Nissan needs a Honda rescue. What went so wrong?

Nissan, once a symbol of Japan's carmaking prowess, spent the past five years trying to regain its footing after the arrest of long-time leader Carlos Ghosn, only to find itself in a precarious spot again.

- Sean Mc Lain

The carmaker has been slashing jobs, cutting vehicle production and reporting lower profit. Nissan has been slower than rivals in refreshing its lineup, and it has fallen behind in the electric-vehicle race it once led.

Now, it is looking to Honda for a lifeline.

The two carmakers said they were in talks over a merger that would be poised to create the world's third-largest automaker by sales.

The idea of two of Japan's biggest rival brands cohabiting under the same roof would once have been considered absurd, but the companies have grown closer as Nissan weakens, announcing this year plans to share costs and work together on electric vehicles.

Nissan shares rose more than 30% in the two trading days after the announcement about merger talks, while Honda shares declined almost 5% in the same period.

The combination could help fortify the carmakers against global threats including a wave of new competitors coming from China that have taken a lead in the electric-vehicle race.

For Honda, a merger with Nissan offers the promise of sharing the high cost of developing new technologies. The Japanese government, which is worried about the auto industry's competitiveness versus China and is subsidizing technology research, has suggested it would welcome the combination.

Nissan is also the largest shareholder in Mitsubishi Motors and collaborates with it on technology, a relationship that would likely carry over into a merged Honda-Nissan company. Together, Honda, Nissan and Mitsubishi sell more than eight million vehicles annually.

But Honda and Nissan have hurdles to overcome before they can make their deal final. The two companies have different cultures. They sell the same types of sport-utility vehicles and sedans for the mass market in the U.S. and elsewhere.