Renault-Nissan Marriage Is in Jeopardy After Ghosn’s Escape

(Bloomberg Businessweek) -- For Renault SA and Nissan Motor Co., the Carlos Ghosn saga is a nightmare that never seems to end. Fallout from their ex-boss’s November 2018 arrest in Tokyo for alleged financial crimes permeated deep into the French and Japanese carmakers’ operations, paralyzing decision-making and straining their two-decade-old partnership nearly to the breaking point.

Yet in the last few months of 2019, the companies gave themselves a second chance to mend the shattered relationship. In a bid to start anew, Nissan replaced top management and Renault dramatically ousted its chief executive officer, former Ghosn protégé Thierry Bollore. But the bad dream came back with a vengeance when Ghosn burst back onto the global scene as an international fugitive, following a spectacular escape from Japan and his strict bail restrictions to his native Lebanon.

Ghosn regained the freedom to speak publicly, and judging by what he’s said, during a 2½-hour Beirut press conference and subsequent interviews, much of his vitriol is directed at the automakers, which along with Mitsubishi Motors Corp. form the world’s biggest carmaking alliance.

Ghosn accused Nissan executives of colluding with Japanese prosecutors against him out of spite over losing power to Renault in the alliance. He also seemed to snub Renault’s managers for not completing merger discussions with Fiat Chrysler Automobiles NV, which he said were well under way before his arrest. The question now is whether Ghosn’s unrelenting media assault has rekindled the spark of suspicion between the companies enough to put them on an inexorable path to separation.

Before Ghosn’s escape, Nissan executives had already examined that possibility, weighing the pros and cons of sustaining the alliance especially when it comes to engineering and technology sharing, according to a person familiar with the matter who asked not to be identified discussing confidential matters. After Ghosn skipped bail, a top French official described the government’s concerns that the fugitive would distract Renault from its efforts to patch things up with Nissan.

Nissan has denied it’s considering dissolving the partnership with Renault. “The alliance is the source of Nissan’s competitiveness,” the Yokohama-based company said in a statement on Jan. 14. “Through the alliance, to achieve sustainable and profitable growth, Nissan will look to continue delivering win-win results for all member companies.”

Yet for some, such as Evercore ISI analyst Arndt Ellinghorst, the financially disappointing alliance—the shares of the two companies were the worst performers among major automakers last year—seems already beyond salvage. “In such a hostile situation and with so much mistrust, I would question whether it’s even worth trying to save it,” he says. “Where’s the value if both Renault and Nissan are less profitable than their peers?”

Ghosn was the linchpin that kept the partnership together despite a lopsided shareholding relationship favoring Renault that was put in place when Nissan was financially ailing. The French carmaker owns 43% of Nissan, with full voting rights, while the Japanese company holds only a 15% stake in Renault and lacks the ability to vote its shares. This, along with a significant stake held by the French government in Renault, has bred deep resentment among some Nissan executives—especially now that Nissan’s revenue and market value are more than 50% higher than those of the French company.

Still, in theory at least, the need for the alliance is more important than ever as the industry spends more to develop electric and self-driving technologies. Ghosn gauged the progress of the three-way partnership through cost savings, a measure that’s now largely questioned by the companies as a relevant metric for successful integration.

A breakup would set Nissan and Renault adrift at a time when both are performing poorly and the auto sector is consolidating. Peugeot maker PSA Group and Fiat Chrysler agreed to merge in December, a deal that was particularly painful for Renault Chairman Jean-Dominique Senard, who’d tried and failed to engineer a tie-up with Fiat only months before but was hampered by Nissan, which withheld the explicit backing for the deal required by the French government.

Both Nissan and Renault are suffering from a drop in car sales in China, Europe, and other key markets, and their profitability is below that of regional rivals PSA and Toyota Motor Corp. Nissan has slashed its profit and sales forecasts for the fiscal year ending March 31, 2020, and says it will cut 12,500 jobs globally. New CEO Makoto Uchida faces the huge task of restoring the brand’s image and rolling out models that appeal to retail customers, which would allow the company to step back from the heavy use of retail incentives and low-margin sales to fleet and rental-car operators that it’s increasingly relied on in recent years.

Renault’s poor showing stems from its aging model lineup and a geographic reach that doesn’t extend much beyond Europe and North Africa. In February the company is expected to report that net income for 2019 fell to a six-year low of less than €2 billion ($2.23 billion), according to Bloomberg estimates.

A split would cause political strain between Japan and France. Prime Minister Shinzo Abe and President Emmanuel Macron discussed ties between the companies last year, and the French government worked behind the scenes to help repair relations, using diplomatic channels and handing Renault’s Senard the responsibility to get the alliance back on track.

The stakes are especially high in France, where unemployment tops 8% and Renault is one of the biggest employers, with more than 48,000 workers. Any breakup would be messy, because of the companies’ intertwined operational ties. The most important vehicle made at Renault’s biggest and oldest car factory, in Flins, is the Nissan Micra. The French automaker also produces engines for Nissan at another plant in Cleon.

As Nissan’s largest shareholder, Renault stands to lose big from Nissan lowering its dividend to conserve cash. Nissan dividends contributed €233 million to Renault’s third-quarter earnings, less than the €384 million contribution a year ago, the French carmaker said in a statement in November. And Nissan withdrew its outlook for a 40 yen (36¢) per-share payout for the year in a filing in November. Renault had received €784 million in dividends from Nissan for 2018.

That means whoever is recruited for the top job at the French automaker will face plenty of uncertainty about one of its biggest assets. “Visibility is zero on the alliance,” says Invest Securities analyst Jean-Louis Sempe. “Renault’s new CEO will have no idea whether he’s coming in to lead a company that’s on its own or with Nissan as a partner.”
 
Read more: Ghosn Takes His Case to a Global Court of Public Opinion

To contact the editor responsible for this story: James Ellis at jellis27@bloomberg.net

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