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Renault alliance struggles to cope with gaping hole left by Carlos Ghosn

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Via Yahoo Finance

Even before Carlos Ghosn jumped bail in the manner of a Hollywood thriller, the former executive had secured his place in automotive history. Before his fall from corporate grace, he was chairman of the world’s second-biggest carmaker – the Renault-Nissan-Mitsubishi alliance – and had helped rescue Nissan from failure in 1999 as one of the architects of its original partnership with Renault.

The 65-year-old looked set to take up a “chairman emeritus” position at the carmaking triumvirate. Instead, Ghosn is holed up in a house in Beirut and the alliance is in danger of collapse. Analysts wonder whether, without Ghosn’s personality holding things together, it can survive in the face of perhaps the industry’s biggest disruptive threat yet – the move away from internal combustion engines.

The alliance reported sales of 10.76 million vehicles in 2018, marginally behind rival Volkswagen’s 10.83 million. Yet it has been riven by infighting as the companies struggle to fill the gap left by Ghosn, who as well as heading the alliance was chairman of each of the three carmakers, and chief executive of Renault.

Renault is looking for its third chief executive in 18 months: Seat boss Luca de Meo is thought to be the frontrunner. Nissan appointed Makoto Uchida as chief executive in December, after previous boss Hiroto Saikawa resigned for being improperly overpaid.

It’s a bit of a broken business. It has been going on too long and they have achieved so little

Philippe Houchois, analyst

Last month, the alliance finally appointed Hadi Zablit, a former Renault executive, as general secretary of the secretariat that coordinates the carmakers’ work. He will report to the three chief executives, but there is no single Ghosn-style powerbroker. Zablit’s appointment came after the companies promised to “significantly enhance and accelerate” operational efficiency – an acknowledgement that it has struggled up to now.

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The changes at the top have complicated an already delicate balance of power in an industry of national importance in Japan and France. The alliance was formed via a cross-shareholding structure that stopped short of a full merger. Renault owns 43.4% of Nissan’s shares; Nissan owns 15% of Renault (but lacks voting power) and, since 2016, 34% of Mitsubishi Motors.

The individual companies have been wary of further integration that could lessen their control. Ghosn said his arrest, for allegedly under-reporting his income, was part of a Nissan conspiracy to prevent a full merger with Renault. He has repeatedly denied all allegations of financial impropriety.

Carmakers across the world are trying to share the vast costs of developing electric vehicles – putting aside often fierce rivalries. Ford and VW have formed a limited alliance, and BMW and Jaguar Land Rover are collaborating on electric vehicle technology.

Renault’s effort at a mega-merger with Fiat Chrysler Automobiles collapsed last June, with Fiat blaming interference from the French state, which holds 15% of Renault. In October, Fiat announced a £35bn merger with Renault’s French rival PSA Group, owner of Peugeot, in a move that left Renault with little choice but to manage its Nissan alliance better.

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Philippe Houchois of investment bank Jefferies said: “The issue we still have is … there has always been a limited overlap of Renault and Nissan, not giving scope for margin savings.”

Insiders also bemoan the companies’ failure to capitalise on their early lead in electric cars, with frictions in engineering departments preventing proper sharing. Renault and Nissan have only one pure electric mass-market car each, the Zoe and the Leaf respectively, at a time when they need to cut carbon dioxide emissions to avoid EU fines potentially running into billions of euros. Investment bank Evercore ISI estimates that Renault alone faces costs of €1.4bn if it is to cut emissions by a fifth – which would wipe out two-fifths of its estimated 2019 profits.

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Details on new electric cars have not yet been made public. Renault is planning eight new models by 2022, with possible launches at the Geneva motor show in March. Nissan is focusing on improving profitability and cashflow by cutting models and making cost savings. No details have been given on a forthcoming battery-powered SUV.

Analysts at Evercore ISI says Renault is “muddling through” its approach to the transition. The “future of the alliance looks troubled”, analyst Arndt Ellinghorst said in a research note, with a “rebalance” overdue. He recommends that Renault cut its stake in Nissan to 35% or less, reducing uncertainty over the alliance and potentially freeing up cash.

Jean-Dominique Senard, the Renault chairman brought in to steady the ship, last month spoke of a détente between Yokohama and Paris, but said a full merger was not the ultimate goal. Even if that calms Nissan’s fears, the alliance is left with a question over its purpose.

“It’s a bit of a broken business,” said Houchois. “It has been going on too long and they have achieved so little.”

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