Honda and Nissan have begun talks about a merger that could create the world’s third-largest automaker.

The two major Japanese companies hope that by working together they can better compete in an automotive world facing seismic changes.

There are two powerful forces at play right now: the global automotive industry is in the midst of a historic shift toward electrification, while at the same time the world’s largest automakers are facing a formidable competitor in China.

As Honda and Nissan enter talks with the goal of completing a merger by 2026, here’s what you should know:

China is winning…in China and abroad

The emergence of Chinese automakers such as BYD and Nio has eroded the market share of global automakers such as Honda, Nissan and Volkswagen in China – a country they were once considered a critical market.

Not only can Chinese automakers produce cars more cheaply, they have also won over Chinese consumers with their electric vehicles and sophisticated software.

These Chinese upstarts are no longer satisfied with dominance at home. They are now focusing on overseas markets, including key markets for Japanese automakers such as Europe, where Chinese automakers are gaining market share.

And China is succeeding. The country has now overtaken Japan as the world’s largest car exporter.

Nissan in particular has been struggling recently, especially in the important American market, where sales have weakened. Last month, for example, the company announced it would cut 9,000 jobs.

While Honda performed better, it still saw profits decline, largely due to weakness in China.

Sam Abuelsamid, a Detroit-based auto industry analyst, says he expects more global deals like Nissan and Honda in the next few years as automakers respond to the threat from China – and he predicts there will be losses.

“Some brands that have been around for a long time may no longer be part of the landscape… in five or 10 years just because they – they don’t have enough scale to compete with – either against the big Western players or…” the Chinese companies,” says Abuelsamid.

This is the main reason analysts say Honda and Nissan are looking to merge. Mitsubishi, in which Nissan holds a significant stake, would also be part of the alliance.

Honda and Nissan are not developing fast electric cars

The global transition to electricity is another force. While Tesla leads the electric vehicle market in the US, other companies are hot on its heels.

The Korean car manufacturers Hyundai and Kia have done it Consumer Reports‘ list of the best mainstream electric vehicles this year, while Germany’s Porsche and BMW performed well in the luxury segment.

Honda and Nissan haven’t made as much noise, partly because they’ve been slower to transition to electric vehicles, although Honda has had a bit more success with hybrid vehicles.

A merger between the two automakers would create the third-largest automaker in the world behind Toyota and Volkswagen – and that brings with it many potential benefits.

It could allow them to combine their expertise and strengths. They could also benefit from more efficient production of vehicles.

“Companies like Honda and Nissan need to join forces to advance research and development, improve purchasing and combine all financial aspects to reduce costs,” said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions.

Not all mergers make sense

Both Honda and Nissan rely heavily on the US market, where there is a lot of overlap in SUVs and sedans.

And a merger wouldn’t solve all problems. In fact, the automotive world is littered with failed mergers, including DaimlerChrysler, which once tried to merge Mercedes-Benz’s German offerings with storied American automaker Chrysler – but that ended in a split in 2007.

What would it mean for American consumers?

Not much in the short term. Honda and Nissan hope to continue discussions over the next few months and then close the deal by mid-2026.

However, if the merger goes ahead, serious consideration would likely be given to which models and brands the combined company would retain. Analysts say Honda, as a larger company, has the edge when it comes to mergers. They add that there is no guarantee that Nissan will survive as a brand.

Abuelsamid says he could imagine that Nissan’s luxury brand Infiniti in particular could “just disappear” due to its overlap with Honda’s Acura.

At some point there will probably be new models, especially electric vehicles. But any changes, be it to the model range in production or at the dealer, would take a long time.

“The automotive industry is moving at a glacial pace,” says Fiorani of AutoForecast Solutions. “It takes forever for anything to change.”