Why car groups Nissan and Renault need each other

When Nissan’s chief executive Hiroto Saikawa addressed employees shortly after the arrest and dismissal of Carlos Ghosn in November, he painted a bleak picture of a company that had suddenly lost its captain. 

It is a sharp contrast with the early days of Mr Ghosn’s leadership, when he achieved a rare turnround of Nissan from near bankruptcy in 1999 through cost savings driven by a highly efficient alliance with France’s Renault.

But, in more recent years, Nissan’s fortunes have darkened again. Profitability has been eroded as the company has overstretched itself in the US, neglected its home market in Japan, and missed its opportunity in India.

“We are trying to correct what we have done wrong,” Mr Saikawa said in his address. 

Key data highlight the problems at Nissan. Operating profit margins are the lowest among almost all of the world’s biggest carmakers at 3.6 per cent, even with billions of dollars of cost savings achieved through a Renault-Nissan alliance that now includes Mitsubishi Motors.

“It’s essential to make use of the alliance, if we consider the many challenges the auto industry faces. I’ve never thought for once that it was a mistake to join this alliance,” said Mitsubishi chief executive Osamu Masuko. 

But decisive action and strong leadership are now needed more than ever.

This explains why Renault is finally moving to replace Mr Ghosn, their chairman and chief executive, who looks likely to languish in prison for months on charges, which he denies, of financial misconduct. His latest bail request was rejected on Tuesday.

Last week the French state, which has a 15 per cent stake in the carmaker, said Renault needed “sustainable governance”, something it could not have with Mr Ghosn behind bars and titularly in charge.

A board meeting is scheduled for Thursday that is expected to appoint as chairman Jean-Dominique Senard, chief executive of tyremaker Michelin. Thierry Bolloré, who is running Renault on a day-to-day basis, is favourite to become chief executive.

This may be the start of the real test for the company, say people close to the group, as investors begin to digest the full financial fallout from the crisis.

Indeed, so far shares have not fared too badly with Nissan 9.5 per cent lower since Mr Ghosn’s arrest and Renault suffering a mere 3 per cent fall.

“Shares of both Nissan and Renault have fallen (after Mr Ghosn’s arrest). But this is just the tip of the iceberg,” said one industry executive. “When people see the consequences of this distraction, it’s going to be a lot worse.” 

In short, the task of reshaping the three car alliance to fit the post-Ghosn era is likely to be highly complicated and wrought with political minefields as the main players jostle in the race for ultimate control.

It is not helped by the lack of trust between the two main allies, which is at an all-time low after Renault questioned the way Nissan handled Mr Ghosn’s dismissal.

Nissan’s expanding internal investigation into the former boss’s financial affairs globally has also been deeply distracting, triggering the departure of several of Nissan’s senior executives who were close to Mr Ghosn. 

Much of the investor attention has focused on tensions created by the disproportionate capital structure of the alliance where Renault holds a 43 per cent voting stake in Nissan while the Japanese partner holds a 15 per cent stake in the French group with no voting rights.

The imbalance became even more pronounced as Nissan became the bigger partner, generating half of Renault’s net profit, which hit a record in 2017. 

To sustain the alliance, Mr Ghosn had considered merging the two companies under a holding company structure, which would have been established in the Netherlands, according to people familiar with the plan.

But some factions within Nissan are opposed to deeper integration, which they think will not make the Japanese group stronger, according to people close to the company.

All three companies agree on one thing, however. They cannot walk away from each other as unwinding the group is likely to prove even more difficult than reshaping it. 

The French government is adamant the alliance should be preserved.

The dispatch of senior French officials to Japan last week to discuss plans to replace Mr Ghosn as head of Renault “was an offer of a hand”, according to a senior government figure, and proof that they are willing to work together to make the alliance work. 

Additionally, Nissan and Renault have repeatedly said dissolving the alliance is not an option. Moves to change the structure of the alliance, say officials, can wait until the situation stabilises.

Critics say Nissan shouldered a disproportionately high amount of the costs of the alliance, reflected in controversial decisions that led to the Japanese company increasing production of its vehicles in underutilised plants in France and South Korea run by Renault. 

Its operating profit margin at 3.6 per cent is well below Renault’s 7.9 per cent and even Mitsubishi’s at 4.6 per cent.

“Because of the politics between the two companies, what was prioritised was better for Renault’s future than it was for Nissan’s future,” said Campbell Gunn, partner at corporate finance advisory firm TAP Japan.

The geographical footprint of the two companies also did not help. Nissan’s core markets are the US, China and Japan, where Renault has little or no presence. It faced cannibalisation in India with Renault’s Kwid competing directly with Nissan’s Datsun, which is built on the same Renault platform.

With the addition of Mitsubishi, which is strong in south-east Asia, Nissan hopes to further broaden its global presence.

But analysts also say Nissan’s deteriorating margins in recent years are self-inflicted.

The company’s sales in Japan fell following repeated quality scandals involving inspections of vehicles and falsified exhaust emission and fuel economy data. Its drive to increase market share in the US eroded profitability while a recent slowdown in China has also hurt Nissan.

“It’s incorrect to say that Renault’s profits are driven by Nissan,” said Thomas Besson, a car industry analyst at Kepler Cheuvreux, a management consultancy. “In the last three years, Renault’s core profits have increased, while Nissan’s underlying performance deteriorated.” 

In some aspects, Nissan’s weak performance offers a compelling case to preserve the alliance.

Industry executives say margins of both companies would be much worse if it was not for the alliance, which will aim to deliver €10bn in annual savings by 2022. The majority of those cost savings are through combined purchasing and the use of a common platform for vehicles.

They already have 30 per cent of their cars on common platforms but that is expected to increase to 75 per cent in two years, which would allow them to cut the $2bn to $5bn in costs of creating a new platform. The alliance, including Mitsubishi, also plans to jointly develop a shared platform for electric vehicles by next year.

“We need to review the alliance but we’re not saying that to break it,” a Nissan executive said. “We need to have a constructive debate on how to make it sustainable.” 

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