It’s Time for Nissan and Renault to Remake the Alliance

Regardless of Carlos Ghosn’s arrest, the alliance between Nissan and Renault has been on shaky ground for years. Nissan realized that it was not in control of its destiny and, for some time, believed it was contributing more to Renault than it was getting back. Additionally, Nissan and Renault are competing for the same customers in countries where neither participated twenty years ago, so the two automakers will increasingly find themselves in competition with each other in Asia, Latin America, and Africa. For these, and other reasons, the Japanese have resisted several attempts for a merger between the two.

Much has happened in the automotive world in the last two decades, including automaker collaborations, given the rapid and unpredictable advances of new technologies. But collaborations do not amount to a de facto merger. The number of project-based alliances between automakers is growing as companies seek to maximize their investments and minimize risky cash outlays. But the Nissan/Renault Alliance, in its present form, has outlived its purpose (at least for Nissan).

To understand the tensions in the Nissan and Renault Alliance today, we first need to understand why Nissan accepted such a radical rescue by a foreign company.  In 1999, Nissan was drowning in debt and excess manufacturing capacity in Japan. Rising operating losses prevented investments in new products, and factory productivity and parts costs were uncompetitive compared to Toyota and Honda.   

But Nissan’s fundamental problem was a business culture that could not undertake the obvious measures to save the company. Strict adherence to the seniority-based selection of management resulted in paralysis among the leadership of the company. No one wanted to take responsibility for taking actions at odds with social norms.  Closing plants, laying off workers, and breaking traditional bonds with suppliers were simply not in the playbooks of Japanese auto executives. Implementing any one of them would have necessitated one or more managers taking responsibility and having to resign from the company.  As with so many failing businesses, the cures were obvious for Nissan; and Ghosn, as a foreigner, was able to do what the Japanese executives could not.

Ghosn’s playbook included selling shares in the four hundred companies with which Nissan had a business or personal relationship; the majority of them were parts suppliers to Nissan as part of its Keiretsu organization, a cross-ownership structure that is unique to Japan. Cross-share ownership is a post-war feature of Japanese industry, in which related companies are supposed to benefit from maintaining close ties through mutual minority ownership.  However, in Nissan’s case, its suppliers were not as efficient as those of Toyota, causing Nissan to pay higher prices for comparable parts. The funds Nissan gained from selling shares in its Keiretsu were used to pay down debt, and Ghosn forced the company to put its future parts contracts out for bid. The strategy worked, and Nissan obtained better terms from its suppliers without sustaining any lasting relationship damage from the share sales. 

Ghosn’s next step was to shut down a western Tokyo-based large auto assembly plant, which was already operating well below capacity, and two smaller drivetrain plants. Production was transferred to other plants, making overall production more efficient and less costly.

Finally, several years later, Ghosn sold Nissan’s headquarters in the notoriously expensive Ginza District of Tokyo and moved everyone to Yokohama, a less fashionable and less expensive city that is closer to Nissan’s development centers.

These strategies, which were obvious and easy remedies to any outsider, quickly eliminated financial liquidity issues, lowered costs, and enabled the company to again invest in products. So, it wasn’t the alliance that saved Nissan, but instead common-sense measures that only an outsider could take.

Nissan no longer needs the kind of oversight that Ghosn provided twenty years ago, and one can even argue that some of Ghosn’s recent decisions have hurt the company. For example, Nissan’s current U.S. lineup lags its rivals. The diversion of capital to develop and assemble the Leaf and its EV successor in the U.S. and Europe are clear examples of poor product planning. Additionally, Ghosn’s quest to achieve 10% U.S. market share resulted in vehicles being dumped into rental car fleets, forcing the brand to suffer accelerated depreciation. These market share tactics also upset profitability in the dealer network, which became dependent on meeting excessive volume targets to earn a profit.

It’s well-known that the majority of corporate mergers fail to meet the acquirer’s objectives and generate future shareholder value, often because of a failure to predict cultural impediments. Combinations between businesses with disparate cultures have an even poorer track record for success. If there hasn’t been cultural integration between the two automakers in the past twenty years, it surely won’t happen through a forced takeover by Renault.

Finally, Nissan is confronting a challenging labor market in Japan. The current controversy will make it even more difficult for the company to attract talent at a time when the auto industry needs to invest in new technologies. Japanese society is aging quickly, so the supply of college graduates is declining. University graduates can pick among multiple job offers, compared to three decades ago when they fiercely competed for any job. Highly qualified graduates are likely to find jobs with greater opportunity than they perceive in Nissan. If Renault were to force a full merger, finding qualified managers and engineers will become even more difficult. Both companies have to find a new way for the alliance to work for all partners, and that probably means loosening the ties among them.

Maryann Keller is principal of Maryann Keller & Advisors, a New York area automotive strategy consultancy.