Carlos Ghosn: cost controller or keiretsu killer?

Directorate for Science, Technology and Industry

David Rooney

The biggest business news in Japan in 1999 was the merger between Nissan and Renault. Nissan Motor, which ranks second after Toyota in Japan, had been ailing financially during the 1990s and its rating had slid into the “speculative” category. The company had been looking for a partner to salvage it from its ever-deteriorating financial condition.

But in March 1999, after a number of speculative rumours, the news was confirmed that the French automotive firm, Renault, would acquire 36% of Nissan stock and would send Carlos Ghosn as Chief Operating Officer to replace the bureaucratic and slow-moving management in Nissan. Since then, there is no doubt that this Brazilian-born 45 year-old is by far the most frequently interviewed and most often quoted businessman in Japan.

Those who remember the nationalistic sentiment that prevailed 20 to 30 years ago in Japan might be surprised by this reaction. Nissan was the most prestigious company in the strategically important Japanese industrial sector. Unlike the independently-minded Toyota, Nissan had traditionally been closed off and more attentive to the Ministry of International Trade and Industry (MITI), the powerhouse of the Japanese economy, which regarded Nissan as the centrepiece of its post-war industrial policy. However, when the deal was announced, to everyone’s astonishment, there was no hostile opposition whatsoever, whether within Nissan, industry, government or in the press, to what might have been seen as a humiliating defeat for the Japanese champion company by the power of foreign capital. MITI even stated publicly that they welcomed the move. The Japanese accepted this news with traditional calm and understanding. After all, the move was the only alternative Nissan had left.

The Nissan story and the recent spate of mergers and acquisitions involving Japanese and foreign interests are now seen by many international experts as a sign of change in the insular attitude of the Japanese people. Perhaps Japan is starting to become even more open in its attitude to mergers and acquisitions than some of its counterparts in Europe, as the recent bid for Mannesmann AG of Germany by Vodafone of the United Kingdom would suggest.

The Nissan merger masterminded by Renault is a clear reflection of the weaknesses in the Japanese management system, which not so long ago had been revered by western business gurus. In fact, most of the actions that Mr. Ghosn proposed in the so-called “revival plan” represent a clear departure from the traditional way of doing business. Take keiretsu, for example, that circle of related stockholders which has encapsulated business relations in Japan for two or three decades. The purpose of keiretsu is multiple. Its system of cross-holding of stocks had been devised during the period of rapid economic growth in the 1950s and 1960s, when Japan was obliged to remove restrictions on the holding of Japanese stocks by foreigners, as a condition of entry to the OECD. Typically, 30-50% of stocks were cross-held by companies in the same keiretsu, as a means of preventing take-overs by outside investors. In a sector such as automobiles, for example, keiretsu fostered long-term relationships between buyers and suppliers, of parts and components. Keiretsu members worked together to carry out joint R&D projects, to ensure a stable supply of parts and to provide mutual help when needed.

In Nissan’s case, there is another aspect, which is less well-known but no less important. The senior managers of the keiretsu companies of the Nissan Group were former Nissan employees, and usually senior ones at that. This made it very difficult for Nissan to refuse to buy from these keiretsu companies, even when they were not competitive. This cohesive and long-standing supplier-buyer relationship has been one of the most important ingredients of both the Japanese corporate governance system and management. Breaking up this keiretsu link has always been considered taboo.

A repair job 

Hence the logic of appointing Carlos Ghosn to the task. He had an impeccable track record as a cost cutter, which he earned as president of Michelin North America and later as the executive vice-president of Renault where, in 1998, he saved FF 9 billion (US$1.5 billion) by closing factories – including a politically controversial one at Vilfoord, Belgium – cutting staff-levels and terminating relations with uncompetitive suppliers. A major highlight of his “revival plan” for Nissan is to reduce the number of keiretsu companies tied by cross stock-sharing from 1,400 to a mere four. The stock currently held by Nissan in these companies will be sold off to generate some much-needed cash. This will probably backfire, as these keiretsu companies in turn sell their Nissan stock, a move which will drive down the ailing company’s stock price even further. But Mr. Ghosn seems undeterred. As with Renault before, he is determined to streamline the supply source and cut costs. As a result, most of the present suppliers will be eliminated from the suppliers’ lists, except the most competitive company that will take all the business. Many of the companies in the Nissan Group will face bankruptcy. What is more, managers who were formerly Nissan managers and who have friends and acquaintances in Nissan will become jobless. This attack on the keiretsu is something that Nissan could never have done alone, however urgent action had become.

Management was evidently the single most significant gain Nissan Motor made from the merger with Renault. It did not need much else. For many years, Nissan has been known for the quality of its technology. The company participated in the Japanese space development programme, developing an engine with the power to launch a rocket booster. Nissan’s workers are regarded as industrious and disciplined. However, its sales were in the doldrums and the firm had begun to lose market share.

But the Japanese company did not appear to have the people it needed in top management to steer the 66-year-old company through today’s tough global marketplace. Its business strategy lacked focus and its resources were scattered over too many product lines and overseas markets. It reflected an awkward and ultimately mistaken strategy of trying to compete on all product lines and markets where Toyota, its much larger rival and market leader, was present. So it suffered heavy losses in its operations in the United States at a time when Toyota and Honda were clocking up record profits.

Many proposals were drawn up to deal with the problem, but they were either rejected or just not implemented properly. As a result of the merger with Renault, at least it now has a manager who is free of the old bondage system and who can make the tough decisions needed to break up the keiretsu and revamp Nissan.

In 1853 Admiral Perry forced the Japanese shogun to open its doors to foreign vessels with four gunboats. In 1945 General MacArthur stood on the outskirts of Tokyo after it had been completely destroyed by air raids. Each event marked the end of one era and the beginning of a new one. At the start of the millennium, Mr. Ghosn may have his name inscribed in the history of Japanese business in very much the same way. He has many hurdles to clear before one can really talk of a new era. Whether Nissan will return to profit in the fiscal year of 2001 is far from certain. But it is unlikely to be Mr Ghosn’s fault if it doesn’t. END

Bibliography

OECD, Business And Industry Policy Forum On Structural Factors Driving Industrial Growth: Background Report, 2000.

Shirouzu, N., "Nissan Shakes Japan's Economic Structure", The Wall Street Journal Interactive Edition, 19 October 1999.

©OECD Observer No 220, April 2000 




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