The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Katrina Hamlin

HONG KONG, Jan 23 (Reuters Breakingviews) - If there's one thing executives at Honda Motor 7267.T and Nissan Motor 7201.T need to fix first when - and if - they merge, it's their China business. The Japanese duo's sales have been falling for years in the world's largest car market. Joining forces would allow them to cut costs, not least on the new electric vehicles they need to vie with dominant rivals like BYD 002594.SZ. But it's a go-slow tie-up, and their joint venture partners are wildcards.

In the 12 months to the end of March last year, the two between them sold 2 million vehicles in the country, company presentations show. That's second only to their U.S. operations. But it's a third less than they managed five years earlier. And because Chinese demand is growing, their combined market share fell faster, halving to around 8%. Meanwhile, comprehensive income in 2023 dropped 95% to 447 million yuan ($61 million) at Nissan's JV with Dongfeng Motor 0489.HK and nearly 90% at Honda's.

As Dongfeng Motor works with both, condensing existing production lines and supply chains would seem relatively straightforward, in theory. Honda also has a partnership with GAC, which might be willing to consider a parting of the ways. There's a precedent: the Chinese group allowed former partner Mitsubishi Motors 7211.T to exit its JV and adapted some of those manufacturing facilities for its own fast-growing EV brand.

A more efficient Chinese operation could help Honda and Nissan try to catch up on EVs. The laggards are developing around 10 electric-car models between them to sell in the People's Republic. Since they have a similar customer base, after merging they could focus on a smaller, more efficient range of products with a larger output per model.

However, JV partners could just as easily become an obstacle. Partnership terms are opaque, making it harder to judge whether restructuring is realistic. Even if Dongfeng and GAC are willing, the process would be tricky and time-consuming. Finding buyers for assets like surplus factories could be difficult given industry overcapacity.

Moreover, speed is not top of Honda and Nissan's to-do list. The two aren't envisioning a merger before August next year. And they have yet to broach the subject with their Chinese counterparts, a Honda executive told reporters last week, acknowledging that they’ll need to talk “sooner or later”.

With BYD and peers growing, investors will hope it's sooner.

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CONTEXT NEWS

Honda Motor and Nissan Motor on Dec. 23 said they have signed a memorandum of understanding to spend six months discussing a potential business integration.

If the two carmakers agree to proceed around June 2025, they would first set up a holding company to be listed on the Tokyo Stock Exchange by August 2026, at which point both companies’ shares would be delisted.

Mitsubishi Motors, which is 34%-owned by Nissan, will decide by the end of January 2025 whether to join the discussions.

(Editing by Antony Currie and Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on HAMLIN/katrina.hamlin@thomsonreuters.com; Reuters Messaging: katrina.hamlin.thomsonreuters.com@reuters.net))