Japanese auto giants Honda Motor and Nissan Motor will start negotiations to merge as they face growing competition from bigger global electric vehicle makers, the Nikkei newspaper reported on Tuesday.

The two companies have increased ties in recent months as they face heavy competition from Chinese EV makers that has added pressure on legacy brands struggling to make enough profit from their EV ventures.

Honda and Nissan issued identical statements saying the report on merger talks by Nikkei was not announced by either companies. Reuters has not independently verified the report.

"As announced in March of this year, Honda and Nissan are exploring various possibilities for future collaboration, leveraging each other's strengths," the companies said in separate statements, adding they will inform stakeholders of any updates at an appropriate time.

Honda's U.S.-listed shares rose 1.3% in afternoon trading.

Nissan and Honda, Japan's third and second biggest automakers after Toyota, have been losing market share in China. That nation accounted for almost 70% of global EV sales in November, with more than 1.27 million in purchases for the month.

The two had combined global sales of 7.4 million vehicles in 2023, but are grappling with challenges from EV makers, particularly in China, where BYD and others have surged ahead.

Global automakers General Motors and Ford Motor too have slowed investments on EVs as high borrowing costs and poor charging infrastructure hinder their adoption despite government incentives.

In Europe, Volkswagen is locked in acrimonious talks with its union over cost cuts as it struggles with falling demand and rising costs.

The global auto industry is also bracing for a potential rollback of EV friendly policies by incoming U.S. president Donald Trump, Reuters has reported.

Honda and Nissan in March agreed to cooperate in their EV businesses, and in August deepened their ties, agreeing to work together on batteries, e-axles and other technology.

The automakers are looking to operate under a single holding company and are expected to soon sign a memorandum of understanding for the new merged entity, the Nikkei reported.

Honda and Nissan are also looking to bring in Mitsubishi Motors, in which Nissan is the top shareholder with a 24% stake, under the holding company, to create one of the world's largest auto groups, the report said.

The stakes of the two companies in the new entity, along with other details are to be decided later, Nikkei said.

Any deal could be the biggest in the industry since the $52 billion merger between Fiat Chrysler and PSA in 2021 to create Stellantis.

Nissan has been reeling with weak demand in China and the U.S., prompting the Japanese automaker to take cost-saving measures such as corporate rejigs.

Last month, the company said its half-year net earnings were down more than 90% from a year ago and cut its annual operating profit forecast by about 70%.

Nissan had been at the forefront of EVs in the 2010s but has been overthrown this decade by newcomers and pure players.