Mega Alliance

Asked at the New York auto show in April what advice he has for struggling General Motors Corp. and Ford Motor Co., Renault SA-Nissan Motor Co. Ltd. CEO Carlos Ghosn fires off a quick response.

“None,” he says.

Sent on a rescue mission from Renault to Nissan in 1999, Ghosn says he “fortunately” didn't follow any outside advice himself, mainly because it came from people lacking intimate knowledge of Nissan's staggering problems.

“That's why I don't think anybody — myself (or) anybody else — can give advice for the head of a team managing (a) car manufacturer,” Ghosn tells a crowd at the auto show's kick-off breakfast sponsored by the International Motor Press Assn. “The only people who can do this are people from inside.”

It appears Ghosn may seize the opportunity to be an agent of change within the world's No.1 auto maker. Four months after Ghosn's April comments, Nissan and Renault were examining a potential $3 billion bid to buy a combined 20% stake in GM at the urging of billionaire investor Kirk Kerkorian.

Ghosn, the industry's most-lauded turnaround guru, sat down with one of the industry's most embattled executives, GM Chairman and CEO Rick Wagoner on July 14 in Detroit.

Later in the day, Wagoner and Ghosn issued a statement saying their teams would take 90 days to analyze whether a 3-way tie up would help their companies reach major goals of shedding costs, sharing technologies and penetrating emerging world markets.

“I am for brisk negotiation,” Ghosn says at Nissan's Design Studio in Farmington Hills, MI, before his meeting with Wagoner.

“The negotiation can stop, even today, if I think there is no appetite from both sides for a tie-up, because I don't want to waste anybody's time trying to negotiate for nothing.”

Wagoner, in a CNBC interview days before the meeting, called the alliance proposal “interesting” and re-committed to keeping an “open mind” during the discussions. But he says the company also needs to remain focused on its North American turnaround plan. He also dismisses speculation he is cool to an alliance.

Just how a GM-Nissan-Renault tie up would benefit all three companies is hotly debatable, but many agree such a mega-alliance would have one implicit goal: slowing the Toyota Motor Corp. sales juggernaut.

“The three (auto makers) are losing market share to Toyota everywhere they operate, and Toyota is gaining market share pretty much everywhere it operates,” says Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor, MI.

Toyota's 2005 total global vehicle production reached 8.2 million units, a 9.1% increase over 2004. The company has vowed to build more than 9 million vehicles this year, nipping at the heels of GM for the title of No.1 auto maker. GM reported 9.1 million deliveries last year.

GM worldwide market share totaled 12.7%, while Renault-Nissan reached 9.0%. Toyota continued to advance with market share of 12.3% in 2005, says McAlinden.

Industry wags are speculating as to whether Toyota will attempt to block the proposed alliance. There also are conflicting media reports on whether Toyota, itself, is considering a possible bid for GM to fend off competition from Nissan. As of mid-July, Toyota said it was not interested in owning a share of GM.

The week of the big meeting in Detroit, Ghosn was asked whether he is concerned about the possibility of another auto maker bidding for GM. Ghosn said the goal of Renault-Nissan is not acquisition. “We are trying to partner with other people, which is a different story,” says Ghosn, who adds he does not want a top post at GM.

But for the proposed alliance to work effectively, the three auto makers would need to hold shares in one another, according to a July 17 research note from JP Morgan.

Echoing other observers, the brokerage's auto analysts write that GM's fierce competition with Renault and Nissan both in Europe and the U.S. represents a fundamental challenge to trilateral vehicle platform sharing without cross-shareholding.

The relative strength of the euro compared with the dollar means Renault, which is 15% owned by the French government, would be well positioned to buy into GM. But for GM to reciprocate, the cash-strapped company would have to spend an estimated $7.7 billion, JP Morgan says.

GM's Adam Opel GmbH European subsidiary, combined with Renault, could present an aggressive challenge to Volkswagen AG. That's why Europe is seen as the “main prize,” says JP Morgan analyst Himanshu Patel. Still, he doubts GM and Renault would be able to find “low-hanging fruit” for significant savings when it comes to shared-parts procurement.

GM potentially has the most to gain from Nissan's product development in compact and midsize cars, analysts say. Nissan plans to launch the new Sentra, Altima and Infiniti G35 sedans in the U.S. this fall.

GM's dominance in fullsize trucks, including the Chevy Silverado and GMC Sierra that soon launch for the '07 model year, could give Nissan's flagging truck line a boost, JP Morgan notes.

In South Korea, GM Daewoo Auto & Technology Co. could pick up capacity at the under-utilized plants of Renault-Samsung Motors Inc. In China, GM's partnership with Shanghai Automotive Industry Corp. is stronger than Nissan's joint venture with Dongfeng Motor Co. Ltd., which currently produces only 100,000 units spread across 10 vehicles and as many platforms.

GM China Group, with its various partnerships, saw first-half sales jump 47% to 453,832 units.

In North America, an alliance potentially would enable Nissan to take over some of the 12 GM plants slated for closure by 2009 under Wagoner's turnaround plan.

Such an arrangement could give Nissan a significant cost advantage over Honda Motor Co. Ltd., which plans to spend an estimated $550 million to build a new assembly plant in Indiana, and over Toyota, which is investing $650 million in a new plant in Woodstock, Ont., Canada — its seventh plant in North America. Ghosn admits Nissan will need more capacity.

Ghosn's success with Nissan is well documented. His latest goal is to reach global sales of 4.2 million vehicles in fiscal 2008 — an increase of 812,000 units over fiscal 2004. To meet the goal, Nissan will launch 28 new models through 2008.

Since adding the title of Renault chairman and CEO 17 months ago, Ghosn has vowed the French auto maker will launch 26 new models by the end of 2009, 13 of them in new segments.

Wagoner, also known as a tough negotiator, recently reported that some 35,000 workers have accepted a plan to leave through retirement or buyout packages by Jan. 1, two years ahead of schedule. But, unlike Ghosn, Wagoner has been unwilling to publicly set specific financial goals.

Many financial analysts say there's not much value in a 3-way tie-up, pointing to the widespread product overlap between the companies and the limited savings potential of joint purchasing, plus the potential flack they'll get from some suppliers, dealers and their labor unions.

“They've got a bit of face to save at this moment,” Gerald Meyers, a former American Motors Corp. CEO and now a consultant and professor of business management at the University of Michigan, says of both Ghosn and Kerkorian. “They can't back away; they can let it fade away.”

Meyers adds: “I think Kerkorian made a bad bet. He started something here that I don't think he can finish.”

Ghosn, in an interview with the French newspaper Le Monde, says that's the kind of negative point of view GM, Renault and Nissan will have to ignore.

“We have to overcome the optimism of some and the skepticism of others in order to evaluate objectively the potential of an alliance,” Ghosn is quoted as saying. “There is no reason it cannot work, if we undertake this project in the same spirit as that we worked on with Nissan.”
— With Christie Schweinsberg