Among the reasons for Honda Motor Co. to enter merger talks with Nissan Motor Co., one looms large: China.

The surging popularity of electric and hybrid vehicles made by BYD Co. and others has erased the leading position that Japan’s automakers once enjoyed as providers of high-quality cars with cachet. That’s left them with too much capacity in local factories that were built to satisfy anticipated domestic demand in the world’s largest market for automobiles.

“When you look at Honda and Nissan, they’ve been losing the market for some time,” said James Hong, an analyst at Macquarie Securities Korea Ltd. “We expect both to come up with very large capacity cuts to at least cover some of the fixed-cost burdens they have in China.”

Nissan made 779,756 cars in China during the fiscal year that ended in March, about half of its peak output in recent years. The Yokohama-based firm has embarked on a cost-cutting plan that will slash global capacity by a fifth to 4 million vehicles, with China accounting for more than half of the 1 million-unit reduction, according to Citigroup Global Markets analyst Arifumi Yoshida.

Honda said in July that it will close factories and reduce capacity by 20% in China. The carmaker is in negotiations with local partners on further cuts, Executive Vice President Shinji Aoyama said last month.

More broadly, Nissan has been in a state of turmoil since the late 2018 arrest and ouster of former Chairman Carlos Ghosn. Multiple management shakeups and an outdated product lineup have also contributed to shink it to Japan’s fifth-largest automaker by market value, at around ¥1.6 trillion ($10.2 billion).

That’s made Nissan a potential takeover target.

Efforts to engage in merger talks appear to have accelerated after Hon Hai Precision Industry Co., the Taiwan-based producer of iPhones known as Foxconn, approached Nissan about acquiring a stake in the company, although a person familiar with the matter said last week its interest is on hold while any negotiations between the two Japanese companies continue.

Regardless, a combination of Honda and Nissan has long been anticipated, and even explored, in the past, with the Japanese auto industry coalescing into two camps: One including the two carmakers and another controlled by the Toyota Motor Corp. group of companies.

A Kyodo report over the weekend citing people that weren’t identified said Nissan and Honda are considering a manufacturing partnership in which they will build vehicles at each other’s plants. Honda will also study possibly producing hybrid vehicles for Nissan, which is also struggling in the US where the demand for those sort of cars is strong.

Japanese automakers aren’t the only ones suffering in China. General Motors Co. is facing $5 billion in charges and writedowns related to its operations in the country as it seeks to turn around a once-profitable business. Germany’s Volkswagen AG, along with BMW and Mercedes, are also struggling after falling behind on technology trends.

Nissan expects to produce 3.2 million vehicles during its current fiscal year, well below its ability to produce 5 million units annually. While that translates to a capacity utilization rate of 64%, excluding China, the rate improves to around 73%, Nissan Executive Vice President Hideyuki Sakamoto told analysts in November.

Optimal capacity utilization rates for legacy automakers is widely considered to be at more than 80%, according to Tatsuo Yoshida, senior analyst at Bloomberg Intelligence.

Seven months after pledging to increase annual global sales by 1 million units over the next three years, Nissan Chief Executive Officer Makoto Uchida walked that back when announcing the company’s restructuring measures last month. Despite the planned job cuts and potential plant closures, he hasn’t given details of where they might happen.

Nissan is already adjusting production speeds and work-shift schedules while integrating old lines with newer ones, Vice President Sakamoto said. Next-generation production technology introduced at its Tochigi plant will be deployed at other facilities to save on headcount. These measures should start to deliver results as soon as next year, he said.

“I wouldn’t say the Chinese market won’t ever be a lucrative one for Japanese manufacturers,” Yoshida said. “But it’s not going to happen during the next three to five years.”