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Japanese automakers Honda and Nissan have announced plans to work toward a merger, forming 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 and that smaller Nissan alliance member Mitsubishi Motors also had agreed to join the talks on integrating their businesses.

Honda's president, Toshihiro Mibe, said Honda and Nissan will pursue unifying their operations under a joint holding company. Honda will initially lead the new management, retaining the principles and brands of each company. The aim is to have a formal merger agreement by June and to complete the deal 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."

Automakers in Japan have lagged behind their big rivals in electric vehicles and are trying to cut costs and make up for lost time.

News of a possible merger surfaced earlier this month, with unconfirmed reports saying that the talks on closer collaboration partly were driven by aspirations of Taiwan iPhone maker Foxconn to tie up with Nissan, which has an alliance with Renault SA of France and Mitsubishi.

A merger could result in a behemoth worth more than $50 billion based on the market capitalization of all three automakers. Together, Honda and the Nissan alliance with Renault SA of France and smaller automaker Mitsubishi Motors Corp. 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.

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.

Nissan, Honda and Mitsubishi announced in August that they would share components for electric vehicles like batteries and jointly research software for autonomous driving to adapt better to dramatic changes centered around electrification, following a preliminary agreement between Nissan and Honda set in March.

Honda, Japan's second-largest automaker, is widely viewed as the only likely Japanese partner able to effect a rescue of Nissan, which 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 percent of its global work force, and reducing its global production capacity by 20 percent after reporting a quarterly loss of 9.3 billion yen ($61 million).

It recently reshuffled its management and Makoto Uchida, its chief executive, took a 50 percent pay cut to take 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 has fallen to the point where it is considered something of a bargain.

On Monday, its Tokyo-traded shares gained 1.6 percent. They jumped more than 20 percent after news of the possible merger broke last week.

Honda's shares surged 3.8 percent. Honda's net profit slipped nearly 20 percent in the first half of the April-March fiscal year from a year earlier, as 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.

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Japanese automakers Honda and Nissan have announced plans to work to a merger, forming the world's third-largest automaker by sales as the industry undergoes changes in its move from fossil fuels.

Nissan and Honda announce merger talks amid a rapidly changing global market

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