By Naomi Tajitsu
TOKYO (Reuters) - Hitachi Ltd (T:6501) will merge its vehicle components unit with Honda's (T:7267) three suppliers in a bid to cut development costs and better respond to a rapid industry shift to electric vehicles (EV) and self-driving.
The deal to create Japan's third-biggest auto-parts supplier by sales also marks intensifying consolidation in the country's auto industry, as they struggle to adapt to technological change.
Their bigger rival Toyota Motor Corp (T:7203) announced last month it would raise its stake in Subaru Corp (T:7270) to more than 20%.
It has been also cementing ties with smaller rivals such as Suzuki Motor Corp (T:7269) and Mazda Motor Corp (T:7261), which have acknowledged that they lack the investment firepower to invest in developing new vehicle technologies.
"We would like to pool the strengths of our six companies to develop electrification components... and self-driving and advanced driving support systems," the companies said in a joint statement on Wednesday.
They added that the joint company would focus on developing components for EV and self-driving systems, combining their scale to come up with products more quickly and efficiently while using their scale to further expand globally.
Hitachi will take a 66.6% stake in the newly formed company by merging its component unit with three Honda affiliates -- Keihin Corp (T:7251), Showa Corp (T:7274) and Nissin Kogyo Co (T:7230), while Honda takes the remaining stake.
Shares in the three Honda suppliers all closed more than 20% higher on Wednesday. Hitachi ended flat and Honda fell 0.7%.
While the deal will loosen Honda's grip over its long-time suppliers, it will allow better access to technology developed by Hitachi's automotive arm, whose 971 billion yen annual revenue dwarfs Showa and Keihin's combined sales of 636 billion yen.
Hitachi Automotive Systems, whose name will be used for the merged company, produces a wide range of components from electric power steering systems, millimetre-wave radar used in self-driving cars, and EV invertors.
Honda's Showa makes shock absorbers and steering systems, Keihin produces engine, and Nissin manufactures brake systems.
"All of Honda's suppliers have been a relatively small entities ... Now it can have a stake in a major auto parts supplier," said Chris Richter, senior research analyst at brokerage CLSA.
"Whatever control they are losing over Keihin for example, is not a big loss compared with what they're going to gain."
Honda has struggled to shore up its automobile operations, as its profitability has more than halved in the past two years due to an ongoing series of quality-related issues, constraining its financial firepower to invest in new vehicle technologies.
The proposed deal will further deepen the two automakers' ties after they established a joint venture to develop, produce and sell EV motors in 2017.