Honda and Nissan have started talks toward a potential merger, they said on Monday, a historic pivot for Japan's auto industry that underlines the threat Chinese EV makers now pose to some of the world's best known car makers.

Japanese automakers Nissan and Honda on Monday announced they had entered into official talks to merge and create the world’s third-largest automaker by sales.

Honda Motor Co. and Nissan Motor Co. took their first historic steps toward merging to create a new force in the world’s automotive industry, as aggressive competition from China forces legacy carmakers to rethink their business models.

Honda and Nissan agreed to explore a merger and set up a joint holding company, they said on Monday, which would create the world's third-largest automaker and signals a massive shift in an industry under tremendous upheaval.

Honda and Nissan have announced plans to merge, forming world's third-largest automaker by sales as the industry transitions away from fossil fuels.