This move comes as the industry transitions away from fossil fuels and towards electric vehicles, where Japanese companies have lagged behind their rivals.

Honda and Nissan plan to team up to jointly challenge world's top electric vehicle manufacturers like Tesla, BYD.

Honda and Nissan agreed to explore a merger and set up a joint holding company, they said today, which would create the world’s third-largest automaker

The two Japanese auto manufacturers signed a basic agreement for merger talks on Monday, according to a joint media briefing in Tokyo. Honda also said it will buy back as much as ¥1.1 trillion yen ($7 billion) of its own shares.

The companies hope a merger could help them take on Tesla and Chinese EV producers amid an increasingly difficult environment for legacy automakers.

The two companies said they had signed a memorandum of understanding and smaller Nissan alliance member Mitsubishi Motors also agreed to join the talks.

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.