The View from Tokyo--Japanese say Nissan got better deal

TOKYO - Analysts here are giving the recent tie-up of Renault SA of France and Japan's Nissan Motor Co. Ltd. two years, tops, before they proclaim it an enduring international love affair or a marriage made in hell.

With $5.4 billion of Renault money, Nissan hopes to work down some of its bloated debt and continue unhindered with its long-term strategic plan to remain a full-line producer, while operating assembly plants in all of the world's major auto markets.

But many observers question whether Renault is up to the task of turning things around at Nissan, particularly in light of the latest reports that Nissan is expected to post a net loss for the fiscal year of $294 million, three times the company's recent estimate. Nissan Chairman Yoshifumi Tsuji likely will resign to take responsibility, some reports say.

Despite this, plus recent successes in Europe notwithstanding (Renault was the leading European brand in 1998 - if you include light commercial vehicles), the French automaker generally is not respected in Japan.

Critics charge that Renault has never had to run a global operation. In 1998, the company sold no cars in the U.S. and only 2,476 units in Japan. And unlike Ford, which had a 19-year relationship with Mazda Motor Corp. before acquiring a controlling interest in the Hiroshima-based automaker two years ago, Renault has no prior experience working with Nissan.

With this in mind, many analysts here believe that Nissan got the better of the deal. That's despite the fact that Renault's chief fire-fighter, Executive Vice President Carlos Ghosn, was named Nissan's chief operating officer and will bring a team of as many as 40 senior managers (including engineers) when he arrives in July.

Mr. Ghosn is credited with closing the French auto-maker's Vilvoorde, Belgium, plant in 1997, as well as implementing other significant cost-cutting measures since leaving Michelin tire company to join Renault in 1996. Under the new management structure at Nissan, he will oversee the operations of all six of Nissan's executive vice presidents including product planning, domestic marketing and overseas manufacturing and sales.

That is the theory underlying the agreement. The reality? Mr. Ghosn doesn't speak Japanese; nor does most of the Renault management team scheduled to come to Japan. In fact, Mr. Ghosn has had little experience doing business with Japan and most of his automotive experience is in the tire industry.

Critics, meanwhile, warn that closing the Vilvoorde plant isn't the same as closing Oppama or Murayama, two Nissan plants reportedly targeted for closure. Getting Nissan to close one of those facilities will not be easy.

Given Nissan's newly revealed debt, even with its promise to cut domestic production and 5,000 jobs, means that the $5.4 billion Renault windfall, rather than reducing Nissan's net debt as first reported to $14.5 billion, could vanish before it is ever spent.

"The deal is good for Nissan," says Peter Boardman, a Tokyo analyst for Warburg Dillon Read, adding: "It's not so great for Renault, which didn't even get management control, only veto rights. Success or failure," Mr. Boardman warns, "will ultimately depend on how well the companies cooperate."

Renault, in need of a production base in Japan from which to expand into Asia, hopes to tap Nissan's advanced technology and further cut costs through platform sharing with its Japanese partner.

Combined production of the two companies in 1998 was 4.8 million units. Renault, with plants in seven countries including France, produced 2.2 million cars and trucks; Nissan, with factories in eight countries including the U.S., U.K., Mexico and Spain, built 2.6 million units.

Nissan's production volume in Japan, however, fell last year to a 28-year low of 1.55 million units. The company, when it announces financial results in mid-May, is expected to register its sixth deficit in seven years. Combined net losses since fiscal 1992 (and projected through March 1999) are more than $3.1 billion.

Yet, on an operating basis, Nissan is in the black.

The company has been making money since fiscal 1995, registering a seven-year profit of $1.5 billion. That's despite a 20% decline in domestic vehicle demand since spring of 1997.

Still, the consensus in Tokyo is that Nissan is in trouble.

Koji Endo, auto analyst at Schroder Securities (Japan) Ltd., sees little in the agreement that will force Nissan to change its bureaucratic, technology-oriented ways. "Nissan's management will continue virtually unchanged," Mr. Endo says. "No one seems to have been fired."

Adds Claus Regge, a Tokyo-based technology consultant: "Renault should expect some unpleasant surprises. Just sending in a guy from France (Mr. Ghosn) and making him COO but still having him report to the Japanese president (Yoshikazu Hanawa), will automatically be a source of conflict."

Another source of conflict, Mr. Regge says, is that few in Japan regard Renault engineering highly. "While Renault quality has improved considerably in recent years," he says, "it's still no match for Nissan's. Nor are Renault's quality control systems, particularly in the manufacturing field. This will be another source of conflict."

Still, if the companies want this "marriage" to succeed, it is within their power to do so. And there are good reasons why it might succeed, though many observers give the pair at most a two-year window of opportunity. After that, Schroder's Mr. Endo says, the whole thing could disintegrate.

Still, Stephen Usher, auto analyst at Jardine Fleming Securities, argues that the tie-up "significantly accelerates the timetable for Nissan's debt reduction. This will enable the company to ease the burden on the balance sheet more quickly."

Mr. Usher, the most bullish of Tokyo analysts on Nissan, adds that the partnership provides an opportunity for further cost reduction through platform sharing and more effective R&D spending as the companies pool their resources.

Plus, if the Japanese market picks up, it could be a "win-win" for both companies. Remove 20% of demand from the European and North American markets, suggests Mr. Usher, as happened in Japan from the first part of 1997, and even Ford, DaimlerChrysler AG or Volkswagen AG would face difficulties. o