Smoothest Combo On The Road

When Renault nabbed a controlling stake in Nissan in 1999, skeptics howled that the $5.4 billion investment would bankrupt the French carmaker. But Renault Chief Executive Louis Schweitzer had a grand vision. Nissan, he believed, could become a pillar of a globe-spanning alliance that would help boost Renault from a regional player to one of the world's top carmakers. "In the short term, Nissan needed Renault. In the long term, Renault needed Nissan," says Philippe Lasserre, professor of strategy at INSEAD management school in Fontainebleau.

Against all odds -- just ask the managers of the DaimlerChrysler (DCX )-Mitsubishi alliance -- Schweitzer's vision has become a reality. Together, Renault and Nissan sold 5.4 million cars in 2003, placing them fourth behind General Motors (GM ), Toyota (TM ), and Ford (F ). Nissan already enjoys the fattest margins of any big industry player, while Renault is Europe's No. 1 brand and is expanding rapidly into developing markets. Now, Schweitzer -- together with his designated successor, Nissan CEO Carlos Ghosn -- is ready to hit the accelerator. "I don't feel we have reached the potential of what this alliance can achieve," Schweitzer says.

That's a big change from 1999, when neither Nissan nor Renault struck anyone as a global contender. But while Ghosn was slashing costs and dismantling supplier keiretsu, Schweitzer was putting the French giant through its own paces -- with a helping hand from Tokyo. Schweitzer sent dozens of Renault managers and hundreds of factory hands to Nissan plants to bone up on everything from the most efficient way to hold screw guns to strategies for flattening management hierarchy. Then in 2003, Renault imported 100 Nissan employees to help oversee the launch of the Megane compact sedan, which helped trim both launch and warranty costs (the company declines to say by how much).

Schweitzer also shook off Renault's parochial French management culture and began pushing his global strategy. He set up assembly lines in Russia, Turkey, Iran, and Brazil. In 1999 he snapped up Romania's hapless Dacia brand, investing a total of $1.5 billion over five years. The goal: Use Romania's cheap but skilled workforce to make a $6,000 car for developing markets. That push bore fruit on Sept. 9, when Dacia launched its no-frills Logan sedan. By 2010, Renault expects to sell as many as 700,000 Logans annually from Bucharest to Bombay. "While we were making the technological move to cooperate with Nissan, Renault went global," says Pierre-Alain De Smedt, Renault's engineering chief.

La plus grande surprise: To get the global message across, English is now the lingua franca at Renault's Paris headquarters -- and top managers must pass tests to make sure their language skills are up to snuff. English is also the language of the 12 cross-company teams from Nissan and Renault that meet once a week by phone or in person to hammer out collaboration in everything from anticorrosion solutions to engine technology. The process can be laborious, but it pays off in harmony. In a recent deadlocked debate about which powertrain to use on a common platform, De Smedt and his Japanese colleagues needed six months to sort out a decision. "We don't force issues," says De Smedt.

Another big Schweitzer push: safety. Renault now ranks No. 1 in Europe in crash tests performed by London-based Euro N-Cap, and all five of its major model lines have earned five stars, the top score. Toyota ranks No. 2 with three models fetching five stars. "Renault has become the new Volvo," says Commerzbank (CRZBY ) analyst Adam Collins.

True, Renault's foray into new markets has squeezed earnings. Operating margins fell to 3.7% last year from 6% in 1999. But analysts say the company is poised for strong growth and rising profits. Sales in the first half of this year rose 11%, to $25 billion, and net profits surged 28.5%, to $1.84 billion, buoyed by a hefty dividend from Nissan, strong sales of the Megane series, and growing earnings in developing markets. And starting next year, the first real cost savings from shared components and engines will hit the bottom line, after the debut of Renault's first two models developed in conjunction with Nissan: the Logan and the Renault Modus minivan, which shares much of its genetic material with the Nissan Micra. For Renault alone, the cost savings from such sharing could reach $550 million next year and twice that in 2006, Commerzbank estimates.

Ghosn will still face challenges when he takes over as CEO next April. One thorny problem has been larger cars, an area where the French giant has been traditionally weak. Analysts say Renault will sell fewer than 10,000 of its $38,000 Vel Satis luxury sedans this year, a fraction of the initial target of 50,000. In Romania, meanwhile, Dacia is running smoothly, but the expat management team that has been in charge is now gradually handing control back to locals. Another dilemma: Ghosn will have to decide whether to bring Renault back to the fiercely competitive U.S. market. Schweitzer has said Renault aims to return to the U.S., but not before 2010, giving it time to develop new models tailored to American tastes. Finally, Ghosn will have to keep Renault's global push on the growth track, and deepen the integration between Tokyo and Paris. "There is much more to do to unlock the cost savings and economies of scale," says Garel Rhys, professor of automotive economics at Cardiff Business School at University of Wales. "Both companies have to fire on all cylinders." At least when Schweitzer hands the keys to Renault over to Ghosn, he'll have the satisfaction of knowing his grand alliance has passed more milestones than anyone thought possible five years ago.

By Gail Edmondson in Paris

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