Can Nissan's Ghosn Change GM's Route?
Carlos Ghosn is a shrewd and charismatic auto executive, an exacting cost-cutter, and the master of the improbable corporate salvage job. The CEO of both Nissan (NSANY) and Renault (RNSDY), he has tremendous industry street cred, no question. But would the Brazilian-born Ghosn really add much to the heated discussions in Detroit right now about how to save General Motors (GM) that chairman and CEO G. Richard Wagoner and his board haven't already figured out?
That question is being tossed around the global auto industry following news on June 30 that billionaire GM investor Kirk Kerkorian, whose investment company, Tracinda, owns 9.9% of GM, had approached Wagoner and GM's board about considering a tie-up with Renault and Nissan. All three company boards are exploring a possible alliance that Wall Street analysts think could involve a $3 billion or so capital infusion by Renault-Nissan in exchange for an equity stake of roughly 20% in GM.
A July 5 report in the business newspaper Nihon Keizai suggested Japanese and French auto makers are most interested in a tie-up that would focus on cooperation in parts procurement and environmentally friendly engine designs and safety technologies. However, neither Renault nor Nissan would part with billions in cash for a significant investment in GM without a major managerial role carved out for Ghosn and his team.
CHANGE OF PACE.
Sources close to Tracinda say the investment firm actually wouldn't mind seeing Ghosn take the top job at GM. Yet such talk may be part of a pressure campaign by Kerkorian to get Wagoner to sign onto a far more radical restructuring plan than the one-third cut in GM's workforce and 20% reduction in production capacity now underway (see BusinessWeek.com, 6/30/06, "Kirk Makes His Move on GM").
A serious tie-up between GM and Renault-Nissan would definitely be a game changer for the global industry. The trio would have combined sales of $327 billion and sell 14.3 million cars and trucks a year (see BusinessWeek.com, 7/2/06, "The Trio that Could Transform Autos").
They would also spend a staggering sum on parts annually. There are potentially huge savings to be had by combining operations and jointly purchasing components. But what looks good on paper is often exceedingly tough to execute in reality.
GM's track record on the alliance front is patchy, and last year it actually paid Italy's Fiat $2 billion to exit their tie-up. Daimler's (DCX) 1999 acquisition of Chrysler has yet to live up to its billing, and its tie-up with Japan's Mitsubishi Motors ended in tears. "Every M&A guy will give you billions of synergies if you even think about any kind of alliance," DaimlerChrysler chief Dieter Zetsche told foreign journalists in Tokyo when asked about finding benefits from allied automakers sharing platforms. "In the real world it's somewhat tougher."
Ghosn's turnaround at Nissan is a rare counter-example. Back in 1999, Ghosn was dispatched to a Nissan with $12.2 billion in net debt and collapsing markets at home and abroad. Costs were trimmed first by 20% during the three-year Nissan Revival plan and then by 15% during the subsequent Nissan 180 plan, which ended last year.
Top line growth was just as impressive. By last September, Nissan's unit sales surpassed 3.6 million—a million more than three years earlier, and Nissan is now targeting 4.2 million by fiscal 2008. Today, Nissan delivers the best profit margins among major auto makers, including arch-nemesis Toyota.
Yet Nissan analysts fear Ghosn is in danger of serious managerial overreach if he expands his responsibilities to GM in whatever capacity. It also remains unclear whether a multibillion dollar tie-up with GM would make for a smart use of capital for Nissan and Renault or their shareholders.
"It is our view that any tie-up with GM would not bring Nissan any advantages over the short run," Noriyuki Matsushima, an analyst at Nikko Citigroup in Tokyo pointed out in a note to clients. "There is no guarantee whatsoever that just because Nissan succeeded, an attempt to turn GM around would succeed."
There are sound reasons for saying that. At Nissan, Ghosn and his team were given carte blanche to take radical action after France's Renault (RNSDY) took a controlling stake in the Japanese auto maker. Unless Ghosn were to somehow end up in the top job, he would merely amount to one voice among many, though presumably on GM's board.
With a 20% stake, Nissan and Renault would be key players, but not necessarily the most powerful ones. "In order to fix GM, Nissan/Renault has to have at least 34% of equity, or preferably more than 50%," says Koji Endo, an analyst at CSFB in Tokyo.
Short of that, Nissan/Renault wouldn't be able to place its executives in any of GM's most critical jobs such as chief financial officer, chief operating officer, and top design czar. Nor would the duo be able to push through even tougher job cuts, plant closures, and benefit cuts should these companies decide that's needed. "Unless this happens, GM's fundamentals will remain unchanged," Endo says.
Also, turning around a GM that lost $10.6 billion last year (it managed a first-quarter profit of $445 million), $90 billion in pension liabilities, and massive retiree health care costs would add up to a far more complex feat than saving a middle-size carmaker like Nissan. Ghosn was lucky in several respects. Nissan had a deep bench in engineering—and with the help of top Nissan designer Shiro Nakamura hired from Isuzu—Ghosn was able to jazz up portions of the company's model lineup quickly. That had an immediate impact on sales, and boosted morale.
Nissan was also in a position to raise cash quickly by selling land and equity stakes it held in Japanese suppliers. That came on top of the billions of dollars of savings that Ghosn and his team squeezed from suppliers. Most crucially, Ghosn had the full support of Nissan employees and their unions. GM doesn't have those advantages. "Success at Nissan may not be a good precedent for GM," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo.
Also, it isn't a snap saving huge sums of money by combining parts purchases at GM, Nissan, and Renault, according to Daimler's Zetsche. "When you refer to the most recent speculation of that alliance, you're talking about pretty high volumes but reduced incremental saving potential," he says, noting that when unit increases from mergers amount to millions of vehicles, it gets harder to eke out savings. "There are very few suppliers that are able to offer you parts in that quantity, and the scale effect goes to zero."
Finally, it's far from clear whether Ghosn can effectively run the Renault-Nissan alliance, let alone devote some of his managerial brainpower to GM. Despite record profits of $4.5 billion in the year through March, 2006, sales in the vital North American market are falling at a time when Honda and Toyota have been gaining market share.
In June, Nissan's U.S. sales fell by 19%, although Nissan should get a boost from several new models, including remodeled versions of the best-selling Altima and Sentra sedans later this year (see BusinessWeek.com, 6/1/06, "Potholes Ahead").
Ghosn has never been one to shy away from a challenge, and he may well see a strategic tie-up with GM as a unique chance to position Renault-Nissan for fast growth in the years ahead. This guy is also extremely ambitious. If the deal goes through and Ghosn ends up with a big say in GM's future revival efforts, he will definitely be held responsible for the results—good or ill. If so, one of the more storied car industry careers will be hanging in the balance.
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