Hitachi will provide 66.6% of the new company's capital, with Honda providing the rest of the investment.
The new company will become Japan's third largest auto parts maker by sales, after Toyota Motor group companies Denso and Aisin Seiki. Hitachi and Honda aim to reduce development and production costs, and focus on developing self-driving and other next-generation technologies.
The company will succeed Hitachi Automotive Systems, a wholly owned subsidiary of Hitachi, and three other parts makers, Keihin, Showa and Nissin Kogyo, in which Honda is the largest shareholder. Honda will make takeover bids for the three parts makers. No specific time frame has been given regarding the takeover bids or the successive merger.
The new company's sales are expected to be about 1.7 trillion yen ($15.6 billion).
All four auto parts makers have been developing self-driving and other next-generation technology. Hitachi Automotive Systems, for instance, leads in the field of electronic control units. Keihin is known for its power control systems. Nissin Kogyo makes braking systems, and Showa is developing a technology for converting the movement of a steering wheel into electronic signals.
Honda and Hitachi have been collaborating since 2017, when a joint venture for electric vehicle driving systems was set up by Honda and Hitachi Automotive Systems.
Honda's move to deepen its partnership with Hitachi points to the growing importance of alliances as the auto industry transitions from traditional car making to a business driven by technology, as symbolized by the rise of a new acronym, CASE, which stands for connected, autonomous, shared and electric cars.
Hitachi has been streamlining its own business structure. In 2019, it sold off Clarion, a car navigation system producer.