Nissan Bounces Back, Boosts Outlook

Nissan (NSANY) is the latest Japanese automaker to file better-than-expected results. The Japanese company announced on Nov. 4 that it posted a $90 million net profit for the six months through September. Nissan also cut its full-year loss forecast to $400 million, compared with a previous projection of $1.79 billion. The company attributed the change in its outlook to the impact of government "cash for clunkers" programs as well as strong growth in China. Nissan is also benefiting from a gamut of cost-cutting measures, spelled out in February, designed to see the company through the worst of the financial crisis that sent global auto sales into free fall following the "Lehman Shock" a year ago.

Still, CEO Carlos Ghosn was wary about painting too bright a picture. "We continue to operate in an environment that is volatile and uncertain," said Ghosn in a statement. "Our outlook will remain cautious until we see evidence that economic recovery can be sustained in world markets."

Nissan's improved financial performance comes as the Yokohama-based automaker attempts to position itself as the industry's leading proponent of electric vehicles. Since Nissan lacked hybrid technology of its own, its green image lagged that of rivals Toyota (TM) and Honda (HMC) for years. However, in August the company showed off its Leaf electric car, which will go on sale in Japan and the U.S. in 2010, promises to run 100 miles on a single charge, and cost no more to buy and run than an equivalent gasoline car.

Electric Car Bullishness Alongside French alliance partner Renault (RENA.PA), also led by Ghosn, Nissan is building up enough production capacity to make hundreds of thousands of electric cars a year—far more than any other major automaker. Nissan plans to market the Leaf globally by 2012, and by 2020 Ghosn predicts EVs will account for 10% of total car sales. "The world is eager to address concerns about global CO2 emissions, and we are proposing solutions to meet the environmental challenge," Ghosn said at the Tokyo Motor Show last month. "The solution is mass-marked zero-emission mobility on a global scale."

That bullishness, backed up by $5.4 billion of investment in EVs and batteries by Nissan and Renault, has helped the Japanese automaker's stock price to double this year. By comparison, shares of Toyota and Honda are up 22% and 49%, respectively.

Still, as positive as all that sounds, not everyone is convinced that Nissan is a better bet than Honda, which has avoided annual losses during the current crisis, or Toyota, which on Nov. 4 announced it was quitting Formula One racing as it battles to get back into profit. Indeed, speak with auto industry watchers in Tokyo, and Nissan attracts greater skepticism than many of its Japanese rivals, save the perennially struggling automaker Mitsubishi Motors (7211.T).

One beef is that Nissan's campaigning for EVs is drowning out communication on the rest of its activities. For instance, the company has said relatively little about its plans for light commercial vehicles, which are now a key part of its North American growth strategy. Analysts also want to know more about how Nissan will raise output at struggling U.S. plants, which are underused compared with Toyota and Honda facilities. "EVs are a future unpredictable and unrealized gain—or loss," says Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo, speaking before today's results. "Clearly, there are problems today that they should address."

Persistent Questions There are also doubts concerning the automaker's EV strategy, which, while impressive, could be too ambitious. Few rivals share the view of Nissan and Renault that electric cars will make up a tenth of global sales within a decade. Hybrid cars, 12 years after Toyota introduced the Prius, account for around 2% of global auto sales. Without advances in battery technology and significant cost reductions, analyst Toru Hatano at consultant CSM Worldwide in Tokyo says it will be very difficult for electric vehicle sales to grow as quickly as Nissan hopes. "Many people are doubtful," he says.

It doesn't help that in recent years, Nissan hasn't always delivered on other big-ticket projects launched with great fanfare. One recent example seems to be a $2,500 cheap car for the Indian market. In May 2008, Nissan, Renault, and Indian two-wheeler maker Bajaj formed a joint venture to create the closest rival to Tata Motors' (TTM) Nano for the potentially lucrative and mostly untapped market for cars that cost less than a few thousand dollars. In a statement, Nissan-Renault said the $2,500 car would be ready by 2011, with the joint venture expecting to build a 400,000-unit plant just for that model.

Since then, however, few details have emerged, and it isn't clear the companies will be able to meet their self-imposed deadline. Colin Dodge, Nissan's executive vice-president for Africa, the Middle East, and Europe, said in late October that Nissan's input in the car is now minimal. "The project itself is very difficult," says Dodge. "Doing this car for around $2,500 and getting motorbike drivers to jump into four-wheel vehicles [is] very challenging, [but] the car is coming along." Dodge declined to comment on when the car will be released or if it will be badged as a Nissan, Renault, or Bajaj.

Addressing Nagging Problems Then there's Nissan's big bet in the U.S. market. In 2003 it inaugurated a new 400,000-capacity plant in Canton, Miss., as part of an effort to step up sales of trucks, minivans, and SUVs. But even when auto sales were robust, Nissan was beset with quality problems and missed sales targets. In October the company stopped producing the Quest minivan in Canton, and it plans to stop making the Infiniti QX56 large SUV there next year. As of October, production capacity utilization at Nissan's U.S. plants was 44%. "Nissan really ramped up, and at one point it looked like they needed it," says IHS Global Insight analyst Rebecca Lindland. "It's now obvious that they don't."

To address those problems, Nissan will begin making a new lineup of commercial vehicles at Canton. Meanwhile, it is retooling another plant in Smyrna, Tenn., with the aid of a $1.6 billion Energy Dept. low-cost loan, to make electric cars and vehicles. Last month, Ghosn said Nissan's U.S. plants could become export hubs, taking advantage of the weak U.S. dollar by making vehicles for the Middle East that are currently built in Japan. Analysts welcome plans to address the situation but would prefer a steadier approach and fewer grand announcements. "Their focus changes very quickly," adds Yoshida at UBS.

While the gripes may be justified, that doesn't mean Ghosn's EV strategy won't succeed. For one thing, EVs are winning billions of dollars in government backing to build or adapt plants, as in Smyrna, or to fund large subsidies which may spur sales of electric vehicles. What's more, while Nissan's star may have dimmed in recent years—its full-year operating profit margin has fallen every year since 2004—Ghosn is still lauded for engineering a legendary rescue act at the company. After he joined the company in 1999, when Renault took a controlling stake in Nissan, it went from being a basket case to one of the most profitable companies in the industry. If nothing else, the Nov. 4 results show once again that Ghosn remains a CEO for a crisis.

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