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Honda Motor Co. and Nissan Motor Co. have begun talks on a merger that would create the world's third-biggest automaker group by volume, sources familiar with the matter said Wednesday, amid fierce global competition in electric vehicles dominated by overseas rivals.

Japan's second- and third-largest automakers are considering the possibility of establishing a holding company, the sources said, in an apparent bid to form an automobile alliance to challenge Tesla Inc. of the United States and Chinese EV makers such as BYD Co.

"We are considering collaboration. Other possibilities are also being considered, but nothing has been decided," Honda President Toshihiro Mibe told reporters.

Honda, Nissan, and Mitsubishi Motors Corp., which partners with Nissan, said in a statement that they are "considering various possibilities for future collaboration, but no decisions have been made."

The merger would create an alliance that rivals industry giants Toyota Motor Corp.

and Volkswagen AG in size, with combined sales reaching around 8 million vehicles if those of Mitsubishi Motors are included.

Honda and Nissan agreed in March to commence a feasibility study on a strategic partnership in EV production and software technologies to cut costs and improve competitiveness, with Mitsubishi Motors joining the talks in August.

At a press conference in August, Mibe said the talks did not involve a capital tie-up, although he did not deny such a possibility in the future.

Global automakers are struggling to secure funds to cover increasingly high costs for EV development due to expensive batteries and the massive resources required for software development, such as autonomous driving functions.

Honda, which traditionally preferred to develop cars in-house, has been ramping up collaboration with companies such as Sony Group Corp. and General Motors Co. in recent years.

Nissan, which agreed to review its decades-old capital alliance with Renault SA last year in a deal that lowered the French automaker's influence over the Japanese company, has been exploring ways to increase its competitiveness.

Honda and Nissan are facing slumping sales in China, where local brands with more affordable EVs are grabbing market share from Japanese automakers.

Last month, Honda cut its net profit outlook for the current business year through March to 950 billion yen ($6.2 billion), which would represent a 14.2 percent decline from the previous year, due to weaker-than-expected auto sales in China.

Also in November, Nissan unveiled a plan to cut 9,000 jobs and reduce global output capacity by 20 percent, saying its business in the United States and China continued to struggle.

In 2023, Honda and Nissan sold 3.98 million and 3.37 million vehicles worldwide, respectively.

The Toyota group sold 11.23 million vehicles that year, maintaining the top position for the fourth consecutive year, followed by Volkswagen with 9.24 million.

Following media reports on the potential merger talks, trading of Nissan shares was briefly halted by the Tokyo Stock Exchange ahead of the Wednesday morning session but resumed after the companies issued the statement.

Nissan shares closed nearly 24 percent higher at 417 yen, while Honda shares declined about 3 percent to 1,244 yen.