TOKYO — Honda and Nissan are in talks to deepen ties, two people said on Wednesday, including a possible merger, in the clearest sign yet of how Japan's once seemingly unbeatable auto industry is being reshaped by challenges from Tesla and Chinese rivals.

A combined Honda and Nissan would create a $54-billion company with annual output of 7.4 million vehicles, making it the world's third-largest auto group by vehicle sales after Toyota and Volkswagen.

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