Merger Integration Faces Hurdles

Author｜Wang Lei

Editor｜Qin Zhangyong

The union between Honda and Nissan is not progressing as smoothly as anticipated.

Last December, the automotive world witnessed a landmark moment when Honda and Nissan jointly announced the signing of a memorandum of understanding (MOU) on their merger, officially initiating negotiations aimed at finalizing the deal by June 2025.

The collaboration would create the world's third-largest automotive group, a seemingly promising prospect, yet the path to cooperation has been rocky.

As the leading partner in this venture, Honda has imposed several conditions on Nissan.

Conversely, Nissan faces a heavier burden, including plans to lay off 9,000 employees globally, with over 70% of these being factory workers.

01 Honda Seeks a Burden-Free Partnership

To date, Honda has primarily put forth two demands on Nissan.

Firstly, it requires Nissan to repurchase the 35.7% stake in Renault held by the Renault-Nissan-Mitsubishi Alliance before the merger in 2026.

This stems from Honda's concern that during the merger negotiations with Nissan, Renault's stake in Nissan might be acquired by a third party, potentially disrupting the integration process.

Previously, rumors circulated that Foxconn Technology Group had its eyes on the Nissan shares held in trust by Renault, aiming to gain operational control of Nissan through this channel.

According to Bloomberg data, Renault's 35.7% stake in Nissan is valued at approximately 557 billion yen (around $3.6 billion).

However, given Nissan's current financial situation, this decision demands considerable resolve. As of December 31, 2024, Nissan's market value had dwindled to approximately 1.56 trillion yen, with cash and cash equivalents amounting to about 1.52 trillion yen.

Honda's other demand is equally pragmatic.

According to a Nikkei Asia report, Honda President Toshihiro Mibe clearly stated in an internal meeting that Nissan must at least triple its annual operating profit by fiscal year 2026 to ensure the success of the merger.

In fact, when the MOU was signed at the end of last year, both Honda President Toshihiro Mibe and Nissan President Makoto Uchida emphasized that turning around Nissan's profitability was crucial for their collaboration.

However, this time Honda has set a clear profitability target for Nissan – at least tripling its annual operating profit, which will be reassessed at the time of signing the final integration agreement in June 2025 regarding Nissan's potential to restore profitability.

"Unless Nissan and Honda can execute the integration as two financially stable companies, this merger will not materialize," said Toshihiro Mibe.

At a press conference in December last year, Honda presented a chart outlining a tentative integration date of August 2026, with Nissan's operating profit set to increase significantly.

While specific figures were not disclosed, combining Honda's profitability requirements with Nissan's fiscal year 2024 forecast, it is now possible to speculate this number.

According to Nissan's recently released semi-annual report for fiscal year 2025 (April 2024 to September 2024), despite a 1.3% year-on-year decline in operating revenue, it remained stable at around 6 trillion yen.

However, Nissan's operating profit plummeted 90.2% from 336.7 billion yen to 32.9 billion yen, while net profit dropped 93.5% from 296.2 billion yen to 19.2 billion yen, resulting in an operating profit margin of just 0.5%.

Concurrently, Nissan revised its full-year operating profit forecast for fiscal year 2024 down to 150 billion yen ($975 million), from a previous forecast of 500 billion yen.

From this perspective, adhering to Honda's demands, Nissan needs to achieve an operating profit of around 400 billion yen (about $2.7 billion) by fiscal year 2026.

02 The External World Demands Confidence

According to the MOU signed by both parties, post-merger, Honda and Nissan will jointly establish a holding company, aiming for annual sales exceeding 30 trillion yen (about $216 billion) with an operating profit target of over 3 trillion yen (about $21.6 billion), along with synergies worth 1 trillion yen (about $7.2 billion).

The target of over 3 trillion yen appears promising on its own, but it cannot withstand the scrutiny of breaking down into specific profit targets for both companies.

Currently, Nissan's operating profit forecast for fiscal year 2024 stands at 150 billion yen, while Honda expects its operating profit to reach approximately 1.42 trillion yen in fiscal year 2024, with Nissan's profit equivalent to only about 10% of Honda's.

If Nissan fails to improve its profitability and leaves Honda to shoulder nearly 3 trillion yen in operating profit, it is clearly unrealistic.

Even if Honda requires Nissan to triple its profits, Honda itself must also meet the remaining target of over 2 trillion yen. Based on Honda's current profitability, there is still a significant gap.

In other words, Honda's demand for Nissan to triple its profits may only be the minimum threshold for both parties to continue their collaboration. If Nissan fails to propose a credible strategy to achieve this goal, the merger might falter even before it begins.

Furthermore, Japanese media revealed that Honda's prerequisite for demanding increased profits from Nissan might be related to Honda's plan to repurchase up to 1.1 trillion yen worth of shares starting from January 6, its largest share repurchase plan to date.

Since the merger negotiations with Nissan were made public, Honda's share price has been affected, even reaching its lowest point in 2024 on December 19. The share transfer ratio when Nissan and Honda sign the merger documents in June 2025 will be determined based on the previous average share price.

In other words, Nissan's profitability will directly impact shareholder returns, and many overseas investors believe that Nissan might drag down Honda. Therefore, Honda hopes to alleviate shareholders' concerns through share repurchases.

03 Pressure on Nissan

For Nissan, achieving an operating profit of 400 billion yen is not an impossible feat, as it has surpassed this figure 16 times in the past 25 years.

However, given the current operating conditions, in the second quarter of fiscal year 2024, Nissan's net profit fell 99% year-on-year, from 128.6 billion yen to 995 million yen. In the third quarter, it could not maintain even the final 1% of its bottom line, turning directly into a loss with a net loss of 9.3 billion yen for the quarter.

Especially in the United States and China, Nissan's two major markets where sales have been declining monthly, it is difficult to foresee significant improvements in profitability from product models in the short term.

Therefore, "downsizing" has emerged as a quick fix to boost profits in the short term. After all, for a giant like Nissan, there are always efficiencies to be squeezed out.

In fact, before officially announcing the merger, Nissan had already initiated a series of emergency self-rescue measures, planning to reduce fixed costs by 300 billion yen and variable costs by 100 billion yen to maintain normal cash flow levels.

To achieve this goal, Nissan sold a 10% stake in Mitsubishi, raising 68.64 billion yen. Additionally, Nissan's selling, general, and administrative expenses will be reduced, and CEO Makoto Uchida has led by example, voluntarily forgoing 50% of his monthly salary starting from November, with other executive committee members also voluntarily taking corresponding pay cuts.

Moreover, there will be 9,000 layoffs globally, with global production capacity reduced by 20%, achieving the purpose of increasing revenue and reducing expenses.

According to Nikkei News, over 70% of the 9,000 layoffs involve factory employees and other production departments, with the rest being administrative departments.

Currently, the first batch of layoff lists in Japan has been released, with Nissan cutting the commercial van production line at its Shonan Plant in Kanagawa Prefecture, planning to lay off hundreds of people.

Returning to China, management adjustments are also underway. Recently, the current Chief Financial Officer (CFO) Stephen Ma was appointed Chairman of the Nissan China Management Committee, reporting directly to CEO Makoto Uchida. Makoto Uchida stated clearly: "The new personnel appointments will bring the necessary experience and enhance the efficiency of our response measures."

It seems that Nissan has already made preparations to improve quality and efficiency, and the merger with Honda appears inevitable. At least from the perspective of both parties, a successful merger remains a high-probability event.