The making of a Global Alliance: Nissan and Renault

The term tactical alliance has become widely used to explain a contract between two or more companies joining together to cooperate in a particular service activity, so that each advantages from the strengths of the other and gains competitive benefit. The businesses are normally not in direct competitors, however have similar service or products that are directed towards the very same target audience.1 The development of strategic alliances is extensively seen asa action to globalization and increasing unpredictability and complexity in the business environment.

In the recent years business worldwide, including lots of market leaders, are ending up being progressively involved in strategic alliances. Furthermore, a number of studies have disclosed that such partnerships are appreciable from traditional foreign financial investment joint endeavors in a number of crucial ways.

Strategic alliances involve sharing of understanding and expertise between partners as well as the reduction of threat and expenses in locations such as relationships with suppliers and the development of new items and innovations.

“The majority of the auto industry views this as a time of consolidation, not expansion, as many expect global overcapacity to exceed ten percent,” said Daron Gifford, National Automotive Industry leader, KPMG LLP. “The reasons for this consolidation are clearly structural and material-cost reduction, as well as revenue growth through new business opportunities.” For the fourth consecutive year, slightly more than half of the executives, 57 percent, agree that alliances will be more important than mergers and acquisitions in the auto industry over the next five years.2Problem DefinitionThis paper will discuss strategic alliance between Nissan and Renault in 1999, the negotiation period that proceeded it and all issues and problems that arose during this process, deriving among others from cultural differences.

Nissan Motor Company, Limited shortened to Nissan is a multinational automaker headquartered in Japan. It formerly marketed vehicles under the “Datsun” brand name and is one of the largest car manufacturers. Nissan is among the top three Asian rivals of the “big three” (the three major Japanese automakers: Nissan, Honda and Toyota). Currently, they are the third largest Japanese car manufacturer.

Nissan has demonstrated a commitment to innovation since the company’s founding in 1933. Not only are Datsuns the first mass-produced Japanese vehicles, their unique, automotive style makes a major impact on the U.S. market when Datsun sedans and compact pickups are first imported in the late ’50s.3Renault S.A. is a French vehicle manufacturer producing cars, vans, buses, tractors, and trucks. The company is well known for numerous revolutionary designs, security technologies, and motor racing. Present in 118 countries, Renault is a multi-brand volume carmaker.4It is also worthwhile to mention another global player in this industry, DaimlerChrysler, since it has been the Renault’s rival during the alliance negotiations.

DaimlerChrysler was founded in 1998 when Mercedes Benz, manufacturer Daimler-Benz (1926-1998) of Stuttgart, Germany merged with the US-based Chrysler Corporation. The deal created a new entity, DaimlerChrysler. Daimler produces cars and trucks under the brands of Mercedes-Benz, Maybach, Smart, Freightliner and many others.5This report will analyse the way to the global alliance between Nissan and Renault, reasons for Nissan having chosen Renault instead of DaimlerChrysler and what kind of problems both companies faced and needed to solve at the beginning of their cooperation.

AnalysisRenault’s Point of ViewBy the end of the 90s Renault was the world’s ninth-largest car manufacturer wit 4,3% of the market. In 1997 Executive Vice President Georges Douin had submitted an international development plan in connection with major changes taking place on the world automobile market. The shift towards the globalisation of the industry looked inevitable.

The company decided to extend its product range through strategy of alliance with a partner in the other main economic region. It was the only way so as not to remain an only restricted player in the European industry and not condemn the company to obey the market rules imposed by the biggest firms. One scenario introduced same potential partners: Subaru, Mitsubishi, Suzuki and Nissan. A suitable partner should have been smaller than Renault to be within its reach (each company besides Nissan). During the analysis, two Japanese companies could have been eliminated as potential partners very quickly (Suzuki due to the fact that GM had a large stake in it and Subaru). As a result, only Mitsubishi and Nissan stood out as the most likely candidates.

Nissan seemed too big, however from the very beginning the Renault delegation members were struck by the attentiveness of the Japanese representatives. Unexpectedly, Nissan was very willing to start talks with Renault. At the same time a very important event took place: a merger between Daimler-Benz and Chrysler. Moreover, DaimlerChrysler started negotiations with Nissan about taking over the group’s truck division Nissan Diesel. Renault CEO – Louis Schweitzer wrote to Mitsubishi and Nissan pointing to the scheme of a potential partnership. Nissan reacted quickly, Mitsubishi took a long time to get back.

At the end of July 1998 Louis Schweitzer met Nissan’s chairman Yoshikazu Hanawa and they learned to trust each other very quickly. During the next two months they discussed about 20 potential opportunities for joint synergies like geographical distribution or complementarity of product ranges. At the same time Louis Schweitzer broke negotiations with Mitsubishi.

Renault’s strength was its product range – mid-range cars and light commercial vehicles while Nissan specialised in mid-range and four-wheel-drive vehicles. The products was extremely complementary. The second advantage was Renault’s geographical reach – Western Europe and South America while Nissan operated mainly in Central and North America, Asia, Japan and Africa.

Although the Nissan industrial outlook was promising (high quality, R&D programs and modern technology), the same could not have been said of organisational matters. In 1998 Nissan had major financial problems, first of all because of high manufacturing costs and too diverse product range. What was very important, Renault had achieved excellent cost control and could teach it Nissan. But only DaimlerChrysler, the second candidate to make an alliance with Nissan, had the financial capacity to absorb Nissan’s deficits and take charge of an industrial restructuring.

The competition of DaimlerChrysler wasn’t the sole problem of Renault. 6 years ago, in 1993, the company tried to make a merger with Swedish Volvo, but despite culturally closeness negotiations collapsed and the merger never took place. This failure impressed a stamp on Renault. International motor industry experts gave DaimlerChrysler a decisive advantage in the negotiations. But unexpectedly the CEO of DaimlerChrysler, Jürgen Shremp, called a press conference and said: “… a close relationship with Nissan are not achievable as quickly and smoothly as initially expected”. It left a door open for Renault.

Nissan’s Point of ViewIn 1998 Nissan was in heavyweight money troubles – reported losses of 14 billion yen, with the debt to sales ratio rising to 66%. Nissan’s roblem need to be understood in the context of changes taking place in the automotive industry. Two major factors were: world-wide over-capacity in the automobile market and stricter environemntal and safty regulations that increased R&D cost per car. Undoubted Nissan’s strengths were innovation and high quality made cars. From 1996, when Hanawa became the 14th President of Nissan, his main concern was to change the culture of the organisation. He wanted to change Nissan into complacent company, despite the economic distress experienced in Japan after the burst of the bubble economy and the poor market and financial performance. Created in 1998 a “Global Business Reform Plan” proclaimed achieving a consolidated operating profit to sales ration of 5% in 2001 and 6% in 2003. There were two way to realise these targets. The first one was to implement an independent survival plan by drastic down-sizing e.g. reduced development costs, integration of platform or divesting non-core business assets. The second approach was to form a global alliance. Of course in this context the second option was proposed. The company needed an outsider to change the difficult situation because Janaese would have never agreed to so drastic and huge changes.

RecommendationsThe crucial question emerging from this case study may be formulated in a short phrase “why does Renault win the battle for Nissan?”. In other words it would mean: what makes a successful alliance, since this has certainly been a major concern by Nissan executives when making this decision. This key issue may be discussed from three different perspectives: taking into consideration potential benefits of the alliance, alternative solutions (alliance with DaimlerChrysler) as well as the influence of cultural background.

Potential benefits of the allianceFirst of all it should be emphasized that the potential benefits of the alliance have come under scrutiny long prior to the final decision. Moreover, they have not only be investigated theoretically but several teams composed of employees from both Renault and Nissan have been working together to analyse them thoroughly, which took a form of a series of Franco-Japanese joint studies. These two factors are of the utmost importance when evaluating the main issues that would shape a potential alliance.

The first answer to the question “why does Renault win the battle for Nissan?” may be called product complementarity. As it was mentioned above, due to the alliance Nissan could gain from Renault’s greater know-how in scope of small passenger cars, while Renault get a possibility to enrich its product range with Nissan’s light commercial vehicles and large passenger cars.

The second crucial factor was the geographical complementarity. The collaboration between both companies provided them with an increased geographical coverage: Nissan could focus on the American market and enjoy some synergies in Europe while Renault got a chance to become a global player with an access to the Asia-Pacific and Latin-American markets.

Finally, the third field that mattered were cost synergies. These synergies, mainly due to rationalization of platforms and a joint purchasing and distribution policy should have amounted to three billion euros savings in coming years. There has to be stressed that this potential for platform integration, indicating a possibility to reduce costs and increase efficiency for both companies has been practically qualitatively and quantitatively analysed by Franco-Japanese teams mentioned above.

However, the potential synergies concerned not only commercial and technological issues, which certainly also contributed to the great success of the discussed alliance. Since the strengths of both companies differed, Renault achieving excellent cost control and succeeding in customer satisfaction, management and the design of their innovative vehicles and Nissan being an expert on quality control and R&D, the exchange of know-how in these fields seemed very promising also from the long-term point of view.

Taking into consideration potential synergies, the key to succeed in an alliance seems to be a win-win partnership. Only a visibly beneficial character of an alliance for both sides of the transaction, among with the complementarity in as many areas as possible and a long-term orientation of these benefits may guarantee a success.

Alternative solutionsThe Nissan – Renault alliance should not have been taken for granted from the very beginning. Nissan needed a cash infusion immediately and the Renault corporation was not the only candidate here. As an alternative the Nissan’s management considered also an alliance with Daimler Chrysler, whose merger few months earlier surprised the whole automobile industry.

A German-American giant had a much greater capacity to absorb Nissan’s deficits. Moreover, it would have been a more prestigious partner for Nissan, with Renault being rather unknown and having no strong image on the Japanese market. The result of the new merger, DaimlerChryslerNissan would have been certainly perceived as a global player with strong presence in all three of the world’s major economic centres.

However, by such a merger there was a risk included of future dominance or possible take over from the bigger company as well as loss of the management autonomy and brand identity.

Furthermore, the previous merger of Daimler and Chrysler has shown an underestimation of cultural clashes between the two companies by the top management. Although the deal was proclaimed as a merger of equal partners, it turned out in a quite short period of time that the Germans has seen themselves as a superior partner and their authoritative approach has been perceived as rather arrogant from the Americans point of view.

Such an attitude has most likely contributed to the fact, that it was finally the Renault – Nissan alliance that took place despite the fact that both the whole automobile industry as well as the Renault management itself expected rather the opposite solution. Finally, Nissan had to choose between a merger and a partnership. The emphasis on the equal status of both partners of an alliance as well as the constant search for win-win solutions proved to be decisive.

Cultural backgroundThe third perspective of the alliance success derives from the attitude of the management to the cultural diversity of both partners. Current studies indicate the fact that even two out of three mergers fail due to cultural clashes. As it has been stated by dr. Geert Hofstede, culture is more often a source of conflict than of synergy. Cultural differences are a nuisance at best and often a disaster.6 Therefore, it is essential not to underestimate these differences from the very beginning.

The example of the Franco – Japanese cooperation from the early phase of analyzing potential synergies of the alliance on both management and operational level due to the implementation of Renault – Nissan joint studies may be an illustration of a perfect recognition of the issue and the long-sighted attitude of both management boards.

Especially the behaviour of the French shows a deep understanding of the issues related to the cultural background. The policy of occasional but continual contacts on the Asian automobile market already a decade prior to the alliance and the beginning of preparations to the deal including maintaining a trustworthy relationship with a partner already a year before reflects the awareness of the typical for all Asians Long-Term Orientation7.

Moreover, the constant search for the mentioned above win-win solutions and the stress on beneficial position of both partners seems to be in line with the Japanese management style placing emphasis on consensus and avoiding extreme approaches. This is closely related to the crucial issue of the whole negotiations – the respect for the basic requirement in the Japanese company relations, namely the need to “save face”. This need has deeply influenced the final scope and form of the alliance, including the equal status, reciprocal buyout of shares and mutual participation in management boards. Moreover, this need has also dominated the conditions referring to the turnaround plan by Nissan implemented after the alliance. Only a new CEO, a foreigner8, might have made drastic changes, unthinkable to be done by a Japanese, contributing to cost lowering and restoring Nissan’s profitability.

Cultural differences also had an impact on the decision making process during the negotiations, since the French although aware of the typical for Japanese system of collective responsibility9 found it difficult to identify the decision-makers within Nissan.

Finally, the relationship between the presidents of Renault and Nissan from the French point of view reflects awareness of values crucial for the Japanese such as long term relationship, mutual trust, honesty, truth and partnership, since the “dominance destroys motivation”10. From the Japanese point of view, the negotiating strategy of President Hanawa seems to be a tactic aiming at one goal: not to lose the face. Both long negotiation period and the alternative perspective of an alliance with DaimlerChrysler might be perceived as an attempt to prove the global position of his company on the market, despite current financial problems.

The attitude of Renault towards the Japanese and its understanding of crucial values for this nation have certainly contributed to the positive final decision of the Nissan president. The approach that bases not on imposing own management and manufacturing style but on exchanging best practices of both partners seem to be a key point.

ConclusionsIt is often emphasized that the Renault-Nissan alliance, signed on March 27, 1999, was the first of its kind involving a Japanese and a French car manufacturer, each with its own distinct corporate culture and brand identity. As a consequence, the Renault-Nissan alliance is a unique group of two global companies linked by cross-shareholding, with Renault holding 44.3% of Nissan shares, while Nissan holds 15% of Renault shares.11Form the today’s point of view, the alliance proved to be a great success.

As far as Nissan is concerned, under president Ghosn’s “Nissan Revival Plan” (NRP), the company has rebounded in what many leading economists consider to be one of the most spectacular corporate turnarounds in history, catapulting Nissan to record profits and a dramatic revitalization of both its Nissan and Infiniti model line-ups.12 Capitalizing on the success of the NRP, in 2001 the company initiated Nissan 180, with targets such as an additional sale of 1 million cars, achieving operating margins of 8% and to have zero automotive debts.

Which may be interesting, Ghosn has been recognized in Japan for the company’s turnaround in the midst of an ailing Japanese economy. Ghosn and the Nissan turnaround were featured even in Japanese manga and popular culture.13 His achievements in revitalizing Nissan were also noted by the Emperor Akihito, who awarded him the Japan Medal with Blue Ribbon in 2004.

The first product of the Nissan-Renault alliance was the Nissan Primera, launched in 2001 and based on the Renault Laguna that had been launched in 2000. Than, Nissan’s Micra, Note and Versa models have shared the same mechanical design as the Renault Clio.

The lessons to be learned from the case are as follow. First, in the automobile industry there is a strong consolidation tendency due to the constant struggle to become more cost-efficient and to stay competitive on the global arena.

The crucial issue is, however, to find the right partner. Which matters is the fit – the complementarity of both partners, both in the field of products and geography as well as the previous detailed examination of potential synergies not only on managerial but also on the operational level, which also enables creation of a relationship among employees of both companies that will be profitable in the future, after the alliance.

Moreover, the cultural clashes can not be underestimated, since they may become a source of misunderstandings and conflicts in a merged company. It is important to take advantage of these cultural differences and to create an atmosphere of mutual cooperation also on the operational level.

Finally, the alliance should be beneficial for both sides and that is the key to success. The search for win-win solutions may be difficult and bothering, but it would certainly pay off in the future.

Literature

1. Bartlett, C; Ghoshal, S.; Beamish, P. “Transnational Management”, McGrawHill, 5th ed, 2008Cove Brian “Automotive Industry Executives Predict More Restructuring Over Next Five Years” , March 2007www.geert-hofstede.comwww.nissan-global.comwww.renault.comwww.wikipedia.org