Nissan Is Back In The Mud

It's makeover hasn't jump-started profits. What's wrong?

First we break even, then we make a profit. That was the simple plan of Yoshikazu Hanawa, president of Nissan Motor Co. In 1997, Japan's No.2 carmaker posted a loss of $122 million on worldwide sales of $57 billion--and many investors hoped the worst was over. He had ambitious plans to cut administrative staff, build more models on fewer chassis, and streamline research and development. To oversee the restructuring, Hanawa even appointed Nissan's first-ever chief financial officer. Good news seemed in sight.

Not so fast. Instead of reaching breakeven, Nissan now risks a 1998 loss much larger than last year's figure. Japan's stock market slide, marketing setbacks, and recessions in Japan and Asia are all combining to thwart Hanawa and deal him another setback. He says he's satisfied with Nissan's progress. But Nissan's problems may be so deep-rooted and Japan's financial crisis so severe that a healthy rebound may elude the company.

DOWDY CARS. Nissan is now in its sixth year of trying to turn itself around. Problems started in the mid-1980s. In Japan, Nissan's engineers simply lost touch with what consumers wanted, rolling out dowdy sedans that didn't sell. In the all-important U.S. market, Nissan repatriated profits while Toyota and Honda reinvested them.

Hanawa, who has been president since 1996, has done a lot since he unveiled a restructuring plan in May. To raise cash, he sold shares in subsidiaries unrelated to Nissan's core business of making cars and has even sold off Nissan's crown jewel--a swank 16-story headquarters in the chic Ginza district of Tokyo--for $125 million. To cut costs, he has slashed inventories by 100,000 vehicles in North America. In other moves to improve efficiency, he is spinning off Nissan's automatic-transmission division and joining forces with DaimlerChrysler to develop and distribute light commercial vehicles.

But that won't be sufficient. The company is saddled with $22 billion in debt and is running out of banks to borrow from. The regional economic slowdown makes it tough to sell off assets. In the meantime, Nissan's sales are stalling out. On Nov. 10, the parent company is expected to announce a $289 million net loss for the first half of the fiscal year ending next March. According to some analysts, Nissan's losses could reach $626 million for the full year.

Ironically, the same cross-shareholdings that once propped up Nissan are starting to choke it. If not for the stock market crash, Nissan would have turned a profit in the first half. But the tumbling Nikkei blindsided Nissan with $661 million in securities-valuation losses from its holdings, including stakes in struggling Fuji Bank Ltd. and Industrial Bank of Japan Ltd. "If share prices continue to go down, it's a huge problem for Japan, not just Nissan," says Hanawa.

Yet the root of Nissan's problems remains unchanged: marketing. Nissan's failure to meet consumer preferences in the U.S. and Europe is a case in point. "While some other carmakers like Honda and Toyota are bringing out sexy new models, Nissan is not doing that," says London-based auto-industry consultant Karl E. Ludvigsen. "Steak is good, but you need sizzle too." In Europe, Nissan barely broke even last year with sales of about 500,000 units.

LOST SALES. Nissan is also lagging in the U.S., where it lost $787 million last year, dragging its parent company into the red. U.S. sales are down 18% for the first nine months of this year, to 475,000 vehicles, while Toyota's are up 7%, and Honda's have risen 8%. While Toyota and Honda are offering little by way of rebates, Nissan is giving back $2,000 on all models. "It's a bargain sale," says Koji Endo, automotive analyst at Schroders Japan Ltd.

In Asia, where Nissan was betting on future growth, the picture is bleaker still. Nissan has shelved plans to build a factory to produce engines in Indonesia. In Thailand, Nissan's market share has shrunk to 9.9% from 14% in 1996. Nissan sold fewer than 9,000 vehicles from January through August in Thailand this year, as compared to more than 37,000 during the same period in 1997. To boost sales volume, Nissan will start exporting new Big-M pickups to New Zealand and Australia next year.

Nissan's greatest lost opportunity may be at home, however. The company launched a slew of new products last year, outfitting them with one new technology after another: direct-injection diesel engines, low-emission engines, and safer headrests. New models range from the 280 horsepower, $24,348 Skyline GTR sports sedan to the $22,608 Presage minivan with a direct injection diesel engine. Even so, sales in Japan are down 12.5% so far this year. Yet Hanawa wants to increase Nissan's market share to 21%, vs. last year's 20.4%.

To do it, the company has even more new models on the way. In October, Nissan launched its $13,565 Sunny sedan, outfitted with a safer frame; buyers can also choose one of several fuel-efficient engine options. The company plans to use the same chassis to roll out 10 other new models of cars and minivans worldwide. In other moves to bolster global sales, say analysts, Nissan may bring back a new version of its much-missed sporty Z compact car. It may also develop a family model based on its Kyxx, a concept car designed in Munich.

Nissan badly needs to pump up sales. Its $22 billion in debt is already 2.6 times the company's equity. In better times, Nissan could rely on loans from banks linked to the Fuyo group, of which Nissan is a part. But those banks, like many others in Japan, are struggling to survive, and loans are hard to come by. Most recently, Nissan has tapped agricultural lending institutions for loans.

Hanawa was counting on raising more capital by selling off assets such as shares in noncore subsidiaries, land, and idle factories. But the recession is making that plan less workable every day. Jardine Fleming Securities Ltd. estimates that Nissan has at least $6.8 billion in unrealized gains on its land and equity holdings. Nissan closed its Zama factory in 1995 with the stated intention of selling its equipment and land. Today most of the land remains unsold.

POOR IMAGE. Nissan is not in immediate danger of collapse, of course. At least in Japan, the parent company says it's making a profit on car sales and even raised its operating profit forecast for the first half of the year from $174 million to $183 million. But still, Hanawa may face some harsh decisions, such as whether to close factories in Japan. Nissan is now operating below the critical threshold of 70% capacity. "Unless they shut down a plant, no matter how much debt they reduce, they can't make money," says Schroders' Endo.

For now, the company suffers from an image problem so severe that Japanese newspapers have run satirical poems from readers poking fun at the once-treasured carmaker. Investors are losing faith, too. Since Hanawa unveiled his latest restructuring plan, Nissan's share price has tumbled to $2.71 from $4. Hanawa's goals seem to grow more elusive every year.

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