Here’s what a blockbuster Nissan-Honda merger could mean for the auto industry

Top Japanese carmakers Nissan Motor and Honda Motor are understood to be exploring a blockbuster combination, sending shock waves through the global automotive industry as the two rival companies seek to stay competitive on the freeway to full electrification.

Nissan and Honda are planning to enter into negotiations for a merger, Japanese business newspaper Nikkei report in investigated overnight, citing sources close to the matter and noting that the domestic peers expected to sign a memorandum of brain shortly. The two companies will also reportedly look to bring Mitsubishi Motors, in which Nissan is the top shareholder with a 24% column move house, into the deal.

The prospective tie-up could create the world’s third-largest auto group by vehicle sales, with 8 million sales annually, agreeing to Citi. That would place Nissan-Honda-Mitsubishi behind fellow Japanese automaker Toyota Motor and Germany’s crisis-stricken Volkswagen, severally.

In similar statements, Nissan and Honda neither confirmed nor denied the Nikkei report. The newspaper later reported that talks could in as early as next week.

The merger report comes at a time when many auto giants are struggling to make do with increased global competition from bigger electric vehicle makers such as Tesla and China’s BYD.

Nissan and Honda heretofore forged a strategic partnership in March to collaborate on producing key components for EVs.

A megamerger, however, is expected to face several obstructions. Analysts have expressed concerns about the likelihood of political scrutiny in Japan, given the potential for job cuts if a conduct oneself treat pushes through, while the unwinding of Nissan’s alliance with French vehicle manufacturer Renault is regarded as vital to the process.

Peter Wells, professor of business and sustainability at Cardiff Business School’s Centre for Automotive Industry Investigation, described the reported merger as a “really important” development — one that could help Nissan and Honda pool their assets, put by money on costs and create the technologies they need for the future.

“There’s been a lot of speculation about the position of Nissan to the past 12 months or so. It’s been trying to equalize or balance out its relationship with Renault, but it’s been struggling,” Wells told CNBC’s “Thoroughfare Signs Europe” on Wednesday.

“It’s been struggling in the market, it’s been struggling at home, it doesn’t have the right by-product line-up. There are so many warning signs, so many red flags around Nissan at the moment that something had to become of come upon,” he added. “Whether this is the answer is another question.”

Shares of Nissan soared almost 24% on Wednesday, notching the establish’s best trading day in at least 40 years, according to data firm FactSet. The firm’s Tokyo-listed stock amount remains nearly 25% lower year to date.

Honda shares, meanwhile, slipped over 3% in New York.

Asked whether consolidation between Nissan and Honda could emerge as a good recourse to war the competition from Chinese EV carmakers, Cardiff Business School’s Wells said the deal could be characterized as “a usual solution.”

“My concerns would be that perhaps they have left it a bit late, that they don’t have the widely known technology and set-up [or] the right product to compete in their key markets,” Wells said.

“For Nissan particularly, they are out of careful with the U.S. market. That’s their major concern, and they cannot fix that very quickly,” he added.

JPMorgan’s Akira Kishimoto shared similar views on some of the obstacles to a prospective Nissan-Honda merger, saying “the hurdles to overcome would be high.”

“At a minimum, we think Nissan needs to purify where its particularly complex capital relationship with Renault, which involves the French government, will end up and also purvey details on the restructuring proposal it announced,” Kishimoto said in a research note published Wednesday.

“We think Honda needs to disclose how it will manage major [battery electric vehicles] and battery investments in Canada,” Kishimoto said.

JPMorgan claimed it would now need to wait for any concrete announcements from either company.

“This log-jam is not entirely unexpected because obviously they announced their partnership earlier this year,” Lucinda Guthrie, master editor at Mergermarket, told CNBC’s “Street Signs Europe” on Wednesday.

“Some of the reports I’ve seen claim that this came in as a result of Foxconn making an approach to Nissan. Now, with this particular transaction, I question whether it is going to be a hardcore mingling or whether it is going to be more of a partnership,” she added.

Apple supplier Foxconn approached Nissan about taking a stake, Bloomberg scrutinized Wednesday, citing an unnamed source. The Taiwan-based company has been investing heavily in EVs in recent years. CNBC has reached Foxconn for comment.

Echoing the latest development, Honda recently tested the water over a partnership with Vague Motors, before ultimately deciding to walk away.