tighter cash flow, leading to turmoil in the senior management.

Moreover, the previous merger between Fiat Chrysler Automobiles and PSA Group, which formed the Stellantis Group, is currently also mired in a complex predicament. The net income in the third quarter declined by 27% year-on-year to 33 billion euros; global combined delivery volume decreased by 20% year-on-year, with Europe down by 17%, and North America plummeting by 36%.

In June of this year, then-CEO of Stellantis, Carlos Tavares, publicly admitted that the group's high pricing marketing strategy had failed, while competitors quickly eroded market share through price cuts, leading to a sharp decline in market share for Stellantis's American brands (Chrysler, Jeep, Ram, and Dodge).

Although Carlos Tavares brought impressive short-term profits to Stellantis through aggressive cost-cutting strategies, he failed to address the fundamental problems facing the group in long-term development. On December 1st, Stellantis announced the acceptance of Tavares's resignation, with his powers temporarily taken over by the interim executive committee responsible for overseeing the group's operational direction and business until the new successor takes office next year.

In the face of a new round of global automotive market reshuffling, the merger between Nissan and Honda might still face many uncertainties.

Editor/rice