Tell Me a Fable

Renault-Nissan's Ghosnian Knot

The simple solution may be too bold for most to accept.
Photographer: Brendan Smialowski/Getty Images
NISSAN MOTOR CO LTD
-0.50
At Closing, April 20th
1135.00 JPY
RENAULT SA
-0.38
At Closing, April 20th
94.12 EUR

In ancient Greek legend, there was a knot found in the Anatolian city of Gordium so intricate that none could loosen it. Alexander the Great, hearing that whoever unfastened it would become the ruler of Asia, sliced it in half with a blow of his sword. Soon after, his magnificent conquests confirmed the prophecy.

It's a similar story with the knot of automotive companies bound together by Renault SA Chairman and Chief Executive Officer Carlos Ghosn. Even after adjustments to remove double-counting due to the web of cross-shareholdings that tie Renault to Nissan Motor Co. and Mitsubishi Motors Corp., net income from the three companies comes to some 9.4 billion euros ($11.6 billion), enough to make it the fourth-largest automotive group worldwide on that measure. But Nissan -- the largest satrapy of this empire -- has a market capitalization that trails Tesla Inc., which has never made an annual profit.

Marriage a la Mode

Renault-Nissan-Mitsubishi's combined net incomes make them a giant of the car industry

Source: Bloomberg, company reports, Gadfly calculations

As Gadfly's Chris Bryant explained last month, unifying this sprawling empire has hitherto defied the political nous even of its founder, who recently turned 64. A major part of the problem will continue to be that, as with its ancient forebear, the simple solution to the Ghosnian knot is too bold for most people to accept.

A look at the combined net income of the group illustrates this. A substantial slice of the amount that Renault reports as its own profit is in fact equity-accounted earnings from its 45 percent stake in Nissan. That tribute came to 2.79 billion euros of the 5.21 billion euro net profit Renault recorded last year, and the last time the French company's own operations generated significantly more than half of its net income was back in 2010.

Sharing Is Caring

The share of Renault's net income coming from Nissan has rarely dipped below 50 percent

Source: Company reports, Gadfly calculations

Note: In 1999 and 2013, losses at one partner meant that more than 100 percent of net income came from the other. We've capped the chart at 100 percent for clarity.

Carry out a comparable analysis on the entire group and a rather stark truth emerges. Compare the scarlet and yellow bars on the chart below, representing Nissan's profits, to the claret one that comes from Renault and the blue ones from Mitsubishi. It's not hard to see which the dominant player is: Just as Alexander's realm was essentially the old Persian Empire speaking Greek, Ghosn's kingdom is basically Nissan with a Dutch head office.

There Were Three in the Bed

Nissan would be the overwhelmingly dominant player in a unified Renault-Nissan-Mitsubishi group

Source: Company reports, Bloomberg, Gadfly calculations

Little wonder it's proving so difficult to come up with a structure that works.

Nissan has the best of the current business, and is likely to extend its lead further thanks to its strong positions in key markets such as Asia and the U.S. In China, more than 16 cars were sold last year under the marques of Nissan and its premium Infiniti brand for every Renault.

The Car in Front

In China, Nissan is the overwhelmingly dominant player in the Renault-Nissan-Mitsubishi alliance

Source: Bloomberg Intelligence

A unified structure that reflected that reality would stick in the craw of the French government, whose 15 percent stake in Renault gives it an effective veto over any attempt to cut the knot. That's especially the case because Renault's employees generate about half the net income per head of their counterparts at the Japanese company, so the first order of business of any combined group would probably be to shutter some French production lines.

The problem is, a combined make-up that didn't reflect that reality would be equally unacceptable to the Japanese, who've shown increasing impatience in recent years with French government influence on the alliance.

Productive Relationship

Net income per employee at Nissan drastically outstrips the equivalent at Renault

Source: Bloomberg, company reports, Gadfly calculations

Note: We've excluded net income attributable to Nissan from the calculation of Renault's net income.

A Parisian bid to increase its sway within the group in 2015 was attacked as "unacceptable" and threatening to the alliance by Nissan's union, which has historically remained silent on such matters. There's "no way" a merger would be acceptable, the Nikkei Asian Review quoted an unnamed Nissan executive as saying earlier this month, presumably under the assumption that such an arrangement would cement French power.

Prime Minister Shinzo Abe's influential cabinet secretary Yoshihide Suga represents part of Nissan's hometown of Yokohama in the Diet, so probably wouldn't take kindly to a stitch-up.

Resolving those contradictions as Ghosn's retirement age approaches seems beyond the wit of a mortal executive, but it has to be done. Having clinched the crown of the world's biggest carmaker last year, it's high time that Renault-Nissan-Mitsubishi's legacy was secured.

When Alexander died at the age of 32, his empire was divided between his generals and disintegrated in a 50-year series of civil wars. To escape that fate, Ghosn will need to find a way to cut the knot he's tied.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling in Sydney at dfickling@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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