Honda Motor (HMC), Nissan (NSANY) and Mitsubishi on Monday confirmed they are in talks regarding a possible merger at a time of auto industry upheaval. Honda stock tried to regain a key level on Tuesday after jumping on the merger news.

The possible three-way merger would see Japan's second and third biggest carmakers join forces, along with smaller Mitsubishi. That combination would create the world's third largest automaker by annual sales, behind only Japanese peer Toyota Motor (TM) and German giant Volkswagen (VWAGY).

Embattled car giants Honda and Nissan hope to stave off falling sales and intensifying competition. Their joint statement on Monday alluded to "dramatic changes in the environment surrounding both companies and the automotive industry," a likely reference to these powerful forces gaining strength:

Electrification: Legacy auto giants are in the middle of a massive shift from gas and diesel cars to electric and hybrid vehicles in a bid to lower polluting emissions. Newer vehicles are also increasingly software defined. All this adds up to steep development costs. By merging, Honda and Nissan could jointly develop such vehicles and use common platforms to share and optimize costs. Cost saving is especially important for the co right now. Both Honda and Nissan's sales are in a sharp two-year slump. Honda posted a steep quarterly profit drop in November, mainly due to a challenging Chinese market.

Competition: Chinese EV makers continue to rise in the domestic and overseas markets. China dominates global EV supply chains and subsidizes its EV industry, with its automakers churning out affordable electric cars. Affordable doesn't necessarily mean cheap. Chinese EV giant BYD (BYDDF) and its startup peers, including Nio (NIO) and XPeng (XPEV), make technology-driven electric cars. Korean EV makers like Hyundai and Kia are also on the rise. By comparison, Japan's auto giants are trying to catch up in fully battery electric vehicles, though they are leaders in hybrid cars. A merger could improve efficiencies in their EV investments.

Autonomy: Analysts at Morgan Stanley identified a third force forcing Honda and Nissan to consider a merger: the rise of semi autonomous or fully autonomous vehicles. Tesla and some of its Chinese rivals are the clear leaders in vehicle autonomy, with Tesla optimistically promising to roll out autonomous vehicles that don't require human supervision next year. Maturing autonomous technologies have placed Nissan and Honda under new pressure to fund AI and software development, the Morgan Stanley analysts said. They noted Tesla's doubling to $1.5 trillion market capitalization in the span of six weeks, adding: "If the age of autonomy has truly arrived, then things will move very fast from here."

Honda Stock, Nissan Stock And EV Stocks

Shares of Honda Motor popped nearly 1% in Tuesday's stock market action. Honda stock tested the falling 50-day moving average after jumping nearly 13% on Monday after the possible merger confirmation. The stock has dropped 28% from a March high, and carries a very weak IBD Composite Rating of 38.

Nissan stock popped more than 7% on Friday, extending its rally above the 50-day line and giving it a 27% gain for December.

Tesla stock climbed 5%, extending Monday's rally on solid EV delivery news. China EV stocks, including Tesla archrival BYD, traded broadly higher.

Please follow Aparna Narayanan on X @IBD_Aparna for more coverage.

YOU MAY ALSO LIKE:

Best Growth Stocks To Buy And Watch: See Updates To IBD Stock Lists

Join IBD Live And Learn Top Chart Reading And Trading Techniques From Pros

Learn How To Time The Market With IBD's ETF Market Strategy

Find The Best Long-Term Investments With IBD Long-Term Leaders