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Honda and Nissan plan to merge as the two Japanese firms seek to fight back against competition from the Chinese car industry.
Joining forces would create one of the world’s biggest car producers alongside Toyota, Volkswagen, General Motors and Ford.
The potentially multibillion dollar deal to combat “the rise of Chinese power” was a key driver behind the plan, said Honda’s chief executive Toshihiro Mibe.
Mr Mibe said a plan to “fight back” needs to be in place by 2030, or they risk being “beaten” by rivals.
The merger, which would include Mitsubishi – of which Nissan is the biggest shareholder – would allow all three companies to share resources against other electric vehicle competitors such as Tesla.
The growing electric car market has been increasingly dominated by Chinese-made electric vehicles, including BYD, which have posed a threat to some of the world’s best known car firms.
“There is a rise of Chinese power and emerging forces and the structure of the automobile industry is changing,” Mr Mibe told reporters at a press conference announcing the merger talks.
Growing competition in China has left many car makers struggling to compete, as lower labour and manufacturing costs make local firms more nimble and able to price their goods lower than foreign counterparts, making them far more attractive to buyers.
It has led to China becoming the world’s biggest producer of electric vehicles.
In October, EU officials said the Chinese state was unfairly subsidising its EV makers and announced big taxes on imports of EVs from China to the EU, after the majority of member states backed the plans. The tariffs are set to rise from 10% to 45% for the next five years, but there are concerns it could raise EV prices higher for buyers.
