As Nissan Slows, Ghosn Feels the Heat

Few chief executives in Japan can charm an audience like Nissan (NSANY) chief Carlos Ghosn. Whether delivering barnstorming speeches or fielding questions from the floor, it's rare—almost unheard of in Japan—to see a corporate leader so at ease in the limelight. Yet even Ghosn could be forgiven for not looking forward to the announcement of the Japanese automaker's annual results on Apr. 26.

After all, following six consecutive years of record profit, Ghosn will be announcing that Nissan's profits fell in the 12 months through March. If earlier projections prove accurate, Ghosn is expected to announce 11% declines in both operating and net profits to $6.5 billion and $3.9 billion, respectively.

Of course, the disappointing results have been expected. Nissan shocked the markets with a rare earnings downgrade at its last quarterly earnings on Feb. 2, wiping $4.7 billion off its stock price (see, 2/5/07, "Nissan's Stock Gets Blindsided"). Yet news on Apr. 24 that Nissan will offer voluntary retirement to some Japan-based workers and the release of Nissan's unit sales figures for the financial year will provide Ghosn's critics with further ammunition.

Offering Early Retirement

In particular, Nissan's bad year will once again raise questions as to whether the charismatic executive can successfully combine dual roles at Nissan-Renault, where he has also been chief executive officer since April, 2005 (see, 4/27/05, "Ghosn On His Double Duty").

While not on the same scale as the February earnings downgrade, the voluntary retirement packages in Japan mark Nissan's first domestic job cuts in eight years. Under the terms of the deal, Nissan will offer redundancy to non-management level employees over the age of 45 with a minimum of five years service with compensation based on years of service.

Reports in the Nihon Keizai, a Japanese business daily, suggest that around 12,000 employees will be eligible, although Nissan says that it expects about 1,500 employees to accept the offer. "The voluntary retirement package is primarily designed to balance staffing levels with assembly requirements, taking into account production mix and productivity gains," Nissan noted in a statement. The markets appeared to cautiously welcome the move. At close of Tokyo trading on Tuesday Nissan's stock rose 0.7% to $10.36 while the market as whole fell slightly.

One of the Worst Hit

The offer of early retirement in Japan reflects the tough domestic market. Sales numbers for the financial year, released today, show just how tough. Nissan's financial year sales in Japan, excluding 660cc minicars, slumped 17% in 2006 to 596,000 units, while its market share fell to 16.6% from 18.4% a year earlier. In March, sales dropped 15.6% year-on-year to 87,385 units.

While Nissan isn't the only one struggling—Japan auto sales touched a 20-year low last year—it is among the worst hit. One problem is that the only segments of the market growing are minicars and the luxury sectors—where Nissan isn't a strong competitor.

"I don't think the recent announcement of voluntary redundancies to employees is an answer," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo. "The market may want to hear something about more innovative, attractive new models to boost sales. We want Nissan to mean 'innovation'."

Trouble In North America/leadin> Just as worrying, the important North American market—which accounts for about 60% of Nissan's operating profits—also shed sales in fiscal 2006. In all, sales dipped 3.7% to 1.035 million units due to weak truck sales and a lack of new models during the first half. Nissan also offered an early retirement package at its auto and engine factories in Tennessee.

Added to weak sales at home, that means Nissan now is now unlikely to meet a commitment to sell 4.2 million units per year globally by March, 2009.

"I don't realistically think there's a lot they can do in the near term," says Andrew Phillips, an analyst at Nikko Citigroup in Tokyo. "They need to come up with more products that are better suited to the market and smooth out their product cycle. That's not an easy thing to do quickly."

By contrast, Japanese rivals go from strength to strength. Toyota (TM) today announced first quarter global sales of 2.35 million, a rise of 9.2%—enough to take them past GM (GM) for the first time. GM's sales rose 3% to 2.26 million during the quarter. Honda (HMC) today announced record production for the tenth straight financial year. For the year ending March, 2007, Honda produced 3.7 million units, a rise of 7.5% on a year earlier. Honda posts its earnings tomorrow.

New Models Eagerly Anticipated

For all the doom and gloom, Ghosn will be able to find some positives when he delivers Nissan's results. While truck sales remain weak in the U.S., new models are selling well. Cars like the fully remodeled Altima sedan—Nissan's best selling U.S. model—Versa subcompact, and Infiniti G35, all released in the last nine months, helped U.S. sales grow 7.9% in March.

What's more, yet-to-be-introduced models such as the Rogue compact crossover sport-utility vehicle are eagerly anticipated. One of Nissan's problems in the U.S. is that it borrowed from the Big Three's copybook and focused on gas guzzlers just as gas prices rocketed.

This meant that at a time when compact crossovers are all the rage, weak sales of Nissan's 5.6 liter full-size SUVs and pickups have been weighing down profits. By contrast, smaller, compact SUVs have been selling well for rivals. "I'm sure they hate being compared to Toyota and Honda all the time, but products like the RAV4 and CR-V sell like hotcakes," adds Nikko Citigroup's Phillips. The Rogue could belatedly provide a worthy competitor.

A Revamp of Sales Operations

Ghosn can also point to series of initiatives since the shocking earnings downgrade in February. In addition to voluntary retirements in Japan and the U.S., on Mar. 16 Nissan announced a management shakeup which included stripping himself of responsibility for North America (see, 3/26/07, "Ghosn Juggles Nissan's Line-Up"). That should give him more time to focus on running Nissan and Renault.

Then, on Mar. 27, Nissan announced a revamp of its Japanese sales operations, which includes shedding excess staff and relocating some branches. "The company said that they would announce a series of profit improvement plans," UBS analyst Tatsuo Yoshida wrote to clients at the time. "This network improvement plan is one of them."

Nissan is also trying to bolster its green credentials. While Toyota and Honda nabbed praise for their leadership, Ghosn has appeared agnostic on hybrids. Indeed, Nissan's first hybrid, a gas-electric version of the Altima, relies on Toyota technology.

Clean Diesels for the U.S.

In recent months, though, Nissan has been taking steps to improve its environmental standing. On Apr. 13, Nissan and electronics maker NEC (NIPNF) revealed that they had signed an agreement to establish a joint-venture company called Automotive Energy Supply Corporation which will focus on the development and marketing of advanced lithium-ion batteries. That's timely given that Li-ions are expected to be vital for the success of next-generation hybrid systems and electric vehicles.

And on Apr. 18, Nissan committed to producing a clean diesel for the U.S. market, using engines developed with Renault, by 2010. "You can expect to see more diesel engines in our product lineup in Europe, Japan, North America, and China by fiscal year 2010," Ghosn said in a speech at the Council on Foreign Relations, adding that the engines would clear stringent U.S. Environmental Protection Agency Tier II Bin 5 emissions requirements.

In perhaps his strongest defense of all, Ghosn can also point to Nissan's profit margins which still stack up well against most automakers. If Nissan were based in Europe or the U.S., and were not compared directly with Toyota and Honda, few would be griping. Yet unless earnings resume their growth path in the near future, that might not be enough to quiet critics.

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