Would-Be Ev Partners Nissan, Honda Can't Match Tesla's Capex Firepower

Prospective EV partners Nissan and Honda lack the capital expenditure (capex) firepower to match Tesla's investment capacity. This suggests potential challenges for these companies in competing with Tesla's rapid advancements in electric vehicle technology and infrastructure. While partnerships could offer synergies, Tesla's significant capex advantage may pose hurdles for Nissan and Honda in keeping pace with Tesla's innovation and market dominance in the electric vehicle sector.

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When it comes to investment, Nissan and Honda are well behind both Tesla and China's BYD.

TOKYO -- One of the biggest factors driving the proposed partnership between Nissan Motor and Honda Motor is their struggle to catch up to younger rivals like Tesla in the speed and scale of investment.

The two automakers have confirmed they are exploring ways to cooperate in EVs and automotive software. But even if Nissan and Honda were to combine all their current EV sales and spending, they would still fall short of their biggest rivals.

Combined group sales added up to 28 trillion yen ($188 billion) in the fiscal year ended March 2023, with a total of 8 million vehicles sold worldwide. That would make them the world's third-largest auto group in terms of volume.

Meanwhile, Tesla held the biggest share of the global EV market in 2023 with 19.3%, followed by China's BYD with 16%, according to research firm Marlines. Although Nissan sold the world's first mass-produced EV, the Leaf, in 2010, its combined market share with alliance partners Renault and Mitsubishi Motors was only 3.2% last year.

Honda's presence is even smaller. It sold fewer than 20,000 EVs in 2023 for a market share of only 0.2%. Output of its first mass-produced EV, the Honda e, ended this past January after just three years.

When it comes to investment, Nissan and Honda had about 850 billion yen in combined capital spending for the year ended March 2023. 

Tesla's capital spending for the year to December 2023 reached a record-high $8.9 billion, or about 1.3 trillion yen, a 24% increase from the previous year, data from QUICK FactSet shows. BYD, the world's largest maker of electric cars when plug-in hybrids are included, had capital spending of over 100 billion yuan, or about 2 trillion yen, for the period from January to September 2023.

The two Japanese automakers are starting to grapple with the huge capital outlays needed to gain ground in EVs.

Nissan Motor Chief Executive Makoto Uchida and Honda CEO Toshihiro Mibe, left, revealed on March 15 that the two automakers are discussing a possible partnership. Right, Tesla chief Elon Musk. (Image Source: Yuki Nako, Reuters)

Honda has announced plans to invest about 5 trillion yen in EVs and software by fiscal 2030, part of a goal of making all new autos it sells either EVs or fuel cell vehicles by 2040. In its mainstay North American market, the company plans to open an EV factory in the U.S. state of Ohio in 2026 and is reportedly considering a new plant in Canada. Honda envisions 2 trillion yen in North American investments alone, the most ever.

Nissan has set a goal of increasing its number of electrified models 50% by fiscal 2030 and plans to allocate 2 trillion yen to electrification investments.

But the would-be partners also lag behind Tesla in the ability to generate cash for such spending.

Honda's free cash flow -- excluding its financial business -- came to 193.6 billion yen for the October-December quarter. That is only about 60% as much as Tesla, which generated the equivalent of 300 billion yen. Nissan suffered negative cash flow of 12 billion yen in its auto business.

Nissan's net cash in its automotive business -- cash minus interest-bearing debt --  came to 1.33 trillion yen at the end of December. This is a 20% increase on the year, but rising investments will squeeze this cushion.

For April-December, Nissan's free cash flow jumped from a year earlier to a positive 181.8 billion yen. Yet it is still recovering from 1.33 trillion yen in cumulative negative cash flow in the three years to March 2022.

If an automaker wants to produce all the core EV elements on its own -- including vehicle software, batteries, and e-axle drive systems -- it would require trillions of yen in investments, said Takaki Nakanishi, analyst and CEO at the auto industry-focused Nakanishi Research Institute in Tokyo.

Honda's free cash flow for the April-December period was about 930 billion yen, and its net cash came to about 3.18 trillion yen at the end of December. Honda's stronger ability to generate cash could be beneficial in a partnership with Nissan if the two automakers prioritize their investments and achieve economies of scale by standardizing components.

"By sharing the same technological approach, we can greatly improve the efficiency of our capital deployment, including development spending," Honda President Toshihiro Mibe told a news conference Friday.

Another challenge is promoting change among suppliers to improve profitability across the entire supply chain.

Parts makers that do business with both automakers include Hitachi Astemo, JATCO, and Akebono Brake Industry. Old-line auto parts makers face a harsh earnings environment as demand for internal combustion engines shrinks even as pressure to make EV-related investments grows.

"Both companies have suppliers that are under strain, and there is a possibility that a partnership [between the two automakers] could lead to a parts maker reorganization," said Seiji Sugiura, senior analyst at Tokai Tokyo Intelligence Lab.

Source: Nikkei Asia

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