Industry Background

In 1999, 55 million vehicles were sold worldwide, out of which 32 million were

passenger cars. 90% of the demand came from the “triad” of the USA (26%), Europe

(40%) and Asia (24%). In the US and in Europe, sales increased by 8.7%, while in

Asia the rate of growth was 5.1%. In 2001, the number of vehicles sold worldwide was

almost the same as compared to 1999. The automobile market was slowly

stagnating in mature markets of the US and the Western Europe. Both these

markets were also affected by rising oil prices and interest rates in 2001. The

shrinking of these main markets was not sufficiently compensated by growth in other

markets.

Major changes, which took place in the automobile industry:

Large scale mergers were happening in the world over that resulted

in lot of repercussions in the automobile industry

An Asian slowdown that was mainly observed in the financial markets had

unfavorable effects on the Japanese automotive industry.

Globalization was leading to an irreversible change in the world auto industry.

A presence of over-capacity in the global auto market was observed. 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 consolidation.

The stringent environmental and safety regulations increased R&D expenses per

car.

The strategic movement of auto majors was almost as important as the

automobile industry.

Company Background: Renault

Renault, once owned by the French state, became a limited company in 1990 and was

finally privatized in 1996. It earned a reputation for their innovativeness and the

anticipating of market trends, which found their expression mainly in creative car

designs and in new forms of power trains. Renault had a complete product range, from

small to large passenger cars, including minivans, as well as light duty commercial

vehicles, trucks and buses. Overall the company sold 2.2 million vehicles worldwide in

1998 making it number ten among the car companies. Though Renault was mainly

present in Europe (responsible for over 90% of the revenues in 1998), especially in

France with 57% of the revenues generated there. It had several manufacturing

sites in Latin America, but had nearly no presence in North America and in Asia-

Pacific. The financial situation was quite sound in 1998 with a net income of EUR

1.3bn from revenues at about EUR 37.2bn, thereof 4.2% was invested in research and

development maintaining the companies very dynamic product renewal policy.

Renault’s Need for Global Strategic Alliance

Within the globalizing and consolidating automobile industry, one of the only ways to

ensure long-term sustainability was to form a larger group in order to leverage

market power. The signal for the same was evident from the merger of Daimler

Chrysler. Renault too had decided to move on the same direction i.e. increasing the

influence in the market by forming strategic alliances. Renault had thus tried to form an

alliance with a European Automobile Manufacturer- Volvo. However, the presence of

French state as a prominent stakeholder, lack of diplomacy from Renault

discouraged Volvo to nod yes. Thus, Renault had failed in its first attempt.

Renault had no presence in Asia. As financial and market power of its chief

competitors was increasing, it would have been difficult for entering this continent on its

own. Further, the Asian

market was strategically important for Renault in order to build up its presence globally.

Thus, Mr. Georges Douin, EVP, suggested an international strategy that

recommended finding a right strategic partner in the Asian market.

Previous Attempts of Renault in Asia

Renault had made many efforts to form partnerships with several Asian companies. It

tried for a research programme on diesel engines with Honda, which did not work. In

addition, it had conducted talks with Korean companies like Samsung and Daewoo.

Even they were very keen to form a partnership with Renault, as this would give them

an easy way to enter European market. However, these attempts too did not end

fruitfully.

Renault had succeeded to form a relationship with Mitsubishi, as the latter was a

partner of Volvo. This gave them a glimpse of Japanese business culture. However,

this association was terminated once the Renault- Volvo merger was called off.

Though all the above attempts came to a dead end, these attempts helped Renault to

get apprised with Asian market. Also, these attempts gave an idea that finding a

strategic partner in Asia would be not an easy task.

How Nissan Was Shortlisted?

Renault decided to send a delegation, to Japan, to find the right strategic partner.

Renault's proactiveness in this regards helped, as it could be a step ahead of the other

hungry competitors.

Nissan and Mitsubishi, being the likely candidates, were sent a letter and Nissan

replied immediately for the same. This gave positive vibes to Renault delegates and

thus seeds got planted for formation of a global alliance.

The letter sent by Mr. Louis Schweitzer, Chairman, Renault to Mr. Yoshikazu Hanawa,

Chairman, Nissan reinforced this development. Further, the leaders of both the

organization shared a good rapport. Thus, the companies decided to go further check

the synergic opportunities available.

Renault was enthused of forming a strategic alliance with Nissan which evident from

the quote of Mr. De Andria, VP, Strategic Planning – “We went hunting for Rabbits and

we found a deer.”

Competition for an Alliance

French automaker Renault faced stiff competition from the German-American

automaker Daimler-Chrysler for the alliance with the Japanese automaker Nissan.

Daimler was initially interested in the tuck division of Nissan; but since the car and

truck division were intertwined in a complex manner, it decided to bid for the entire

company.

Renault, on the other hand, accepted the condition that the deal has to include the

truck division. Now we examine the pros and cons of Nissan’s potential alliance with

Daimler and Renault:

Daimler Chrysler

Pros

Daimler was twice the size of Renault and had the financial capacity to absorb all

the accumulated loss of Nissan.

Due to its financial strength, Daimler had the capacity to help Nissan in industrial

restructuring which would have been a long and difficult process in Japan.

Cons

Most important issue in the Nissan-Daimler was that it was an acquisition deal, not

a partnership of equals. So Nissan would have lost face in front of Japanese as

well as internationally.

The synergy in this deal would have been less. Both Nissan and Daimler were strong

in large cars segment.

During that period, Daimler was struggling to make its previous merger with Chrysler a

success, so a second merger with an Asian company, so diverse in culture, could have

been difficult to handle.

Renault

Pros

This was a partnership of equals. Nissan would have been able to maintain its

individual identity.

Major issue for Nissan was cost management and rationalisation of its product portfolio.

At that time Nissan had 26 platforms for vehicles. Thus the cost of manufacture was

very high.

Renault was known for its low cost structure and global strategy for platforms

and purchasing. At that time Renault worked on only 8 platforms for its cars. Thus

Nissan could have benefitted more by having an alliance with Renault compared to

Daimler. Daimler was known more for its luxury cars and low cost manufacturing

was not its forte.

The synergy between Renault and Nissan was very high. Their product

portfolio complemented each-others’.

The geographic regions where both were strong were different. Renault was a

major player in Western Europe and South America while Nissan was strong in

North and Central America, Asia, Japan and Africa. Financial analysis showed that

potential synergy would yield, at least on paper, a saving of 1.5 billion in 2002.

Cons

Since financially Renault was not very strong, a deal with Nissan could have pulled

Renault into red.

Renault’s previous attempt to form a partnership alliance with Volvo had failed.

Thus we see that the pros outweigh cons in favour of Renault.

The Outcome

Throughout the negotiation process Renault Executives maintained honesty and

built an environment of trust, without appearing arrogant in any way. This helped the

deal go through in Renault’s favor. Once Daimler pulled out of the deal, there was no

other option for Nissan but to accept Renault’s offer. But Renault Executives acted

very honestly and did not take any undue advantage of Nissan’s weak position.

Company Background- 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.

By 1936, as World War II appeared imminent, the production shifted from cars to

military trucks. After the war, many of Nissan’s former auto dealers moved over to

Toyota, leaving Nissan with a depleted sales force. However, by 1945 and 1947, the

production of trucks and cars resumed respectively. And by 1960 Nissan got the

Deming prize for engineering excellence.

During the 1960s, Nissan’s main competitor was Toyota and its cars were designed to

directly compete with Toyota’s products. It was also during this period that it

established Nissan Mexicana, S.A.de C.V, its first overseas manufacturing plant. In

1966, Nissan merged with Prince Motors as per the advice of the Japanese

Government since Nissan maintains close link with the government. The twin oil crisis

in the 70s resulted in greater demand for smaller and more efficient cars which led to

surge in exports.

In the 80’s Nissan set up manufacturing base in the USA and it was also looking to

start a plant in Europe. Nissan initiated rapid overseas expansion but the domestic

sales were beginning to fall. Nissan entered into a vicious cycle of over-capacity,

falling sales and price cuts in the domestic market while at the same time expanding in

the overseas market. This led to conflicts with the Japanese unions and the

management. Nissan employees protested against the idea of increasing production

capacity overseas when their domestic plants were underutilised. The then President of

Nissan, Takashi Ishihara’s unilateral approach did not go down well with the union and

this badly affected Nissan’s image.

The succeeding President 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. Nissan was losing touch with the customer needs of the current generation

since the dealers, 50% of whom were company owned, did not have the autonomy in

selecting car models. .

With the burst of Japan’s bubble economy, Nissan’s profits plummeted. 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. In 1993, 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 that time, Nissan’s 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. Hanawa wanted to integrate Nissan towards one vector in order to

show better results. His initial plans focused on new car development, with the aim of

recovering domestic market share.

Hanawa’s main concern was to change the culture of the organisation. Nissan’s culture

was that of complacency and there was a lack of urgency. There was no cross-

functional and cross- regional communication. The design of the cars was out of touch

with the market. There was a bureaucratic culture rooted into the organization which

made implementation of change very difficult.

Nissan suffered a net loss of 14 billion yen in 1998 and it was clear that some

initiatives had to be taken to rescue the company. The Corporate Planning Department

presented ‘Global Business Reform Plan’ to Hanawa and the board. It proposed to

achieve profit to sales ratio of 5% by 2001 and 6% by 2003. Two options were

presented that would help the company achieve this target. One was to undertake a

drastic down-sizing and the second option to form a global alliance and to survive

through increased scale.

Nissan’s Need for a Global Alliance

Nissan had a greater need for a partner to pull it out of its financial instability. The

other non-financial considerations for a global alliance were:

Technology access: Need to increase efficiency by concentrating on production of

smaller cars.

Focus beyond quality: Nissan’s obsession with quality had driven the company

away from market reality such as customer orientation and importance of product

designing. The aspects of cost reduction, Marketing, innovative style and appearance

could be introduced to the company through an alliance. This was essential in steering

the company towards market reality.

Global Presence: Though Nissan had a presence outside Japan, the company was

unable to leverage profitably from such a presence. A local partner or a well-

established player would assist in overcoming this shortcoming in Nissan. Also, the

Asian slowdown called the Japanese companies’ potential into question.

Nissan’s Urgency for a Revival

Mr.Yoshikazu Hanawa, Nissan’s 14th president was heading the global alliance with

Renault. He foresaw March 30, 1999 as a symbolic deadline for reviving the

company’s financial health. That was the period for the short-term credit lines to be

renegotiated. While Renault’s reason for a global alliance was more towards

strengthening its current global position, for Nissan it was a matter of survival. A

partner was needed to keep Nissan’s high manufacturing cost, trim its product range

and make quality available at an affordable cost. The declining global market share

(4.9% in 1998) also reiterated the need for a global partner.

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.

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”.

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.

The Alliance Process

Schweitzer’s inner circle for the tightly guarded ―Pacific Project included Executive

Vice- Presidents (EVP) Georges Douin and Carlos Ghosn. Douin, who oversaw product

and strategic planning and international operations, conducted the early studies of

potential Asian partners. Ghosn was a cost-cutting expert who masterminded Renault’s

post-1996 restructuring. It did not take long for the group to look beyond a one-country

relationship with Nissan. Renault and Nissan had many common and

complementary interests. Both CEOs were intent upon improving their

companies’ competitiveness, rebuilding the organizations, and enhancing the

companies’ reputations. There were no previous conflicts between the two companies

or CEOs to impede a relationship. Conversely, there was no strong foundation on which

to build.

Issues

The meta-issue for the companies to negotiate was the basic nature of a relationship.

Specific agenda items included the scope of their collaboration, their respective

contributions, and an organizational structure. Whatever the basic relationship,

management control and equity valuations were bound to be Renault-Nissan sensitive

issues. Given Nissan’s history and prominence in Japan’s industrial sector, Hanawa

and his team would be protective of the company and determined to ensure that

Nissan Motor had a future. At the same time, while Renault had $2 billion in cash to

spend, the company’s financial history and government supervision necessitated that

Schweitzer proceed prudently.

The Negotiations

The 9-month period may be divided into five phases:

1 – Preliminary Study (July - September 1998)

2 – Joint Study Teams (September - December, 1998)

3 – Reporting (December 1998)

4 – Alliance Formation Process (January-March 13, 1999)

5 – Employee Involvement

The following sections describe the various actors and each phase of the negotiation

process.

I. Preliminary Study (July - September 1998)

i) Nissan’s corporate planning department which had people from all the

fieldsstartedoff their investigations on the European car company and did a

thorough internal study of Renault and came out with findings mentioned below:

The main reasons for optimism was found based on research – Two company

showing strength in different regions, Nissan’s strength in large cars,

while Renault in small cars and also the common platform integration for

manufacturing the vehicles.

Size of the two companies in terms of market capitalization were looking similar

and hence there is lessening threats of future dominance or possible take

over from either side.

ii) With 80% of Renault’s sales are coming from Europe, they wanted to broaden the

coverage, gain scale and solidify market position.

Both the company developed a shopping list of more than 100 projects and out of

which 21 projects were prioritized first after numerous negotiations with both the

company representatives.

II. Joint Study Teams (September - December, 1998):

From September to December 1998, 21 intercompany teams assembled from

specialists on each side thoroughly examined the companies’ respective operations.

The teams held meetings at nearly every one of the companies’ sites worldwide, visited

plants, and exchanged cost and other proprietary information. Top management

facilitated collaboration within the study teams and a coordinating committee reviewed

progress monthly. Communication between study teams was prohibited; teams

reported directly to the chief negotiators.

Engineers were asked to control to have an in depth study on projects and there was a

greater amount of secrecy between two companies. But as discussions progressed,

companies were opening up for better synergies and most of the projects resulted in

‘win-win’ situation.

III. Reporting (December 1998):

After the submission of reports the two companies decided to form a common strategy

in order to achieve the profitable growth for both the companies. Their basic policy

was to distinguish the brand identities from each other and to integrate the processes

that were far away from customers.

IV. Alliance formation (January-March 13, 1999):

The negotiation became aggressive focusing on the restructuring, finance and legal

affairs. For Nissan apart from finalizing the agreement, their main objective was how to

examine the sharing of best practices with Renault. But Renault was not ready to

reveal until the alliances were formed.

V. Employee involvement:

Renault laid its emphasis on communication comparatively more than

negotiation, which made Nissan employees easy to understand Renault.

For Nissan, Hanawa was always at the center of control and he

communicated mostly to his three lieutenants alone which made some key

people to think why they were not involved in the processes at all directly.

This would have allowed the HR to plan for future and to get ready to face

issues after post alliance integration.

Hanawa and Schweitzer

Phase One

In June 1998, after the Schweitzer-Hanawa exchange of letters, a select group of

Renault and Nissan representatives met secretly to explore their respective interests in

strategic collaboration. By the middle of the month, they were preparing for their CEOs

to meet. Six weeks later, Schweitzer and Hanawa met for the first time in Tokyo.

They established rapport quickly and put the wheels in motion for studies on potential

benefits of collaboration.

Phase Two

During the 7 weeks from August 1-September 10, working groups in and from both

companies conducted preliminary analyses on purchasing, engines and gearboxes,

car platforms, production, distribution, and international markets. Results were

promising. Nissan’s capabilities in large cars, research and advanced technology,

factory productivity, and quality control complemented Renault’s talent in medium-sized

cars, cost management, and global strategies for purchasing and product innovation.

Highlighting the trust he felt they had established, Schweitzer proposed to Hanawa

that they strengthen their relationship by holding each other’s shares. Hanawa replied

that Nissan had no money to spend on buying Renault stock. Schweitzer said they

could talk about the subject again in the future though he also underscored how critical

their collaboration was to Renault’s future. On September 10, the two CEOs met in

Paris and signed a memorandum of understanding committing their companies to

evaluate synergies more extensively in an exclusive arrangement for the next 3½

months.

Phase Three

From September to December 1998, 21 intercompany teams assembled from

specialists on each side thoroughly examined the companies’ respective operations.

The teams held meetings at nearly every one of the companies’ sites worldwide, visited

plants, and exchanged cost and other proprietary information. As one reporter (Lauer,

1999a) later observed, information exchange of this kind was remarkable in an industry

where companies jealously guard their manufacturing secrets.

Top management facilitated collaboration within the study teams as needed and a

coordinating committee reviewed progress monthly. The executives’ main concern

during this period was development of a business strategy; specific financial issues

were left for the final rounds. Schweitzer and Hanawa—and the negotiation teams

—continued their meetings at venues ranging from their headquarters to cities in

Thailand, Singapore, and Mexico.

Within Renault, Schweitzer and his executives concentrated on refining their concept

of an alliance. They drew on their experience with Volvo and examined the Ford-

Mazda partnership as a model, paying particular attention to financial and cultural

dimensions.

By October, the negotiations centered on a Renault investment in Nissan. For his part,

Hanawa set four pre-conditions for a deal: retaining the Nissan name, protecting

jobs, support for the organizational restructuring already underway at Nissan with

Nissan management leading the effort, and selection of a CEO from Nissan’s ranks.

In mid-November, Nissan’s board of directors took the extraordinary step of

inviting Schweitzer, Douin and Ghosn to Tokyo to present their vision of the alliance.

The presentation was so well-received that the Renault team deemed it a turning point

in the negotiations.

Later in the month, Hanawa paid a courtesy call to DaimlerChrysler co-CEO Schrempp

in Stuttgart. Schrempp proposed to go beyond his interest in Nissan Diesel and make

an investment in Nissan Motor itself. Hanawa then flew to Paris to inform Schweitzer

personally of his intention to follow up on Schrempp’s offer. This was not Hanawa’s

first contact with alternative partners. He had also sounded out Ford CEO Nassar

(Ghosn & Riès, 2003:176), who showed no interest.

In December, as the Renault and Nissan negotiating teams discussed the legal form of

a relationship, they hit an impasse. Renault had suggested a subsidiary or joint

venture. Nissan rejected both concepts. EVP Ghosn, who did not regularly participate

in the negotiations, proposed an informal alternative that both sides accepted.

At the end of December, with the approaching expiration of the September

memorandum, Schweitzer and Hanawa negotiated over, among other things, a clause

―freezing Hanawa’s contact with other potential partners until the completion or end of

talks with Renault. Hanawa demurred from locking in just yet. On the 23rd, the

CEOs signed a letter of intent, minus a freeze clause, for Renault to make an offer

on Nissan Motor by March 31, 1999, Nissan’s fiscal year-end. Hanawa asked

Schweitzer to include Nissan Diesel in the offer.

Phase Four

The fourth phase of the negotiations began with Renault’s first public, albeit guarded,

acknowledgement of its talks with ―potential partners … including Nissan, but the

period was punctuated by developments in the competing Nissan-DaimlerChrysler.

DaimlerChrysler was not simply a foil for Hanawa to leverage in the Renault

negotiations; it had real pull of its own with Nissan management. They admired

Daimler (Mercedes) and knew DaimlerChrysler had deep pockets. In contrast, they

saw Renault as ―no better off than Nissan in terms of future viability and survival.

On the Renault-Nissan agenda, Renault’s cash contribution was a tough issue. Nissan

sought $6 billion. Renault initially expressed interest in a 20% stake, and if Nissan

were valued between $8.7 billion (market value) and $12 billion (a comparable

companies valuation), a 20% stake would yield no more than $2.4 billion for Nissan.

Nonetheless, Nissan was not ready to move quickly from its position. It had

DaimlerChrysler in the wings and breathing space afforded by a long term, ¥85 billion

loan ($740 million) from the state-owned Japan Development Bank. Fluctuating share

prices and exchange rates further complicated matters.

The negotiating teams continued their discussions through the winter, meeting several

times in Bangkok. In late February, a Nissan spokesman denied that a Renault deal

was imminent and asserted that talks with DaimlerChrysler were ―continuing. This

may have reinforced Schweitzer’s fears that DaimlerChrysler was the favored partner.

Two weeks later, on March 10, Renault’s position completely changed when Schrempp

formally withdrew his bid for Nissan Motor. The DaimlerChrysler Board of Directors,

leery of Nissan’s financial condition and understated debt at Nissan Diesel, had pulled

him back (Barre, 1999b). Hanawa probed Ford’s CEO yet again about a linkage, but

without success. Schweitzer realized Hanawa’s choice was now ―Renault or nothing.

Phase Five

On March 16, at the beginning of the 2-week final phase of the negotiations,

Schweitzer obtained the internal approvals he needed from the Renault Board of

Directors and Work Council (Renault Communication, 1999). These decisions

centered on a 35% stake in Nissan for $4.3 billion. This amount exceeded the 33.4%

threshold for an investor to gain veto power on a board in Japan and remained below

the 40% level at which French accounting standards would require Renault to

consolidate Nissan’s debt. With the approvals in place, Renault issued a press release

about its intention to purchase 35% of Nissan. At this time, Schweitzer offered to start

exclusive negotiations with Nissan without delay.

The negotiations intensified. Nissan executives withheld their approval of an alliance

for several days (Lauer, 1999b). When an agreement was finally reached, Renault’s

investment had risen to $5.4 billion for 36.8% of Nissan Motor and stakes in other

Nissan entities.

The Deal

The global partnership agreement signed by Schweitzer and Hanawa on March 27,

1999 committed Renault and Nissan to cooperate to achieve certain types of

synergies while maintaining their respective brand identities. The strategic direction of

the partnership would be set by a Global Alliance Committee co-chaired by the

Renault and Nissan CEOs and filled out with five more members from each company.

Financial terms included an investment of ¥643 billion ($5.4 billion) by Renault. For

¥605 billion of the total, Renault received 36.8% of the equity in Nissan Motor and

22.5% of Nissan Diesel. With the remaining ¥38 billion, Renault acquired Nissan’s

financial subsidiaries in Europe. The agreement included options for Renault to raise

its stake in Nissan Motor and for Nissan to purchase equity in Renault. With respect

to management, Renault gained responsibility for three positions at Nissan

(Chief Operating Officer, Vice-President of Product Planning, and Deputy Chief

Financial Officer). One seat on Renault’s board of directors was designated for

Hanawa. At the alliance level, plans called for the formation of 11 cross-company

teams to work on key areas of synergy (e.g., vehicle engineering, purchasing,

product planning) and to coordinate marketing and sales efforts in major

geographic markets.

Model Categories of Nissan and Renault

Model Category Renault Nissan

Entry Level x

Sub-Compact x x

Compact x x

Mid-Size x x

Luxury x x

Minivan x x

4*4 x

Pick-up x

Utility x x

From the above table it can be inferred that in model categories too, Nissan and

Renault shared a medium commonalty. This again can result in excellent synergies.

Thus each can market their different models in others strong markets.

Financial Position of Nissan V/S Renault

By 1998, Nissan Motors was under major financial problems. From 1992, the

company has been showing losses. This left the company with total debts of 23

billion Euros and a list of annual repayments that was getting difficult to service.

The company did not have a rational purchasing policy nor did it have sound

relations with suppliers. Production costs were high. Nissan’s global market share

slumped from 6.4% in 1990 to 4.9% in 1998. Quest for performance and quality at

Nissan came at a high cost.

The Renault group is the oldest French automaker. Operated as a public enterprise, it

started the internationalization process during the 1970’s and through the mid

1980’s enjoyed a strong market position, until 1984 when the company started to

falter by experiencing record losses of $2B. Based on the setting of two clear

priorities, quality and innovation, the company was able to regain profitability as early

as 1987, maintaining this record up until 1998. Throughout this period however, the

company could not achieve global status and reported productivity issues that

resulted in slim margins. Despite this situation, the company showed an enviable cash

position, no debt and a net worth of €7.9B. With such financial health and accumulated

international experience, Renault was in a good position to address possible mergers

and/or acquisitions to increase its global market share.

Key Financial Insights

The debt to sales ratio at Renault is very conservative. They rely mostly on internally

generated funds to finance their operations. While at the same time the debt in Nissan

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 has been reporting consistent Net Loss from 1993.This reduced net income can

be attributed to the increased inefficiency in operations of Nissan. 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.

Nissan was one of the largest Japanese manufacturers in terms of the numbers of

units sold. 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 of more than 8% while

that of Nissan was less than 2%.

Operations Perspective

Engineering design cannot be harmonised soon since Japanese people work

twice as much as Renault engineering persons. It would not be easy for

Renault to develop a car in two years like Nissan. On the other hand they can

agree on the validation markers which can effectively be co-ordinated.

The difference in approaching the supplier relationship should be worked out

properly.

Renault believes in complete freedom to its supplier after design but Nissan

treats its suppliers as partners and always has a control over it right from

design to delivery. Mutual understanding should be achieved in dealing the

suppliers since company’s profit is reliable on effective global purchasing.

The ten common integration platforms should be properly utilized for

producing the vehicles for obtaining the cost efficiency in manufacturing.

Nissan should quickly adapt the product innovation and design concepts from

Renault in order to revive their car segment to suit for younger generation.

Renault should learn the Quality techniques and productivity improvements from

Nissan in order to reduce the cost of the products and increase in efficiency.

Effective cost cutting techniques should be implemented in Nissan with the help

of Carlos Ghosn immediately to realize the benefits and in order to overcome

financial crisis for long term.

Toyota Production system of bottom up approach, effective communication and

employee effectiveness should be adapted in both the companies to realize the

productivity improvements.

Customer voice should be heard before designing the product through

dealers and also effective network of independent dealership network should

be built instead of Nissan’s complete control over them.

New Company, New Hr Strategies

Human Resource Department played a key role at Renault in managing and

motivating people. This is evident from the involvement of HR in matters of

social relations and negotiations with the Unions. This is also evident from the fact

that the top-most Renault management team includes the Corporate Secretary

General, Human Resource, Renault Group.

The management committee of all major Group divisions and departments have a

Human Resources Advisor (HRA), who is responsible for assessing and monitoring all

the executives under his/her purview. HRAs are centrally co-ordained on a regular

basis. This ensures that human resource policies pertaining to optimization of

individual careers in terms of mobility assignments and training are properly

implemented throughout the organization. They are in- charge of summarizing

assessments and judgments made by different managers. The overall restructuring of

Renault’s HR system was initiated in 1998 and resulted in the current form of HR

Department.

Improve the Group’s Productivity

The priorities of the HR department were three fold: (a) development of HR managers

who could play a strategic role in the organizational restructuring program (a) building

an international organization and (c) to be more people oriented by addressing the

needs of professionals working within the group.

Within the framework of organizational restructuring the primary role of HR was to

improve the productivity of the group. Although Renault was among the large global

automobile companies in terms of annual vehicle production, the company had

suffered from decreasing productivity since the 1990s, which had worsened due to

sluggish vehicle sales both at home and abroad. To improve productivity, Renault was

pursuing its long-standing policy of regularly scaling down the workforce through hiring

freeze.

Conclusion

The alliance highlights the thoughtful and careful progress required for a global

alliance between two culturally different companies. Key lessons from this study are:

Display of power and force may not be favourable to a global alliance.

Dominance destroys motivation. There must be a clear ‘win-win ‘cause for the

alliance. Mr. Schweitzer’s emphasis and practice of ‘equal status and

participation in management’ assisted in gaining the trust of his Japanese

counterpart. Trust has always been an integral part of the Japanese culture.

Change in management system to reflect the need of the hour is crucial for a

global alliance.

Japanese management system mostly displays a management of

consensus. This, however, may challenge the single-minded thought process

and conviction required at times of crisis. Mr.Hanawa’s decision to not

involve the larger portion of the management during the realization of this

alliance gave him the autonomy to make or change decisions without wasting

a lot of time. Also, Mr.Hanawa also highlights the need for change in the

implementation of Japanese Keiretsu culture.

Dedication of resources to study the pro and cons of a global alliance must

be promoted by both the parties. The team involved in this study should

encompass personnel across all functions in order to assess even the soft

elements such as operational fit at engineering level.

Exchange of knowledge during this process may be viewed as parting

with company sensitive information. Knowledge transfer should be made

effective between the two partner’s in order to depict trust, honesty and

mutual consideration and understanding. Secretive functioning may hamper

the relationship building efforts.

For smooth functioning, each partner in the alliance should not be threatened

by a future dominance or a takeover by the other side. The complementary

factors between two companies in question would help to resolve this fear.

Thus, Renault and Nissan before leading towards formation of global strategic

alliance, they went beyond ostensible differences; probe other parties’ interests and

capabilities for fit. Schweitzer and his team focused on Renault and Nissan’s common

long-term goals, complementary interests and respective capabilities. Further, both the

entities prepared extensively, continuously, and jointly as well as internally. This led

to a conception of a new form of relationship as it was a not common internationally

in the auto industry where one-way holdings prevailed. Further, both the parties

behaved not only as a negotiator but also as a prospective partner. Thus, they

effectively assessed the quality of an outcome by its effects as well as its content.

However, just the formation of alliance would not have solved the dilemma faced by

both the organisation. The alliance would have to effectively exploit the synergies of

both and thus propel their growth.

Bibliography

(http://blog.alliance-renault-nissan.com/)