TOKYO (Kyodo) -- Major Japanese automakers Honda Motor Co. and Nissan Motor Co. are arranging talks on a merger that would create the world's third biggest automaker group by volume, a source familiar with the matter said Wednesday, amid fierce global competition in electric vehicles dominated by overseas rivals.

Japan's second and third largest automakers are considering the possibility of establishing a holding company, the source said, in an apparent bid to form an automobile alliance to challenge U.S. Tesla Inc. and Chinese EV makers, such as BYD Co.

Honda and Nissan said in a statement that they are "considering various possibilities for future collaboration, but no decisions have been made."

Trading of Nissan shares was briefly halted by the Tokyo Stock Exchange, which said it needed to verify media reports regarding the merger talks, but resumed after the statement was issued.

The merger would create an alliance rivaling industry giants Toyota Motor Corp. and Volkswagen AG in size, with combined sales reaching around 8 million vehicles if those of Nissan partner Mitsubishi Motors Corp. are included.

Honda and Nissan agreed in March to commence a feasibility study on a strategic partnership in EV production and software technologies to cut costs and improve competitiveness, with Mitsubishi Motors joining the talks in August.

At a press conference in August, Honda President Toshihiro Mibe said the talks did not involve a capital tie-up, although he did not deny such a possibility in the future.

The potential merger comes as global automakers are struggling to secure funds to cover increasingly high costs for EV development due to expensive batteries and the massive resources required for software development, such as autonomous driving functions.

Honda, which traditionally preferred to develop cars in-house, has been ramping up collaboration with companies such as Sony Group Corp. and General Motors Co. in recent years.

Nissan, which agreed to review its decades-old capital alliance with Renault SA last year in a deal that lowered the French automaker's influence over the Japanese company, has been exploring ways to increase its competitiveness.

Honda last month cut its net profit outlook for the current business year through March to 950 billion yen ($6.2 billion), which would represent a 14.2 percent decline from the previous year, due to weaker-than-expected auto sales in China.

Also in November, Nissan unveiled a plan to cut 9,000 jobs and reduce global output capacity by 20 percent, saying its business in the United States and China continued to struggle.