Dangerous Liaison: Renault And Nissan

It could take 10 years for the combination to yield 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. In the global consolidation race sweeping the industry, neither was the pick of the pack. 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 perennial wallflowers has something the other needs. The $41 billion Renault, which sells four out of 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 $38 billion of debts--over four times its market capitalization--gets a life-saving cash transfusion and the use of Renault's European design flair to revamp tired, uninspired models.

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. Meantime, 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. And if Nissan's makeover fails, the wasted investment could kill Renault's chances of remaining independent. "Renault should focus on what it's been doing"--innovative products, cost-cutting, restructuring, and European distribution, says Gregory Melich, auto analyst with Morgan Stanley Dean Witter in London. "It can be bold and dynamic without a partner."

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 why even Schweitzer has been saying recently that the alliance was only worthwhile if Nissan could 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.

Ghosn and his team certainly have the know-how to turn Nissan around. A former head of Michelin Corp.'s U.S. operations who joined Renault in 1996, Ghosn spearheaded a three-year, $3.3 billion cost-reduction program that is ahead of schedule and already souping up Renault's profits. Last year, Renault slashed 2,700 jobs for the second straight year and boosted productivity by 19%. Ghosn also heads Renault's new tech center outside Paris and has been instrumental in pioneering successful new models, such as the Megane series. "Ghosn is a genius," says Sabine Blumel, auto analyst for brokerage IMI Sigeco UK Ltd. in London.

The risk is that Ghosn will get bogged down at Nissan, while Renault suffers from his absence. Nissan's problems are enough to daunt even a prodigy. 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. Sales plunged nearly 15%, to 621,550 units, last year in the important U.S. market, where poor styling and design have been dogging Nissan for a decade. "Nissan's image in the U.S. is very negative," says auto consultant Wesley R. Brown of Nextrend in Thousand Oaks, Calif. "It's just blah. It has no real excitement."

Plagued by its conservative corporate culture, Nissan has constantly ignored market signals, churning out bland imitations of more successful models by rival Toyota Motor Corp. Also, unlike its competitors, Nissan has failed to shrink the number of platforms on which it bases models to cut costs. It still uses more than 20 platforms, vs. just three at Germany's Volkswagen and five at Renault. "Nissan probably shouldn't even be in the auto business," insists one London analyst.

The biggest impediment to a successful union, however, may be cultural. "You've got two cultures here that are extremely nationalistic and believe that their way is the right way. There will be some major control issues," warns Nextrend's Brown. Renault is betting that, unlike several of its internationally savvier rivals from Ford to Chrysler, it can make a partnership with a Japanese auto maker work first time around. Significantly, though, both DaimlerChyrsler and Ford rejected an alliance with Nissan in recent weeks. "They had no visible restructuring plan," sniffs one DaimlerChrysler insider.

Unlike DaimlerChrysler, Renault needs girth and could benefit from access to Nissan's engineering technology, for instance in fuel-injection engines. "It's a big risk [for Renault], but management may have persuaded themselves that it is worth [it]," says Garel Rhys, head of auto research at the Cardiff University Business School in Wales.

Schweitzer has little alternative. As rivals built world-scale outfits in quick-paced mergers, they were edging Renault toward 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 global competition will be tough. But dodging the challenge altogether would have been suicidal.

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