New York (CNN) – Honda and Nissan have officially agreed to hold talks over a possible merger in the next six months. It’s a deal that would create the world’s third-largest automaker and give them more resources to compete with a growing threat from Chinese automakers.

A third, smaller Japanese automaker, Mitsubishi, which already has an alliance with Nissan, will also take part in the talks. The combined company, if formed, would trail only Toyota (TM) and Volkswagen in global sales.

Mergers in the auto industry are nothing new. They have been taking place since General Motors (GM) took over various brands in the first decade of the 20th century. But sometimes they find it difficult to bring different partners together.

German automaker Daimler-Benz agreed to buy Chrysler Corp. in 1998. to, but the combined company was split up a decade later. The newly independent Chrysler went bankrupt and needed a federal bailout within two years.

Chrysler’s recent merger with Europe’s PSA Group in 2001 to form Stellantis had its own problems last year with falling sales and profits. And although Nissan’s alliance with Renault was not a formal merger, it ultimately collapsed following the arrest of Nissan boss Carlos Ghosn in Japan over allegations of “significant” financial misconduct. He fled the country before a trial could take place.

But given the costs and challenges of the industry’s efforts to transition from gasoline-powered cars and trucks to electric vehicles, and increasing competition from Chinese automakers that have bypassed most Western automakers in that effort, Honda and Nissan have had to pool their resources to to achieve this and remain competitive.

“Today is 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 no company could achieve alone.”

Nissan has been struggling with severe financial problems since the collapse of its alliance with Renault, which has left the company in desperate need of a larger merger partner.

Profit fell 94% in the six months to September compared to the same period in 2023 as the company suffered losses in its automotive business and reported little profit due to its financing business. In response, Nissan announced it would cut production output by 20% and lay off 9,000 workers. It also cut its full-year operating profit forecast by 70%.

Some analysts had speculated that Nissan could face bankruptcy as early as 2026 as large debts come due.

The Honda-Nissan merger could lead to even more mergers in the industry in the future, Morgan Stanley auto analyst Adam Jonas said in a note last week as news of the talks broke.

“Legacy automotive companies that fail to find new partners face the prospect of being smaller companies with higher capital expenditures and higher research and development costs per (each vehicle sold),” he wrote.

“Furthermore, amid what could be a broader era of consolidation, those who have chosen to do so have chosen not to participate effectively ‘become smaller.’ We are entering a new phase of the automotive industry where size and cost leadership strategies emphasize collaboration and potential changes in scale.”