The Renault-Nissan merger and what it means for the automobile industry

By Anant Gupta

Renault and Nissan seem to be on the path of a merger as media reports emerged of the consolidation of a 20-year old Renault-Nissan alliance into a single entity. This news serves as an indication by the alliance to step up their game in the highly competitive automobile landscape, where bigger partnerships such as Toyota Moto Corp. and Volkswagen AG threaten to capture the market share of the smaller players. Investors reposed faith in such a move, with Renault’s stock price surging by 4.6 percent following discussion of such a merger. However, the underlying complexities in bringing this deal to fruition also rests heavily at the back of their minds.

The original alliance – and why calls for a merger become stronger

The Renault-Nissan alliance was signed in 1999, bringing two of the biggest automakers, Renault and Nissan, from opposite corners of the world (France and Japan respectively) on a common platform. What seemed like a partnership between two strange bedfellows turned out to be a highly lucrative and mutually beneficial agreement. It allowed both companies to share technology, expertise and skilled labour to capture on their strengths and minimise each other’s weakness. A critical factor for their success has been ‘cross-shareholding’ – where one company has a minority stake in the other company. Renault owns 43 percent stake in Nissan, while the latter holds 15 percent stake in the former. This compels the management to think of the bigger picture and work for the welfare of both partners.

The results are there to show for it. In 2013, the alliance sold eight million vehicles, accounting for one out of every ten cars sold globally. Since then, they have managed to cross ten million in vehicles sales (in 2017) and retain their position as a market leader in the plug-in electric vehicle manufacturer category.

However, the landscape has altered tremendously since then. The advent of Tesla and its subsequent assumption as a market leader in the electric vehicle segment has hit the alliance hardest. Tesla’s Model S is already the second-highest selling model with global sales over 200,000 units and is fast catching up with Nissan Leaf’s 300,000 number. Also, the recent mergers in the last decade (Porsche-Volkswagen in 2008, Chrysler-Daimler Benz in 2009 and Tata’s acquisition of JLR in 2008) has led to the rise of automobile behemoths having synergised processes and technology. By making use of economies of scale, competition becomes stiffer and chokes out the smaller players.

A merger would allow both partners to make more efficient use of their resources, focus on the electric-vehicle and new-energy segment and untangle the complicated partnership the alliance finds itself in.

Carlos Ghosn – The man who can fix anything

If there would be one man solely responsible for this merger, it would be the current Chief Executive of Renault Motors and the Chairman of the alliance, Carlos Ghosn. Ghosn, nicknamed ‘Le Cost Killer’ for his aggressive restructuring and cost-cutting initiatives that revived first Renault and then Nissan, has been at the helm of things since. In 1999, Nissan was in dire need of funds and had seen red in seven of the last fiscal years. Its debt was more than $2 billion in today’s time and production was almost to a halt. Japan was buzzing about the company filing for bankruptcy, when in stepped ‘Mr. Fix it’ in Japan itself. By rejecting the introduction of loss-making models into the production line, Ghosn focused on improving the profitability of existing models. At that time, just four out of 43 models were making profits.

Under Ghosn’s leadership, the rejected X-Trail model was also reintroduced in an improved format in 2001, which turned out to be far profitable than envisaged. Ghosn also pioneered the concept of Cross-Functional Teams – picking personnel and managers in each department to specifically focus on a company issue and communicate with other departments. It not only improved the visibility of the problem at hand but also led to better communication and provided invaluable insights. Cutting suppliers in half to improve economies of scale and slashing costs by 20 percent in two years provided the final impetus for Nissan to rise from 2 trillion yen in debt to 1.5 trillion in cash in 2002. It also prompted a Japanese manga in honour of Ghosn, further cementing the celebrity status he occupies in their hearts.

The alliance between Renault and Nissan (and later Mitsubishi) was his brainchild, and the merger is expected to be his final act. Ghosn has one last task to fix before he hangs his boots.

Why a merger remains a complex challenge

While cross-shareholding has its benefits, during times like these, they can be difficult to navigate around. Apart from the stake each partner has in the other company, the French government also has a 15 percent stake in Renault – which it would not relinquish easily. Adding to the complexity, the decision of finalising a group headquarters and its permanent location – France, Tokyo or some other nation – would take considerable time.

While it has been speculated that Nissan might finally buy the French government’s stake, Ghosn has reiterated that the French government cannot be forced to water down its hold over the alliance. However, Japan would not be keen with the French government retaining its stake once the merger is finalised. The alliance could function smoothly since the partners were operating primarily from their base nation, a merger will result in the crossover of staff, especially managerial level and above into a completely different culture and work atmosphere.

One possibility also remains of the entity maintaining its headquarters in both France and Japan to appease both nations. This would also result in both Nissan and Renault retaining a percentage of stock in the merged entity.

How the automobile industry views the merger

The automobile industry would be closely watching every step taken in the direction of the merger. With the alliance forecasting increase in its output from the current 10.6 million units (second only to Volkswagen’s 10.7 million units) to 14 million in 2022, a single, merged entity would pose a considerable threat to the rest of the players. The EV segment could also see a boost, which is expected to branch out into autonomous vehicle category in the near future. Also, a combined entity can result in crossover sales in markets where the presence of at least one partner is significant. With China leading the way in electric vehicle registration, the entity would be looking to make a bigger impact in the Asian superpower. Also, global challenges of emissions and clean fuels would not be lost on Ghosn when he sits to discuss the merger.

However, until the company’s structuring and ownership issues are resolved, a merger seems unlikely, even if it is orchestrated by the man who can fix anything.