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Would Automotive Megacorporation Survive in a Smart-Car World?
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Nissan: Not a Single Profitable Vehicle
On December 23, Honda Motor Co. CEO Mibe Toshihiro and his counterpart from Nissan Motor Corp., Uchida Makoto, held a press conference to announce an in-principle agreement to begin merger talks. The plan is to establish a holding company in August 2026 that would control both companies. The Honda and Nissan brands would remain. Mibe and Uchida were joined at the press conference by Mitsubishi Motors CEO Katō Takao, who said that Mitsubishi, currently part of the alliance of Nissan and France’s Renault, would also participate in merger negotiations. Between them, these three manufacturers sold a total of 8.37 million cars in fiscal 2023 (the year through March 2024).
In January, this possibility evaporated as Mitsubishi announced it would no longer take part in talks aimed at engineering a merger. Had this new alliance come about, though, it would have been surpassed in global sales volume only by Toyota and Volkswagen. A successful merger along these lines would cause all Japanese car makers to fall into one of two groups: the broadly defined Toyota group (Toyota, its subsidiary Daihatsu, and Suzuki, Subaru, and Mazda, all of which are partially owned by Toyota), and the non-Toyota group (Honda, Nissan, and Mitsubishi). Even without Mitsubishi’s participation, though, a Honda-Nissan pairing should vault the new group into the global top five.
Merger negotiations began just over four months ago when, on August 1, Honda and Nissan announced plans to collaborate chiefly on EV design. The manufacturers discussed the possibility of sharing design of the “eAxle”: a single unit that contains the vehicle’s operating system (operating software), battery, motor, and associated power electronics. By way of analogy, the operating system (which sends instructions to the vehicle), the battery (which sends energy to the motor), and the eAxle (which provides motive power) are to an electric vehicle what the brain, heart, and limbs are to a human. Because this development will see the manufacturers partnering on a core component of the vehicle that affects basic performance, neither CEO would rule out the possibility of future capital ties at the August press conference.
As part of the negotiations, Nissan and Honda established six working groups aimed at enabling future collaboration. From around October, information began to be leaked to the effect that Nissan was prioritizing rectifying its rapidly worsening financial performance, and as a result negotiations had not progressed. Concerns also began to emerge from within Honda that a partnership with Nissan might not be a good idea.
News of Nissan’s worsening performance broke on November 7, when the manufacturer announced its financial results for the April–September 2024 half-year, including a 94% year-on-year drop in net profit to just ¥19.2 billion. The poor result was attributed to poor sales in Nissan’s chief markets of Japan, North America, and China, which resulted in surplus production capacity.
Nissan’s struggle in its main markets was the result of a policy of minimizing development investment that dates back to its days under Carlos Ghosn, who headed the company from 1999 to 2017. The approach made Nissan fall behind its competitors when it came to delivering offerings that would be popular with consumers, and the manufacturer had to resort to deep discounts, thereby significantly damaging profitability.
At the November press conference to announce financial results, CEO Uchida said that none of Nissan’s models made significant profits. By way of a response to this state of affairs, Uchida presented a restructuring plan that would involve laying off 9,000 employees—around 7% of the global workforce—and slashing production capacity by 20%. The cost of restructuring the business will be booked as an extraordinary loss, and Nissan’s full-year forecast stated that net profits for the year had yet to be determined, increasing the possibility that the car maker would post a loss for the full fiscal year. This appeared to bring Nissan’s negotiations with Honda to a standstill.
Why Foxconn Wanted Nissan
However, in a sudden development, Nissan and Honda announced they were negotiating a capital tie-up. A third party—an overseas corporation—is believed to have been behind the announcement. Ever since Nissan’s performance began to go downhill, the Taiwanese electronics giant Foxconn, at the direction of CEO Liu Young, began to approach Japan’s Ministry of Economy, Trade, and Industry, as well as Nissan’s main lender Mizuho Bank, regarding a potential buyout. Foxconn is known for being the corporation that bought Sharp in 2016.
Upon learning of Foxconn’s plans, it appears that Nissan and Honda expedited their merger negotiations to avoid a takeover. Around a week before the announcement that the two companies had begun negotiations, Taiwanese media reported that Seki Jun, Foxconn’s chief strategy officer for electric vehicles and a former Nissan employee, had travelled to France to sound out Renault on the possibility of purchasing its stake in Nissan.
Foxconn’s machinations therefore had a major part to play in the structural change undergone by Japan’s automotive industry. But before we get into that, let’s look at what kind of a business Foxconn is. Along with Taiwan Semiconductor Manufacturing Company, the major semiconductor manufacturer Foxconn is one of Taiwan’s leading global businesses, known for manufacturing the Apple iPhone. In anticipation of “life after the smartphone,” Foxconn now pursues a strategy of investing in three core technologies—artificial intelligence, semiconductors, and communications—and sees its future in three next-generation business realms: electric vehicles, robotics, and digital medicine. The corporation also supplies the semiconductor giant Nvidia with chips that are indispensable in the world of generative AI, a sector that is currently enjoying intensifying global competition.
It was in this context that Foxconn has come to focus more on what are referred to as contract design and manufacturing services. The difference between CDMS and electronics manufacturing services traditionally provided by the Taiwanese giant is that while EMS simply involves assembling a device designed by the client, providers of CDMS handle not only manufacturing but also upstream development processes as part of an integrated approach.
Foxconn’s electric vehicle business is predominantly CDMS-based. Lacking a brand of its own, the manufacturer provides branded auto manufacturer clients with standardized electric vehicle prototypes for them to customize. All manufacturing is then contracted to Foxconn. Under this business model, while Foxconn does not directly sell to end users, it still needs to be able to offer industry-leading technical prowess and quality control. It pursued the strategy of taking over an auto manufacturer as an efficient way of acquiring expertise and getting CDMS for electric vehicles on track rapidly.
On October 8, 2024, I attended a major technology expo hosted by Foxconn in Taipei, at which I had the opportunity to interview Seki. His responses suggested that Foxconn is moving forward rapidly with its global EV strategy, and to this end has stepped up its mergers and acquisitions. In the interview, Seki stated that Japan was one of Foxconn’s most important markets.
Blurring the Line Between Cars and Smartphones
I believe that in the future electric vehicles will merge with AI to create driverless, robotic cars. Such cars are also referred to as “software-defined vehicles.” An SDV’s success is dictated by the manufacturer’s prowess in software development. Basically, you can think of an SDV as being a smartphone with four tires.
You could say it was inevitable in this age of SDVs that Foxconn, with its unsurpassed prowess in smartphone manufacture, would get into the automobile market. Indeed, in January 2024, the Chinese smartphone giant Xiaomi began operating a state-of-the-art factory for performance electric vehicles in Beijing. This trend for cars to become more like smartphones or robots also played a major part in Nissan’s and Honda’s decision to enter merger negotiations. The automobile industry of the future will see the quality of a car’s software have a great bearing on its success, which will require enormous investment in developing EV operating systems. For example, Honda announced in May 2024 that it would invest ¥10 trillion in this area by 2030, double the initially planned amount. That might still not be enough, however, and CEO Mibe has long remarked that Honda cannot face up to the challenge of system development single-handedly.
If the Nissan-Honda merger goes ahead, the resulting entity will have an annual R&D budget approaching ¥2 trillion: more than Toyota’s ¥1.3 trillion. The three-party alliance aims to enable the manufacturers to pool capital, expertise, and ideas in a bid to survive in the rapidly changing automobile industry.
Nissan and Honda: Size Comparison
Honda | Nissan | |
---|---|---|
Established | 1948 | 1933 |
Consolidated sales (fiscal 2023) | ¥20.4 trillion | ¥12.7 trillion |
Consolidated operating profit (fiscal 2023) | ¥1.38 billion | ¥569 billion |
Workforce (groupwide) | 194,993 (end March 2024) | 133,580 (end September 2004) |
Market capitalization | ¥7.9 trillion (as of 26 December) | ¥2.1 trillion (as of 26 December) |
Source: Honda and Nissan press releases, other sources.
However at the December 23 press conference to announce the start of merger negotiations, Honda’s Mibe stressed that the manufacturers had yet to actually reach agreement on a merger, and stated that the independence of both companies was a prerequisite for any deal. In other words, the merger’s success chiefly comes down to whether Nissan manages to turn itself around. The melding of corporate cultures will also be a major obstacle, and it will be no mean feat to negotiate the optimization of globally overlapping production and sales operations. In other industries, Suntory Holdings once entered into merger negotiations with Kirin Holdings, and Mitsubishi Heavy Industries with Hitachi, but in both cases, negotiations ultimately fell through.
It follows that there is no guarantee that the Honda-Nissan integration will definitely happen, but if it falls through, it may spell the singlehanded dominance of the Japanese automotive industry by star performer Toyota, spelling further decline in one of Japan’s core industries.
(Originally published in Japanese. Banner photo: From left, Nissan CEO Uchida Makoto, Honda CEO Mibe Toshihiro, and Mitsubishi Motors CEO Katō Takao in Tokyo on December 23, 2024. © Jiji.)