Three questions no one wants to ask following the Ghosn scandal



Peter Els
11/27/2018

Carlos Ghosn’s arrest in Japan over accusations of under-reporting his compensation and personal use of company assets is a bolt from the blue, threatening to remove the leader of the Renault-Nissan-Mitsubishi Alliance in the midst of the unprecedented disruption sweeping the industry.

Ghosn, 64, as architect of the two-decade-old Alliance, has enjoyed a near-cult following in Japan. And while he continues to oversee the tie-up, held together by complex cross-shareholdings, both the Nissan and Mitsubishi boards have voted to dismiss him – Nissan with a unanimous vote.

 

Image Source: Bloomberg.

 

Under his watch, the Renault-Nissan-Mitsubishi alliance has grown to challenge the Volkswagen Group and Toyota for title of the largest automaker in the world, with sales of more than 10 million vehicles in 2017.

But with the globetrotting Franco-Brazilian executive entering what was expected to be his last four-year term, his mandate’s focus has shifted from leading the Alliance to strengthening the partnership to make sure it would last “long after I’m gone.” The strategic shift in his role being signaled by him relinquishing his role as CEO of Nissan to Hiroto Saikawa and appointing Thierry Bollore as chief operating officer at Renault.

While many in Japan may have regarded the return of a Japanese national to the role of CEO, albeit mentored by Ghosn, as a step in the right direction, it would appear that this is not true for everyone in the organization.

Once viewed as Nissan’s savior, has Ghosn’s removal been engineered to strengthen the company’s position in the Allaince?

With deficits topping $20 billion, and a steadily declining market share forcing a gross underutilization of manufacturing capacity, Nissan was rapidly approaching insolvency in the late 1990’s - until Ghosn stepped in with a plan to rescue the Japanese manufacturer from extinction.

Ghosn, with the backing of Renault CEO, Louis Schweitzer, was immediately confronted with daunting cultural differences. Never shying away from a challenge, Ghosn saw himself as “the perfect outsider — foreign to Japan, to its networks, to its conventions and to its prejudices.”

In hindsight, these differences may still play a significant role in the executive’s downfall.

Over several months, Ghosn and his managers, including about 30 Renault executives, devised the Nissan Revival Plan, to take effect on April 1, 2000. The plan was hashed out by what he called cross-functional teams, in areas such as growth, purchasing, research and development, and manufacturing. The specifics of the plan included lowering purchasing costs by 20 percent; reducing the number of plants by three, and closing 10 percent of dealerships.

He also divested Nissan of much of its holdings in affiliate companies, a system known as ‘keiretsu.’ About 21,000 jobs, 14 percent of the workforce, were cut.

The plan promised a return to profitability in the 2000 fiscal year, and a profit margin of 4.5 percent by 2002, with Ghosn pledging he would quit if he did not reach those targets. In 2003, Nissan’s operating margin was 11.1 percent, one of the best in the auto industry.

But underlying this success was an undercurrent of lingering resentment, not least of all aimed at the structure of the Alliance and increasingly, Ghosn’s perceived frivolous lifestyle and exorbitant remuneration.

The framework of the alliance has been contentious almost since it began in 1999, when Renault took control of the much larger but ailing Nissan for the equivalent of about $5 billion. The deal saw Renault take a 43.4 percent stake in Nissan, which in turn was handed 15 percent of Renault, with no voting rights.

The companies remain separately traded, but share a growing percentage of platforms and components, and many of their operations are directed by cross-company teams. Last year, Nissan sold 5.8 million vehicles, versus 3.8 million for Renault, and before Ghosn’s arrest its market capitalization was roughly three times that of Renault’s.

While Nissan has chafed at being under the control of the smaller company, Ghosn's continued hold on power, as CEO and chairman at Renault as well as chairman at Mitsubishi and CEO of the overall alliance holding company, has also sparked increasing resentment.

What is more, Ghosn's pay has become an issue in recent years. He has drawn criticism for collecting a salary from both Renault and Nissan: He received 9.2 million euros in his final year as Nissan CEO in 2016, and 7.4 million euros at Renault in 2017: Roughly 10 times as much as the leaders of Toyota Motor Corp. and Honda Motor Co. according to data compiled by Bloomberg.

Although this compensation may seem excessive when compared to the other Japanese manufacturers, it is not the case when framed against global auto leaders’ income packages: Ford Motor Co., which twice reached out to Ghosn about its top job, paid its chief executive officer $24 million annually during the period. The late Italian auto executive Sergio Marchionne collected almost $40 million a year in that time.

 

Image Source: Bloomberg

 

All the same, Nissan claims that it has uncovered evidence, after being tipped off by a non-Japanese executive in the legal department, that Ghosn underreported his income in Japan by about half the $88 million, or 10 billion yen,  he earned at Nissan over the five years from 2010. Claims, which according to the Japanese public broadcaster NHK, he denies.

Investigators also allege Ghosn dipped into the corporate till for personal outlays, effectively subsidizing a life that had grown to include homes in Paris, Tokyo and Brazil, and other emblems of luxury, notably a 2016 wedding party at Versailles with a Marie Antoinette theme.

In Japan, public displays of gaudiness tend to be frowned upon, and an often-quoted adage says a nail that sticks up gets pounded down. Getting back to the cultural differences alluded to earlier, the resentment toward Ghosn, personal or professional, has been an undercurrent in the boardroom intrigue that led to his arrest.

In the U.S., public companies are required to break down pay, including perks like housing benefits, and list them in proxy statements. Japan-listed companies have been required since 2010 to disclose pay for executives who earn 100 million yen ($886,000) or more. That includes non-cash perks like housing. No such benefits were listed for Ghosn. It’s unclear who paid for the penthouse he used in Tokyo.

Against the backdrop of Ghon’s power and remuneration, Japanese executives have long been concerned their company was getting the short end of the deal: Contributing most of the alliance’s profits while Renault retained voting control.

So in March, sources close to the matter told Reuters, the alliance partners began discussing plans for a closer tie-up in which Nissan would acquire the bulk of the French state's 15 percent stake in Renault, thereby moving to correct the perceived imbalance.

Unfortunately Ghosn’s mandate that required him to focus on strengthening the alliance to endure after his departure, was interpreted by many company loyalists as an attempt by Renault to continue the status quo.

While all three companies openly support the Alliance there is little doubt that Nissan feels aggrieved by the terms and would, justifiably, want a more equitable agreement with Renault.

Nissan CEO Hiroto Saikawa, who succeeded Ghosn in 2017, did not mince words in the press conference called after Ghosn's arrest. "This is a negative impact of the long regime of Mr. Ghosn," Saikawa said of the accusations against Ghosn. "This is a good opportunity to revise the way we work."

This immediate and indignant condemnation of the Alliance’s leader and structure seems a little puzzling, given that Ghosn has yet to give his side of the story and hasn’t been charged. It is also unusual that Saikawa was not supported in the press briefing by any other Nissan executives.

So while the board’s sacking of Ghosn would appear to indicate support for Saikawa’s leadership, there remains a niggling question over the timing and true motives for the allegations and Nissan’s reaction. And if it seemed the 65-year-old would be a transitional chief, he's suddenly talking like a transformational one, eager to get the carmaker back on track in Japan and the U.S and gain a bigger share of the Alliance’s pie.

While the French side has appeared blindsided by the rapidly unfolding events Saikawa, an opponent of a merger between the companies, is openly seeking to improve the Japanese carmaker’s bargaining position in a partnership he says has for too long favored the French side.

According to Saikawa, Nissan will pursue a review of the shareholding structure, including the issue of voting rights, with Renault. This aimed at creating a more equitable partnership between the two automakers.

According to Japanese corporate law, Renault’s voting rights could be canceled if Nissan raises its shareholding to more than 25 percent in the French carmaker. Under French rules, if Renault lowered its stake in Nissan below 40 percent, then it will help the Japanese carmaker get voting rights in the French company.

To clear the way, Nissan's board removed Ghosn as chairman and representative director on Thursday, Nov. 22. It also appointed a committee led by outside directors to further investigate Ghosn's alleged abuses, overhaul the company's governance and nominate a new chairman from the current board.

"In one word, this is a soft coup d'etat," said Tatsuo Yoshida, a senior auto analyst at Sawakami Asset Management who worked at Nissan during the beginning of Ghosn's tenure. "There has been anti-Ghosn sentiment accumulating for a long time."

Will the Alliance survive Ghosn’s fall from grace?

Ghosn's downfall has spurred speculation among pundits and politicians about an alliance meltdown, with Mitsubishi CEO Osamu Masuko, whose company joined the alliance in 2016, openly suggesting that no one could match the charismatic leader's unifying authority.

"I don't think there is anyone else on Earth like Ghosn who could run Renault, Nissan and Mitsubishi," Masuko told reporters in Tokyo.

Even president Emmanuel Macron of France, which holds two seats on the board and a 15 percent stake in Renault, expressed concern for the alliance, saying the government "would remain vigilant regarding the stability of the alliance" and vowed to support Renault employees.

So with Carlos Ghosn widely acknowledged as the engineer and the duct tape of the Renault-Nissan-Mitsubishi alliance, the prospect of a future without him might appear questionable.

Nonetheless, on Monday 26th November Mitsubishi followed top shareholder Nissan in voting Ghosn off the board. The decision came after a 70-minute meeting of its members, with Masuko taking over as temporary chairman until a shareholders meeting is held.

But while Ghosn the executive may be removed, Ghosn the legacy will be far more difficult to replace.

In the beginning, Ghosn compelled the companies to cooperate through sheer force of will, but as the Alliance progressed the companies became inextricably interwoven, making it almost impossible to pry them apart. So, with platforms, purchasing and plants shared across the French-Japanese partnership, unwinding Ghosn's creation could do more damage than keeping it together.

That is the dilemma facing executives in Paris, Yokohama and Tokyo:

"At the operational level, they have already passed the point of no return," said Tatsuo Yoshida, a senior auto analyst at Sawakami Asset Management in Tokyo. "It is almost impossible to get divorced."

So that realistically leaves one solution: A negotiated restructuring of the Alliance, complete with the inevitable internal power struggle.

But it also raises a general question about global alliances.

Are global alliances and mergers viable?

The Renault-Nissan-Mitsubishi alliance has expanded into the world's biggest auto empire, with global sales of 10.6 million vehicles in 2017. Massive scale brings billions of dollars in annual savings from business synergies and shared functions.

Last year, these joint savings surged 14 percent to 5.7 billion euros, with the Alliance forecasting that figure to reach 10 billion euros, by 2022.

These days, sharing the burden is a must because of the hefty investments needed for new technologies in autonomous driving, connected cars and electric vehicles. Amid a rapidly changing industry, size truly matters.

The key, in alliance parlance, is so-called convergence among the companies' business units. It aids partners through incremental revenues, cost savings and cost-avoidance. Purchasing departments, meanwhile, can haggle pricing lower by leveraging economies of scale.

The partners often build vehicles for one another, maxing out capacity to ensure more profitable operations. Renault's plant in South Korea, for instance, supplies the U.S. with about a third of its hot-selling Nissan Rogue crossovers.

Further savings come from teaming on product development. The Rogue rides on a new family of shared platforms for the alliance. The architecture is used in the Nissan Qashqai crossover, as well as Renault vehicles such as the Espace crossover and Talisman sedan.

It is dubbed the Common Module Family platform, and the alliance reckons it can eventually underpin 70 percent of all the brands' vehicles. Doing so, executives promise, should slash purchasing costs by up to 30 percent and engineering costs by up to 40 percent.

The same goes for engines and gearboxes. Three-fourths of the companies' vehicles run on shared powertrains.

When it comes to investing in next-generation technology, the alliance also pools resources and shares spoils. Alliance Ventures, the venture capital unit set up in January, has a $1 billion war chest for the next five years. It is investing in everything from high-tech mapping to autonomous driving.

But while these advantages are very clear, and many may say, even critical in this disruptive age, very little is spoken about how regional companies overcome cultural rifts when trying to form global Alliances and mergers.

The story unfolding around Ghosn and the Franco-Japanese Alliance is an excellent illustration of this. However one need only look to China and its approach to intellectual rights, or even at the Fiat Chrysler merger, where rumors of a spinoff of the Italian brands is gaining momentum, to realize the cross-cultural difficulties companies face in trying to achieve the obvious economies of scale.

Whatever the outcome of the allegations against Ghosn, the Alliance he forged will never be the same. Whether his fall from grace was engineered or not, the fragile peace has been broken and the hawks set free to hopefully forge a new, more equitable partnership.

 

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