Renault-Nissan Alliance Works Well, But Politics May Doom It.
“Clearly Ghosn held the thing together with the strength of his personality but the alliance will have to find other ways to make it work”
All the business evidence points to a successful future for the Renault-Nissan alliance after years of dynamic leadership from Carlos Ghosn, but the venture could founder because of political struggles between France and Japan.
If France won’t agree to give up some power in the alliance to Nissan, the alliance might be broken up.
The benefit of the alliance, which includes Mitsubishi Motors, is not questioned. The alliance has said it plans to raise combined sales in 2022 to 14 million from around 11 million in 2018, on four common engineering modules with common engines in 75% of the output. That would likely keep it in a tight contest for the world’s biggest automaker, along with Volkswagen and Toyota.
But Japan feels that the ownership favors Renault. This imbalance might have made sense in 1999 when Nissan was saved from bankruptcy, but not now, when Nissan is perceived by the stock market as accounting for most of the combined capitalization of the two companies.
Renault owns 43% of Nissan which owns a non-voting 15% stake in the French company. France owns 15% of Renault. The French government has made puzzling statements about ownership. In late January French finance minister Bruno Le Maire said no change in shareholding was being negotiated.
“No shareholding re-balancing or modification of cross shareholdings between Renault and Nissan are on the table,” Le Maire was quoted as saying by Automotive News.
But later Le Maire said this.
“I’m sure the alliance will stay,” he said.
The alliance is unlikely to be maintained unless changes to the ownership structure are made.
Sour the relationship
Board meetings at Nissan on April 8 and Renault in May will decide the ownership issue. Meanwhile former alliance leader Ghosn is still in custody in Tokyo, charged for under-reporting his earnings to avoid tax. Ghosn denies the charges. Evidence emerging from the investigations might sour the future relationship between Renault and Nissan.
There is clearly much industrial logic in keeping the alliance together. But of course that doesn’t include the politics. Ghosn proposed an interim merged structure that would see management of Renault, Nissan and Mitsubishi Motors overseen by a Dutch foundation as a prelude to their integration as a global automotive group based in Amsterdam. But that now stands no chance because it doesn’t address the issue that Nissan is under-represented.
Various options are being suggested to make the alliance acceptable to Nissan and Japan.
France could sell its 15% stake in Renault to the Japanese, or float it on the stock market. But this might stir up a political storm in France. Renault could allow Nissan’s stake to acquire voting rights. Renault could sell off some of its stake in Nissan and bring it down to 15%.
The bottom line probably is that Japan will insist that Renault needs to dilute its control of Nissan.
Opinion is mixed on the likely outcome.
Professor David Bailey, Professor of Industrial Strategy at Aston Business School, says the alliance’s new leadership should be up to the job, and breaking up the arrangement would make no sense.
“Clearly Ghosn held the thing together with the strength of his personality but the alliance will have to find other ways to make it work. We aren’t going to see a full blown merger, Nissan obviously is against that. They’ll need committee type arrangements, management matrixes to sort out cross alliance responsibilities,” Bailey said in an interview.
Moody’s Investors Service sees three options, and likes the idea that things will work out fine without too much drastic action.
“We have identified three possible scenarios for the future of the alliance. The first is that the two carmakers dissolve their partnership and operate independently. The second is that Renault increases its ownership in Nissan and merges the operations of Renault, Nissan and Mitsubishi Motors, given Nissan’s 34% stake in Mitsubishi Motors,” a Moody’s report said.
“And the third is that Nissan and Renault continue with the status quo and further integrate their operations. Of the three scenarios, the third is the most likely outcome and will support the carmakers’ profitability and credit quality,” Moody’s said in a report.
Others are not so sure drastic action can’t be avoided.
Investment researcher Evercore ISI says a breakup is the most likely outcome, after media reports France wanted a joint holding structure.
“We would be surprised if Nissan was to agree to closer ties with Renault. The Ghosn crisis has revealed much deeper cultural frictions that we see as extremely difficult to overcome. It appears to us that a separation is more likely,” Evercore ISI analyst Arndt Ellinghorst said.
But Citi Research said the Ghosn departure could be a catalyst for positive change if sorts out the ownership structure.
“One glance at the cross-shareholding structure and it is obvious that it is unnecessarily complicated. More than 80% of models will be on a common platform by 2022, and as such we’d argue the Alliance is practically irreversible,” Citi Research analyst Raghav Gupta-Chaudhary said.
Still value to unlock for investors
“An equalization of stakes could result in shareholder returns of up to 23%. If there ever were a time to reward shareholders by distributing cash locked up in its Nissan stake, it is now in our view. With Ghosn no longer at the helm, a full-blown merger may be off the table, but we believe there is still value to unlock,” Gupta-Chaudhary said.
Aston Business School’s Bailey says the bottom line is the attitude of France.
“It would not make any sense to split the alliance. The structure gives them scale to make the huge investments need in new technology,” Bailey said.
“But it depends on the French government conceding some control so they could equalize the value of Nissan’s holdings,” Bailey said.