TOKYO (Reuters) – Honda (NYSE:HMC) and Nissan (OTC:NSANY) are considering producing vehicles in one another’s factories as part of their talks to deepen ties, news agency Kyodo reported on Saturday without citing sources.

The report added that Honda will also consider supplying hybrid vehicles to Nissan as part of the potential merger, without mentioning the source of the information.

Honda, Japan’s second-largest car company, and Nissan, its third-largest, are in talks to deepen ties with an eye on potentially setting up a holding company, according to two people familiar with the matter. One of the people said the automakers are also discussing a potential merger.

A merger could create the world’s third-largest auto group by vehicle sales behind Toyota (NYSE:TM) and Volkswagen (ETR:VOWG_p), with an annual output of 7.4 million vehicles.

The two automakers forged a strategic partnership in March to cooperate in electric vehicle development, but Nissan has faced ongoing financial and strategic troubles in recent months.