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, andthe profit margin has improl'ed in the home market. "

- 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 asurvival 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 criticismfrom all quarters. Many pointed out that Renault was taking a huge risk by investingin Nissan, as Renault itself had managed a turnaround in its own operations only in1997. It was also felt that the future of Renault would depend on turning Nissanaround.

The man given the important task of turning Nissan around was Carlos Ghosn(Ghosn), executive vice president of Renault. Ghosn was known as a turnaroundspecialist in corporate circles. He had the distinction of tooling around Michelin's5South 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 thesame with Nissan as it was facing myriad problems.

In early 1999, BusinessWeek wrote, "But for a recently turned-around Renault, theNissan link is a dangerous liaison. Auto-industry experts figure it could be 8 to 10years before Renault saw a real return on its investmeni, if all goes well. Meantime,potential conflicts over everything from management control to cost cutting loomlarge - 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 ofremaining independent." 6

1 "Nissan Motor CEO Carlos Ghosn is Turnaround Hero, " www.gsb.stanford.edu, November11,2002.

2 Nissan Revival Plan on Track, www.clarionledger.com. October 19,2001

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

4 As on June 16,2003, 1$ = 117.660 ¥

5 The Michelin group was established in 1832. The company manufactured tires. It expandedits services to mobility assistance systems, travel assistance services. The company's productline includes - passenger car & light tmck tires, aircraft tires, tires for earthmover,agricu1tmal products, two-wheelers, and the components.

6 Dangerous Liaison: Renault and Nissan, BusinessWeek, March 29, 1999.

Business Strategy

BACKGROUND NOTE

The history of Nissan dates back to 1933, when Jidosha Seizo Co. Ltd., wasestablished in Yokohama. The company was into manufacturing cars and trucks. In1934, the company's name was changed to Nissan Motor Co. Ltd., and in the sameyear, Nissan started exporting Datsuns to Asia, Australia and Central and SouthAmerica. In the following year, the company's fully integrated assembly plant becamefunctional. By 1943, Nissan inaugurated its second manufacturing plant at Yoshiwarabut in the same year, due to the Second World War, production of cars and trucks wasstopped. In 1944, Nissan's headquarters was shifted to Tokyo and the name was alsochanged to Nissan Heavy Industries Ltd.

In 1945, Nissan resumed production of cars. In the following year, it shifted itsheadquarters back to Yokohama and diversified its operations to research anddevelopment of textile machinery. In 1949, the company's name was again changed toNissan Motor Co. Ltd. Over the years, Nissan expanded its operations into variousfields. 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 intotechnological co-operation with Austin Motors of UK, and in the following year itstarted manufacturing rocket motors. By 1957, the company had startedmanufacturing forklifts.

In 1958, Nissan started exporting passenger cars to the US under the brand nameDatsun. Along with exporting, the company also focused on establishingmanufacturing units outside Japan. In 1959, Nissan established its first overseasfactory at Taiwan and in the following year it established Nissan Motor Corporation inthe 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). Afterthe merger, Nissan added passenger cars Skyline and Gloria to its product line. In1968 its headquarters was again shifted to Tokyo. In 1971 it brought out its firstExperimental Safety Vehicle (ESV), which had various safety technologies. In 1979,Nissan established Nissan Design International, Inc. in the USA and in the early1980s, it focused more on expanding globally (Refer Table I for Nissan's globalpresence).

Table I: Global Presence of Nissan*

Continent

Asia Pacific

Africa

Europe

North America

South America

Countries

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

Mozambique, South Africa and Uganda.

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

USA, Canada, Mexico.

Peru, Brazil, Chile, Colombia, Haiti.

* This list is not exhaustive.

Source: www.nissan-global.com

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In 1983, Nissan USA brought out Datsun trucks followed by the Sentra (Sunny) in1985. In 1989, Nissan established Nissan Distribution Service (Europe) B.V andNissan Europe's regional headquarters in Netherlands. Due to the superior teclmologyof its vehicles, Nissan was able to gamer marketshare in the world's largestautomobile market - the USA. Its Datsun cars were very popular in the US market.

However by the early 1990s, Nissan's decline started. Many analysts attributedNissan's decline to the mistakes it had committed in the 1980s-failing to respond tothe changing market conditions and effecting frequent changes in the company'scorporate identity. For instance, in 1981, Nissan changed its brand name in the USAfrom Datsun to Nissan, and this resulted in confusion among the customers. Inaddition 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 theUS automobile market declined to 4.7% in 1991 from 5.5% in 1980, while during thesame period other Japanese auto makers increased tIleir share in tile US market from17.7% to 28.5%. In Japan also, Nissan's market share declined from 34% in 1974 tobelow 19% in the late 1990s. In 1992 fiscal its pretax profits were $615 million - a50% decline when compared to its 1991 pretax profits.

Many analysts were of the opinion that in tile early 1990s, tile top management atNissan failed 10 take notice of changing trends in tile customer tastes especially in theUS, its biggest export market. Commented David Magee, "Management once hailedas progressive and trend-setting was now a part of Japan's old boy network, arrogantand oblivious to market changes and customer needs.,,7 According to analysts, overcapacity, high production costs, and unrelated investments were major.weaknesses ofNissan during the 1990s.

In tile 1990s, Nissan had manufacturing capacity for producing more tIlall 2.4 millionvehicles, which was more tI1aHtile market demand for its vehicles, resulting in overcapacity. By 1999, Nissan's manufacturing capacity exceeded the market del11al1dby30-40%. Instead of shutting down plants, it decreased the number of working hoursfor tile employees, resulting in under utilization of production facilities leading toincreased l11al1ufacturing costs. While the company had to operate at 80% of itscapacity level to be profitable, Nissan was operating far below the required capacitylevel, resulting in declining operating margins over tile years (Refer Table II).

Along witIl under utilization of capacity, Nissan also suffered from an outdatedproduct line. It was reported tI1at instead of bringing out new designs, Nissancontinued to invest in its old designs and launched variants of existing products, whileits 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 theconsumers, Nissan offered discounts on its models. This resulted in poor brandperception alllong the consumers. While Toyota and Honda were coming out WitIllrigh margin luxury cars, Nissan stuck to its entry-level pick up and sedan. Instead ofstrengt1lening tile dealer network in the USA like Toyota and Honda did, Nissanconcentrated on increasing dealers in Japan, where the company's market share wasdwindling.

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

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Business Strategy

Table II: Operating Margin of Nissan

(in %)

Year

~990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Operating Margin

2.9

2.7

0.6

(0.8)

( 1.0)

0.7

3.0

1.3

1.7

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 highcomponent costs, Nissan made less profits per car when compared to other automobilemanufacturers (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 by

strong cultural ties with those companies, Nissan did not sell its stakes in them.

Table III: Per Car (Pre Tax) Profits of Various Manufacturers

(in $) (in 1998)

Company Name

Daimler - Benz

Chrysler

Honda

Ford

Toyota

GM

Nissan

Profit Per Car

1,792

1,577

1,376

1,245

1,195

905

305

Source: The Economist, May 14, 1998.

8 A loose association of companies organized around a single bank for their common benefit.

Most of the time, companies own equity in each other.

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Nissan was also deep in debt, which it was unable to clear. By the late 1990s, Nissanreportedly had debts of $22 billion, which was around 2.6 times its equity. Theinterest payments on this debt drained the company of resources which could havebeen utilized for product development. In order to raise capital, Nissan evenapproached agricultural lending institutions, in 1998, as most of the Japanese bankswere facing problems. Around $6.8 billion was blocked in Nissan's land and equityholdings.

Apart from operational problems, analysts felt that another problem area at Nissanwas its culture. Nissan seemed to have developed a culture of blaming the ex1ernalenvironment for all its problems. While Toyota and Honda, operating in the samevolatile external environment, were able to post growth and profits year after year,Nissan blamed the external environment for its poor performance. Further, there wasno coordination between its global divisions. The company's global divisions, such asNissan North America and Nissan Europe, operated like separate entities when itcame to finance, sales and marketing. Every division blamed the other for poorperformance. Sales blamed product planning and vice versa. There was lack ofcommunication between the different departments too.

ATTEMPTS TO RESUSCITATE NISSAN

Nissan took various steps during 1992 - 1998 to turn the company around. Howevernone of these efforts were successful. The first restructuring plan announced in 1993aimed at reducing over capacity but failed to achieve its objectives due to strongopposition from the labor unions to shutdown plants. Nissan launched anotherrestructuring plan in 1995, when the manufacturing plant at Zama island was shutdown, but the workers had to be transferred to other manufacturing plants due tostrong resistance from the labor unions. The 1995 restructuring plan also failed to turnNissan around.

In FY 1998, another restructuring plan - Global Business Reform Plan - wasannounced. It aimed at consolidating operating profits of the company, concentratingon increasing profitability rather than sales. It planned to introduce high profit marginmodels, focusing on global markets especially the US market. But even before thisplan could be implemented, Nissan had to borrow $708 million from state-ownedJapan Development Bank to remain operational. By December 1998, Nissan' sproblems worsened with international credit rating agencies downgrading the Nissanstock 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 disposedoff some of its assets at throwaway prices. It sold off its finance subsidiary inAustralia to General Electric Capital Services Inc. It also sold its Tokyo headquartersbuilding and its stake in Nissan Diesel Motor Co.

In spite of all these steps, Nissan's performance did not improve. It was reported thatNissan was on the verge of bankruptcy, with no cash left to continue operations. Thisforced Nissan to look for a partner willing to infuse funds into the company and turn itaround.

NISSAN -RENAULT ALLIANCE

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

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Business Strategy

With no other automobile company showing interest, Nissan had to accept the $5.4billion capital infusion from Renault for a 36.8% stake in the company. In March1999, Nissan and Renault signed the Renault-Nissan Alliance which gave Nissan theoption of acquiring a stake in Renault in future. Renault was given the option ofincreasing its stake in Nissan to 44.4% in future. Renault also bought out Nissan'sEuropean financial subsidiaries for $320 million. The main aim of the alliance wassaid as to "achieve profitable and balanced growth for the two partners, through thecreation of a powerful bi-national Group.,,9 An important aspect of the alliance wasthat both Nissan and Renault would be maintaining their individual identity (ReferTable IV for the highlights of alliance). The new entity would combine the strengthsof both the companies to derive maximum benefits. Renault's product planning anddesigning strengths would complement Nissan's engineering strengths.

Table IV: Highlights of the Renault - Nissan Alliance

• Three Renault executives were appointed to the Nissan Board. YoshikazuHanawa, President and Chief Executive Officer of Nissan Motor Co. wasnominated to Renault board.

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

• Cross company teams were formed to identify the synergies between the twocompanies.

Source: www.autointell.com.

Analysts were still skeptical about the success of the Renault-Nissan alliance asNissan was reeling under a huge debt. They felt that the alliance might turn disastrousfor Renault, which had come out of losses only in 1997 and had just started postingprofits. They also thought that it would be difficult for the alliance to succeed as boththe French and the Japanese had strong affinity towards their own cultures. Many feltthat 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 - innovativeproducts, cost cutting, restructuring, and European distr.bution. It can be bold anddynamic without a partner."IO However, Renault and Nissan were confident of makingtheir 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 asChief 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 toJapan, Japanese newspapers reported that Ghosn was a 'cost killer' and would takedrastic cost cutting measures. Contrary to the reports, immediately after taking overasthe COO of Nissan, Ghosn did not announce any plan for Nissan's revival, nor didhe

9 www.renault.comlgb/groupe/alliances_pl.htm10 "Dangerous Liaison: Renault and Nissan," BusinessWeek, March 29, 1999.

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announce any cost cutting measures. The best way to approach a new assignmentaccording to him, was to start without any pre-fabricated opinions about people orproblems. Said Ghosn, "You have to have the approach of a scientist. [A scientist] hasa lot of knowledge, but his knowledge is only a tool. Observation of fact brings himthe solution."!!

During the initial months, Ghosn visited the manufacturing plants of Nissan, itsoverseas 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 shopfloor. There is a lot you can learn and understand by talking to the people andlistening to what they have to say.,,12 His approach, analysts felt, helped him to gainthe confidence of the Nissan employees and understand the situation prevailing inNissan. After extensive touring, Ghosn listed down five factors for the decline ofNissan:

• 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 lines of work inthe company

• Lack of a sense of urgency

• No shared vision or common long-term plan


In addition to the above factors another factor that was responsible for Nissan' sdecline according to Ghosn was lack of proper communication (both internal andexternal). Over the years, it was observed that external communications at Nissan

were more reactive rather than proactive. Like most of the traditional Japanesecompanies, Nissan, rarely divulged information to the general public. It followed theold rule - 'No news is good news.' Nissan's internal communications were equallybad. There was absolutely no inter-departmental interaction in the Japaneseheadquarters, though the picture was quite different in Nissan North America, wherethere were well-established internal and external communications systems. Ghosnrealized that without communication flow in the organization, Nissan would never beable to revive itself. During the initial months, he concentrated on the communication

flow - both internal and external. He involved himself in every communication thatwas sent within and outside the organization. Information was released to employeesand 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 languagefor communicating important decisions.

Ghosn's thrust on communications resulted in the new management gaining theconfidence of employees. Ghosn also realized that Nissan was a very conservativeorganization with little or no employee empowerment. Decision-making wascentralized and did not involve employees at all. According to Ghosn, one of the mainreasons for the failure of Nissan's earlier restructuring plans was lack of employeeinvolvement.

II "Turnaround: How Carlos Ghosn Rescued Nissan," Harper Collins Publishers, 2003.12 'Turnaround: How Carlos Ghosn Rescued Nissan," Harper Collins Publishers, 2003.

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Business Strategy

In order to increase employee participation in turning Nissan around, Ghosn formednine Cross-functional teams (CFfs) which were to focus on business development,purchasing. manufacturing & logistics, R&D, sales and marketing, general andadministrative, finance and cost, phase-out of products and parts complexitymanagement, and organization. Each CFf consisted of 10 members from the middlelevel management and employees from specialized functions. Each team was led bytwo leaders from the top executive level and one pilot leader chosen from the ten linemanagers (Refer Table V). The members of CFfs were drawn from differentoperational regions - North America, Europe and other overseas markets. Around 500employees took part in the CFfs and sub-teams. The main responsibility of CFfs wasto list out the problems that plagued the company and suggest corrective measures tothe 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 disciplinessharing common ground. Leaders acted as information source for each team.

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

• Members - middle level managers selected on the basis of focus area andleadership qualities.

• Subteams - composed of CFf members and other company employeesselected by the CFf team. These sub teams were responsible for providingdetails about specific issues with more depth.

Adapted from "Turnaround: How Carlos Ghosn Rescued Nissan," Harper CollinsPublishers, 2003.

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However, the CFfs had their own share of problems due to differences in the culturalbackgrounds of the employees. It was observed that employees found it difficult tocommunicate for two reasons: one being that, most of the CFf members were meetingfor the first time and the secoqd being the language barrier between employees.Employees from Japan could not understand English and employees from Europe andNorth America failed to understand Japanese. In addition, differences in approach tocar building between Nissan and Renault employees also caused problems. While theJapanese believed that car building was a function of engineering, the French focusedon product planning and policy. But Ghosn was confident that the CFTs woulddevelop better inter-personal relations.

After a month of forming the CFfs, middle level managers started coming up withsuggestions 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 Nissanemployees realize that the company needed drastic restructuring and to achieveaturnaround, Nissan had to implement policies that would go against the traditionalJapanese 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 makeNissan profitable by 2002.


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.


The objectives of the NRP sent shock waves across the Japanese corporate circle, asthey went against the traditional Japanese management beliefs. For instance, jobs inJapanese companies were considered to be life long, and employee downsizing/layoffswas unheard of. The NRP also met with severe criticisms from the media, which feltthat lay offs would worsen the economic situation in Japan. Some newspapers went tothe extent of saying that as part of its social responsibility, Nissan should restrain fromcutting jobs.

But Ghosn was firm on implementing the NRP. He provided support information tothe 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 evenexplained to the Japanese government officials, politicians, and the media, the needfor 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 ourtotal costs, or a minimum of 58% of our net sales.,,13 In order to reduce purchasingcosts, 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 ascheme called 3-3-3 resulting in closer co-operation among purchasing, engineeringand suppliers.14 Suppliers were averse to the idea of cutting down costs by 20% over atime frame of 3 years. However, the top management assured them that Nissan wouldassist them in achieving the objective, and also promised that those suppliers whotook concrete steps to reduce costs would be given more business. The newpurchasing principle was simple - 'you givesome, we give some, you give more, youget more.'

13 "Turnaround: How Carlos Ghosn Rescued Nissan," Harper Collins Publishers, 2003.14 3-3-3 denotes - 3 partners (suppliers, and purchasing and engineering departments), over 3

years, working in 3 regions (Asia, Americas, Europe/Middle East/Africa).

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Business Strategy

Breaking the Keiretsu supplier network appeared to be difficult due to strong personalrelationships developed with suppliers over the years. For instance, though Nissan wasutilizing only 53% of its manufacturing capacity, it supported a huge supplier networkand bought components from them at inflated prices. It was reported that in 1999Nissan had 1,612 suppliers. The company planned to reduce the numbers to 600 by2002.

Before the implementation of the NRP, Nissan seemed to have a tacit understandingthat the company would buy only from members of Keiretsu. Commenting on thispractice, !taru Koeda (Koeda) executive vice president - purchasing, said, "Thecompany placing orders is obligated to order from the supplier. The supplier can'tspecialize and can't sell excess capacity elsewhere.,,15

Another problem was the structure of the purchasing department. In pre-Ghosn days, arelationship manager known as Shukotan was assigned to each supplier, whonegotiated prices with the supplier. Over the years, the Shukotans developed personalrelationships 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 thatlast 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, irrespectiveof 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. BothKoeda and Rey developed a new system. A sourcing committee was formed to reviewvendor price quotes on the international level. If a supplier in Europe was offering lowprices, then Nissan purchased components from him. Said Koeda, "This is the bestchange 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 downprices. Nissan purchased fewer parts from the company but in large quantitiesresulting in specialization for the company in the manufacture of engine and brakeparts. Said Hiroaki Hamada of Unisia lecs, "Short-term, we'll lose some sales. Butlong-term, we'll be competing with global players, and it will make us stronger.,,18However not all suppliers were happy with the changes. Said Takashi Matsumoto,General Manager, sales, Calsonic Kansei (dashboard instruments manufacturer, andNissan supplier), "We used to be part of them. When they developed a new car, wedeveloped it with them. Now we have to submit an estimate, and if we don't meet theirrequirements, they don't buy from US.,,19

Along with the focus on reducing operating costs, one of the important objectives ofthe NRP was to reduce the financial costs of the company. In order to cut downfinancial 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 Turnaround. www.business2.com. January 2002.16 Turnaround, www.business2.com. January 2002.17 Vice President, Renault International and After Sales Purchasingi8 Turnaround, www.business2.com. January 2002.19 Turnaround, www.business2.com. January 2002

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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 reducedthe 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 differentcountries acted as a separate entity and managed different bank accounts and financialdata. This practice resulted in Nissan dealing with 200 different banks worldwide, theidea being that having separate bank accounts in different world regions would helpthe company to build relationships with regional bankers, which would be beneficialto the company. However, the CFfs pointed out that the company was paying morefor managing its own financial resources and that it would derive more benefits fromcentralization. By 2002, Nissan was dealing with only 15 banks worldwide. Alltreasury functions were transferred to the company's headquarters in Tokyo.

Table VII: Consolidated Automotive Net Debt Over the Years*

(in ¥ billions)

Year

Net Debt

1992

2,855

1993

2,866

1994

2,737

1995

2,398

1996

2,152

1997

2,274

1998

2,041

1999

1,349

2000

953

*Fiscal years.

Source: Nissan Annual Report 2001.

The consolidation of the treasury functions led to a decline in the financial operationalcosts 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 startedworking with banks that offered global services meeting the company's banking andfinancial 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 NRPproposed to cut down the sales incentives offered to dealers for selling surplus cars,centralize the advertising function and streamline the dealer networks all over theworld. The company decided to close down 10% of its retail outlets in Japan andreduce the number of dealers by around 20%. In Europe, Nissan streamlined its dealernetworks by combining them with those of Renault. It was reported that both Renaultand Nissan would have the same dealer network, which would reduce costs for themin the European region.

Nissan also streamlined its dealer networks in the US and started revamping the lookof their showrooms. In April 2000, Nissan launched a new image program for itsdealers in the US. The dealers spent around $0.2 - 2.5 million on redesigning their

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Business Strategy

showrooms. All the show rooms across the country had the same look. The remodeledNissan showrooms had high ceilings, more spacious customer waiting areas, anddataport connections for laptops. The exteriors of these showrooms were changed tometallic finish.

Along with streamlining the dealer networks, Ghosn focused on addressing theproblems faced by dealers while selling vehicles. According to reports the mostcommon complaint was that though Nissan had technologically superior products, its

product styling was poor. Ghosn realized that a good design was necessary to comrcetewith other players and recruited Shiro Nakamura (Nakamura) from Isuzu Motors 0 in1999. Like other activities, designing activities were also spread across the globe andevery design had to be approved at Japan. Realizing that though there were gooddesigns on paper, they were not converted due to various reasons, Nakamuraremodeled facilities at the company's design center in Tokyo. He started gettingclosely 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 andmarketing teams to know the latest trends in the market and changing consumerpreferences.

The launch of new products meant increased focus on manufacturing efficiency. Inorder to achieve this, Nissan decided to reduce over capacity in Japan. It was reportedthat 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 assemblyplants 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 engineshop in Fukuoka. It established a new manufacturing plant in Mississippi to increasethe manufacturing capacity in the US, so that it could cater to the increasing demandin the world's largest automobile market.

Nissan also focused on brand building activities. It was reported that prior to theformulation of the NRP, Nissan suffered from poor brand image. Though initiallyNissan had an image of a technologically advanced automaker, this image took abeating due to the poor quality of vehicles produced in the late 1990s. During 2000,Nissan formulated a global brand identity strategy and conducted training programsfor more than 4,000 employees to enable them to understand its brand strategy.

All the above changes were connected with restructuring Nissan's operations. Humanresource was another area, which needed attention. However, Ghosn faced resistancefrom employees while bringing about changes in the human resource management dueto their strong association with traditional management practices. Ghosn made it clearto the employees that age-old and redundant practices had to go, for the well being ofthe 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, performancemanagement and compensation. There was no uniformity across the company. Ghosncentralized the HR function. The HR department at Japan was to manage mattersrelating to people all over the company. Ghosn faced stiff resistance whileimplementing the HR restructuring measures which included laying off people,closing down plants, and revamping the performance management systems andcompensation structures. Implementing the HR reforms took longer than otherreforms, as it involved delicate issues involving people. The following were the HR

initiatives proposed in the NRP:

20 Isuzu Motors Limited established in 1916 was initially into car production. In 1918, it

expanded into manufacturing of trucks. It was one of the oldest car manufacturers in Japan.

146


• 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 hadbecome redundant over the years. For instance, earlier, there were advisers in allforeign subsidiaries of Nissan, to help foreigners understand Japanese managementpractices. Over the years, the foreign subsidiaries gained knowledge of Japanesemanagement practices and advisers were left with no responsibilities. Ghosn shiftedthese advisers to positions with more responsibilities and accountability. In addition,he regrouped 29 project directors into six groups led by one program director. Thenew six program directors reported to Pelata and Gho~n and were responsible fordeveloping new models, and sales and profitability of the new models. Ghosncommunicated to all employees that promotions and pay hikes would be based onperformance rather than on seniority. He also started offering warrant bonds2J to theemployees who performed well. Further, he announced that good performers would begetting 25% of their pay package as annual cash bonus. Analysts felt that all thesemeasures helped in boosting the morale of the employees.

However, the toughest part of HR restructuring was laying off employees. The NRPannounced that Nissan would layoff around 21,000 employees worldwide (4,000 inmanufacturing, 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 oppositionto lay offs, Nissan transferred direct and semi-direct employees from the plants thatwere to be closed down. Nissan also downsized through natural attrition, voluntaryretirement schemes to eligible employees and by freezing new recruitment in plants.When there were openings at other plants, they were filled up with employees fromplants which were shut down. Analysts felt that the constant flow of information to theemployees 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, itannounced profits in FY 2001 due to successful implementation of the NRP. For theFY 2001, Nissan announced an operating profit of $3.92 billion and an operatingmargin of 7.9%. Nissan's debt was reduced to $3.48 billion and its stock also movedup hitting a 52 week high of $15.97 per share on NASDAQ22. Announcing Nissan's2001 financial results Ghosn declared - "The Nissan Revival Plan is over. [The recordresults] are the fruit of the NRP, fruit that even the most optimistic of outsideobservers in 1999 didn't think of.,,23

After the implementation of the NRP, Nissan saw its market share slowly increasingwith 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 performedwell, Nissan's other products such as Stagea wagon, Primera and Skyline, Cima(renamed Infiniti Q45) performed below expectations. Analysts felt that Nissan wouldhave to bring out a hit product fast to gamer market share. In February 2002, Nissan

21 Bonds that also include an option to purchase stock of the issuer.22 The National Association of Securities Dealers Automated Quotation System (NASDAQ)

was a US-based stock exchange, which was comprised largely of technology stocks. Startedin 1971, NASDAQ was the first screen based, Door less trading system ~nd was the secondlargest stock market in the US.

23 "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 commonplatform with Renault, blending the Japanese engineering and designing acumen withEuropean styling. March was launched in the entry segment in Japan where Nissandid not have any products. Nissan offered March in new colors (paprika orange, limabean green). March also had on-board e-mail and navigation systems, side airbags anda stronger engine. Priced at $8,000, March received 25,000 orders in the first week ofthe 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 ofAltima 4. In the North American International Auto Show, Altima was voted the Carof the year for 2002. Altima became the first car by any Japanese auto maker to get theaward. Another car by Nissan - the Infiniti G35 sedan, was also received well by theAmerican customers. In addition, Nissan announced that it would be launching a fullsize pickup truck, a sport utility vehicle and a minivan in the US market. Thecompany officials were confident that with the launch of new products in variousmarkets, 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 beworking towards achieving another strategic revival plan - NISSAN 180 wasannounced in April 2002 with the aim of achieving sales growth. The objectives ofNissan 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 astruggling company into a good company; through Nissan 180, we will transform agood company into a great company. The achievement of NISSAN 180 will rely onfour pillars: more revenue, less cost, more quality and speed and maximized alliancewith RenauIt.,,25 In 2002, Renault increased its stake in Nissan to 44.4% and Nissantook 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, Nissancould 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 itsglory in the early 1990s. Discuss the reasons for the decline of Nissan in the1990s.

2. When Ghosn joined Nissan, the Japanese media speculated that he would beannouncing a series of cost reduction steps to revive the company. But he did nottake any such measures. What was the approach adopted by Ghosn to develop aNRP?

3. While many companies have undergone turnaround processes, not many havebeen successful. Many analysts were of the opinion that Nissan's turnaround was

. a corporate fairy tale. Analyze the reasons behind the success of Nissan'sturnaround strategy. How far did communication and the involvement ofemployees contribute to the successful implementation of the NRP? Whichaccording 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 thecase (Case code BSTR 073), log on to www.icmr.icfai.org

24 Originally produced in 1992, it lost market due to outdated design and technology.25 "Turnaround: How Carlos Ghosn Rescued Nissan," Harper ColIins Publishers, 2003.

148

Nissan's Turnar~undStory

Exhibit I

Consolidated Financial Statements before NRP(in millions ¥, except for per share information)Particulars

199919981997199619951994

Net Sales

6,580,0016,5654,6376,658,8756,039,1075,834,1235,800,857

Net Income (Loss)

(27,714)(14,007)77,743(88,148)(166,054)(86,195)

Net Income (Loss)

(11.03)(5.57)30.94(35.19)(66.09)(34.59)

per share* Cash dividends

17,59125,13017,58917,58817,585,17,584

paid** Shareholder's equity

1,254,5951,282,4851,356,0901,356,6781,429,0651,579,793

Total Assets

6,917,5617,883,7867,473,7787,091,5947,192,9147,328,151

Long-term debt

1,591,5961,669,6421,969,4231,929,1042,209,8292,367,708

Depreciation

498,444508,012436,756431,974505,548429,032

No. of employees

131,260137,201135,331139,856145,582143,310

* Net Income (Loss) per share amounts are based on the weighted average number of shares of commonstock 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.

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Business Strategy

Exhibit II

Consolidated Financial Statements after NRP Implementation

(in millions ¥, except for per share information)

Particulars

200220012000

Net Sales

6,196,2416,089,6205,977,075

Operating Income

489,215290,31482,565

Net Income (Loss)

372,262331,071(684,363)

Cash Dividends paid*

27,84100

Net Income (Loss) Per share**

92.6183.53(179.98)

Shareholders equity***

1,620,822957,939563,830

Total Assets***

7,215,0056,451,2436,175,658

Long-term debt

1,604,9551,402,5471,655,610

Depreciation

374,827360,191434,553

No. of Employees

125,099133,833141,526

* Cash dividends during the full year by subsidiary companies to non-Nissan minority shareholders arenot included.

** Net income (loss) per share amounts are based on the weighted average number of shares of commonstock 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 withthe changes in the regulations relating to the presentation of translation adjustments effective fiscal year2000.

Source: Nissan Motors Annual Report 2002.

150


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 ofRenault 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 fromRenault started becoming popular with their success in the car races. In 1899, Renault took part in theParis Motor Show with two cars - Type A and Type B. Success of both cars resulted in increasedorders. 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. Rightfrom the initial years, Renault focused on expanding its product range. In 1906, it came up with itsfirst Renault bus - omnibus and in the following year it even entered production of plane engines. In1909, the name of the company was changed to Les Automobiles Renault. During the First WorldWar, Renault supplied taxis to the army for transportation of soldiers. After the war was over, LouisRenault was awarded a medal for Renault's contribution.

In 1917, Renault entered manufacturing of army tanks. Renault's FT17 bagged order from Frenchdefence ministry order and soon its production reached to 1100 units per year. In 1922, Renaultbecame 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 early1930s, Renault came out with various models. However the second world war disrupted theproduction of civilian cars. During the war years, factories (including Renault's) in the areas ofGerman occupation were forced to produce for Germany. During the war, allied forces bombedRenault's factories and around 80% of the factory was destroyed. After the completion of war, Louiswas arrested for collaborating with Germans and in 1944, Louis died.

After Louis' death, the French government nationalized Renault and the company was renamed asRegie Nationale des Usines Renault. In 1946, production of passenger cars restarted and in thefollowing year, the company brought out its most popular car - 4CY. In the 1950s, the companyfocused on introducing new vehicles and strengthening its dealer network. By 1959 Renault becamethe world's 6lh largest car producer. In 1960, Renault launched Alpine 110, which became verypopular. In the following year, the company discontinued production of 4CY and launched R4. In1962 it brought out the R8 model - with disc brakes on all 4 wheels. The decade of 1960 was mostsuccessful 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 wasfollowed by R6, R20 and R30 models. In 1976, Renault launched its R18, which was hailed as thesecond most successful car after R5. By 1980, Renault was France's largest automobile manufacturerwith a market share of 40%. The company had won numerous awards for its designs andadvertisement 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 governmentbought a private partner-Yolvo. However, the partnership faced lots of problems and Yolvo sold itsstake in Renault. By 1996, the French government sold its stake and Renault became a public limitedcompany. 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 therestructuring plan, Renault closed down its plant in Belgium, laid off employees and reducedoperating costs all over the company. Due to restructuring plant, by 1997, Renault became profitableand in 1999, Renault and Nissan entered into an aJliance to form a bi-national firm. By the firstquarter of 2003, Renault reported revenues of€9,015 million.

Adapted from various sources.

151

2.

3.4.5.6.7.8.9.10.11.12.13.14.15.16.17.18.19.20.21.22.23.24.25.26.27.28.29.30.31.32.33.,4.35.

152

Business Strategy

Additional Readings & References:

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

Thornton Emily & Armstrong Larry, Nissan's Slow V-Turn, BusinessWeek, May 12,1997.

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 Keity,Dangerous Liaison: Renault and Nissan, BusinessWeek, March 29, 1999.

Thornton Emily, The Debt That's Dragging Nissan Downhill, BusinessWeek, April 5,1999.

Edmondson Gail, Thornton Emily, He Revved Vp Renault. Will Nissan Be Next?BusinessWeek, April 12, 1999.

Thornton Emily, Nissan: Still Downshifting, BusinessWeek, May 17, 1999.

Armstrong Larry, Nissan: On the Road Again, BusinessWeek, May 31, 1999.

McCutcheon Peter, Nissan slashes 21,000 jobs, www.abc.net. October 18, 1999.

Restructuring 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, November 15, 1999.

On The Rocky Road To Marriage, The Economist, May 18,2000.

Bremner Brian, Nissan's Ghosn: Can He Bring Back Japan's Samurai Spirit?BusinessWeek, May 23, 2000.

Zachary Katherine, Dismantling the Keiretsu, Ward's Auto World, May 1,2001.

Ghosn Tightens Nissan Grip, www.news.bbc.co.uk, June 21, 2001.

Treece B. James, At Nissan, Ghosn Hits Grand Slam, www.autonews.com. July 9,2001.

Renault's Alliance With Nissan Halfway Down A Long Road, The Economist,August 16,2001.

Dawson Chester, Nissan: Saying Sayonara, BusinessWeek, September 24, 2001.

Nissan Revival Plan on Track, www.charionledger.com. October 19,2001.

Raskin Andy, Turnaround, www.business2.com. 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 of Automaker'sTurnaround Efforts, www.dallas.bizjournals.com. May 6, 2002.

Dawson Chester, Commentary: Ghosn's Way: Why Japan Inc. Is Following aGaijin, BusinessWeek, May 20, 2002.

Purlonger David, Nissan: Back from the Brink of Failure, www.topcompanies.com.June 28, 2002.

Tischler Linda, Nissan Motor Co., www.fastcompany.com. July 2002.

Rapoport Carla, Thierry Moulonguet - Nissan Motor, www.cfoasia.com.

www.nissan-global.com

www.renault.com

Nissan's Turnaround Story

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