The Japanese auto industry is at a once-in-a-century turning point. Amid the need to respond to structural shifts such as the spread of electric vehicles (EVs) and the rise of emerging ventures, automakers are compelled to innovate their management.

Honda Motor Co. and Nissan Motor Corp. are in merger talks, with Mitsubishi Motors Corp. also potentially joining the alliance. Altogether, the three companies' sales volume would top 8 million units, pushing them to third place in the global market.

Japanese automakers are divided into two camps, with the other centered around Toyota Motor Corp. Realignment of the domestic auto industry has continued intermittently since the 1990s, yet the idea of the No. 2 and No. 3 competitors merging was previously unimaginable.

What prodded Honda and Nissan into business integration talks was their sense of crisis.

The recent trends of decarbonization and digitalization have transformed the industrial landscape. EVs, considered the mainstay of next-generation vehicles, can be completed by assembling motors and other key components, thus the hurdles for market entry are lower than for internal combustion engine vehicles. This phenomenon is akin to that brought about by the advent of digital home appliances.

Shift of industrial landscape accelerating

The global auto industry has witnessed a shift in power, with Tesla Inc. taking the lead in the EV market, closely followed by Chinese makers including BYD Co.

Japanese automakers, which once dominated the global market with their high fuel efficiency and other edges, are now finding their foothold not as solid as expected. While Honda posted record sales again in the first half of fiscal 2024, it faces fierce competition with local carmakers in China.

Nissan has been seriously underperforming. It has lost momentum in in the core North American market due to delayed entry into the hybrid vehicle (HV) market. The automaker unveiled a streamlining plan to cut 9,000 jobs worldwide, but has yet to draw up an outlook for sales recovery.

Honda and Nissan had agreed in March to partner on in-vehicle software and batteries. If the two companies integrate, Honda is destined to take on the risks faced by Nissan in the middle of restructuring.

Nevertheless, the two companies are aiming to merge apparently because they believe they cannot tackle the rapid shifts in the industry without jointly establishing a system for swift managerial decisions.

Meanwhile, they must heed the fact that the larger an organization, the longer it takes to build a consensus. If the new alliance lacks a sense of speed, it would suffer greater adverse effects from bloating itself. Tesla was able to achieve its EV-specific business model thanks to the strong leadership of its founder, Elon Musk.

As Honda and Nissan have different business cultures, it won't be easy to harmonize them.

Nissan is in the middle of pursuing new management following the long reign of former chairman Carlos Ghosn and, coupled with its financial woes, finds itself on an unsteady path. Meanwhile, there is deep-seated caution within Honda about the potential merger, as the company has stuck to its own principles since its foundation.

Undeniably, there are great benefits to scaling up business. Back in the 1990s, Japan's auto industry realigned with the aim of achieving 4 million-plus unit sales. Conditions for survival are now getting more severe, with the need to invest colossal amounts into decarbonization measures and the development of self-driving vehicles.

Although automakers have focused on the EV market, it has suffered an unexpected slowdown due in part to those vehicles' high price tags. With the market outlook more and more uncertain, there is growing need to divert investments into HVs that are less expensive for consumers.

In the development of self-driving vehicles, Japanese carmakers have faced competition with the U.S. tech giants known as GAFA -- Google, Amazon, Facebook and Apple -- and other deep-pocketed tech businesses.

Great impact on supply chains

Toyota has expanded its business in "all directions" from HVs and EVs to hydrogen fuel cell vehicles, backed by robust profits from 11 million-plus unit sales.

Honda and Nissan, meanwhile, can no longer afford such a strategy.

Nissan has been unable to allocate management resources to HVs, and its EV lineup lacks consumer appeal despite the automaker once taking the lead in their mass production. Honda is ahead with HVs, but its efforts to focus on EVs and fuel-cell batteries are only halfway along.

It is essential for the two companies to pour efforts into boosting their growth potential while dispersing risks and making up for mutual weaknesses.

Automobiles are the breadwinner of the Japanese economy. The workforce in related industries exceeds 5.5 million, with numerous parts makers operating under producers of finished cars. The realignment of the industry will greatly impact management and employment within client companies.

Many subcontractors are trying to find a way out into other industries, such as space and health care, amid the expected shrinking of the gas engine vehicle market. Major companies and the Japanese government should take steps to support these businesses to avoid nipping their growth in the bud.

The Japanese economy faces a crucial test of whether its mainstay businesses can sustain their competitiveness.

Nissan and Honda are urged to utilize their sense of crisis to review their own organization and product lineups, and to strategize how to boost their driving forces for growth.