For Nissan, a Game of Who'll Blink First

Talks with potential Chinese partner Dongfeng are stalling

When Carlos Ghosn thinks about China, he thinks big. The chief executive of Nissan Motor Co. (NSANY ) says the Chinese market is his company's "No. 1 geographic priority." Ghosn has elevated Nissan's China business unit to division status--on par with its Japanese and U.S. operations--and boosted its stake in a Chinese truck venture from 5% to 30%. The linchpin of Ghosn's strategy: A car-production joint venture with Dongfeng Automobile Co. in Wuhan. Back in April, Ghosn said he expected to sign such an agreement "in a few weeks' time." In June, Nissan again thought it was closing in on an agreement.

But getting China to work on Ghosn's timetable is another matter. Nissan has been unable to come to terms with the hard-nosed executives of state-owned Dongfeng, and in late August a new round of negotiations was postponed. "There is progress, but no resolution yet," Ghosn told BusinessWeek recently.

The slipperiest issue: Nissan's exposure to Dongfeng's debts, which China Minzu Securities estimates at $3.8 billion. Another problem is the size of Nissan's stake in the venture. Ghosn wants management control, but so far Dongfeng appears unwilling to cede that. Then there are Dongfeng's 122,000 workers--far more than the company needs, experts say. If the two sides can't come to an agreement soon, Nissan may have to look elsewhere, warns Executive Vice-President Norio Matsumura. "We'd like to have something to say in the fall, but if not it will be very difficult" to continue talking with Dongfeng, he says gravely.

Meanwhile, Nissan is in danger of losing ground to competitors in China. Last year, Volkswagen (VLKAY ) and Audi together sold 361,000 vehicles in the country, including Santanas, Passats, Polos, and Audi A6s made at factories in Shanghai and the northeastern city of Changchun. General Motors Corp. (GM ) sold 58,000 cars, mostly Buick Regals and Sails produced in Shanghai. Honda Motor Co. (HMC ) made 50,000 Accord sedans and Odyssey minivans last year at a former Peugeot production plant in Guangzhou that it purchased in 1998. In October, Toyota Motor Corp. (TM ) says it will start making the first of a planned 30,000 subcompact cars annually at a new plant in Tianjin.

By contrast, Nissan sold 42,000 vehicles in China last year. That includes Cefiros and Sunnys imported from Japan and Bluebird midsize sedans assembled under license by Dongfeng affiliate Fengshen Automobile Co. That's a far cry from the company's vision, which encompasses a full product line built in China--from entry-level cars on up, says Patrick Pelata, executive vice-president for product planning. "There's a lot of potential" in China, Pelata says.

Tapping that potential--the market is expected to grow 15% to 20% annually--would be far easier with Dongfeng as a partner. The carmaker, China's third-largest, offers an established production base and a nationwide sales network, so Nissan won't need to build all-new factories and dealerships. What's more, the Dongfeng group already assembles Nissan cars, so the two companies aren't complete strangers. Meanwhile, France's Peugeot Citroen recently announced it would revive a flagging joint venture with Dongfeng by launching a new Citroen model by 2004, so there is some pressure on Nissan to get its deal settled quickly. Company sources say Nissan is looking to wrap up an agreement before the end of September.

That would likely come as a great relief for Ghosn. Failure to do a deal with Dongfeng could force the Japanese auto maker to go through a prolonged, painful reassessment of its options in China. Teaming up with a smaller Chinese company would involve a whole new round of complicated discussions and negotiations following the effort already put into wooing Dongfeng. If Ghosn wants a local partner in China, he needs to think not only big but also fast.

By Chester Dawson in Tokyo

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