Nissan and Honda are reportedly engaged in exploratory discussions about a potential merger that could create a $52 billion Japanese automotive giant, according to individuals familiar with the matter.

The companies are exploring ways to combine their efforts to better compete in a challenging environment. Traditional automakers face stiff competition from rapidly growing Chinese electric vehicle (EV) manufacturers, coupled with slower-than-expected consumer demand for EVs globally.

On Wednesday, shares in Nissan soared by more than 22% during early trading in Tokyo, reflecting investor optimism about a potential deal and its implications for the company’s valuation. In contrast, Honda’s stock dipped by up to 3%.

Although the talks are still in their preliminary stages, concerns are emerging about the political ramifications of merging two iconic Japanese car brands. Significant job cuts could accompany such a merger, a source familiar with the discussions noted.

Nissan and Honda announced in March their intent to collaborate on EV development. Since then, they have deepened their discussions amidst uncertainties surrounding the potential implications of Donald Trump’s return as U.S. president on the automotive industry.

Before Wednesday’s surge, Nissan’s market capitalization had declined by 40% this year, leaving it at $8.2 billion. In comparison, Honda’s market value stands at $44 billion. A merged entity would rank as the world’s third-largest carmaker, following Toyota and Volkswagen, based on last year’s sales figures. This scale would enhance the combined company’s ability to invest in competing with Tesla and China’s BYD.

Nissan has been navigating significant challenges, unveiling an emergency turnaround plan in November that included 9,000 job cuts and a 20% reduction in global production capacity. Additionally, the company downgraded its profit forecasts twice this year after reporting losses for the July-September quarter.

Efforts to secure a strategic investor have been ongoing for months. The Financial Times recently reported that “all options” were being considered, including a merger with Honda.

The merger discussions were initially reported by Nikkei. On Tuesday evening, Nissan stated: “The content of the [Nikkei] report is not something that has been announced by either company.” It added, “As announced in March this year, Honda and Nissan are exploring various possibilities for future collaboration, leveraging each other’s strengths. If there are any updates, we will inform our stakeholders at the appropriate time.”

Honda echoed similar sentiments, saying it and Nissan were “exploring various possibilities for future collaboration.” Renault, Nissan’s longstanding alliance partner, declined to comment.

Market analysts in Tokyo remain skeptical of the merger’s feasibility. They cite overlapping business areas between Nissan and Honda, as well as the potential for substantial layoffs and asset write-downs. “It is hard to imagine Honda would do this without some sort of subsidy or guarantee from the Japanese government, because it’s hard to identify which bits of Nissan Honda would really want,” noted the head of a major investment fund.

In August, the two companies announced plans to jointly develop EV software and roll out a new EV by the end of the decade. A merger would expand their U.S. manufacturing footprint, helping both brands mitigate the impact of proposed tariffs on Mexican imports. Nissan’s significant manufacturing operations in Mexico add to the merger’s strategic appeal.

Industry observers anticipate potential policy changes under Trump’s administration, which could slow EV adoption in the U.S. by relaxing emissions standards. Nissan’s low market value and extensive U.S. manufacturing capabilities have made it an attractive target for international buyers seeking to navigate future trade restrictions, according to mergers and acquisitions experts in Tokyo.

“There are certainly companies looking at Nissan as a possible way of buying a U.S. manufacturing presence as a way around any future tariffs,” said one banker with experience advising Japanese automakers. “The price is low enough to make that something worth doing, and so it’s not surprising Nissan would have been looking for a domestic merger as a defense against that.”

A merger could also affect Mitsubishi Motors, in which Nissan holds a 27% stake. If included, the enlarged company’s annual production capacity would approach 8 million vehicles.

Nissan is pursuing new product launches to address its declining financial performance. The company has struggled to counter slowing global EV sales with a robust hybrid offering, a segment where Toyota has excelled.

Nissan’s challenges have attracted activist investors, including Singapore-based Effissimo Capital Management, known for its campaigns against major Japanese corporations like Toshiba.

Should the merger talks progress, reconciling the starkly different corporate cultures of Nissan and Honda will be crucial. The Japanese government proposed a similar merger in 2020, citing concerns about the ability of domestic automakers to compete with Chinese EV and software developers as standalone entities. However, officials remain cautious about the potential employment impact.

Last month, the FT reported that Renault might consider selling part of its stake in Nissan to Honda as part of an alliance restructuring. A Renault insider commented that a stronger Nissan-Honda relationship could “only be positive” for the French group.

Renault has recently reorganized its alliance with Nissan, reducing its shareholding in the company to just under 36%. Nissan holds a 15% voting stake in Renault.