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(Bloomberg) -- Among the reasons for Honda Motor Co. to enter merger talks with Nissan Motor Co., one looms large: China.
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The surging popularity of electric and hybrid vehicles made by BYD Co. and others has erased the leading position that Japan’s automakers once enjoyed as providers of high-quality cars with cachet. That’s left them with too much capacity in local factories that were built to satisfy anticipated domestic demand in the world’s largest market for automobiles.
“When you look at Honda and Nissan, they’ve been losing the market for some time,” said James Hong, an analyst at Macquarie Securities Korea Ltd. “We expect both to come up with very large capacity cuts to at least cover some of the fixed-cost burdens they have in China.”
Nissan made 779,756 cars in China during the fiscal year that ended in March, about half of its peak output in recent years. The Yokohama-based firm has embarked on a cost-cutting plan that will slash global capacity by a fifth to 4 million vehicles, with China accounting for more than half of the 1 million-unit reduction, according to Citigroup Global Markets analyst Arifumi Yoshida.
Honda said in July that it will close factories and reduce capacity by 20% in China. The carmaker is in negotiations with local partners on further cuts, Executive Vice President Shinji Aoyama said last month.
More broadly, Nissan has been in a state of turmoil since the late 2018 arrest and ouster of former Chairman Carlos Ghosn. Multiple management shakeups and an outdated product lineup have also contributed to shink it to Japan’s fifth-largest automaker by market value, at around ¥1.6 trillion ($10.2 billion).
That’s made Nissan a potential takeover target.
Efforts to engage in merger talks appear to have accelerated after Hon Hai Precision Industry Co., the Taiwan-based producer of iPhones known as Foxconn, approached Nissan about acquiring a stake in the company, although a person familiar with the matter said last week its interest is on hold while any negotiations between the two Japanese companies continue.
Regardless, a combination of Honda and Nissan has long been anticipated, and even explored, in the past, with the Japanese auto industry coalescing into two camps: One including the two carmakers and another controlled by the Toyota Motor Corp. group of companies.