On The Road To Regret?

It's rare for a corporate spokesman to publicly deride his employer. But that's how bad things have gotten at Nissan Motor Co. Two months ago Jason Vines, a vice president of Nissan's North American division, was asked to explain the Japanese carmaker's fall from the ranks of top global carmakers. "This company got hit with a big 'stupid stick'," said the blunt-talking Vines--a reference to a series of top-management blunders that could soon cost Japan's second largest automaker its independence. A lot of people would have been sacked for such a remark. But when a company has lost money for six out of the last seven years, and has a crushing debt burden of some $40 billion, candor is not such a bad thing. "I thought at first that I'd hired Jerry Springer as my spokesman," Minoru Nakamura, the head of Nissan North America, quipped last January at the World Automotive Congress in Detroit. "The words were dramatic, but true."

So true, in fact, that Nakamura used them as a rallying cry. At his presentation in Detroit, Nakamura brought a large stick out on the stage with the name Nissan emblazoned on it. "We must get rid of the stupid stick," he said to the automotive crowd--and he broke the stick over his knee. Everyone cheered wildly. It was wonderful theater, but a stick shtik won't save Nissan. The company has been making bad decisions for 10 years, which is why it is now in the final stages of a humiliating public auction. To survive, it needs a foreign partner--until recently, an unthinkable idea in Japan--and a huge injection of cash. DaimlerChrysler and Ford have both kicked the tires at Nissan but opted not to buy. Now Renault, the rejuvenated French automaker, has stepped forward with an offer to buy 35 percent of Nissan for $5.3 billion. And Nissan is ready to accept. "There could be hiccups, but we don't see any right now," says Vines.

Industry watchers reckon that both Renault and Nissan need partners. Both are second-tier players in a consolidating industry. Whether they need each other, however, is another question--one that the stock market seems to be answering with a resounding thumbs down. Renault's stock price has tumbled by 30 percent since last month, when the company first announced its interest in Nissan. U.S. investment funds have been big sellers. "I thought [Americans] were the ones who like to take risks," harrumphed Olivier Pouteau, an analyst with CPR Finance in Paris.

Au contraire: it's the French government, 44 percent owner of Renault, that's willing to gamble on Nissan's future. French Prime Minister Lionel Jospin himself urged the two companies to talk, and he clearly welcomes the idea of a French-led global auto company. Yet the wager still strikes many observers as a long shot. Under Japanese law, if Renault buys a 35 percent stake in Nissan, it gains veto power over any major decisions made by the Japanese company. But ultimate control could remain in Tokyo. "You've got a relatively arrogant French company bailing out a relatively arrogant Japanese company," says George Peterson, managing director of AutoPacific, a marketing research firm in Santa Ana, Calif. "Even if Nissan's financial problems are solved, there would be some very difficult organizational issues." Renault may yet win the complete decision-making authority it probably needs. According to a source close to the talks, Nissan's top management is prepared to cede control of the company to the French--and is now trying to convince the Japanese board to go along. Renault CEO Louis Schweitzer will head for Tokyo on March 27 to meet with Nissan president Yoshikazu Hanawa.

DaimlerChrysler CEO Jurgen Schrempp wanted to grab the wheel when he made his pass at Nissan. Tokyo analysts say Schrempp sought to buy at least 50 percent of the company, but Nissan's board balked and instead suggested a smaller investment. That seemed a possibility until DaimlerChrysler officials got a look at Nissan's finances. While Nissan's stated debt load is $22 billion, the company may owe another $20 billion in obligations to its keiretsu partners in Japan. For example, Nissan is spending heavily to bail out the faltering Fuji Bank, the automaker's chief financier. U.S. auto analyst David Healy calls Nissan a "financial bottomless pit."

Tough talk to ignore, but maybe Renault perceives Nissan as a soulmate. Until recently, Renault was an underperformer itself, suffering through a 15-year slump before turning in record profits of $1.5 billion last year. That's quite a comeback from a $900 million loss in 1996. Much of the success can be attributed to tough-minded management. Renault has sped up new-car development, streamlined production and persuaded its parts suppliers to lower their prices. The company aims to whack $3.5 billion out of its cost structure over the next three years. Renault is not averse to challenging powerful unions: the company caused an uproar in 1997 when it closed a Belgian factory.

And its perky cars are a hit with consumers. Led by the tiny Clio and the Megane Scenic minivan, the company now sells more cars in Europe than anybody. But Renault is almost invisible in two key regions where Nissan is established--the United States, the most profitable auto market, and Asia, which is depressed now but has massive potential. So any union between Renault and Nissan would be a nice geographic fit. And there could be other benefits for the French. Renault would gain access to Nissan's cutting-edge technology. Nissan makes some of the best car engines in the world, and its factories in Tennessee and England are considered the most efficient in the industry.

Nissan's worst problems are in the United States, where it has lost market share and piles of money--$700 million last year. The company's fortunes have been slowly sinking since 1981, when it changed its name from Datsun--best known for the F10 sedan and 240Z sports car. The move was abrupt and angered dealers, who were not even given money by the Tokyo head office to change their signs. More recently, Nissan has been plagued by all sorts of mistakes: stodgy styling, peculiar advertising and major holes in its product lineup. The company has never had a winning midsize sedan, SUV or minivan in America.

Top management has been slow to grasp market realities. Nakamura recently summed up the problem: "When I go back to Japan and say we need bigger cars, bigger trucks and bigger engines," he told The Washington Post, "people in Tokyo laugh and ask: why are you people in the United States so out of trend with the rest of the world? Bigger? The rest of the world wants smaller." Nissan has also been addicted to selling cars at low prices to maintain market share--a recipe for losing money. One Nissan manager says that if you walked into his U.S. dealership and asked about the Maxima (a high-quality sedan that competes with the best-selling Honda Accord and Toyota Camry), the likely response would be: "It's only $299 a month."

Vines claims that Nissan has learned its lessons. Though the company will lose money again this year, he says: "This is the final bloodletting." Japan's recession may at last be over, and Tokyo has finally gotten serious about cutting costs--albeit a decade too late. The home office has also stopped meddling with its North American unit. (Nissan's Tokyo leadership is comfortable with Renault, says a source, because the French are prepared to do the same thing--give the America business plenty of leeway.) And the company is ready to unveil a new batch of cars that are well regarded by U.S. critics. But turning itself over to a foreigner has got to be a shameful experience for Nissan, which has long considered itself superior to the country bumpkins from Nagoya (home of Toyota).

If a deal is signed, Renault will face a daunting task. Takuya Nozaki, an analyst with the Teikoku Databank research institute in Tokyo, says that Nissan needs to cut its 135,000 work force by a third. If a combined Japanese-French company is prepared to go to that extreme, this might be a good deal. If not, Nissan's huge debt problem might easily pull down Renault. Has Nakamura really broken the stupid stick--or just given it to someone else?