By Jacky Wong

Traditional automakers are running out of road, caught between two forces that are reshaping the industry: Chinese electric-vehicle makers upending once-profitable markets and the capital demands of the electric transition. More consolidation looms.

The potential tie-up between Honda Motor and Nissan Motor -- helmed by CEOs Toshihiro Mibe and Makoto Uchida, respectively -- is just the latest signal of this trend. The two Japanese giants have announced a plan to merge in 2026, creating the third-largest automaker in the world. But instead of being a show of strength, the combination more reflects the grim reality that traditional automakers are facing.

For one, China looms large in the decision. Nissan has been struggling to adapt to the new industry landscape in the country, which was once a profit paradise for global automakers. In the six months ended in September, it sold 339,000 cars in China, less than half of the level for the same period in 2018.

And Nissan isn't alone. Volkswagen, long the most popular car brand in China, sold around a quarter fewer cars in China over the same period. Its long-held position as the top-selling brand in the country has been overtaken by Chinese EV-maker BYD.

Chinese EV makers have turned their home market into a brutally competitive battleground. Foreign brands used to have more than half of the Chinese market, but that has dropped to around 30%, according to data from the China Association of Automobile Manufacturers via Wind. In recent months, more than half of the passenger cars sold in the country were new-energy vehicles, which includes plug-in hybrids, according to the China Passenger Car Association.

Even luxury brands aren't immune. Carmaker Porsche's deliveries in China dropped 29% from a year earlier in the first nine months of 2024. German luxury cars used to be status symbols for China's nouveau riche, but new Chinese EVs, equipped with cutting-edge technology, have started to upset them.

Meanwhile, overcapacity in Chinese autos threatens to flood the global market with cheap exports. The Wall Street Journal reports that carmakers in China last year used only about half their capacity.

So a viable EV strategy is a must for global automakers to stay competitive in China and around the world. But that runs into another problem: the huge capital investments needed that might yield uncertain outcomes in other markets, most notably the U.S.

EV sales in the U.S. have slowed and might slow further if the incoming Trump administration removes some of the subsidies and policies to encourage the switch from gasoline cars.

The Honda-Nissan merger probably won't be the last consolidation we will see in the auto industry. Partnerships are proliferating between traditional carmakers and EV upstarts.

Volkswagen, for example, has teamed up with Rivian in the U.S. and Xpeng in China. Traditional car manufacturers are also likely to keep joining forces to pool resources for developing EV technology. The trend toward supporting national champions, a motivating force behind the Honda-Nissan merger, is likely to be felt in other car-producing countries.

For traditional auto companies, competing alone is looking less and less viable. A new age of auto mergers might have just begun.

Write to Jacky Wong at jacky.wong@wsj.com

(END) Dow Jones Newswires

January 13, 2025 05:30 ET (10:30 GMT)

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