Nissan Motor (NSANY) and Honda Motor (HMC) have officially begun talks to merge by 2026 as Japan’s automakers seek an edge over tough Chinese rivals and Tesla (TSLA).

Honda and Nissan plan to merge as the two Japanese firms seek to fight back against competition from the Chinese car industry. The integration would create one of the world's biggest car producers alongside Toyota,

Honda and Nissan signed a basic agreement for merger talks, according to a joint media briefing held in Tokyo. Honda also said it will buy back as much as $7 billion of its own shares.

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

The merger will create the third-largest car company in the world, after Toyota and Volkswagen. Mitsubishi Motors, in which Nissan is top shareholder, was also considering joining, the companies said.