Nissan has decided to withdraw from its memorandum of understanding with Honda on pursuing a merger under a holding company, according to Japan’s Nikkei (NI-KI) business daily. Nissan will call off merger talks with rival Honda, the Nikkei newspaper said, abandoning a tie-up that would have created the world’s No.3 automaker and raising questions about how it will drive a turnaround by itself.

Honda, Japan’s second-largest carmaker, and Nissan, its third-largest, last year said they were in discussions to merge and create the world’s third-largest automaker by sales, bulking up in an industry that faces a vast threat from China’s BYD and other electric vehicle (EV) entrants.

If the US and then Europe reduce or preferably abolish the EV mandate, that will effectively serve as a bailout for Nissan and for every gas powered car maker, including Honda, Ford, GM, Stellantis, VW etc. 

Nissan Motor Co. rejecting the acquisition offer that would make it a subsidiary of Honda Motor Co., according to a person familiar with the matter, would have merged the two carmakers to join forces. The talks to create the world’s third-largest carmaker have gone poorly since the plans were first announced in December. 

This development raises fresh questions about how Nissan could ride out its latest crisis without external help. Nissan is in the middle of a turnaround plan, aiming to cut 9,000 employees and 20% of global capacity.

Honda, with a market value nearly five times bigger than Nissan, was increasingly worried about its smaller rival’s progress on the turnaround plan, per insiders. The merger talks have coincided with the threat of potential tariffs from U.S. President Donald Trump. Tariffs against Mexico would be more painful for Nissan than for Honda or Toyota, according to analysts.

Nissan has been hit harder than some other carmakers from the past shift to EVs, having never fully recovered after the scandal of the arrest and removal of former Chairman Carlos Ghosn in 2018.

Christopher Richter, senior Japan autos analyst at brokerage CLSA, commented in the situation: “The news saying that Nissan did not want to be a Honda subsidiary appears to highlight that control was a contentious issue… Without being able to have control, Honda appears to be walking away.”

Nissan is 36% owned by French carmaker Renault SA, which in late January sent representatives to Japan to express concern over the transaction and seek a premium for its stake, according to some insiders.

Mitsubishi Motors Corp., which has reportedly decided against joining the alliance, said earlier this week it would make a final decision once Honda and Nissan reach an agreement later this month.

Honda’s shares jumped more than 8% on the news, while Nissan’s fell nearly 5%. Renault’s stock fell 3.4%. Now the question is, what will happen with Nissan? It’s in a downward spiral and there are hungry investors, like Foxconn, that want to take an ownership position in the company. But one thing’s for sure, this story is far from over.