Published on December 21, 2007
Global Strategy of the Renault-Nissan alliance Subject: Joint analysis on the Renault-Nissan alliance addressed to the CEO of Mitsubishi (group project) From: Group 22 Michael Sutherland Nicolas Murcia Saebong Cheon Yu Ri Na Jeong To: Professor Jan Jörgensen Due date: November 22, 2006
To M. Takashi Nishioka, Chairman of the Board of Mitsubishi Motors, Nowadays, Renault-Nissan is the fourth worldwide automaker with sales of 6,129,254 units in 2005, up 5.9% over 2004 (http://www.nissan-global.com/). Considering the traditional position of Mitsubishi in the actual market, the analysis of the Renault-Nissan alliance case would provide you with valuable elements on how to approach the growing and competitive auto manufacturing global market. As such, the success of Carlos Ghosn is correlated to his extensive vision of synergies between the Renault and Nissan, thus, he believes that the transfer of knowledge between foreign engineering teams would only occur within a framework of equality. The reason he didn’t merge Renault and Nissan rely on the advantage of mutual challenge that push both firms to seek new cost reductions, economies of scale and scope opportunities. Consequently, Renault and Nissan both managed to reach their goal by remaining profitable.
Table of Content: The advantages and disadvantages of the alliance between Nissan and Renault………………1 Reasons for an alliance instead of a merger and the benefit from synergies…………………...4 Importance of Corporate Culture……………………………………………………………….6 The possibility of GM entering the alliance……………………………………………………8 Evaluation of Nissan before and after the alliance……………………………………………..9 Worldwide Domestic Conditions affecting Nissan-Renault…………………………………..12 The collapse of the Keiretsu helps Nissan to remain globally competitive…………………...13
The advantages and disadvantages of the alliance between Nissan and Renault The “Alliance” between Renault and Nissan has made possible many joint projects such as the gasoline tank, the steering-wheel stabilization system, and also led to the creation of institutional entities for “strategic command and operational coordination” (Segrestin, 2003). Since Renault and Nissan have successfully become partners in a new equity joint venture by combining their knowledge, they have reinforced their position as a worldwide leader automaker. For instance, common structures called Renault-Nissan Information Services (RNIS) and Renault-Nissan Purchasing Organization (RNPO) (www.renault.com) have finally changed their mutual expectations, the scope of their partnership, and the meaning of their union. Research demonstrated that the development of a joint platform is a means of setting up common organizational routines and synchronization mechanisms that make possible the effective transfer of knowledge (Segrestin, 2003). One of the most significant advantages was the joint platform. Nissan planned two small cars with in depth studies and Renault three potential cars. However, their schedule wasn’t as intense as that of the Nissan vehicles, but were rather stretched and targeted for a higher level of performance in comparison with their Japanese counterparts. According to the functional task team (FTT;www.renault.com), the wheel base which Nissan was building was not suitable to Renault’s level of expectations, probably because of their approach of different markets. Yet, additional research and development costs would have increased risk of failure of the joint project and weakened the alliance, so Renault’s small and medium wheel base design was adopted instead (Segrestin, 2003). Of course, project managers should allow both firms to innovate and come to a common decision rather than relying on the authority of the main
shareholder, Renault. Nevertheless, the delay in the first phase might have been deadly to Nissan. Within the organization, work was to be coordinated among distant teams, who had their own organizational systems, their own methods, scheduling and course of action. Merging teams was not an alternative. Both manufacturers wanted to maintain their autonomy and the alliance was still too unstable to sustain a rapid process of integration. One of the projects that the common platform had to support was shared components without any deficiencies in functional performance or delays that could affect either Renault or Nissan. As a result, any shared component must meet the requirements of every platform’s vehicles (Segrestin, 2003). This is one of the major challenges because from a design approach, the diverse vehicles were most likely to have conflicting requirements. For instance, the climate control system is generally expected to work continuously in Japan, with a relative low rate of air flow, whereas, in Europe, the cooling system is expected to work intermittently, but silently and at a relatively higher rate of flow (Segrestin, 2003). Moreover, the amount of space in which to install the system varied from model to model. In these conditions, it would have to reach the highest ratings in an extensive range of performance requirements (costs, volume, loudness, flow, etc.) to comply with this list of constraints essential for an innovative architecture. Cultural diversity, linguistic obstacles and physical distance gap in collaborative projects often justify most issues. Although these factors have signified a significant role in the alliance, it is apparent that the constraints of the design program were the major barrier. As such, this obstacle led to three harmonization problems. Firstly, Renault and Nissan adopted a collaboration model based on the concept of delegation (Segrestin, 2003). In terms of delegation, functional requirements were not clear, complete and shared components must meet clear specifications to
be certified by numerous protocols. Secondly, the specifications were complicated to convey because they were ambiguous. For example, how would you translate the necessity to safely attach a fuel tank? Consequently, the cooperative process is mainly focused on the evaluation of resources and understanding of concrete solutions. Furthermore, even if the Renault engineering team reaches a consensus on the efficient specifications with the Nissan engineering team, they will have divergence on the method implementation should be accomplished. It is logical to expect many minor issues in cooperative design processes that partners will inevitably deal with when planning design methods. But when it becomes a severe issue, both parties were disadvantaged. This is why they applied a double validation process to decide whether Nissan and Renault should continue their efforts toward a joint solution or end their collaboration on particular tasks. It is important to notice the ability of partners to come across a feasible solution when issues arise (Segrestin, 2003). The alliance has provided advantages to both companies. They can progress into foreign markets faster and with lower costs because they don’t have to build new plants. Renault builds cars in Nissan’s Mexico plants and Nissan uses Renault’s Brazil plant and distribution networks. The sales network of both companies is harmonizing itself and each manufacturer benefits from the technical expertise and organizational know-how of its partner (Segrestin, 2003). Nissan and Renault are collaborating on building universal platforms, with shared components and where companies lead engine design in their area of expertise. For example, Renault specializes in diesel as well as in innovation and Nissan focuses on gasoline and the manufacturing process. They’ve increased their purchasing power because they buy supplies for twice as much cars (6 millions). Consequently, the alliance has boosted profitability, market capitalization and sales in 192 for both partners (Nancy DuVergne Smith, 2004).
Reasons for an alliance instead of merger and the benefit from synergies The making of the alliance was motivated by the enthusiasm of Ghosn to develop potential synergies, where both firms maintain their operational freedom. The foundation of the alliance focuses on the need for the negotiation of a formal equity joint venture because Renault and Nissan must evaluate their partners’ equities, capabilities and willingness to cooperate before selecting the right hierarchy (Segrestin, 2003). Indeed, Carlos Ghosn, former Renault CEO before the alliance, has always been focused in preserving the identity of the two companies as he strongly formulated: “If you don’t respect people’s identity, they will not get motivated and you will not get a strong corporate performance”(web.mit.edu). Renault was willing to implement a common platform, which would generate significant economies in development costs (design studies, prototyping, and validation protocols), industrial equipment and purchasing (Segrestin, 2003). This strategy has been frequently adopted by automakers such as Daimler-Chrysler in the United States or Volkswagen and Skoda in Eastern Europe, as a means of bringing the engineering teams together and of sharing and developing knowledge. From an economic point of view, the alliance between Renault and Nissan can be perceived as a mean of integrating two companies in order to improve coordination and achieve cost reductions (Segrestin, 2003). Furthermore, even in case of integrating conflict, stimulating competition between Renault and Nissan, they would both reduce their costs by benefiting from economies of scale, and thus, increasing their bargaining power towards suppliers (Susini, 2003). It can be noticed that the engineering teams weren’t merged, but worked independently from one another in the first years of the alliance in order to reduce management costs and avoid permanent commitments (Segrestin, 2003).
The teamwork is open-ended to preserve a sense of equality between the partners and encourage both sides to contribute in their own fashion. As a matter of fact, both Renault and Nissan were free to withdraw from the alliance at any moment should an irreconcilable divergence of interests arise. As a result, the removal of shared components from the span of the platform could be necessary when its development appeared too difficult or too hazardous because it isn’t worth producing and developing a common component if expenses exceed projected benefits. Besides, since October 30, 2001, Renault owns 44% of Nissan, which owns 15% of the French firm similar to keiretsu cross-sharing operation. This strategy secures operational independence to both firms in the long run, allowing them to forecast cooperation strategy in the fields of expertise and resources required for successful co-development project (Segrestin, 2003). In an interview, Carlos Ghosn outlines the future approach for the alliance Renault-Nissan in the following direct talk: “We will never merge the two companies. Why? Because my job is to create value and a merger would destroy value”. (xtra.emeraldinsight.com) By conserving its autonomy and the Japanese-based corporate culture, Nissan successfully implemented a management decision-making process elaborated by Renault. He maintained that there will be more mass purchasing efforts and vehicle platforms as well as growing exchange of technologies, but he is convinced that the global market strategies of the two companies will remain disconnected and independent. Carlos Ghosn gives a lesson of liberalism to explain his vision where two foreign firms build mutual respect and trust to pursue a common goal: “We ask every single team not to do anything for the sake of the other teams. Pursue your own interests, growth and profitability. Because you are doing this, you will seek synergies”. (xtra.emeraldinsight.com) This is the reason why Renault decided to build an alliance not a merger.
Importance of Corporate Culture An important issue in the Nissan-Renault alliance relies in the management of two different cultures. In order for the combined share of ideas and strategic management to be effective, the employees of both companies must respect the identities of their fellow colleagues as well as their values. If this critical first step isn’t met and members in a particular team act disrespectfully and selfishly towards their teammates, an organization is bound to self-destruct in a short time of period. This explains why when a French worker happens to interact with a Japanese co-worker, for example when Carlos Ghosn is communicating with a Japanese executive at Nissan, one does understand the cultural background of the other. This outcome results from Ghosn excessively investing in cross-cultural training programs, having over 1500 employees from Renault learn about the Japanese business culture and 400 Nissan employees study the French culture (Pooley, 2005). This is a positive first step in order to create a successful alliance of two different cultures. After mentioning the French and Japanese cultures, it’s important to thoroughly understand their differences in order to view how Ghosn will go about them. To achieve this, it would be considered relevant to demonstrate how certain of “Hofstede’s Cultural Theories” (Clerc, 2000) can apply to the case of Nissan and Renault. Firstly, Japanese societies are known to be more collectivist, and the contrary can be affirmed about French societies relying heavily on individualistic efforts from employees. As is, Nissan was previously working and abusing the concept of groupthink, where the decision process evolved around people who thought alike. Then Ghosn arrives and right away cuts 21,000 jobs, closes down five factories and terminates most of the relationships with the suppliers within the keiretsu (Harney, 1999), procedures that
almost caused a major cultural crisis in Japan thus possibly resulting in the failure of the alliance. Moreover, in the Japanese culture, a young employee is prohibited from managing a colleague who is older in terms of age as well as seniority. As such, when Ghosn arrived in the company and began restructuring the management process, his new system of promotion was based strictly on performance, no matter what the age of the employee. Consequently, this caused much confusion and frustration among the Japanese workers from Nissan and Ghosn was indirectly forced to implement a new “system of double hierarchy”, merely a consideration of both cultures working together in the English language (Clerc, 2000). Finally, many ex-employees of Nissan would argue that the company was in desperate need of re-structuring their apparently homogenous culture. An example is given when ex-CEO of Nissan Hanawa Yoshikazu stated: There was an atmosphere in Nissan that it is difficult for managers and employees to feel environmental changes. Nissan had been operated by people who had had a similar idea and a fellow feeling. Even though a leader tried to conduct reforms, many said “It is not necessary to change for now” or “It is only an imitation of the American way”. As a result, it became to be too late to change. A mono- culture turns into disaster when reforms are needed. In order to rescue Nissan, we had nothing but to let someone having a different culture to take up an important post. Therefore, I asked Renault to let Mr. Ghosn to come to Nissan. (Nakae, 2005) Also, Ghosn himself stated once that “Nissan had gradually developed a culture in which the standard response to problems was ‘It’s not me, it’s someone else.’ If the company was in trouble, it was always the fault of other people […] The root of the problem was that the areas of executive responsibility were vague” (Nakae, 2005). This statement would help in explaining why he delayered the structure of the company by cutting 21,000 jobs mainly because of job redundancy causing one department to blame the other department for a problem that should be shared and analyzed by the company as a whole.
The possibility of GM entering the alliance To this moment, the alliance between Nissan and Renault has resulted in relative success thanks to the efforts and strategies of Carlos Ghosn. This success story raised significant interest on behalf of billionaire investor Kerk Kerkorian, who possesses 9.9% of GM’s shares. Ever since late June of 2006, Kerkorian has been insisting GM’s CEO Rick Wagoner to begin negotiations with Renault’s top guy, Carlo Ghosn, to possibly create a three-way alliance with Nissan- Renault. This alliance would allow the companies as a whole to sell approximately 14.3 million cars and trucks annually, representing total revenues adding to $327 billion, which would definitely surpass the performance of archrival Toyota (Welch, 2006). Thus, the trio would be able to work more efficiently and realize cost savings and value creation reaching $10 billion (Dolbeck, 2006). On the same aspect, the GM alliance would allow for huge economies of scale, including an increase in bargaining power over their suppliers because of their magnitude. Unfortunately for Nissan-Renault, GM has a long history of failed alliances with automakers such as Isuzu, Fiat and Subaru’s maker Fuji Heavy Industries (Treece, 2006). This, on top of the reported $10.6 billion loss last year doesn’t inspire Ghosn. Moreover, some analysts estimate that the alliance would cost $3 billion in order for Nissan-Renault to have a 20% equity stake in GM, a large sum of money that could be invested in other production plants or could have been redistributed to their rightful shareholders (Rowley, 2006). According to Ghosn, he would need anywhere from 34% to over 50% of control in order to fix GM (Rowley, 2006). Finally, on top of being extremely time-consuming for Ghosn to operate a third carmaker, an important consideration for Ghosn is what to do with labor unions considered popular in the United-States with the United Auto Workers. Ghosn would find it particularly challenging to lay-
off 21,000 unionized workers and closing plants down if restructuring was needed. The American culture is quite different from the Japanese, and these types of actions would cause much more than a cultural crisis! In the end, GM ceased negotiations with the possible alliance because the company feared inferior profits compared to what Nissan-Renault would profit from the alliance and because this arrangement would prevent GM from pursuing other partnerships. Evaluation of Nissan before and after the alliance In 1999, following the alliance, Nissan needed Renault’s cash to reduce its debt and Renault wanted to learn from Nissan’s success in North America which is essential for Renault to expand in its market. The alliance’s success depended on Nissan turning into a profitable company again. Nissan went through various changes to regain its profitability and competitiveness. Before Nissan agreed to the alliance, it was in significant debt problem in 1999. The debt had amounted to $ 11.2 billion, and it prevented Nissan from making necessary investments in its aging product line (www.nissan-global.com). Nissan had cut back on investments in order to save money, although its products were too old to compete with others. For example, ‘March’ (or ‘Micra’ in Europe) was nine years old. However, the competitors’ new products came out every five years. Though ‘March’ had had a few updates, this outdated product was competing for 25% of the Japanese market and for the similar portion of European market (Ghosn, 2002). The rest of the car lines weren’t much different from March, and had similar problems. One of the reasons for its financial difficulty was its keiretsu partnerships. Japanese believed maintaining equity stakes in partner companies would promote loyalty and cooperation between the customer and
the suppliers, and Nissan also invested in hundreds of different companies (Ghosn, 2002) . The company had more than $4 billion invested in different companies on which the company did not have any managerial leverage. Moreover, in some cases, Nissan even invested in its competitors such as Fuji Heavy Industries. This large amount of money was locked up and could not be utilized for Nissan’s own good (Ghosn, 2002). Renault paid off Nissan’s huge debt in return of 36.6% equity stake in the Japanese company. However, that didn’t mean Nissan had regained its profitability. It had to go through massive changes in its system. First, Nissan had retrieved itself from the keiretsu. People thought that the cross sharing of equities of both partners would harm the relationships between Nissan and their suppliers, but the relationships became even stronger. Suppliers didn’t care what the company does with their shares as long as it was their customer. They had clear distinction between customer and shareholder. In fact, Nissan’s sell-off had increased the profitability of suppliers to whom they delivered price reductions (Ghosn, 2002). At the time, breaking up with keiretsu seemed radical, but now many other Japanese companies are following Nissan’s lead. The personal management also had changed. As previously mentioned, Nissan now evaluates employees based on their performance in the company, not on how long they worked for the company. Moreover, following the alliance, nearly 14,000 employees were unemployed. This change contributed to maximizing the utilization of personnel. The overall changes were very successful. The operating profit had increased from $6.8 million to $2.4 billion, and operating margin had increased from 1.4% to 4.75%. They show Nissan’s success in making use of its assets and success in alliance (www.nissan-global.com).
Worldwide Domestic Conditions affecting Nissan-Renault As entering a new market or trying to fit in the existing market, which strategy the firm should follow always varies with the host country’s condition at that point. Nissan-Renault has been affected by conditions such as voluntary export restraints, tariffs of Europe, need of new light commercial vehicles in India, and European Commission’s new rules. When Japanese automobile companies first entered the American market back in the 1970s, many of the American automobile companies were threatened by those Japanese low price and high quality cars. Therefore, the American government introduced voluntary export restraints to limit the number of cars coming into the United-States. The restraint increased 14% of the price of Japanese automobile (Benjamin, 1999). Hence, this led consumers to switch to American automobiles. As a solution, instead of trying to be recognized as low priced small cars, Japanese automobile companies, including Nissan, started to introduce luxury cars and trucks to the market and to build their plants on American soil. Therefore, voluntary export restraints eventually served to boost the demand for Japanese automobiles as well as to create new markets for the Japanese automobile companies: trucks and luxury vehicles. Moreover, similar events happened when Nissan entered the European market. Because of the high export tariffs and the delivery costs to its European consumers, Nissan decided to also build their plants on European soil (www.wikipedia.com). The plant was completed in 1986 and since then, it has been one of the most productive plants in Europe. And it is predicted that by year 2007, Nissan’s European soil is going to be producing about 400,000 cars per year (www.wikipedia.com).
When entering the Indian Market, Nissan-Renault has benefited from the instant elimination of competition. Because of the need for new light commercial vehicles in India, the Indian government has permitted Nissan to sell vehicles in their market (Arun, 2005). Therefore, because it was permitted and supported by the government itself, it was very easy and simple for Nissan to operate in India. Also, once Nissan established their quality and built their dealer networks in India, as a next step, they could move forward and compete with Telco in the Medium truck market. Of course Telco wanted to stop them by also entering the light commercial vehicles market. However, because the Indian government restricted Telco to produce automobiles heavier than 6 tons gross weight, Telco cannot do anything except wait until Nissan becomes bigger and compete with them (Arun, 2005). The domestic conditions that have been affecting the Nissan-Renault not only helped them grow but also caused them difficulties to operate. The European Commission’s new rule on car sales has encouraged car dealers to sell various names of companies to reduce the “dominance of national champions” (Guerrera, 2002). The law has also made it easier for the car companies that have smaller market shares in Europe. Therefore, larger companies such as Nissan-Renault now have more competition, consequently making it harder for them to be recognized and sell greater quantities of cars.
The collapse of the Keiretsu helps Nissan to remain globally competitive As the other Japanese companies, Nissan has been supplied by keiretsu which is long- term purchasing relationship, intense collaboration and the frequent exchange of personnel and technology between companies and select suppliers (Okamura, 2005). Most of the Japanese automakers depend on the keiretsu and it is very unusual for a Japanese firm to not be part of it. However, when Carlos Ghosn arrived as CEO of Nissan, he didn’t want to follow these Japanese traditional rules. In his Revival Plan, he states that purchase costs, which represent 60% of the total cost, should be reduced by 20% in a three year period, and the number of suppliers, which totals 1145, should be decreased to no more that 600 companies (Ikeda, M. & Nakagawa, Y. 2000) The CEO actually dropped all of the keiretsu suppliers, keeping only four of them. Although many people in Japan disagreed with this idea of ending so many long-term business relationships, Nissan prevailed. Ghosn claimed that the keiretsu system resulted in higher costs when purchasing automobile parts. Also, it is difficult for keiretsu suppliers to have the most advanced technology developed independently which decreases the competitiveness of Nissan in the global market. Also the collapse of the keiretsu led to increased competition among suppliers. As a result, Nissan has been able to select better quality supplies at more affordable prices (Okamura, 2005).
Bibliography: Key articles: Susini, J.P. (2003). The determinants of Alliance performance: Case study of Renault & Nissan Alliance. Econ. J. of Hokkaido University. Vol. 33. pp.233-262. Article found from http://eprints.lib.hokudai.ac.jp/dspace/bitstream/2115/5398/3/EJHU_v33_p232-262.pdf Nakae, K. (2005). Cultural change: a comparative study of the change efforts of Douglas MacArthur and Carlos Ghosn in Japan. Sloan School of Management. https://dspace.mit.edu/bitstream/1721.1/32114/1/63201635.pdf Segrestin, B. (2003). Organisation productive - relation salariale - financiarisation : les spécificités de l'industrie automobile. Article retrieved from http://220.127.116.11/search?q=cache:huFYIKQ- DCwJ:crem.univrennes1.fr/site_francais/actualites/textes_actu_exterieures/ Other articles: Griffin, RW. & Pustay, MW. (2005). International Business. 4th Edition. Pearson-Prentice Hall. Pooley, R. (2005) The Model Alliance of Renault and Nissan, Human Resource Management International. Bradford Vol 13, Iss.2, pp29. Clerc, P. (2000) Managing the Cultural Issue of Merger and Acquisition: The Renault-Nissan Case. Göteborg University. Harney, A. (1999, November 2nd). Restructuring gives Japan’s workers culture shock: […]. Financial Times. London, pp 14. The Renault-Nissan Alliance. (2004). Article retrieved on November 11th, 2006, from http://facweb.furman.edu/~dstanford/ibnotes/39cases04/casequestions.html Nancy DuVergne Smith (2004) Nissan-Renault alliance faces down a few challenges. CTPID Communications Director. Article found from http://web.mit.edu/newsoffice/2004/ghosn.html http://xtra.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTex tArticle/Articles/040170503.html Bungsche, H. & Heyder, T. (2003) After the loss of Japanese autonomy; the merger of Nissan/Renault and Mazda/Ford in comparison. TREIZIEME RENCONTRE INTERNATIONALE DU GERPISA. Ministère de la Recherche Paris, France. Treece, J. (2006, October 2nd). Ghosn to GM : Automotive News Europe. Vol 11. Iss 20. Ghosn, C. (2002). Saving the Business Without Losing the Company. Harvard Business Review.
Appendices: Exhibit I: Sales according to the number of vehicles sold Worldwide Sales 2005 2004 Change 2005/2004 Renault Group 2,531,506 2,490,337 +1.7% - Renaul 2,248,756 2,308,972 -2.6% - Renault Samsung 119,027 85,046 +40% Motors 164,406 96,319 +70.7% - Dacia Nissan Group 3,597,748 3,295,830 +9.2% - Nissan 3,448,637 3,157,002 9.2% - Infiniti 149,111 138,828 7.4% Renault-Nissan Alliance 6,129,254 5,786,167 +5.9% Sales in Japan 2005 2004 Change 2005/2004 Renault 3,520 3,253 +8.2% Nissan 866,157 826,822 +4.8% Renault-Nissan Alliance 869,677 830,075 +4.8% (Source: http://www.nissan-global.com/EN/NEWS/2006/_STORY/060130-02-e.html)
Exhibit II : Important graphics revealing positive performance Consolidated Operating Profit Margins for Nissan since alliance Global Sales Volume (Source: www.nissan-global.com)
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