Honda Motor Co. (HMC, Financials) and Nissan Motor Co. (NSANY, Financials) are reportedly investigating a possible merger to increase their competitiveness in the electric vehicle sector, especially in important markets like China and Southeast Asia where rivals like Tesla (TSLA, Financials) and BYD (BYDDF, Financials) rule.

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With a dramatic 93.5% decline in profits over the first half of the fiscal year, Nissan has been struggling with major financial concerns. The corporation has presented strategies to lower its manufacturing capacity by 20% and its worldwide staff by 6.7%.

Strong sales for hybrid cars and bikes have helped Honda's financial situation to remain somewhat steady.

The reaction of the stock market on the merger talks has been conflicting. While Nissan's stock shot up 24% in Tokyo trade, marking its biggest one-day rise in four decades, Honda's shares fell by roughly 3%.

Aiming to remain competitive among fast developments in the EV market and mounting pressure from Chinese automakers, Honda and Nissan inked a memorandum of understanding earlier this year to cooperate on EV and smart vehicle technologies development.

Nissan's 34% share in Mitsubishi Motors (MSBHF, Financials) would also be important for this arrangement as it would help to form a combined business able to sell about 8 million cars yearly.

The cooperation is intended to boost technical innovation and cost efficiency, therefore boosting their capacity to compete with companies like Toyota Motor Corporation (TM, Financials) and Volkswagen AG (VWAGY, Financials).

As manufacturers adjust to changing technology and more fierce competition within the EV market, this possible merger mirrors a larger trend of consolidation in the automobile industry.

Targeting a bigger portion of the fast growing electric and smart car industry, both Honda and Nissan have described their intentions to introduce new EV vehicles by 2030.

Analysts say that the merger could give Nissan and Mitsubishi the tools they need to improve their market positions. However, Honda's possible wins from the deal are less clear because it already has a strong position in the hybrid and scooter markets.