Nissan and Honda announced on Monday that they are in talks to merge, with the aim of creating the world’s third-largest carmaker by sales. The unprecedented merger is seen as a direct response to its shrinking market position in China, the world’s largest auto market, where Japanese automakers are rapidly losing ground to local giants such as BYD.

Honda CEO Toshihiro Mibe, in a press conference, emphasized the need for greater scale to compete in emerging technologies such as electric vehicles (EVs) and intelligent driving. “An enterprise integration would give companies an advantage that will not be possible under the current collaboration framework,” Mibe said. The combined entity is expected to have annual revenue of 30 trillion yen ($191.4 billion) and an operating profit of more than 3 trillion yen.

China’s dominance in electric vehicle manufacturing has forced Japanese automakers into a corner. BYD and other local players have eroded the once-strong position held by companies such as Nissan and Honda, leaving them with excess capacity at factories originally built to meet growing demand.

Honda and Nissan have announced major production cuts in China: Honda plans to cut capacity by 20%, while Nissan’s production in China has fallen to half of its peak levels.

James Hong, an analyst at Macquarie Securities, highlighted the underlying challenge: “Honda and Nissan have been losing market for a long time. They need to enact large capacity cuts to deal with fixed cost burdens in China.”

The proposed deal will create a holding company listed on the Tokyo Stock Exchange, with Honda taking a leading role in the governance structure. Although full integration is not expected until 2030, both companies aim to combine resources to achieve economies of scale, share advanced technology and remain competitive against global EV powerhouses.

Nissan CEO Makoto Uchida addressed concerns about the company’s struggles, assuring stakeholders that the merger aims to ensure future growth. “It’s not about giving up a swing,” Uchida said. “It’s about looking at ultimate size and growth through partnerships.”

While the merger could solve overlapping challenges, experts remain cautious. Nissan’s underperformance, marked by declining market value and outdated product lines, has made it a potential takeover target. Recent interest from Taiwan’s Foxconn underscores Nissan’s precarious position. In addition, analysts suggest that the integration will require significant restructuring, including more plant closings and capacity reductions.

The merger reflects a broader industry trend, with automakers around the world consolidating to survive in a rapidly evolving market.