Dangerous Liaison: Renault And Nissan

It could be 8 to 10 years before the deal yields a return

French auto maker Renault wound up its 1998 centenary year with profits jumping 63%, to $1.5 billion, and sales soaring as buyers snapped up nifty new models such as the Megane Scenic minivan. Now, Chairman Louis Schweitzer is betting all his chips on a megadeal to propel his company into the global big leagues. The tall and intense Schweitzer announced on Mar. 16 that he is negotiating to buy a 35% stake in Japan's ailing No. 2 auto maker Nissan Motor Co. for $4.3 billion. Combined, the two would be the world's fourth-largest auto maker. "It's a fast-track route to become a global player," says Arthur Maher, head of European forecasting at J.D. Power-LMC Automotive Services in Oxford.

It's also a marriage of desperation for both parties. Other big Japanese outfits rejected Renault's advances, while Nissan's attempts to cuddle up to both DaimlerChrysler and Ford Motor Co. flopped. But each of the two perpetual wallflowers has something the other needs. The $41 billion Renault, which sells four out of every five of its cars in Europe, gets a valuable entree into the key U.S. and Asian markets, plus access to Nissan's strong engineering and production technology. Nissan, currently staggering under a stupendous $22 billion of debt, gets a life-saving cash transfusion and the use of Renault's European design flair to revamp tired, uninspired models.

CULTURE CLASH? But for a recently turned-around Renault, the Nissan link is a dangerous liaison. Auto-industry experts figure it could be 8 to 10 years before Renault saw a real return on its investment, if all goes well. Meanwhile, potential conflicts over everything from management control to cost-cutting loom large--even though Renault's 35% stake would enable it to veto decisions it doesn't like. If the deal fails, the wasted investment could kill Renault's chances of remaining independent.

As he goes into the final rounds of negotiations with Nissan President Yoshikazu Hanawa, Schweitzer could still pull the plug on the deal. Many analysts wish he would. "You can do a lot of other things with $5 billion," says Steve Haggerty, auto analyst for Schroder Securities in London. He figures that if the deal goes through, the 56-year-old Renault boss has just a one-in-five chance of making it a big success. Chances are that the combined company will bump along with indifferent results. That could be a major drag on Renault, whose earnings are likely to take a 20% hit annually if a deal takes place. That's one reason even Schweitzer has been saying recently that the alliance was only worthwhile if Nissan can be turned around rapidly.

But to do that, Renault might have to empty its own executive benches. Industry insiders say Hanawa has agreed to make Renault's managing director and ace cost-cutter Carlos Ghosn his No. 2 at Nissan with the title of Chief Operating Officer. Renault would also get two or three seats on a slimmed-down Nissan board and draft 30 to 40 executives to Tokyo to help restructure Nissan. But Nissan's problems are enough to daunt even a prodigy like the Brazilian-born Ghosn. The $53 billion auto maker is expected to report consolidated net losses of about $455 million for the year through Mar. 31, quadruple last year's. "Nissan probably shouldn't even be in the auto business," insists one London analyst.

Significantly, both DaimlerChyrsler and Ford rejected an alliance with Nissan in recent weeks. "They had no visible restructuring plan," sniffs one DaimlerChrysler insider.

But Schweitzer really has little alternative. As rivals built world-scale companies in quick-paced mergers, they were edging Renault towards ultimate oblivion as an independent company. "We have to be as efficient as the Japanese and keep our knack for innovation," says Schweitzer. He also needs to keep his nerve. Melding two very different cultures while fending off ferocious competition from global rivals will be tough. But dodging the challenge altogether would have been suicidal.

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