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The odd couple

The agreement signed back in March 1999 stipulated that Renault acquired 36.8 per cent of the equity of Nissan. Even though the French carmaker now holds 44 per cent stake in Nissan, it is in fact the latter who has bypassed its controlling shareholder in that it now claims the highest profit margins of any mass-market, global car manufacturer. The initial €4.4bn ($5.4bn) investment by Renault is now worth a staggering €15bn ($18.4bn). This is profit worth gloating over.

Nissan CEO, Carlos Ghosn, has transformed Nissan since being in control of it
Renault CEO Louis Schweitzer, the sucessful architect behind the Renault-Nissan alliance

Professor Garel Rhys, industry expert and director of the Centre for Automotive Industry Research at the Cardiff Business School in the UK, thinks the success is down to three key factors, two made by the Alliance, one down to shear luck.

Firstly Renault made a big decision from the start to address the issue cost, mainly in Japan. “By Renault effectively taking control, it was able to look at the relationship between Nissan and its suppliers, to see if that was working to add the efficiency in the plants themselves,” he explains. The outcome of this survey in a sense was to destroy the myth that every Japanese car company by definition is efficient. “This is the sort of myth perpetuated by things like: ‘if it is Japanese it is brilliant’,” Rhys notes. The reality was slightly different. As with other nations, there were some good and some lousy companies. The close relation between Nissan and its suppliers in Japan had in fact led to complacency. The open book approach – or sharing each other’s costs – did not lead to efficiency as people had argued. The new French boss attacked both this relationship as well as Nissan’s manufacturing capacity. This followed plant closures, a controversial if effective move as it marked the first time a major plant was closed in Japan. Nissan accepted this, as it knew if it did not it would be in trouble.

Second on the list of road to recovery, Rhys thinks was the introduction of a family of fresh products, ones that really interested the consumer. “Like most Japanese companies, Nissan is conservative, run by very conservative people at the top,” he explains. What Renault did was to give the designers and the young engineers power. Much of Nissan’s current success can in fact be attributed to this move that in turn encouraged the likes of Shiro Nakamura, chief of design, to be more autonomous, be a decision maker. Rhys sees many of the styling elements on the new products coming from Renault itself, most notably on the Primera where the rear end can easily be mistaken to that of the Laguna. Whether or not this is true, the crucial fact is that Nissan cars acquired a sense of desire.

The third aspect, Rhys points towards, is something that the Alliance cannot really take credit for, and that is the dollar-yen exchange rate. “The amount of profit Nissan is earning in the US is distinct from elsewhere and although it is impressive, it also makes the carmaker vulnerable. It needs to be much more efficient and profitable in other parts of the world, and at the same time ride the wave while it can,” he adds. The Americans may still love Japanese products, but it is, in fact, still Toyota and Honda who are well ahead of Nissan in that market. The latter nevertheless can be noted as a solid player there with improved market share, but with some way to go. Nissan can sell anything in the US, convert it to the yen and make an amazing profit. “You actually see an amazing increase in your profitability in Japan,” Rhys says. “These are the three fundamental factors in Nissan’s comeback: two are clever the other is a gift,” he says.

Improved performance in tough conditions

Amid sluggish trading conditions and uncertain economic times, Renault improved its performance mainly in the second-half of 2003. Renault and Nissan’s combined vehicle sales reached 5.3 million in 2003. The Alliance sold a combined 5,357,315 units in 2003, up 4.2 per cent over the previous with Nissan and Renault selling a total of 2,968,357 and 2,388,958 vehicles, respectively. The Alliance global market share came to 9.3 per cent (4.1 per cent for the Renault group and 5.2 per cent for Nissan).

Renault continued to expand outside Western Europe, with sales growth of 9 per cent mainly in Central and Eastern Europe, specifically Russia. There was a pick up in the Turkish market of 127 per cent and an 18.8 per cent rise in sales at Dacia. Although the market fell nearly 18 per cent in Korea, Renault Samsung Motors grew its share of the passenger car market to 10.8 per cent.

Renault’s 2003 net income jumped to €2.5bn ($3bn), with a 3.7 per cent operating margin. The carmaker grew revenues by 3.8 per cent to €37.5bn ($46bn) on the success of its range and its strategy of international expansion, it claims. The automobile division contributed €35.5bn ($44bn) to group revenues, compared with €34.3bn ($42n) in 2002, a 3.7 per cent rise.

Revenues grew thanks to an improvement in the mix and prices of new vehicles in Europe. One of the main factors for this was the success of the entire Mégane II range (3-door and 5-door hatchbacks, 4-door saloon, estate and coupe-cabriolet), Scénic II as well as Espace IV.

Other elements contributing to the upturn were steady growth in diesel sales, a stronger commercial performance in international markets, an increase in spare parts activity and a rise in sales of components to other companies, specifically Nissan. Also contributing to good performance, the company says, was a tightening of general expenses, while purchasing and production costs continued to decline. The second three-year cost cutting programme was completed this year, in line with its target of €3bn ($3.7bn).

For 2004, Renault expects the automobile market to edge upwards in Europe and increase slightly in the main countries in which the group operates outside the region. Amid sluggish markets, Renault expects to benefit from a Mégane family as well as from heightened competitiveness, primarily as a result of cooperative ventures within the Alliance. In addition, Renault has said it will pursue its international development and will be looking to grow volumes outside Europe.

The American dream

Rhys sees this move as a huge effort by Renault that will ultimately cost a great deal of money. The carmaker will need to invest heavily in new products that will appeal to the US market, a far cry from its current successful models that are mainly superminis like the Clio, or smaller city cars like the Mégane hatch.

“What you really need is the upper medium and the bigger vehicles in the US. The big sellers by the Japanese makers there are products like the Toyota Camry and Honda Accord,” says Rhys. He explains that this is perhaps not where the French carmaker’s strength lies. “So there is much to be done before Renault can contemplate entering America and if it says 2020, by then things might have completely changed, people would have forgotten what they had said and if it’s no good, it won’t go there,” he adds.

The China syndrome

Despite China’s recent popularity with carmakers, Renault has been slow in entering the market and seems to want to use Dongfeng Motor, Nissan’s China partnership, instead of setting up its own deal. Rhys has strong, if controversial views on investing in the region.

“Everyone is piling into China,” he points out. “It’s like a rerun of the motoring industry in the 1920s and 30s and most of these manufacturers will find that it may just end in tears with so many of them there.”

In 2002, Volkswagen had 40 per cent of a one million market in China and last year it had 30 per sent of a two million market. “Following in its footsteps is General Motors with nine per cent and lagging behind is a big group of carmakers who between them hold between six and three per cent. Then there is a much longer trail of companies hanging on from three to one per cent.”

In this scenario Renault is one of many, therefore it may be wiser to start looking at other possibilities. Ford, for example, has been ignoring Poland and Hungary and is instead thinking very seriously about Russia. “In my view Russia is about ready to take off,2 says Rhys. With all eyes on China many are missing out on ripe territories like Russia, or even India.

India is a vital future market for carmakers. Up until 2001, car production there was more or less the same as in China. It was only in 2002 that the Chinese pulled ahead a bit and then a great deal by 2003. “The Indian situation is not nearly as fragmented as the Chinese,” explains Rhys. The dominant players there are Maruti, Suzuki, Tata and the Korean company Hyundai which is doing extremely well there. Rather than putting all their eggs in the Chinese basket car companies should look at something different. “India in many ways is more promising than China,” says Rhys.

Most notable on the new market front for Renault is another promising land, Iran. With 75 per cent of the population under the age of 30, it certainly seems promising on paper. Renault has, in fact, just signed a big deal with Iran establishing a joint venture company called Renault Pars. The French partner will hold a 51 per cent stake in the new company, while the three Iranian companies – Iran Khodro, Saipa and the Industrial Development and Renovation Organisation – will jointly form the remaining 49 per cent. Starting from 2006, Iran Khodro and Saipa will start rolling off vehicles produced under the joint venture company from Renault’s Dacia-derived X90 platform, with each manufacturer having an initial 150,000 units.

Rhys notes that although Iran is a big potential market, it is also perhaps a limited one because the GNP per head on average must be more than the price of the car for a real take-off. So there is potentially a huge market, but as long as Iranians can afford the cars. “Also what you must do is to get the host country to agree not to have 100 per cent Iranian content. You must have components in big volumes, which means you might have to import those. So there are some issues there,” Rhys adds.

Overall, assuming there are no significant changes in major exchange rates compared to the current situation, Renault’s internal momentum, it claims, should enable it to achieve a group-operating margin of around 4.5 per cent of revenues for 2004. Renault also anticipates a further increase in net earnings this year.

The rising Nissan

The Japanese wing of the Alliance announced that its global production, domestic sales and exports all rose in January compared with the same month a year ago. Global production in the first month of 2004 climbed 8.9 per cent from the same period a year ago to 249,365 units helped by rising output in the US and Europe.

Global production in January climbed 8.9 per cent to 249,365 units as overseas production rose 20.2 per cent to 135,758 units. In the US, production jumped 77.6 per cent to 56,369 units thanks to the successful launch last year of the Quest minivan, the Armada sports-utility vehicle and the Titan pick-up truck at Nissan’s new Canton, Mississippi plant.

In Japan Nissan did better than the last few years mainly due to the popularity of the Cube brand – the Cube was released in October 2002 and the Cube Cubic launched last September. Rhys points out that although there has been an increase of Nissan’s market share in Japan for the first time in a decade, this may have also been due to Honda’s shares collapsing four per cent last year there. Toyota, on the other hand, climbed over 40 per cent for the first time in 10 years in Japan, but Nissan also increased its market share by about two per cent. This crucially marks the first reversal of decline in over a decade, Rhys notes.

In Europe Nissan was beginning to move up the scale. "It has been stuck at about 2 - 2.8 per cent there, still not up to the 3 per cent they were in the early 90s, therefore it is still some way to go, but at least they are heading in the right direction," Rhys explains.

Nissan claims that it has so far successfully completed Nissan 180, a bold three-year revival plan that started in April 2002. The plan called for growth, profit and zero debt. This led to a series of cars designed with a European angle, most notably the Primera and Micra, which are now major success in Europe.

Nissan 180 has also led to a major reshuffling on the managerial side in recent months. The changes are designed, claims Nissan, to ensure the successful completion of the plan. The company is also preparing its organisation for the swift launch of its next three-year business plan, highlights of which Nissan will unveil later this month.

Some of the main management changes include Ghosn taking over responsibility for US operations. Executive vice president Norio Matsumura, currently responsible for this region, will become responsible for the Japan operations. Additionally, Nissan’s marketing and sales division in Japan will be reorganised to make it more customer focused and efficient.

Senior vice president Toshiyuki Shiga will take full management control of Nissan’s China operations, currently overseen by Ghosn. Shiga will also continue management of the company’s general overseas markets (GOM) operations, comprised of all markets except Japan, the US and Europe. All changes are effective as of this month.

Renault's Romanian adverture

Since Renault’s involvement with Dacia in 1966, much has been done to boost the image and sales of the Romanian carmaker. Apart from the Solenza, the vehicles currently being produced by Dacia are based on former models in the Renault range. In 2003, the carmaker became the leader in the Romanian market with a 44.6 per cent share of the total car and LCV market. It now aims to completely renew its range starting in 2004.

Dacia’s chief weapon will be the X90 – known as the E5,000 – a Mégane-sized vehicle scheduled for launch in late 2004 at the Paris Motor Show. The idea was to design a totally new, up-to-date and reliable car that is affordable for customers in the local markets – Romania, the surrounding Eastern European countries – as well other countries such as Russia, the Mediterranean countries outside Western Europe, and the Americas. The X90 will also be assembled by Renault outside Romania: in Russia, Morocco and Colombia starting in 2005, and, as mentioned, in Iran starting in 2006.

Designed partly on the Alliance's B platform, it will have a modern, conventional look to appeal to buyers in countries where car ownership is still the exception rather than the rule. Saloon and estate versions will be launched first, followed later by a pick-up. The production target is 500,000 vehicles per year by 2010: 200,000 units in Romania, and over half of the production outside the country – in Russia in particular – starting in 2005. Dacia’s strategy is to achieve a “French” quality guarantee on a level with the Renault 19.

Dacia’s story has been fairly successful with 69,166 vehicles sold in 2003, of which 11,292 exports, up from 57,681 vehicles sold in 2002, of which 4,939 exports. Therefore the Alliance’s Eastern European front is doing well, at least on the export front.

Renault Samsung Motors (RSM) was formed when Renault acquired the automobile division of the Korean group Samsung back in 2000. Currently marketing two models – the SM5 and SM3 – the company is planning to make a range of vehicles based on Renault or Nissan models adapted for the Korean market, using its ultra-modern manufacturing plant with production capacity of 240,000 vehicles per year, an R&D centre and a network of 154 sales outlets. The SM5, coupled with the SM3, enable RSM to cover nearly 25 per cent of the market in Korea.

What the Europeans have is a particular interpretation of brand value and of what is a European car. The Japanese have now realised the importance of establishing European design centres and giving a European interpretation of what is effectively a world car, explains Rhys. The Japanese in America tend to do well with cars that are smaller than the American ones. The Europeans, however, already make Japanese size cars therefore the competition here is much more head on. Rhys notes that one advantage the Japanese had in the early 80s and early 90s was that the customer saw them as much better products. Now that the Europeans have fought back, the Japanese are struggling to improve their market share.

The company most noted for its accelerated growth in the last couple of years is not Nissan but Toyota. It has only been in the last year that Nissan has begun to move upwards. “It could well be at its three per cent by the end of the year because it’s possible that the Japanese this year will have a record market share collectively in percentage terms, but mainly because of Toyota,” adds Rhys.

Toyota has realised that apart from good engineering you must also concentrate on product excellence, and for the products in turn to fit into specific markets. Unfortunately up until now, the products Nissan was making were not as acceptable as the ones from Toyota or Honda. “10 years ago, Nissan was twice the size of Honda, now Honda is bigger. It has been a tremendous decline for Nissan,” says Rhys. The carmaker was also number two in Japan, only 200,000 unites behind Toyota with chances of even passing it, but this did not happen and instead it went backwards, so much that Suzuki was on its tail. “It’s therefore a turnaround, but it hasn’t finished its process yet. I won’t get excited yet until profits increase systematically all around the world, and when there are substantial profits made in places other than the US,” he adds.

There is a fourth ingredient that has made this recipe so unique, one that perhaps should not be undervalued or diminished, and that is the sole presence of one Brazilian born, French Lebanese national called Carlos Ghosn, currently CEO of Nissan and soon to be heading both sides of the Alliance. In a bold move, he is expected to return to Paris next year to assume the role of current Renault boss Louis Schweitzer – the man behind the initial take over five years ago – who will remain as non-executive shareholder. It will be interesting to follow what will come of Renault and Nissan under Ghosn’s leadership. It is certainly being viewed as a controversial move by industry experts.

Rhys points out that it is interesting that in many ways the French have been the most innovative of people, but as Nissan has improved economically, Renault has regressed. “In order to make the whole empire do well, you must keep all balls in the air. The trouble in the modern world is that people work in the world of the soundbites,” he says. “They want to make judgement too quickly. There are around 30 books written in America about the DaimlerChrysler takeover and, of course, they all say it’s a failure.”

It took PSA Peugeot Citroën over 12 years to integrate the brands fully. “It is too early to say if Renault-Nissan has worked or DaimlerChrysler has failed. There are still so many things to be done. They need to make sure they get the economies of scale, make the products people want and enter new markets in the right way,” explains Rhys. “In Scottish terms: the jury is still out. There is still a lot of evidence to come out. At the moment it is promising, but not conclusive.”