By Naomi Tajitsu
TOKYO (Reuters) - Hitachi Ltd <6501.T> will merge its vehicle components unit with Honda's <7267.T> 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 it struggles to adapt to technological change.
Honda's bigger rival Toyota Motor Corp <7203.T> announced last month it would raise its stake in Subaru Corp <7270.T> to more than 20%.
Toyota has also been cementing ties with smaller rivals such as Suzuki Motor Corp <7269.T> and Mazda Motor Corp <7261.T>, which have acknowledged that they lack the investment firepower to invest in developing new vehicle technologies.
The merged company announced on Wednesday aims to focus on developing components for EV and self-driving systems, along with new, on-demand mobility services, combining their scale in a bid to come up with products more quickly and efficiently.
Hitachi said that increasing complexity of vehicle technologies required bigger R&D firepower, a bigger global footprint and access to a bigger pool of talent.
"The merged company will be a mega supplier and will deliver competitive advanced technologies and solutions," Hitachi Executive Vice President Keiji Kojima told reporters. "We will leverage our strengths and our scale to 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 <7251.T>, Showa Corp <7274.T> and Nissin Kogyo Co <7230.T>, while Honda takes the remaining stake. The merger is expected to be completed in about a year.
Hitachi, which makes everything from television sets to elevators to trains, said that its majority stake in the merged company would make it easier to attract new customers. Traditionally, Japanese automakers have deep ties to their group suppliers, sharing technology and talent.
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 for the moment, 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 specialises in shock absorbers and steering systems, Keihin in engine parts, and Nissin manufactures brake systems. Hitachi executives acknowledged that some of its products would overlap with those of its new partners, but did not offer specific details on how the issue would be addressed.
"All of Honda's suppliers have been 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 a 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.
(Reporting by Naomi Tajitsu, Miwa Sasaki, Chris Gallagher, Makiko Yamazaki, Maki Shiraki; Editing by Miyoung Kim, Sam Holmes and Muralikumar Anantharaman)