New York  — Honda and Nissan have formally agreed to hold talks over the next six months on a possible merger, a deal that would create the world’s third-largest automaker and give them more resources to compete with a growing threat from Chinese carmakers.

A third, smaller Japanese automaker, Mitsubishi, which is already in an alliance with Nissan, will also participate in the talks. The combined company, should it be created, would trail only Toyota (TM) and Volkswagen in global sales.

Mergers in the auto industry are nothing new. They have taken place since the acquisition of various brands formed General Motors (GM) in the first decade of the 20th century. But they sometimes have trouble succeeding bringing together different partners.

German automaker Daimler-Benz agreed to buy Chrysler Corp. in 1998 only for the combined group to be split up a decade later. The newly independent Chrysler went bankrupt and required a federal bailout within two years.

Chrysler’s latest merger, with Europe’s PSA Group in 2001 to form Stellantis, has had its own problems in the last year, with falling sales and profits. And Nissan’s alliance with Renault, while not a formal merger, ended up collapsing following the arrest of Nissan’s CEO Carlos Ghosn in Japan over charges of “significant” financial misconduct. He fled the country before a trial could take place.

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But with the cost and challenges of the industry’s efforts to shift from gasoline-powered cars and trucks to electric vehicles and with rising competition from Chinese automakers, which have moved past most Western automakers in those efforts, Honda and Nissan needed to combine resources in order to remain competitive.

“Today marks a pivotal moment,” Nissan CEO Makoto Uchida said in a statement announcing the negotiations. “Together, we can create a unique way for (customers) to enjoy cars that neither company could achieve alone.”

Nissan has struggled since the collapse of its alliance with Renault, facing severe financial problems that put it in desperate need of a larger merger partner.

Profits in six months ending in September plunged 94% compared with the same period in 2023, as the company lost money on auto operations and reported only a narrow profit due to its financing business. In response, Nissan announced it would cut its manufacturing output by 20%, laying off 9,000 workers as a result. It also slashed its forecast for full-year operating profit by 70%.

Some analysts had speculated Nissan could face bankruptcy as soon as 2026 when it has a huge amount of debt coming due.

The Honda-Nissan tie-up could lead to even more mergers in the industry in the future, said Adam Jonas, auto analyst with Morgan Stanley, in a note last week, when news of the talks emerged.

“Legacy auto companies that don’t find new partners must face the prospect of being smaller companies with higher capital expenditures, and research and development costs per (every vehicle sold),” he wrote.

“Moreover, amidst a potentially broader consolidation era, the ones who chose not to participate effectively ‘get smaller.’ We’re entering a new phase of the auto industry where the strategies for scale and cost leadership put the focus on cooperation and potential changes in scope.”