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The Making of a Global Alliance • Case Analysis
Team members: Deepthi Raghunath - 24 Gia D’Cunha - 30 Gunin Mattack - 32 Gurvir Singh Sangha - 33 Hari Kumar M P - 34 Executive Summary
The following analysis of the case explains how the Nissan emerged from a small cars and auto-parts manufacturer to a global company and finally the alliance with Renault. In the 80’s most of the major car manufacturers had increased their manufacturing capacity – thus there was an excess capacity in the whole of the industry. Nissan’s domestic sales went down during the period. In early 90s the Japanese economy bubble burst and with it went Nissan. Nissan’s revenue statements started showing negative
figures. One of the ways to overcome it was to establish a global alliance to survive through increased sales. Nissan found a joint venture with Renault. Soon Nissan felt that it could learn about Renault’s cost management and customer relations by alliance. Daimler-Chrysler also was in the run to go in for alliance with Nissan, given the size and prestige of Daimler-Chrysler, it could easily pay off all of Nissan’s debts, increase sales – in short remove all of Nissan’s problems. However, in agreeing to be acquired by Daimler-Chrysler, Nissan would lose its independence. On the other hand the deal with Renault would allow Nissan to have an independent existence and still have access to processes to address Nissan’s problems. Finally Nissan signed the deal with Renault.
History of Nissan: Nissan was established in 1933 by Yoshisuke Aikawa to manufacture and sell small Datsun cars and auto parts. In 1935, the first car was rolled out from the Yokohama plant and export of vehicles to Australia was also started the same year. In 1936, as World War II approached, the production of cars was cut back and the production of military trucks given more importance. This was a change in product portfolio to match the shift in needs. After the war, many of Nissans former auto dealers moved over to Toyota, leaving Nissan a depleted company.
However, in 1945 and 1947 the production of trucks and cars were started respectively. By 1959, the Datsun 210 produced by Nissan was taking part in the Australian rally and in 1960 it got the Deming prize for engineering excellence. In the 60’s Nissan’s main competitor was Toyota and its cars were designed to directly compete with Toyota’s products. This is an aggressive marketing method to meet the opponent’s offensive moves. It was also during this period that it established Nissan Mexicana, S.A.de C.V, its overseas manufacturing plant. It also opened two state-of-the-art plants: the Oppama in 62 and Zama in 65. In 66, Nissan merged with Prince Motors under the suggestion of the Japanese government with which Nissan had close ties. This shows a high degree of governmental control that governed the automobile industry in Japan. In the 70’s the Oil crisis hit the world as result of which the demand for smaller & more efficient cars went up. In the 80’s Nissan set up manufacturing operations in the USA and it was also looking to start a plant in Europe – the Japanese company to look at doing so. Nissan went in for decentralized production to capitalize on locational economies. However, most of the major car manufacturers during the time had increased their manufacturing capacity – thus there was an excess capacity in the whole of the industry. Nissan’s domestic sales also went down during the period. The unions were agitated that Nissan was establishing plants in foreign countries when the local plant capacity itself was in excess than demand. The President during the time Takashi Ishihara also didn’t help matters by having a unilateral approach to management – this caused a severe breakdown of relationship between management and unions. In 85, Mr. Ishihara was replaced by Mr. Yutaka Kume as president of Nissan. Mr. Kume launched a program to upgrade the image of Nissan. Many new models of cars were released. He also started talks with the unions to mend the ruptured relations. Mr. Kume success can gauged by the fact that all the employees including workers came to address him as Kume-san rather than as Mr. President. Though Mr. Kume was able to change many things, he could not do anything about Nissans dealers – 50% of the dealers were owned by Nissan and thus he feared that Nissan was losing touch with the customer needs of the current generation. In early 90s the Japanese economy bubble burst and with it went Nissan. From a profit of 101.3 billion yen in 1992 Nissan went to a loss of 166 billion yen in 1995. It was during this time that Mr. Yoshifumi Tsuji became president. He tried to improve the domestic sales by meeting regularly with domestic dealers – but the sales showed no signs of improving. It was as Mr. Kume had feared the concept and style of Nissans cars were not in tune with the current market. In 93, Mr. Tsuji announced a cost reduction program to cut costs by 200 billion yen by 1995, but the program failed to achieve its target.
It was in this climate that in 1996, Mr. Yoshikazu Hanawa became the president of Nissan. At the time, Nissans market share of the domestic market was just 15.9%. Mr. Hanawa started plans to increase the market share as well as to change the culture of the organization. Nissans culture was that of complacency and there was a lack of urgency. There was no crossfunctional and cross-regional communication. The design of the cars was out of touch with the market and a high degree of bureaucracy has set in. There was an emphasis on engineering culture rather than managerial culture and promotions were based not on ability of individuals but length of service.
Major changes which took place in the automobile industry: • There was a round of large scale mergers the world over that created a storm in the automobile teacup. • An Asian slowdown primarily in the financial markets had an adverse effect on the Japanese auto majors in particular. • An irreversible shift towards globalization was sweeping the auto industry and was changing the way the players in the industry operated. • Economic and political policies in Europe were changing. Major scale synergy was encouraged by the industrial policy prevalent in Europe in the 1990s. This was important for Renault since it was owned by the French state. • Over-capacity: There was a lot of over-capacity in the global auto market. The demand the world over was only 52 million vehicles, while the existing capacity was 70million vehicles. This led to a greater importance for firms to seek size through mergers. • There were stricter environmental and safety regulations that increased R&D costs per car. The strategic movement of auto majors was almost as important as the automobile itself. The major movers in the industry expected to see a giant in the form of an alliance between Daimler Chrysler and Nissan.
Global Business Reform Plan:
In May 1998, the Central Planning Department came up with a “Global Business Reform Plan”, which was presented to Mr. Hanawa which contained proposals to increase the profits to sales ratio to 5% in 2001 and 6% in 2003. The plan gave two alternate methods of achieving the objectives: The first method was to implement a survival plan that included down-sizing, reducing development cost, integrating platforms, streamlining sales, and divesting non-core business assets. The second alternative was to establish a global alliance to survive through increased sales. It was in this climate that the letter from Mr. Lewis Schweitzer, Chairman and CEO of Renault outlining terms of a possible alliance was received by Mr. Hanawa. The letter was clear in that it proposed an alliance would only with Nissan Motors. Mr. Hanawa immediately contacted Mr. Yutaka Suzuki, Director and GM at Corporate Planning Department and Mr. Toshiyuki Shiga, Sr. Manager at Corporate Planning Department to look into the proposal. Mr. Shiga had in 1997 worked with Mr. Andre Douin, Head of Renault’s Planning Division to talk about possibility of Renault producing pickup trucks under Nissans license. Therefore he already had a considerable knowledge about Renault. On the basis of the research carried out, Nissan found that a joint venture with Renault had three main areas of benefit: One, Both the companies had market strength in different areas of the world. Second, Renault was good at producing small cars while Nissan was good at producing large cars. There was a possibility to integrate platforms and for cost reduction. Third, both companies had similar market capitalization and thus the threat of takeover from either side was less. In July 98, after extensive consultations between the two companies, 21 joint projects were finalized. In September 98, Nissan started operational level studies – until the moment, only the management was involved. The Central Planning Department was not told why the joint studies were being conducted. The same applied to Joint Study Teams who were not told the real purpose of the study and also the teams were not aware of each other’s existence. Mr. Suzuki, Mr. Shiga and Mr. Taiji Sugino a manager at Central Planning Department were responsible answering all questions raised by the joint project teams from the Nissan side. In November 98, as the joint project teams were working, Renaults top management team of Louis Schweitzer, Georges Douin and Carlos Ghosn made a presentation to the Nissan Management Committee. The presentation visibly shook up the Nissan team – both at the Renault teams boldness as well as what they outlined (the problems of Nissan) In December 98, all the 21 joint teams gave the final reports – there were some “win-lose” projects but most of the projects were “win-win”. Throughout this period, from the time the first letter about a potential alliance from Mr. Schweitzer was received in June, Mr. Hanawa and Mr. Schweitzer were in close contact with each other.
It is important to note that in the beginning Mr. Hanawa never thought of forming an alliance but was looking at Renault with intent of forming joint cooperation. It was only after repeated interactions with Mr. Schweitzer that Mr. Hanawa came to think of the global alliance. For Nissan, the global alliance was not an objective but a process through which it could learn about Renault’s cost management and customer relations. Completing the negotiations for the alliance was just a step as far as Nissan was concerned. It was in December that Daimler-Chrysler who had been negotiating with Nissan to buy Nissan Diesel made an offer to acquire all of Nissans operation. For Nissan this was offer that it could not resist. Given the size and prestige of Daimler-Chrysler, it could easily pay off all of Nissan’s debts, increase sales – in short remove all of Nissan’s problems. However, in agreeing to be acquired by Daimler-Chrysler, Nissan would lose its independence.
Nissan / Renault
Goals for the merger: “Steer alliance strategy and supervise common activities on a global level, while respecting the identity and culture of each company and not interfering in operations” “Cooperate successfully without losing their uniqueness” Reason for Nissan: • Company was falling apart • $ 20 billion in debt Reason for Renault: • Small to medium size cars in Europe • 85 % of sales in Western Europe
National Context - Culture Japan High similarities less differences High Context culture Medium power distance Long term oriented High uncertainty avoidance Low individualism Very high masculinity France High similarities less differences Medium/high context culture Medium power distance Long term oriented
High uncertainty avoidance High individualism Low masculinity Organization’s Context – Culture Nissan Assumption for success: technology and reliability Detail oriented Standardization Basic instruction, simple, to the point Renault Assumption for success: management, cost efficiency, design Like macro, general idea, abstract concepts Want to feel free Show respect for employee through complex work scheme Key Success points • • • • • • • • • Respect uniqueness of each partner Culture and organizational culture complement each other Cross companies teams Find good practice to keep and others to get rid of Quality Focus Downsizing in Nissan Language training French executives transferred to Japan and Japanese Consultant sent in France
Counter side: There were some people, however at Nissan, who wished that there were a few key persons within the company who were involved during the discussion with Renault.
Outcomes Mutual respect and level of implication.
Growing market shares Nissan: • Increased cost efficiencies • Gain market share Renault: • Innovation and Japanese standardization •Gain market share Conclusion • • Good analysis before change Resistance to change
• In case of a merger or alliance : Organizational culture should be close (more important than national culture) • • Clear strategy from the beginning HR strategy aligned with business strategy
A look at the following figures reveals that Daimler Chrysler had bigger financial muscles than Renault.
Daimler Chrysler Renault Annual revenue($ Millions) 147745000 41349000 Net income 5404000 1500000
World market share 8.4% 4.3% However, Renault was the bigger in the European market than Daimler Chrysler with 10.7% market share compared to 5% of the latter. In the US market, Daimler had a 15.6% share of the total market. Some aspects of Renault are mentioned as follows: • The debt equity ratio at Renault is very conservative. They rely mostly on internally generated funds to finance their operations. • Renault stresses on reduction of costs with the aim of achieving greater efficiency and effective utilisation of capital. Excess capacity at Nissan: Nissan was suffering from excessive production capabilities in different regions where it had production capabilities. In Japan alone, it had an excess capacity of 20%. The following information provides some important points about the operations of Nissan before the merger with Renault.
1995 1996 1997 1998 Sales 5834123 6039107 6658875 6564637 Net income(loss) (166054)
(88418) 77743 (14007)
• It can be seen that the sales at Nissan had been fairly constant over the years. However, it can be seen that the company suffered losses in all the above years leading to the merger except in 1997. • This reduced net income can be attributed to the increased inefficiency in operations of Nissan. Increased debt of Nissan: The debt to equity analysis of Nissan shows the following facts:
1993 1994 1995 1996 1997 1998 debt/equity ratio % 148 188 155 275 283 339 debt/sales ratio% 38
46 38 62 58 66 • The debt in the company has been increasing drastically over the years. According to the case, Nissan had debts amounting to 23 billion Euros which it found increasingly difficult to service. • Because of such high leverage Nissan was heading towards bankruptcy and unable to respect its debt obligations. Nissan actually suffered from lack of global demand for cars. In Japan, there was a reduction of 12.58% from 1996 t0 1997. The same can be said of demand for cars in different parts of the world. As a result Nissan was hit with overcapacity and lack of demand. The following points are also noteworthy of Nissan: • units sold. Nissan was one of the largest Japanese manufacturers in terms of the numbers of
• However, in terms of profitability its performance was very poor. If we compare the EBT margin of Honda with Nissan, we will find that Honda with the similar number of units sold has a much healthier EBT margin.
Marketing Perspective: • Market expansion: Renault and Nissan had large market shares in different parts of the globe. This presented tremendous opportunities for market expansion and improvement of market share in existing markets. • Complementary Product lines: Renault and Nissan were represented in different product segments that were complementary to each other. Renault was ahead in the field of mid-range cars and light commercial vehicles. Nissan specialized in mid range and four-wheel drive vehicles typical of the American light commercial vehicles. • Processes: Renault and Nissan are also complementary in their processes. There is scope for global learning between the partners. Renault has excellent cost controls methods and global strategies for purchasing and platforms. Nissan stood out in quality control, R&D and technology. So this merger could create a win-win situation in terms of global learning.
• Pricing strategy: Nissan was always of the opinion that high quality cars would sell at a high price. However this logic was not a very workable one. There had to be more design orientation and focus on the customer needs. Hence the old pricing strategy needed a major revamp. The Renault cost reduction strategy was a part of the Renault “Big Picture “Presentation to the Nissan executives. • Branding strategy: The strategic alliance did not involve bringing the two brands together. The basic policy of the alliance would be to have a clear separation between the brand identity and any kind of synergy. The alliance focused on manufacturing integration but not brand integration. The alliance would continue to promote Renault and Nissan as two separate brands and take advantage of their respective positions in the minds of the consumers. • Focus strategy: Nissan had a very extensive product line that they priced very high, as a result they lost out on market share and saw a slump in their market share from 6.4% in 1990 to 4.9% in 1998. Renault could help Nissan streamline its product line to follow a focused strategy in terms of products and pricing. Mr. Levy, EVP, Renault, said “Renault’s expertise in cost reduction, purchasing, production sites …Renault could rally help Nissan to find the way out of its difficulties. Renault was more likely to teach them (the Japanese) the art of fishing”
The deal with Renault would allow Nissan to have an independent existence and still have access to processes to address Nissan’s problems. The other way to put it is that though Daimler-Chrysler had the finances, Renault had the tools that were required for Nissan. Nissan choose the option of going with Daimler-Chrysler, but the talks failed. Nissan signed the deal with Renault on 27 March 1999. Renault bought 36.8% stake in Nissan Motors and 22.5% stake in Nissan Diesel investing a total of 643 billion yen into Nissan.
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