Nissan's Turnaround Story

Nissan's Turnaround Story "Nissan was in a difficult situation not only for the short term but for the future. "

- Carlos Ghosn, CEO & President, Nissan Motor Corp, November 2002. 1 "It shows Nissan 's cost-cutting efforts have really worked in parts procuriment, the profit margin has improl'ed in the home market. "

and

- Tsuyoshi Mochimaru, Auto analyst - Daiwa Institute of Research, Tokyo, October 2001. 2 "They keep on calling it a revival plan but I'm sure they'll admit it's just as much a survival plan as well. "

- Petcr McCutcheon, Rellorter - www.abc.net. October 1999.3

NISSAN TURNS AROUND! It seemed like a corporate fairy tale. In March 2001, Nissan Motor Co. (Nissan) announced profits of ¥331 billion4 after posting losses for eight consecutive years. (Refer E:xhibits I & II) In 1999, when French automobile maker Renault S.A. (Renault) took a controlling stake of 36.8% in the ailing Nissan, it met with criticism from all quarters. Many pointed out that Renault was taking a huge risk by investing in Nissan, as Renault itself had managed a turnaround in its own operations only in 1997. It was also felt that the future of Renault would depend on turning Nissan around. The man given the important task of turning Nissan around was Carlos Ghosn (Ghosn), executive vice president of Renault. Ghosn was known as a turnaround specialist in corporate circles. He had the distinction of tooling around Michelin's5 South American and North American operations and Renault itself (Refer Exhibit III). But analysts were still skeptical and felt that it would be very difficult to achieve the same with Nissan as it was facing myriad problems. In early 1999, BusinessWeek wrote, "But for a recently turned-around Renault, the Nissan link is a dangerous liaison. Auto-industry experts figure it could be 8 to 10 years before Renault saw a real return on its investmeni, if all goes well. Meantime, potential conflicts over everything from management control to cost cutting loom large - even though Renault's stake would enable it to veto decisions it doesn't like. And if Nissan's makeover fails, the wasted investment could kill Renault's chances of remaining independent." 6

1

"Nissan Motor CEO Carlos Ghosn is Turnaround Hero, " www.gsb.stanford.edu, 11,2002.

2

Nissan Revival Plan on Track, www.clarionledger.com.

3

Nissan Slashes 21 ,000 Jobs, W\vw.abc.net, October 18, 1999.

4

As on June 16,2003,

5

The Michelin group was established in 1832. The company manufactured tires. It expanded its services to mobility assistance systems, travel assistance services. The company's product line includes - passenger car & light tmck tires, aircraft tires, tires for earthmover, agricu1tmal products, two-wheelers, and the components. Dangerous Liaison: Renault and Nissan, BusinessWeek, March 29, 1999.

6

November

October 19,2001

1$ = 117.660 ¥

Business Strategy

BACKGROUND NOTE The history of Nissan dates back to 1933, when Jidosha Seizo Co. Ltd., was established in Yokohama. The company was into manufacturing cars and trucks. In 1934, the company's name was changed to Nissan Motor Co. Ltd., and in the same year, Nissan started exporting Datsuns to Asia, Australia and Central and South America. In the following year, the company's fully integrated assembly plant became functional. By 1943, Nissan inaugurated its second manufacturing plant at Yoshiwara but in the same year, due to the Second World War, production of cars and trucks was stopped. In 1944, Nissan's headquarters was shifted to Tokyo and the name was also changed to Nissan Heavy Industries Ltd. In 1945, Nissan resumed production of cars. In the following year, it shifted its headquarters back to Yokohama and diversified its operations to research and development of textile machinery. In 1949, the company's name was again changed to Nissan Motor Co. Ltd. Over the years, Nissan expanded its operations into various fields. In 1950, Nissan acquired an equity stake in Minsei Diesel Motor Co., Ltd., (later known as Nissan Diesel Motor Co., Ltd). In 1952, Nissan entered into technological co-operation with Austin Motors of UK, and in the following year it started manufacturing rocket motors. By 1957, the company had started manufacturing forklifts. In 1958, Nissan started exporting passenger cars to the US under the brand name Datsun. Along with exporting, the company also focused on establishing manufacturing units outside Japan. In 1959, Nissan established its first overseas factory at Taiwan and in the following year it established Nissan Motor Corporation in the USA. In 1961, Nissan Mexicana S.A. de C. V. was established in Mexico and in the following year it commenced operations at its Oppama Plant in Japan. In 1966, Nissan merged with Prince Motors Ltd., (a Japanese government undertaking). After the merger, Nissan added passenger cars Skyline and Gloria to its product line. In 1968 its headquarters was again shifted to Tokyo. In 1971 it brought out its first Experimental Safety Vehicle (ESV), which had various safety technologies. In 1979, Nissan established Nissan Design International, Inc. in the USA and in the early 1980s, it focused more on expanding globally (Refer Table I for Nissan's global presence).

Table I: Global Presence of Nissan* Continent

Countries

Asia Pacific

Australia, China, Hong Kong, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, Taiwan, Thailand, Israel, Oman, Dubai, Turkey, Saudi Arabia and UAE.

Africa

Mozambique, South Africa and Uganda.

Europe

Austria, Baltics, Belgium, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Kazakhstan, Norway, Poland, Portugal, Russia, Slovak Republic, Spain, Sweden, Switzerland, The Netherlands, UK.

North America

USA, Canada, Mexico.

South America

Peru, Brazil, Chile, Colombia, Haiti.

* This list is not exhaustive. Source: www.nissan-global.com 136

Nissan's Turnaround Story

In 1983, Nissan USA brought out Datsun trucks followed by the Sentra (Sunny) in 1985. In 1989, Nissan established Nissan Distribution Service (Europe) B.V and Nissan Europe's regional headquarters in Netherlands. Due to the superior teclmology of its vehicles, Nissan was able to gamer marketshare in the world's largest automobile market - the USA. Its Datsun cars were very popular in the US market. However by the early 1990s, Nissan's decline started. Many analysts attributed Nissan's decline to the mistakes it had committed in the 1980s-failing to respond to the changing market conditions and effecting frequent changes in the company's corporate identity. For instance, in 1981, Nissan changed its brand name in the USA from Datsun to Nissan, and this resulted in confusion among the customers. In addition to tIris, it was reported tI1at Nissan's internal problems like high costs, production lags and labour problems also contributed to tile company's decline.

DECLINE OF NISSAN Nissan started showing signs of decline from the early 1990s. Its market share in the US automobile market declined to 4.7% in 1991 from 5.5% in 1980, while during the same period other Japanese auto makers increased tIleir share in tile US market from 17.7% to 28.5%. In Japan also, Nissan's market share declined from 34% in 1974 to below 19% in the late 1990s. In 1992 fiscal its pretax profits were $615 million - a 50% decline when compared to its 1991 pretax profits. Many analysts were of the opinion that in tile early 1990s, tile top management at Nissan failed 10 take notice of changing trends in tile customer tastes especially in the US, its biggest export market. Commented David Magee, "Management once hailed as progressive and trend-setting was now a part of Japan's old boy network, arrogant and oblivious to market changes and customer needs.,,7 According to analysts, over capacity, high production costs, and unrelated investments were major.weaknesses of Nissan during the 1990s. In tile 1990s, Nissan had manufacturing capacity for producing more tIlall 2.4 million vehicles, which was more tI1aHtile market demand for its vehicles, resulting in over capacity. By 1999, Nissan's manufacturing capacity exceeded the market del11al1dby 30-40%. Instead of shutting down plants, it decreased the number of working hours for tile employees, resulting in under utilization of production facilities leading to increased l11al1ufacturing costs. While the company had to operate at 80% of its capacity level to be profitable, Nissan was operating far below the required capacity level, resulting in declining operating margins over tile years (Refer Table II). Along witIl under utilization of capacity, Nissan also suffered from an outdated product line. It was reported tI1at instead of bringing out new designs, Nissan continued to invest in its old designs and launched variants of existing products, while its competitors Toyota and Honda launched new products at regular intervals. According to analysts, anotIler reason for Nissan's decline was its poor marketing. Instead of launclring marketing campaigns to increase its bfalld awareness among the consumers, Nissan offered discounts on its models. This resulted in poor brand perception alllong the consumers. While Toyota and Honda were coming out WitIl lrigh margin luxury cars, Nissan stuck to its entry-level pick up and sedan. Instead of strengt1lening tile dealer network in the USA like Toyota and Honda did, Nissan concentrated on increasing dealers in Japan, where the company's market share was dwindling.

7

''Iumaround: How Carlos Ghosn Rescued Nissan," Harper Collins Publishers, 2003. 137

Business Strategy

Table II: Operating Margin of Nissan (in %) Year

Operating Margin

~990

2.9

1991

2.7

1992

0.6

1993

(0.8)

1994

( 1.0)

1995

0.7

1996

3.0

1997

1.3

1998

1.7

1999

1.4

Source: www.nissan-global.com. Nissan's cost of production was also high. It was reported that Nissan's suppliers (members of a Keiretsu8) charged very high rates for the components they supplied. Nissan paid 15-20% higher than its competitors for components. Due to high component costs, Nissan made less profits per car when compared to other automobile manufacturers (Refer. Table III). Nissan also had investments in 1,394 companies, most of which were not related to the automobile business. Most of these investments were giving poor returns due to the slowdown in the Japanese economy. Bound strong cultural ties with those companies, Nissan did not sell its stakes in them.

by

Table III: Per Car (Pre Tax) Profits of Various Manufacturers (in $) (in 1998) Company Name

Profit Per Car

Daimler - Benz

1,792

Chrysler

1,577

Honda

1,376

Ford

1,245

Toyota

1,195

GM

905

Nissan

305

Source: The Economist, May 14, 1998.

8

138

A loose association of companies organized around a single bank for their common Most of the time, companies own equity in each other.

benefit.

Nissan's Turnaround Story

Nissan was also deep in debt, which it was unable to clear. By the late 1990s, Nissan reportedly had debts of $22 billion, which was around 2.6 times its equity. The interest payments on this debt drained the company of resources which could have been utilized for product development. In order to raise capital, Nissan even approached agricultural lending institutions, in 1998, as most of the Japanese banks were facing problems. Around $6.8 billion was blocked in Nissan's land and equity holdings. Apart from operational problems, analysts felt that another problem area at Nissan was its culture. Nissan seemed to have developed a culture of blaming the ex1ernal environment for all its problems. While Toyota and Honda, operating in the same volatile external environment, were able to post growth and profits year after year, Nissan blamed the external environment for its poor performance. Further, there was no coordination between its global divisions. The company's global divisions, such as Nissan North America and Nissan Europe, operated like separate entities when it came to finance, sales and marketing. Every division blamed the other for poor performance. Sales blamed product planning and vice versa. There was lack of communication between the different departments too.

ATTEMPTS TO RESUSCITATE NISSAN Nissan took various steps during 1992 - 1998 to turn the company around. However none of these efforts were successful. The first restructuring plan announced in 1993 aimed at reducing over capacity but failed to achieve its objectives due to strong opposition from the labor unions to shutdown plants. Nissan launched another restructuring plan in 1995, when the manufacturing plant at Zama island was shut down, but the workers had to be transferred to other manufacturing plants due to strong resistance from the labor unions. The 1995 restructuring plan also failed to turn Nissan around. In FY 1998, another restructuring plan - Global Business Reform Plan - was announced. It aimed at consolidating operating profits of the company, concentrating on increasing profitability rather than sales. It planned to introduce high profit margin models, focusing on global markets especially the US market. But even before this plan could be implemented, Nissan had to borrow $708 million from state-owned Japan Development Bank to remain operational. By December 1998, Nissan' s problems worsened with international credit rating agencies downgrading the Nissan stock to junk status. This made things worse for Nissan as it had to pay an additional $254 million as interest charges on the debt. In order to raise money, Nissan disposed off some of its assets at throwaway prices. It sold off its finance subsidiary in Australia to General Electric Capital Services Inc. It also sold its Tokyo headquarters building and its stake in Nissan Diesel Motor Co. In spite of all these steps, Nissan's performance did not improve. It was reported that Nissan was on the verge of bankruptcy, with no cash left to continue operations. This forced Nissan to look for a partner willing to infuse funds into the company and turn it around.

NISSAN -RENAULT

ALLIANCE

Initially, Nissan had talks with three players - Daimler (Germany), Ford (US) and Renault (France). Nissan was more interested in either Daimler or Ford picking up a stake in the company as both these companies were bigger and had more financial muscle than Renault (which had just re-established itself in 1997). But both Daimler and Ford backed out and Nissan was left with only one possible partner - Renault. 139

Business Strategy

With no other automobile company showing interest, Nissan had to accept the $5.4 billion capital infusion from Renault for a 36.8% stake in the company. In March 1999, Nissan and Renault signed the Renault-Nissan Alliance which gave Nissan the option of acquiring a stake in Renault in future. Renault was given the option of increasing its stake in Nissan to 44.4% in future. Renault also bought out Nissan's European financial subsidiaries for $320 million. The main aim of the alliance was said as to "achieve profitable and balanced growth for the two partners, through the creation of a powerful bi-national Group.,,9 An important aspect of the alliance was that both Nissan and Renault would be maintaining their individual identity (Refer Table IV for the highlights of alliance). The new entity would combine the strengths of both the companies to derive maximum benefits. Renault's product planning and designing strengths would complement Nissan's engineering strengths.

Table IV: Highlights of the Renault - Nissan Alliance •

Three Renault executives were appointed to the Nissan Board. Yoshikazu Hanawa, President and Chief Executive Officer of Nissan Motor Co. was nominated to Renault board.

•

In order to formulate a joint strategy and increase synergies between the two entities, a transnational organization was created. Under the new organization, a global alliance committee was formed to formulate strategies to be adopted by the new entity. Chairman and CEO of both Renault and Nissan and top Renault and Nissan executives were members of the committee.

•

Cross company teams were formed to identify the synergies between the two companies.

Source: www.autointell.com. Analysts were still skeptical about the success of the Renault-Nissan alliance as Nissan was reeling under a huge debt. They felt that the alliance might turn disastrous for Renault, which had come out of losses only in 1997 and had just started posting profits. They also thought that it would be difficult for the alliance to succeed as both the French and the Japanese had strong affinity towards their own cultures. Many felt that Renault should not have taken a stake in Nissan. Gregory Melich, auto analyst, Morgan Stanley said, "Renault should focus on what it's been doing - innovative products, cost cutting, restructuring, and European distr.bution. It can be bold and dynamic without a partner."IO However, Renault and Nissan were confident of making their alliance successful.

ENTER CARLOS GHOSN Three of Renault's top executives - Carlos Ghosn (Executive vice president, Renault), Patrick Pelata (Senior vice president, vehicle development) and Thierry Moulonguet (Vice president, capital expenditure controller) were appointed on Nissan's board as Chief Operating Officer, Executive Vice President-Product Planning and Strategy, Managing Director and Deputy Chief Financial Officer of Nissan respectively. When the executives from Renault headed by Carlos Ghosn (Ghosn) came down to Japan, Japanese newspapers reported that Ghosn was a 'cost killer' and would take drastic cost cutting measures. Contrary to the reports, immediately after taking overas the COO of Nissan, Ghosn did not announce any plan for Nissan's revival, nor did he 9 10

140

www.renault.comlgb/groupe/alliances_pl.htm "Dangerous Liaison: Renault and Nissan," BusinessWeek,

March 29, 1999.

Nissan's Turnaround

Story

announce any cost cutting measures. The best way to approach a new assignment according to him, was to start without any pre-fabricated opinions about people or problems. Said Ghosn, "You have to have the approach of a scientist. [A scientist] has a lot of knowledge, but his knowledge is only a tool. Observation of fact brings him the solution."!! During the initial months, Ghosn visited the manufacturing plants of Nissan, its overseas plants and offices, and met with Nissan employees at all levels. He said, "I talked to people at all levels, at the plant level, at the management level, on the shop floor. There is a lot you can learn and understand by talking to the people and listening to what they have to say.,,12 His approach, analysts felt, helped him to gain the confidence of the Nissan employees and understand the situation prevailing in Nissan. After extensive touring, Ghosn listed down five factors for the decline of Nissan: •

Lack of clear profit orientation

•

Insufficient focus on customers and too much focus on chasing competitors

•

Lack of cross functional, cross-border and intra-hierarchical the company

•

Lack of a sense of urgency

•

No shared vision or common long-term plan

lines of work in

Source: www.nissan-global.com. In addition to the above factors another factor that was responsible for Nissan' s decline according to Ghosn was lack of proper communication (both internal and external). Over the years, it was observed that external communications at Nissan were more reactive rather than proactive. Like most of the traditional Japanese companies, Nissan, rarely divulged information to the general public. It followed the old rule - 'No news is good news.' Nissan's internal communications were equally bad. There was absolutely no inter-departmental interaction in the Japanese headquarters, though the picture was quite different in Nissan North America, where there were well-established internal and external communications systems. Ghosn realized that without communication flow in the organization, Nissan would never be able to revive itself. During the initial months, he concentrated on the communication flow - both internal and external. He involved himself in every communication that was sent within and outside the organization. Information was released to employees and also to the outside press after Ghosn approved it. In another important move, Ghosn made English the official language at meetings to create a common language for communicating important decisions. Ghosn's thrust on communications resulted in the new management gaining the confidence of employees. Ghosn also realized that Nissan was a very conservative organization with little or no employee empowerment. Decision-making was centralized and did not involve employees at all. According to Ghosn, one of the main reasons for the failure of Nissan's earlier restructuring plans was lack of employee involvement.

II "Turnaround: How Carlos Ghosn Rescued Nissan," Harper Collins Publishers, 2003. 12

'Turnaround:

How Carlos Ghosn Rescued Nissan," Harper Collins Publishers, 2003.

141

Business Strategy

In order to increase employee participation in turning Nissan around, Ghosn formed nine Cross-functional teams (CFfs) which were to focus on business development, purchasing. manufacturing & logistics, R&D, sales and marketing, general and administrative, finance and cost, phase-out of products and parts complexity management, and organization. Each CFf consisted of 10 members from the middle level management and employees from specialized functions. Each team was led by two leaders from the top executive level and one pilot leader chosen from the ten line managers (Refer Table V). The members of CFfs were drawn from different operational regions - North America, Europe and other overseas markets. Around 500 employees took part in the CFfs and sub-teams. The main responsibility of CFfs was to list out the problems that plagued the company and suggest corrective measures to the top-level management. The CFfs were given 3 months to come out with solutions.

Table V: Composition of CFTS •

Leaders - two leaders from top executive ranks from different disciplines sharing common ground. Leaders acted as information source for each team.

•

Pilots - chosen by the top management. They were responsible for formulating agenda, conducting research and dialogue among team members.

•

Members - middle level managers selected on the basis of focus area and leadership qualities.

•

Subteams - composed of CFf members and other company employees selected by the CFf team. These sub teams were responsible for providing details about specific issues with more depth.

Adapted from "Turnaround: Publishers, 2003.

How Carlos Ghosn Rescued Nissan,"

Harper Collins

However, the CFfs had their own share of problems due to differences in the cultural backgrounds of the employees. It was observed that employees found it difficult to communicate for two reasons: one being that, most of the CFf members were meeting for the first time and the secoqd being the language barrier between employees. Employees from Japan could not understand English and employees from Europe and North America failed to understand Japanese. In addition, differences in approach to car building between Nissan and Renault employees also caused problems. While the Japanese believed that car building was a function of engineering, the French focused on product planning and policy. But Ghosn was confident that the CFTs would develop better inter-personal relations. After a month of forming the CFfs, middle level managers started coming up with suggestions to revive the company. Ghosn insisted on more effective suggestions. After the completion of the 3-month period, the nine CFfs came up with around 2,000 ideas out of which 400 ideas were presented to Ghosn and the executive committee. This task of identifying problems and suggesting solutions made the Nissan employees realize that the company needed drastic restructuring and to achievea turnaround, Nissan had to implement policies that would go against the traditional Japanese management philosophies. The executive committee discussed all the recommendations of the CFTs and then formulated the Nissan Revival Plan (NRP). In October 1999, the NRP was made public (Refer Table VI). Ghosn announced that the aim of the NRP was to make Nissan profitable by 2002. 142

Nissan's Turnaround Story

Table VI: Salient Features of the NRP •

Reducing operating costs by ¥1 trillion

•

Reducing number of suppliers

•

Reducing net debt from ¥ 1.3 trillion to ¥ 700 billion by FY 2002

•

Introduction of around 22 new products by 2002

•

Reducing employees by 21,000

•

Reducing the assembly plants from seven to four in Japan

•

Reducing manufacturing platforms from 24 to 15 in Japan.

Source: www.nissan-global.com. The objectives of the NRP sent shock waves across the Japanese corporate circle, as they went against the traditional Japanese management beliefs. For instance, jobs in Japanese companies were considered to be life long, and employee downsizing/layoffs was unheard of. The NRP also met with severe criticisms from the media, which felt that lay offs would worsen the economic situation in Japan. Some newspapers went to the extent of saying that as part of its social responsibility, Nissan should restrain from cutting jobs. But Ghosn was firm on implementing the NRP. He provided support information to the media for each action to be taken. He told critics of the NRP that Nissan was left with no other choice but to implement the drastic steps stated in th~ NRP and even explained to the Japanese government officials, politicians, and the media, the need for implementing the NRP.

IMPLEMENTING

THE NRP

One of the objectives of the NRP was to reduce the purchasing costs by 20% by 2002. Ghosn said, 'This is a crucial objective, because purchasing represents 60% of our total costs, or a minimum of 58% of our net sales.,,13 In order to reduce purchasing costs, the NRP stated that it would focus on: •

Centralizing purchasing activity

•

Including services in global purchasing strategy

•

Decreasing the number of suppliers

In order to achieve the objective

of reducing purchasing costs, Nissan launched a scheme called 3-3-3 resulting in closer co-operation among purchasing, engineering and suppliers.14 Suppliers were averse to the idea of cutting down costs by 20% over a time frame of 3 years. However, the top management assured them that Nissan would assist them in achieving the objective, and also promised that those suppliers who took concrete steps to reduce costs would be given more business. The new purchasing principle was simple - 'you givesome, we give some, you give more, you get more.'

13 14

"Turnaround: How Carlos Ghosn Rescued Nissan," Harper Collins Publishers, 2003. 3-3-3 denotes - 3 partners (suppliers, and purchasing and engineering departments), years, working in 3 regions (Asia, Americas, Europe/Middle East/Africa).

over 3

143

Business Strategy

Breaking the Keiretsu supplier network appeared to be difficult due to strong personal relationships developed with suppliers over the years. For instance, though Nissan was utilizing only 53% of its manufacturing capacity, it supported a huge supplier network and bought components from them at inflated prices. It was reported that in 1999 Nissan had 1,612 suppliers. The company planned to reduce the numbers to 600 by 2002. Before the implementation of the NRP, Nissan seemed to have a tacit understanding that the company would buy only from members of Keiretsu. Commenting on this practice, !taru Koeda (Koeda) executive vice president - purchasing, said, "The company placing orders is obligated to order from the supplier. The supplier can't specialize and can't sell excess capacity elsewhere.,,15 Another problem was the structure of the purchasing department. In pre-Ghosn days, a relationship manager known as Shukotan was assigned to each supplier, who negotiated prices with the supplier. Over the years, the Shukotans developed personal relationships with suppliers and this came in the way of negotiating price discounts. Said Koeda, "Manufacturers would say to the Shukotan, 'We gave you a break on that last part, how about you give us a good contract for this one?,,16 According to the NRP, the authority to place orders for the components, irrespective of Keiretsu relationships, was given to Koeda. Ghosn also bought in Bernard Rey (Rey)17 from Renault to help Koeda in developing Nissan's purchasing strategy. Both Koeda and Rey developed a new system. A sourcing committee was formed to review vendor price quotes on the international level. If a supplier in Europe was offering low prices, then Nissan purchased components from him. Said Koeda, "This is the best change in our process." Some of the suppliers extended full support to the NRP. For instance, Unisia lecs, (engine and brake parts supplier) was one of the few suppliers who agreed to cut down prices. Nissan purchased fewer parts from the company but in large quantities resulting in specialization for the company in the manufacture of engine and brake parts. Said Hiroaki Hamada of Unisia lecs, "Short-term, we'll lose some sales. But long-term, we'll be competing with global players, and it will make us stronger.,,18 However not all suppliers were happy with the changes. Said Takashi Matsumoto, General Manager, sales, Calsonic Kansei (dashboard instruments manufacturer, and Nissan supplier), "We used to be part of them. When they developed a new car, we developed it with them. Now we have to submit an estimate, and if we don't meet their requirements, they don't buy from US.,,19 Along with the focus on reducing operating costs, one of the important objectives of the NRP was to reduce the financial costs of the company. In order to cut down financial costs, the following steps were proposed in the NRP: •

Centralizing financial operations across the globe

•

Disposing off strategic shareholdings

•

Disposing off land, securities and non-core investments

•

Reducing sales inventory ratio by 30%

15 16

17

i8 19

144

Turnaround. www.business2.com. January 2002. Turnaround, www.business2.com. January 2002. Vice President, Renault International and After Sales Purchasing Turnaround, www.business2.com. January 2002. Turnaround, www.business2.com. January 2002

Nissan's Turnaround Story

In 1999, Nissan held stakes in around 1,400 companies. Most of them were in noncore businesses. Under the NRP, Nissan decided to dispose off its stakes in all the 1400 companies and this enabled it to payoff its huge debt. By March 2001 it reduced the debt to ¥ 953 billion, below ¥ 1 trillion for the first time in 15 years (Refer Table VII). It also decided to centralize finance operations. Earlier each division in different countries acted as a separate entity and managed different bank accounts and financial data. This practice resulted in Nissan dealing with 200 different banks worldwide, the idea being that having separate bank accounts in different world regions would help the company to build relationships with regional bankers, which would be beneficial to the company. However, the CFfs pointed out that the company was paying more for managing its own financial resources and that it would derive more benefits from centralization. By 2002, Nissan was dealing with only 15 banks worldwide. All treasury functions were transferred to the company's headquarters in Tokyo.

Table VII: Consolidated Automotive Net Debt Over the Years* Debt 953 2,274 2,041 2,866 2,737 2,152 2,855 1,349 2,398 (inNet ¥ billions) 1997 1998 1999 2000 1993 1995 1996 19941992 Year

*Fiscal years. Source: Nissan Annual Report 2001. The consolidation of the treasury functions led to a decline in the financial operational costs from ¥90 billion in 1999 to ¥24 billion in 2000 as there were reduced direct expenses for manpower and accounting fees. In the post NRP scenario, Nissan started working with banks that offered global services meeting the company's banking and financial needs across the continents. Nissan also focused on cutting down sales, and general and administrative (S, G&A) costs for the company by 20%. In order to reduce the S, G&A costs, the NRP proposed to cut down the sales incentives offered to dealers for selling surplus cars, centralize the advertising function and streamline the dealer networks all over the world. The company decided to close down 10% of its retail outlets in Japan and reduce the number of dealers by around 20%. In Europe, Nissan streamlined its dealer networks by combining them with those of Renault. It was reported that both Renault and Nissan would have the same dealer network, which would reduce costs for them in the European region. Nissan also streamlined its dealer networks in the US and started revamping the look of their showrooms. In April 2000, Nissan launched a new image program for its dealers in the US. The dealers spent around $0.2 - 2.5 million on redesigning their 145

Business Strategy

showrooms. All the show rooms across the country had the same look. The remodeled Nissan showrooms had high ceilings, more spacious customer waiting areas, and dataport connections for laptops. The exteriors of these showrooms were changed to metallic finish. Along with streamlining the dealer networks, Ghosn focused on addressing the problems faced by dealers while selling vehicles. According to reports the most common complaint was that though Nissan had technologically superior products, its product styling was poor. Ghosn realized that a good design was necessary to comrcete with other players and recruited Shiro Nakamura (Nakamura) from Isuzu Motors 0 in 1999. Like other activities, designing activities were also spread across the globe and every design had to be approved at Japan. Realizing that though there were good designs on paper, they were not converted due to various reasons, Nakamura remodeled facilities at the company's design center in Tokyo. He started getting closely involved with the design team in the US at Nissan Design America (NDA). There was increased interaction between the design teams across the continents. Design teams at Nissan increased their interaction with engineering, sales and marketing teams to know the latest trends in the market and changing consumer preferences. The launch of new products meant increased focus on manufacturing efficiency. In order to achieve this, Nissan decided to reduce over capacity in Japan. It was reported that in 1999, Nissan was using 24 platforms at 7 assembly plants located in Japan. Under the NRP, the company proposed to cut down the platforms to 15 and assembly plants to 4. It closed down assembly plants at Murayama (near Tokyo), Shatai (Kyoto) and Aichi Kikai Minato (Nagoya) and engine plant at Kurihama and Kyushu engine shop in Fukuoka. It established a new manufacturing plant in Mississippi to increase the manufacturing capacity in the US, so that it could cater to the increasing demand in the world's largest automobile market. Nissan also focused on brand building activities. It was reported that prior to the formulation of the NRP, Nissan suffered from poor brand image. Though initially Nissan had an image of a technologically advanced automaker, this image took a beating due to the poor quality of vehicles produced in the late 1990s. During 2000, Nissan formulated a global brand identity strategy and conducted training programs for more than 4,000 employees to enable them to understand its brand strategy. All the above changes were connected with restructuring Nissan's operations. Human resource was another area, which needed attention. However, Ghosn faced resistance from employees while bringing about changes in the human resource management due to their strong association with traditional management practices. Ghosn made it clear to the employees that age-old and redundant practices had to go, for the well being of the company. Earlier, like all other functions, the HR function was also independent in each country. Each operational region had its own set of rules for recruitment, performance management and compensation. There was no uniformity across the company. Ghosn centralized the HR function. The HR department at Japan was to manage matters relating to people all over the company. Ghosn faced stiff resistance while implementing the HR restructuring measures which included laying off people, closing down plants, and revamping the performance management systems and compensation structures. Implementing the HR reforms took longer than other reforms, as it involved delicate issues involving people. The following were the HR initiatives proposed in the NRP:

20

146

Isuzu Motors Limited established in 1916 was initially into car production. In 1918, expanded into manufacturing of trucks. It was one of the oldest car manufacturers in Japan.

it

Nissan's Turnaround

Story

•

To eliminate seniority as the basis for promoting personnel in the company.

•

To consolidate the senior executive positions, which were found to be redundant.

•

To revamp compensation schemes to give more emphasis to performance.

•

To tie bonus pay to the success of NRP.

•

To eliminate expense accounts.

Under the NRP, Ghosn consolidated several senior executive positIOns, which had become redundant over the years. For instance, earlier, there were advisers in all foreign subsidiaries of Nissan, to help foreigners understand Japanese management practices. Over the years, the foreign subsidiaries gained knowledge of Japanese management practices and advisers were left with no responsibilities. Ghosn shifted these advisers to positions with more responsibilities and accountability. In addition, he regrouped 29 project directors into six groups led by one program director. The new six program directors reported to Pelata and Gho~n and were responsible for developing new models, and sales and profitability of the new models. Ghosn communicated to all employees that promotions and pay hikes would be based on performance rather than on seniority. He also started offering warrant bonds2J to the employees who performed well. Further, he announced that good performers would be getting 25% of their pay package as annual cash bonus. Analysts felt that all these measures helped in boosting the morale of the employees. However, the toughest part of HR restructuring was laying off employees. The NRP announced that Nissan would layoff around 21,000 employees worldwide (4,000 in manufacturing, 6,500 in Japanese dealer network, 6,000 in sales, general & administration, 5,000 in spin-offs, and 500 in R&D). In order to minimize opposition to lay offs, Nissan transferred direct and semi-direct employees from the plants that were to be closed down. Nissan also downsized through natural attrition, voluntary retirement schemes to eligible employees and by freezing new recruitment in plants. When there were openings at other plants, they were filled up with employees from plants which were shut down. Analysts felt that the constant flow of information to the employees about the need to downsize, reduced the opposition to HR reforms.

PROFITABLE AT LAST Though Nissan had set the official target for returning to profitability as FY 2002, it announced profits in FY 2001 due to successful implementation of the NRP. For the FY 2001, Nissan announced an operating profit of $3.92 billion and an operating margin of 7.9%. Nissan's debt was reduced to $3.48 billion and its stock also moved up hitting a 52 week high of $15.97 per share on NASDAQ22. Announcing Nissan's 2001 financial results Ghosn declared - "The Nissan Revival Plan is over. [The record results] are the fruit of the NRP, fruit that even the most optimistic of outside observers in 1999 didn't think of.,,23 After the implementation of the NRP, Nissan saw its market share slowly increasing with the launch of new products. However, Nissan's new products had varied results. While products such as Bluebird Sylphy sedan and X-Trail sport utility performed well, Nissan's other products such as Stagea wagon, Primera and Skyline, Cima (renamed Infiniti Q45) performed below expectations. Analysts felt that Nissan would have to bring out a hit product fast to gamer market share. In February 2002, Nissan

21 22

23

Bonds that also include an option to purchase stock of the issuer. The National Association of Securities Dealers Automated Quotation System (NASDAQ) was a US-based stock exchange, which was comprised largely of technology stocks. Started in 1971, NASDAQ was the first screen based, Door less trading system ~nd was the second largest stock market in the US. "Turnaround: How Carlos Ghosn Rescued Nissan," Harper Collins Publishers, 2003.

147

Business Strategy

announced the launch of March - which was the first product that shared a common platform with Renault, blending the Japanese engineering and designing acumen with European styling. March was launched in the entry segment in Japan where Nissan did not have any products. Nissan offered March in new colors (paprika orange, lima bean green). March also had on-board e-mail and navigation systems, side airbags and a stronger engine. Priced at $8,000, March received 25,000 orders in the first week of the launch itself. And by April 2002, the number of orders increased to 55,000. In earJ~ 2002, Nissan had its share of success in the USA also with the launch of Altima 4. In the North American International Auto Show, Altima was voted the Car of the year for 2002. Altima became the first car by any Japanese auto maker to get the award. Another car by Nissan - the Infiniti G35 sedan, was also received well by the American customers. In addition, Nissan announced that it would be launching a full size pickup truck, a sport utility vehicle and a minivan in the US market. The company officials were confident that with the launch of new products in various markets, Nissan would be able to increase its market share in the corning years. After a successful completion of the NRP, Ghosn announced that Nissan would be working towards achieving another strategic revival plan - NISSAN 180 was announced in April 2002 with the aim of achieving sales growth. The objectives of Nissan 180 to be achieved by the end of FY 2004, were announced as follows: •

To sell one million additional units.

•

To achieve an operating margin of 8%.

•

To achieve zero net automotive debt.

Commenting on NISSAN 180, Ghosn said, "Through the NRP we transformed a struggling company into a good company; through Nissan 180, we will transform a good company into a great company. The achievement of NISSAN 180 will rely on four pillars: more revenue, less cost, more quality and speed and maximized alliance with RenauIt.,,25 In 2002, Renault increased its stake in Nissan to 44.4% and Nissan took a 15% stake in Renault ushering in a new era in the automobile industry. Analysts felt that with its newfound energy under the leadership of Ghosn, Nissan could become a company to reckon with in the global automobile industry.

Questions for Discussion: 1.

Nissan, which was hailed as a trendsetter and a progressive company, lost its glory in the early 1990s. Discuss the reasons for the decline of Nissan in the 1990s.

2.

When Ghosn joined Nissan, the Japanese media speculated that he would be announcing a series of cost reduction steps to revive the company. But he did not take any such measures. What was the approach adopted by Ghosn to develop a NRP?

3.

While many companies have undergone turnaround processes, not many have been successful. Many analysts were of the opinion that Nissan's turnaround was . a corporate fairy tale. Analyze the reasons behind the success of Nissan's turnaround strategy. How far did communication and the involvement of employees contribute to the successful implementation of the NRP? Which according to you were the most difficult and delicate elements in the NRP plan?

Copyright © 2003 ICFAI Center for Management Research. All rights reserved. This case was written by K. Subhadra, under the direction of Sanjib Dutta. To order individual copies of the case (Case code BSTR 073), log on to www.icmr.icfai.org

24 25

148

Originally produced in 1992, it lost market due to outdated design and technology. "Turnaround: How Carlos Ghosn Rescued Nissan," Harper ColIins Publishers, 2003.

Nissan's

1999 1997 1995 1996 30.94 1994 1998 6,917,561 77,743 17,589 25,130 7,473,778 1,969,423 2,209,829 7,328,151 1,929,104 139,856 429,032 505,548 431,974 137,201 508,012 498,444 131,260 (35.19) (88,148) (166,054) 5,834,123 (66.09) 6,039,107 5,800,857 (34.59) 6,5654,637 6,658,875 (14,007) (5.57) 6,580,001 (27,714) (11.03) 17,585, 17,588 17,584 17,591 7,192,914 7,091,594 2,367,708 7,883,786 1,669,642 1,591,596 135,331 436,756 1,356,090 145,582 1,429,065 1,356,678 1,579,793 143,310 1,282,485 1,254,595 (86,195)

Cash dividends equity Shareholder's (in millions Financial Statements before NRP

Turnar~undStory

Exhibit I ¥, except for per share information)

* Net Income (Loss) per share amounts are based on the weighted average number of shares of common stock outstanding during each year. Figures for net income (Loss) per share are in exact yen. ** Cash dividends paid are the amounts, which were paid during the year. Source: Nissan Motors 1999 Annual Report.

149

Business Strategy

Exhibit II Consolidated Financial Statements after NRP Implementation 2001 2000 83.53 05,977,075 0 290,314 133,833 6,451,243 331,071 6,089,620 82,565 (179.98) 360,191 1,402,547 957,939 434,553 141,526 1,655,610 563,830 6,175,658 (684,363)

2002 92.61 489,215 7,215,005 6,196,241 372,262 1,620,822 1,604,955 374,827 125,099 27,841 (in millions ¥, except for per share information)

* Cash dividends during the full year by subsidiary companies to non-Nissan minority shareholders are not included. ** Net income (loss) per share amounts are based on the weighted average number of shares of common stock outstanding during each year. Figures for net income (loss) per share are in exact yen *** Shareholders' equity and total assets for fiscal years 1997-1999 were restated in accordance with the changes in the regulations relating to the presentation of translation adjustments effective fiscal year 2000. Source: Nissan Motors Annual Report 2002.

150

Nissan's Turnaround

Story

Exhibit III Profile of Renault The history of Renault dates back to 1898, when Louis Renault (Louis) introduced a new car Renault Type A with 270-ccm-engine capacity, 1.75 Hp and 3-speed gearbox. After the success of Renault Type A, in 1899 Louis along with his brothers established Renault Freres (Renault Brothers). They opened their first manufacturing factory on Avenue du Cours in Billancourt. The cars from Renault started becoming popular with their success in the car races. In 1899, Renault took part in the Paris Motor Show with two cars - Type A and Type B. Success of both cars resulted in increased orders. By 1901, Renault introduced two more new models - Type D and Type E. In the same year, its first international license was signed and it opened a factory in Belgium. In 1902, Renault came out with its first engine and it filed for first patent for supercharging system. By 1904, Renault developed a network of 120 dealers and it was producing 948 cars a year. Right from the initial years, Renault focused on expanding its product range. In 1906, it came up with its first Renault bus - omnibus and in the following year it even entered production of plane engines. In 1909, the name of the company was changed to Les Automobiles Renault. During the First World War, Renault supplied taxis to the army for transportation of soldiers. After the war was over, Louis Renault was awarded a medal for Renault's contribution. In 1917, Renault entered manufacturing of army tanks. Renault's FT17 bagged order from French defence ministry order and soon its production reached to 1100 units per year. In 1922, Renault became a joint stock company and in the same year, the company came out with its new model 6CY. In 1924, it established its finaneial subsidiary and its dealers started selling cars on installment plans. In the following year, a new diamond shape was introduced as the company's symbol. In the early 1930s, Renault came out with various models. However the second world war disrupted the production of civilian cars. During the war years, factories (including Renault's) in the areas of German occupation were forced to produce for Germany. During the war, allied forces bombed Renault's factories and around 80% of the factory was destroyed. After the completion of war, Louis was arrested for collaborating with Germans and in 1944, Louis died. After Louis' death, the French government nationalized Renault and the company was renamed as Regie Nationale des Usines Renault. In 1946, production of passenger cars restarted and in the following year, the company brought out its most popular car - 4CY. In the 1950s, the company focused on introducing new vehicles and strengthening its dealer network. By 1959 Renault became the world's 6lh largest car producer. In 1960, Renault launched Alpine 110, which became very popular. In the following year, the company discontinued production of 4CY and launched R4. In 1962 it brought out the R8 model - with disc brakes on all 4 wheels. The decade of 1960 was most successful for the company with its R series, becoming more popular. In 1972, Renault brought out its biggest successes - R5. R5 was designed in just 2 days. This was followed by R6, R20 and R30 models. In 1976, Renault launched its R18, which was hailed as the second most successful car after R5. By 1980, Renault was France's largest automobile manufacturer with a market share of 40%. The company had won numerous awards for its designs and advertisement campaigns. In 1983, Renault launched a new car in the US market - The Alliance, which symbolized Renault's partnership with American Motors. And in 1990, the French government bought a private partner-Yolvo. However, the partnership faced lots of problems and Yolvo sold its stake in Renault. By 1996, the French government sold its stake and Renault became a public limited company. However, the company was into a series of problems due to high production costs. In 1996, under the direction provided by Ghosn, Renault implemented its restructuring plan. Under the restructuring plan, Renault closed down its plant in Belgium, laid off employees and reduced operating costs all over the company. Due to restructuring plant, by 1997, Renault became profitable and in 1999, Renault and Nissan entered into an aJliance to form a bi-national firm. By the first quarter of 2003, Renault reported revenues of€9,015 million. Adapted from various sources. 151

Business Strategy

Additional Readings & References:

4. 5. ,4. 33. 12. 7. 35. 28. 27. 26. 20. 13. 11. 18. 17. 21. 14. 24. 25. 29. 19. 3. 6. 10. 9. 23. 22. 30. 32. 8. 31. 16. 15.

I.

Miller Karen Lowry, Armstrong Larry, Treece. B. James, Will Nissan Get It Right This Time? BusinessWeek, April 20, 1992.

2.

Thornton Emily 1997.

&

Armstrong Larry, Nissan's

Slow V-Turn,

BusinessWeek,

May 12,

Nissan On Its Knees, The Economist, May 14, 1998. Armstrong Larry, Can Nissan Regain Its Youth? BusinessWeek,

July 13, 1998.

Thornton Emily & Kerwin Kathleen, Nissan Is Back In The Mud, BusinessWeek, November 2, 1998. Renault:

Deal with Nissan Completed,

www.autointell.com.

March 27, 1999.

Edmondson Gail, Thornton Emily, "Miller Karen Lowry and Naughton Dangerous Liaison: Renault and Nissan, BusinessWeek, March 29, 1999. Thornton Emily, The Debt That's Dragging 1999.

Nissan Downhill, BusinessWeek,

Edmondson Gail, Thornton Emily, He Revved Vp Renault. BusinessWeek, April 12, 1999. Thornton Emily, Nissan: Still Downshifting,

BusinessWeek,

April 5,

Will Nissan Be Next? May 17, 1999.

Armstrong Larry, Nissan: On the Road Again, BusinessWeek, McCutcheon Peter, Nissan slashes 21,000 jobs, www.abc.net. Restructuring

Keity,

May 31, 1999. October 18, 1999.

Nissan, The Economist, October 21, 1999.

Ostrom Douglas, Nissan Restructuring Plan Provokes Official Concern, www.jei.org. October 29, 1999. Larimer Tim, Great News: No More Jobs for Life, www.time.com. November 1, 1999. Thornton Emily, Remaking

Nissan, BusinessWeek,

On The Rocky Road To Marriage,

The Economist, May 18,2000.

Bremner Brian, Nissan's Ghosn: BusinessWeek, May 23, 2000. Zachary Katherine, Dismantling

November 15, 1999.

Can He Bring

the Keiretsu,

Treece B. James, At Nissan, Ghosn Hits Grand 2001. With

Nissan

Halfway

Dawson Chester, Nissan: Saying Sayonara,

Spirit?

June 21, 2001. Slam, www.autonews.com.

Down A Long BusinessWeek,

Nissan Revival Plan on Track, www.charionledger.com. Raskin Andy, Turnaround,

Samurai

Ward's Auto World, May 1,2001.

Ghosn Tightens Nissan Grip, www.news.bbc.co.uk,

Renault's Alliance August 16,2001.

Back Japan's

www.business2.com.

July 9,

Road, The Economist,

September 24, 2001.

October 19,2001.

January 2002.

Taylor III, Alex, Carlos Ghosn, Fortune, February 5, 2002. Taylor III, Alex, Nissan's Turnaround

Artist, Fortune, February 7,2002.

Dawson Chester, Nissan Bets Big on Small, BusinessWeek,

March 4, 2002.

Wethe David, Nissan Dealerships to Get a New Look as Part Turnaround Efforts, www.dallas.bizjournals.com. May 6, 2002. Dawson

Chester,

Commentary:

Ghosn's

Way:

Why Japan

of Automaker's

Inc. Is Following a

Gaijin, BusinessWeek, May 20, 2002. Purlonger David, Nissan: Back from the Brink of Failure, June 28, 2002. Tischler Linda, Nissan Motor Co., www.fastcompany.com. Rapoport Carla, Thierry Moulonguet www.nissan-global.com www.renault.com

www.topcompanies.com. July 2002.

- Nissan Motor, www.cfoasia.com.