TOKYO: Honda and Nissan are in talks to merge by 2026, they said on Monday, a historic pivot for Japan`s auto industry that underlines the threat Chinese EV makers now pose to the world`s long-dominant legacy car makers.

The tie-up would create the world`s third-largest auto group by vehicle sales after Toyota and Volkswagen .

It would also give the two companies scale and a chance to share resources in the face of intense competition from Tesla and more nimble Chinese rivals, such as BYD.

The merger of Honda, Japan`s second-largest automaker, with Nissan, its No. 3, would be the biggest reshaping in the global auto industry since Fiat Chrysler Automobiles and PSA merged in 2021 to create Stellantis in a $52-billion deal.

Smaller Mitsubishi Motors, in which Nissan is top shareholder, was also considering joining and would make a decision by the end of January, the companies said.

The chief executives of all three held a joint press conference in Tokyo.

`The rise of Chinese automakers and new players has changedthe car industry quite a lot, said Honda CEO Toshihiro Mibe, citing technological trends of electrification and autonomous driving.

`We have to build up capabilities to fight with them by 2030, otherwise we`ll be beaten.` The two companies would aim for combined sales of 30 trillion yen ($191 billion) and operating profit of more than 3 trillion yen through the potential merger,they said.

They aimed to wrap up talks around June 2025 before setting up a holding company by August 2026, when shares of both companies would be delisted.

Honda, which has a market capitalisation of more than $40 billion, roughly four times that of Nissan, will appoint the majority of the company`s board, they said.

Combining with MitsubishiMotors would take the Japanese group`s global sales to more than 8 million cars. The current No. 3 is South Korea`s Hyundai and Kia.

Honda and Nissan have been exploring ways to bolster their partnership, including a merger, Reuters reported last week.

In March, both said they were considering co-operation on electrification and software development. They widened the collaboration to Mitsubishi Motors in August.

Last month, Nissan announced a plan to cut 9,000 jobs and 20% of its global production capacity after sales plunged in the key China and U.S. markets.

Honda also reported worsethan-expected earnings due to a China sales slump, although solid motorcycle and hybrid car businesses helped it secure a relatively stable financial base.

`This is not a rescue of Nissan,` however, Honda`s Mibe said, adding that Nissan`s business turnaround was a `prerequisite` for the merger.

Like other foreign carmakers, Honda and Nissan have lost ground in the world`s biggest market China to BYD and other domestic makers of electric andhybrid cars loaded with innovative software.

In a separate online press conference on Monday, former Nissan chairman Carlos Ghosn, now wanted in Japan as a fugitive for jumping bail and fleeing to Lebanon, said he did not believe the Honda-Nissan alliance would be successful, as the two were automakers were not complementary.

French automaker Renault, Nissan`s largest shareholder, said it would `discuss with Nissan and consider all possible options`. Sources have said Renault is open in principle to a Honda-Nissan tie-up.

Taiwan`s Foxconn, seeking to expand its nascent EV contract manufacturing business, approached Nissan about a bid but the Japanese company rejected it, sources have told Reuters.

Foxconn decided to pause the approach after it sent a delegation to meet with Renault in France, Bloomberg News said on Friday.

Nissan chief executive Makoto Uchida, at Monday`s press conference, denied a view that Foxconn`s move prompted its merger talks with Honda.-Reuters