Japanese automakers Honda and Nissan have announced plans to work toward a merger that would form the world’s third-largest automaker by sales, as the industry undergoes dramatic changes in its transition away from fossil fuels.

The two companies said they had signed a memorandum of understanding on Monday [Dec. 23] and that smaller Nissan alliance member Mitsubishi Motors Corp. also had agreed to join the talks on integrating their businesses.

Automakers in Japan have lagged behind their big rivals in electric vehicles and are trying to cut costs and make up for lost time as newcomers like China’s BYD and EV market leader Tesla devour market share.

Honda’s president, Toshihiro Mibe, said Honda and Nissan will attempt to unify their operations under a joint holding company. Honda will lead the new management, retaining the principles and brands of each company. They aim to have a formal merger agreement by June and to complete the deal and list the holding company on the Tokyo Stock Exchange by August 2026, he said.

No dollar value was given and the formal talks are just starting, Mibe said.

There are “points that need to be studied and discussed,” he said. “Frankly speaking, the possibility of this not being implemented is not zero.”

A merger could result in a behemoth worth more than $50 billion based on the market capitalization of all three automakers. Together, Honda, Nissan and Mitsubishi would gain scale to compete with Toyota Motor Corp. and with Germany’s Volkswagen AG. Toyota has technology partnerships with Japan’s Mazda Motor Corp. and Subaru Corp.

News of a possible merger surfaced earlier this month, with unconfirmed reports saying Taiwan iPhone maker Foxconn was seeking to tie up with Nissan by buying shares from the Japan’s company’s other alliance partner, Renault SA of France.

Nissan’s CEO Makoto Uchida said Foxconn had not directly approach his company. He also acknowledged that Nissan’s situation was “severe.”

Even after a merger Toyota, which rolled out 11.5 million vehicles in 2023, would remain the leading Japanese automaker. If they join, the three smaller companies would make about 8 million vehicles. In 2023, Honda made 4 million and Nissan produced 3.4 million. Mitsubishi Motors made just over 1 million.

“We have come to the realization that in order for both parties to be leaders in this mobility transformation, it is necessary to make a more bold change than a collaboration in specific areas,” Mibe said.

Nissan, Honda and Mitsubishi earlier agreed to share components for electric vehicles like batteries and to jointly research software for autonomous driving to adapt better to electrification.

Nissan has struggled following a scandal that began with the arrest of its former chairman Carlos Ghosn in late 2018 on charges of fraud and misuse of company assets, allegations that he denies. He eventually was released on bail and fled to Lebanon.

Speaking Monday to reporters in Tokyo via a video link, Ghosn derided the planned merger as a “desperate move.”

From Nissan, Honda could get truck-based body-on-frame large SUVs such as the Armada and Infiniti QX80 that Honda doesn’t have, with large towing capacities and good off-road performance, Sam Fiorani, vice president of AutoForecast Solutions, told The Associated Press.

Nissan also has years of experience building batteries and electric vehicles, and gas-electric hybrid powertrains that could help Honda in developing its own EVs and next generation of hybrids, he said.

But the company said in November that it was slashing 9,000 jobs, or about 6% of its global work force, and reducing its global production capacity by 20% after reporting a quarterly loss of 9.3 billion yen ($61 million).

It recently reshuffled its management and Uchida, its chief executive, took a 50 per cent pay cut while acknowledging responsibility for the financial woes, saying Nissan needed to become more efficient and respond better to market tastes, rising costs and other global changes.

“We anticipate that if this integration comes to fruition, we will be able to deliver even greater value to a wider customer base,” Uchida said.

Fitch Ratings recently downgraded Nissan’s credit outlook to “negative,” citing worsening profitability, partly due to price cuts in the North American market. But it noted that it has a strong financial structure and solid cash reserves that amounted to 1.44 trillion yen ($9.4 billion).

Nissan’s share price also had fallen to the point where it is considered something of a bargain. On Monday, its Tokyo-traded shares gained 1.6%. They jumped more than 20 per cent after news of the possible merger broke last week.

Honda’s shares surged 3.8 per cent. Honda’s net profit slipped nearly 20 per cent in the first half of the April-March fiscal year from a year earlier, as its sales suffered in China.

The merger reflects an industry-wide trend toward consolidation.

At a routine briefing Monday, Cabinet Secretary Yoshimasa Hayashi said he would not comment on details of the automakers’ plans, but said Japanese companies need to stay competitive in the fast changing market.

“As the business environment surrounding the automobile industry largely changes, with competitiveness in storage batteries and software is increasingly important, we expect measures needed to survive international competition will be taken,” Hayashi said.