Renault/Nissan:

The Making of a Global

Alliance

Prepared By: Jason Park & Isaac Hattem

Why is Renault seeking a strategic partner? What are Renault’s strengths and

weaknesses in seeking a partner?

The most successful strategic alliances are between companies with

complementary strengths and weaknesses. Renault has been building cars since it was

started under the name Société Renault Frères. Louis Renault, his brothers Marcel and

Fernand, and his friends Thomas Evert and Julian Wyer founded it in 1899. Since the

beginning they have been an industry leader in small car designs, combining functionality

with style. In 1998 Renault was the world‟s ninth-largest car manufacturer with 4.3% of

the market. During the 90‟s globalization was occurring in all industries including the

automobile industry. Major manufactures were seeking strategic alliances and mergers as

ways to increase market share, reduce costs, and improve productivity. Renault has been

an established French automaker since it started producing cars in 1897.

Like many other companies Renault has been looking to expand into the Asia for

its large potential market. They felt that the best way to do this was through a strategic

alliance. Renault has been looking for another automobile manufacturer to peruse a

possible alliance with since the early 90‟s. From February 1990 to December 1993

Renault attempted a merger with Swedish car manufacturer, Volvo. It was expected that

the merger would go through, than in December of 1993 Volvo shareholders voted

against the agreement. This was a big loss for Renault, not only had they lost the

opportunity to merge but they wasted time and money in the pursuit. Renault felt that it

was now five years behind in the race to gain international stature.

Renault‟s main objective in finding a strategic alliance partner was to increase

their market share by selling cars in new markets in Asia and North America. As you can

see on Appendix 2, in 1998 Renault did not sell cars to ASEAN or Association of

Southeast Asian Nations, and North America. At the time according US Census Bureau,

the United States had an adult population of 175,400,000 people. That is a large market

in itself, Nissan at that time had a 4% market share in North America selling 656,704

vehicles in 1998. Renault was also looking for a partner that could help expand their

product line. Renault has always been a leader in compact car sales, but does not even

produce a pick-up or 4x4 vehicle. Both of these vehicle segments are attractive for their

high potential and larger profit margins.

From 1983-1988 Renault suffered from net income losses, followed by positive

net incomes from 1989-1996. Renault is a strong company that has made many changes

in recent history that helped them recover from debts of over 57billion francs (appx. half

their annual revenue) and annual losses of 12.5 billion in 1984. Renault knew that in

order to grow they would need to spend a second stage of recapitalization, 10 billion

francs in 1985 combined with factory closings and layoffs resulting in Renault becoming

profitable again in 1987. Renault remained profitable until it suffered its first loss since

the late 80‟s in 1996. Renault once again made changes and the results showed an

increase in their earnings before tax margin (EBT) from 3.6% in 1996, to 4.6% in 1998.

They also managed to become profitable again and increase sales from 184,078 million

French francs to 243,934 million francs. As you can see. Renault has been able to face

problems and come out ahead on multiple occasions. This shows other companies that

they have the products and knowledge to work through and be successful in difficult

times.

As well as being profitable and showing signs of growth Renault has other

qualities that make them a good potential strategic alliance partner. Renault is ahead of

its competition in its mid-range and light commercial vehicles. Their smaller vehicles are

functional, reliable, and stylish. The cost at which these vehicles were produced was also

impressive, Renault has long been known for this excellent cost control. They are able to

keep their costs low by offering a limited number of platforms and engine and

transmission platforms. What makes this attractive to perspective partners is that the

strategies that have made Renault successful can be applied and used by others hopefully

with the same results.

The biggest and most attractive part about Renault is their command and

dominance of Western Europe. Renault has made a very strong name for itself. In 1998

Renault owned 11% or the market share in Western Europe. Along with having a strong

share of the market they also have 18 full-fledged production facilities across Europe.

One of the reasons Renault has been so successful in Western Europe is that small and

mid-size cars are very popular there. This is a theme that has become more popular

across the globe; places like China and Japan have an increasing demand in smaller more

efficient vehicles. Overall the expected demand for automobiles is expected to grow in

places like Germany, France, Japan, China, Korea, and Latin America. Renault is very

good at what it does; it builds smart, efficient, stylish vehicles and markets them well to

all of Western Europe. Some might say Renault has a problem because they produce no

4x4s or Pick-ups, we believe the opposite. Prior to this period they didn‟t need to

produce these vehicles. However because they want to continue to grow if they

expanded their product line they could increase sales. If they expand their product line,

their strong brand name will help with the introduction of the new vehicles and help

increase sales. These strengths are the reason any potential perspective strategic alliance

partner should consider doing business with Renault.

Even though Renault has many strengths that make it a good company for a

strategic alliance it does have some weaknesses. Renault sells small efficient vehicles

across Western Europe, almost 1.8 million in 1998 but that is about it. The amount of

vehicles sold to the rest of the world during that same year was just under 330,000 units.

This is one of the bigger weaknesses Renault has. They are dominant and well known in

Western Europe but just a small fish in a big pond surrounded by sharks. This would

make forming an alliance with a company from Asia difficult because they are relatively

unknown. Renault was so unknown that if a company such as Nissan told its

stockholders of a potential merger they might take that as a bad sign and sell their shares.

As discussed earlier Renault has had a difficult time over the past thirty years staying in

the green, as a result they don‟t have a huge amount of cash reserves especially when

compared to DaimlerChrysler. This could hurt Renault if a potential partner was carrying

a lot of debt that they were looking to pay off by forming an alliance.

One of Renaults greatest strengths could be seen has a weakness. Renault is a leader

in cost management because of their limited platform line, but other companies could see

this as a problem. When you look at Renault vehicle sales in 1998 there is a clear

distinction of their small car dominance. However some may view these numbers as a

weakness. Renault produces thirteen different car models of which four are subcompact

and compact size cars. These four cars account for almost 60% of their cars sold. That

means that their nine other vehicles only account for 40%, perspective partners might

wonder why they are so successful in this segment and not successful in others. Renault

has virtually no 4x4 or Pick-up production, which is a larger potential market. A

potential alliance partner might see this as too big of a segment to be missing, while

others could see this as room to expand.

These perceived weakness by some could be seen and strengths by others. We

feel that Renault would make a great fit for the right partner. Renault is a strong

company, which through innovation, perseverance, quality, and good leadership has

become one of the world leaders in small vehicle production. Renault has worked really

hard to modernize its production, rationalize its purchasing network and become one of

the most efficient manufacturers. This combined with its ultra-modern research center

just outside Paris has resulted in increased sales and recognition. Should Renault find the

right company a strategic alliance could be profitable for Renault and their partner.

Why is Nissan seeking a strategic partner?

What are Nissan’s principal challenges and strong qualities?

The trend towards globalization was everywhere in the auto industry. In order to

stay competitive many automakers were seeking strategic alliance to gain market share

and decrease costs. Nissan felt that it had many things to offer another manufacturer that

could benefit a potential partner. Strategic alliances allow for companies to reach a

broader market, manufacture new goods, used effective cost saving techniques, and learn

from others.

Nissan like many automakers has had a long bumpy history with both successes

and failures. In 1998 the industrial outlook for the automobile industry was promising

overall. However Nissans future wasn‟t looking as promising. At this time in the

company‟s life Nissan is seeking a strategic partner for various reasons. Nissan was in a

bad position financially. “Engineering culture took precedence over managerial culture,

while the quest for performance and quality won over costing. Promotion was based

entirely on the length of service.”(pg 597) Nissan‟s inability to establish a purchasing

policy or a system of relations with suppliers added to the problem. For a long time

Nissan had been focused on high quality and engineering innovation without focusing on

the resulting costs. As a result Nissan has accumulated debts totaling 23 billion euros.

The Japanese car manufacturer went from having a global market share of 6.4% in 1990

to 4.9% in 1998. Due to decreased number of sales Nissan had a hard time paying back

its list of annually repayments.

Yoshikazu Hanawa took office for Nissan during the middle of a Japanese

recession. Prior to joining in 1996 Nissan had accumulated a debt to sales ratio of 62%,

along with continued losses since 1992. By 1998 Nissan has reported losses of 14 billion

¥ with the debt to sales ratio rising to 66%. This ratio was growing because the auto

industry was becoming more inundated with vehicles, it was estimated that automakers

had the production capacity to build 70 million vehicles, but the demand was an

estimated 52 million. This decrease in cars demand on top of the increase costs per car

associated with research and development hurt automakers across the board, especially

Nissan.

Bankruptcy was the direction Nissan was headed. Nissan needed a quick

solution, Mr. Yoshikazu Hanawa, set a symbolic date, March 30, 1999 as a deadline for a

deal. This marked the end of the Japanese financial year, when short-term credit lines

were to be renegotiated. Mr. Hanawa wanted to use this deadline to help negotiations

with perspective alliance partners. If both parties knew when a deal had to be made by

both companies would work more productively. Nissan needed a partner to bail them out

financially in the short term.

Nissan didn‟t want to loose their identity. They wanted a partner to not only help

them financially but also allow them to help with restructuring the production system and

purchasing policy. Japanese culture has always had the notion „it is better to learn to fish

then be given a fish.‟ Renault was not the only fisherman trying to teach Nissan,

DaimlerChrysler was also in negotiations with them. It was clear that DaimlerChrysler

had the funds needed to help pay off Nissan‟s debts but it wasn‟t clear that they would be

able to help Nissan fix the problems that caused the debt in the first place. At this time it

seemed as though DaimlerChrysler wanted Nissan to help in its quest to take over the car

manufacturing industry. If DaimlerChrysler formed an alliance with Nissan, Nissan

could lose its Japanese identity. Renault believed that they could teach Nissan „the art of

fishing,‟ Renault experience with consolidated large deficits also helped make them a

perfect fit with Nissan.

Nissan‟s need for a strategic alliance is due to their increasing debts, declining

market share, high costs of production, and the Japanese recession. A strategic alliance

with the right company could help Nissan reduce their debt, increase sales, lower cost of

production, and expand their global market.

Nissan faced a number of challenges when working on a strategic alliance with

another car manufacturer. Challenges will occur with any alliance, no two companies fit

perfectly together. When discussing the reasons why Nissan is in search of a strategic

alliance the problems they have were discussed as well. Due to Nissan‟s recent financial

problems their attractiveness to others has diminished. Nissan has accumulated debt in

excess of 23 billion euros, this debt with have to be paid off at some point by Nissan or

any potential partner. Any prospective partner would have to make changes to Nissan‟s

purchasing policies and supplier relationships. Nissan has a wide variety of platforms

that keep costs high because only some parts can be used for different vehicles.

Appendix 10 shows us that Nissan is a top car manufacturer in terms of sales however

their inefficiencies resulted in a low earning before tax percentage of approximately 2%.

We can see that their sales are strong but their costs of production are just too high.

Nissan can become profitable with changes made to reduce the cost per vehicle. As well

as having a low EBT, their debt to equity ratio has been growing to an extremely high

339% in 1998.

Other challenges Nissan will face in trying to find a partner for a strategic alliance

is Nissan‟s corporate structure. They work in a very collective way, decisions are not

made by one person, rather decisions are made by groups, increasing time to make

decisions while not always picking the right one. One place were this is evident is in

their production facilities. Nissan has 12 plants worldwide; each one of them has the

capacity to build way more then actually produced. In 1998 seven plants in Japan and the

rest of Asia had the capacity to produce 2,260,000 cars but they only produced 1,706,000

this over 24% less then possible. This is a huge expense because underutilization costs

money. Nissan is in need of a strategic alliance to not only help financially but also help

them make production more efficient while implementing change in company structure.

Lastly one potential issue with Nissan is in their distribution methods. Unlike its

competition Nissan privately owns 50% of its dealership; Toyota only owned 10% of

dealerships. This is another reason Nissan was operating at a loss, if these dealership lost

sales they would only lose money in the cars, Nissan was losing money on the cars and

the money it cost to run the dealership. Because these dealerships were owned by Nissan

dealers had no autonomy in selecting car models, resulting in poor market feedback.

According do the 12th

president of Nissan, Yataka Kume, “Nissans cars are becoming

further and further away from the true voice of our customers.” Nissan needs to make

changes to become more successful. They need to produce cars more cost effectively and

efficiently by making changes to company structure, sales force and product lines. A

strategic alliance with the right company can help revamp the companies‟ image and

structure resulting in increased market share and revenues.

These challenges combined with their need for an alliance does not make Nissan a

bad company rather misguided. Many of the problems they face now are in direct

relation to decisions and polices made years ago. Similarly when looking at Renault,

what some may see as a weakness other might see as a strength. Nissan has huge

potential production capacity; this is something that might attract any manufacturer

looking to form an alliance. Renault for example could potentially produce cars in a

Nissan factory under the Renault name, helping to reducing costs of production for both

companies.

Nissan has always emphasized engineering and technology; they produced a high

quality product. Sport Utilities Vehicles and large vehicles are gaining popularity;

Nissan has been building this types of vehicles for a long time. To some the current trend

for buyers in going bigger. If this turns true then Nissan can be in a good position to

meet the increasing demand for SUVs. Renault for example believed this to be true, if an

alliance formed between Renault and Nissan both companies would be in a good position

should the industry switch from preferring smaller cars to bigger cars or vies versa. One

of Nissan‟s strong points is building high quality; 4x4s, pickup-trucks, utility vehicles,

and mini vans. For those who feel this is growing market Nissan could be an attractive

potential alliance partner.

The automobile industry can be ruthless. It can affected by things that are not

foreseeable. Automobile manufacturers have to make decisions that allow them to adapt

to industry change. Strategic alliances are great ways for manufacturers to help combat

this changes in the market by reducing costs, improving technology, building cars with

the customer in mind, improving plant productivity and quality management, and

creating new and innovative products. As we have seen both Renault and Nissan have

room for improvement while still being a quality company. The potential synergy

between the two can be easily seen and once further research was conducted, it was very

clear the two were a good match.

Background information

About Chrysler

By 1990, Chrysler was in the brink of bankruptcy, but Robert Lutz, the CEO of

Chrysler was able to turn its company around and even managed to prevent a hostile

takeover by Kirk Kerkorian (a Chrysler shareholder). By 1997, Chrysler had fully

recovered and had generated revenues of up to $57 billion and its operating profits were

estimated to be around $3.7 billion at the time. It has progressed to become one of the

most profitable and cost efficient automobile producers in the world. Chrysler specialized

in offering a unique product line of sports utility vehicles and minivans, combined with

popular designs demanded by the American consumers. Chrysler also offered other

product lines consisting of compact cars, jeeps and commercial vehicles, which were sold

under Chrysler, Plymouth, Jeep and Dodge. Chrysler sold approximately 3 million

automobiles in North America, which accounted to about 93% of its sales. However,

Chrysler was not able to reach out to the European/Asian markets at this time ("Daimler-

Benz and Chrysler Merge", 2009).

About Daimler-Benz

Since the 1990's, Daimler-Benz has evolved from being a diversified industrial

conglomerate that offered products ranging from the Mercedes-Benz to the AEG

(weapons) to a solely automotive company under the new CEO, Juergen Schrempp. The

Mercedes-Benz was a very demanding luxury car line, it was seen to be the cash cow for

Daimler-Benz. It was also viewed as one of most luxurious cars in the world. Daimler-

Benz produced luxurious automobiles, commercial vehicles, and internal combustion

engines. It's sales revenues were generated mainly in Western Europe, which accounted

for over 60% of the 1.1 million cars sold in 1997 and roughly 25% in North America.

However, Daimler-Benz's products did not reach into the Asian markets. Revenues

totaled about $52.2 billion, from the sale of automobiles and commercial vehicles

(trucks) contributed to about $2.3 billion of the total revenues ("Daimler-Benz and

Chrysler Merge", 2009).

About Nissan

By 1999, Nissan was going through a financial difficulty as it had sustained heavy

losses during the past eight years. It had a large amount of accumulated debt that it

needed to pay off. It was near the brink of bankruptcy before the alliance with Renault.

Nissan's profit margins were extremely low, its purchasing costs were higher than

Renault's and its manufacturing capacity was way beyond its needs. However, even after

the alliance with Renault, Nissan still had debts over $11 billion. Nissan had to

restructure its company to turn itself around so that it can continue to operate in the

automobile industry. Nissan offered a variety of automobiles and commercial vehicles in

its product lines. In 1998, its annual production capacity was about 2.4 million

automobiles making Nissan the number two manufacturer in Japan and eight in the

automobile industry. Nissan sales in Japan accounted for about 41% of Nissan's

automobiles sales and 27% of there total sales came from North America. It also had

production facilities located throughout Europe which accounted to about 20% of its sales

(Nissan, 2009).

About Renault

Before the alliance, Renault was very limited as to how it operated as it was

owned by the French state since 1990, but it was privatized in 1996. Renault was well

known for its innovations and the ability to satisfy its customers through unique

automobile designs and special engine components. Renault offered a variety of different

automobiles such as small compact cars, minivans, commercial vehicles, trucks, and even

buses. In 1998, Renault had sold 2.2 million vehicles worldwide, even though it was

mainly present in Europe. Europe accounted for 91% of its sales, and 57% of those sales

came directly from France. At this time Renault ranked number ten among the

automobile industry worldwide. It had a variety of production facilities in South America,

but it did not have any market share in the US or in Asia. Renault has been performing

well financially by 1998, Renault had revenues of €37 billion and net income of €1.3

billion (Renault, 2009).

Merger: DaimlerChrysler

Daimler-Benz and Chrysler announced their merger in May of 1998. Daimler-

Benz ended up paying a premium of roughly $38 billion to the Chrysler's shareholders.

Through the merger, the CEO of Daimler-Benz was titled manager of the year. Daimler-

Benz wanted to offer its products internationally and broaden its product lines. Chrysler

on the other hand wanted access to Daimler-Benz's technology. Ultimately, through the

merger, both companies wanted to achieve cost savings through a joint research and

development program, and through the combined efforts of a purchasing and

manufacturing process. Looking closer at the merger, the two companies product lines

were very complimentary as Daimler-Benz specialized in manufacturing luxurious

automobiles (Mercedes-Benz) while Chrysler matched the product lines with SUVs,

minivans, and other commercial vehicles. In addition, the majority of sales made by

Daimler-Benz came from Europe whereas Chrysler's sales was generated mainly in North

America. However, both companies did not have a strong grasp in the Asian markets nor

in South America. However, both companies were confident that its synergies would

drive up market demand for their combined product lines in these areas. They also

believed that the merger would create cost savings of $1.41 billion in 1999. Through the

cost savings in a joint research and development program and also through the combined

resources in purchasing and manufacturing. Afterwards, they believed that the cost

savings would accumulate to over $3 billion over the next couple years. Daimler-Benz

and Chrysler believed that they could achieve economies of scale through the joint efforts

of a variety of different projects. After the merger, DaimlerChrysler announced that their

revenues were estimated to be $132 billion with operating profits of about $8 billion

which placed them at third in the automobile industry. Through the merger,

DaimlerChrysler had sold 4.5 million automobiles by 1998 and they were ranked fifth in

sale of automobiles (Bogenschutz, 2000)

Daimler-Benz and Chrysler were foreign to each other, the merger was signed

based on the agreement that it was essentially an equal merger to avoid cultural clashes.

In essence, both CEOs were considered the chairmen of DaimlerChrysler. Even though

DaimlerChrysler was incorporated in Germany, it had two different headquarters, one in

Germany and the other in Michigan. This was one of the reasons that contributed to the

failure of the DaimlerChrysler merger, 2 years later. By the end of 2000, Chrysler was

running a separate division without any synergies. The CEO of Daimler-Benz admitted

that the merger was actually an acquisition of Chrysler. By then, Chrysler began

sustaining heavy losses due to slow sales in the US and its product lines began to be

outdated and its products were constantly being challenged by its competitors. Daimler-

Benz tried to turn this around by implementing a $4 billion plan, outlined to shut down

manufacturing facilities and laid off many workers. The plan also included hiring a new

German CEO to run the Michigan headquarter. He brought 25 other German executives

to work with him. By 2002, two thirds of Chrysler's management (American managers)

had either resigned or been laid off (Neubauer, 2009).

Difficulties

The events that led to the fall of DaimlerChrysler merger can be seen through the

cultural differences between the two companies. Initially, top executives underestimated

the cultural differences and didn't take into account of the problems it may cause.

Daimler-Benz business style was completely the opposite of Chrysler's. Daimler-Benz

operated at a very authoritative level and had a variety of hierarchy levels, which

contributed to the various divisions it had within the complex hierarchy. Its business had

a centralized bureaucracy where all decisions had to go through it. On the other hand,

Chrysler was more lenient with its decision making process and its decisions were made

faster than Daimler-Benz as it didn't have to go through a centralized administration.

These differences were brought up in both the top and lower management meetings,

however, the German managers viewed Chrysler as inefficient and viewed their own

ideology to be superior than the Americans. To add to this, Chrysler was in heavy debt

and needed a turnaround. Ultimately, this led them to believe that they were the better

half. As a result, management from either side did not want to work together and were

not willing to open up to each other. For instance, Daimler didn't want to share its

platforms or any ideas relating to the Mercedes-Benz because its executives felt that their

buyers would feel cheated if they shared its technology with Chrysler's outdated one.

Ultimately, from the outlooks of the merger, it seemed like an empty shell where the only

benefits seemed to be the cost savings they gained through the initial merger. From

Chrysler's perspective, its management had trouble turning its company around, it

released its new automobile models too late, especially when the demand for automobiles

was actually declining. In addition, management did not implement any change in

strategies against the downturn of the automotive markets, which hurt the merger

considerably. These factors led Chrysler to sustain heavy losses in 2001 (Mergers and

Acquisitions: Why They Can Fail, 2009).

The DaimlerChrysler merger was clearly not headed the direction. Kirk

Kerkorian, the third largest shareholder sued DaimlerChrysler over Schrempp's previous

statement and demanded $9 billion in compensation. As Schrempp previously stated that

the merger was in fact an acquisition rather than a merger, Kerkorian stated that he would

not have sold his Chrysler shares if he had previous knowledge that Daimler-Benz

wanted to acquire Chrysler. Since the merger in 1998, its stock price had dropped

approximately 63% by 2003 and Daimler had paid a premium that was too costly for the

merger. In addition, Chrysler had made a 33% stake in Mitsubishi in March 2000 which

also sustained heavy losses and three months later bought a 10% stake in Hyundai which

took the same toll. However, by the end of 2003, DaimlerChrysler released a new

automobile, the Chrysler Crossfire, which contained shared components from Daimler.

Approximately 40% of its components such as the transmission, engine and the axles

were borrowed from the Mercedes-Benz. In the end, the merger fell apart and Chrysler

was sold off in 2007 (Jamieson, 2009).

Strategic Alliance: Renault-Nissan

By March 1999, Renault and Nissan had signed an agreement, which formed an

alliance between the two giant automobile companies. The alliance essentially helped

both parties benefit from each other. For instance, at this time, Nissan was in a desperate

need for cash to pay off its interest payments and Renault was able to provide it with the

necessary cash reserves it had. In addition, Nissan was able to enter the European and US

automobile markets through the alliance. Nissan was also able to learn from Renault's

product lines such as the technological know-how in the small compact cars it specialized

in. On the contrary, through the alliance, Renault was able to penetrate the Asian markets

that it lacked previously. Renault also added some of Nissan's product lines to its own

such as the commercial and large passenger cars that Nissan specialized in. In addition,

Renault was able to learn from Nissan's technological advancements in the manufacturing

process. Overall, Renault-Nissan alliance showed complementary strengths from both

parties and seemed to help both companies in the right ways. By the end of 1999,

Renault-Nissan was ranked fourth in the automotive industry based on its total output of

5 million automobiles and had grasped about 9% of market share worldwide (Renault,

2009).

The Renault-Nissan alliance was formed based on three distinct goals. First, it

was to combine and utilize the resources to achieve economies of scale. Secondly, it was

to use each other's complementary strengths to improve the efficiency in its technologies,

production process, and market share. Lastly, it was to provide a distinct brand name in

its automobiles to preserve a strong brand image for each type of automobile it produces

to attract various customers to its products. These goals allowed Renault and Nissan to

help grow profitably while being from different cultures similar to the DaimlerChrysler

merger.

The alliance agreement had two phases. The first phase of the alliance was in

1999 where Renault took a 36.8% stake in Nissan for about €4.4 billion with the option

for Nissan to take a stake in Renault at a later date. Renault also had the option to

increase its stake in Nissan at a later date. By that time, three executive directors from

Renault joined the Nissan's board. Carlos Ghosn, one of the executive directors was

appointed the Chief Operating Officer, he announced that he would turn Nissan around

within three years while cutting its debts in half. At the same time, eleven employees

from both companies started to look for synergies to be employed even though they have

already started this process a long time before the alliance was formed. Based off of

2000-2002 data, the synergies were to have contributed to the cost savings of about $3.5

billion (Renault, 2009).

On May 2002, the second phase of the alliance was initiated as Nissan took a 15%

stake in Renault. However, these shares did not have any voting rights and Renault used

these funds to raise its shareholdings. As a result, the French state would own a smaller

stake in Renault. (Falls to about a 26% stake in Renault.) This phase was actually

announced in October 2001, a year earlier than expected because Nissan was able to

reduce its overall debt levels from ¥1,350 billion in 1999 to about ¥433 billion in 2001.

The purpose of this phase was to improve both companies financial position while

increasing its shareholdings. In addition, through the second phase, the Renault-Nissan

B.V. was formed. It was incorporated under the Dutch laws and both Renault and Nissan

had equal ownership over it. Within it, the Alliance Board of Directors consisted of three

Renault directors and three Nissan directors chaired by Carlos Ghosn who was also

appointed as CEO of Nissan in 2001. Renault-Nissan B.V. was a strategic management

group to define the strategies and to manage the synergies between the two automobile

companies through joint activities on a global scale. For instance, common power trains

and platforms were shared between the two companies. By 2002 there were two common

power trains and platforms that were in use and it hoped to attain eight power trains and

ten platforms by 2010. In order to incorporate this, the Renault Nissan B.V. had to form

the Renault-Nissan Purchasing Organization in April 2001. This organization hoped to

handled over 70% of both companies purchases in the long run. By the end of 2002, it

had already accounted for about 40% of the alliances purchases. In addition, the

production facilities were also shared where Nissan's commercial vehicles were

manufactured in Renault's production facilities and Renault's minivans were

manufactured in Nissan's production facilities. Lastly, the creation of a joint information

technology and information systems department allowed both companies to have similar

systems which increases its effectiveness to function as a team. The creation of these

organizations provided the necessary synergies in the IT/IS, production and purchasing

areas of the alliance ("What makes for a good marriage", 2009).

Difficulties

The biggest challenge in the Renault-Nissan alliance was the cultural differences

between the two companies and how it viewed the alliance and its goals. At the time of

the Alliance, Nissan was struggling for its survival and turning the company around was

a very difficult task. However, a Lebanese-Brazilian businessman named Carlos Goshn,

who was currently the executive vice present of Renault and COO of Nissan, was able to

turn Nissan around. It was easier for him to turn the company around as it had had

financial difficulties and the Japanese were struggling to stay afloat and Goshn was able

to modify Nissan as a foreigner. For instance, the Japanese company was considered a

collective organization where all the decisions were made based on a general consensus

whereas Goshen's ideology was more of an individual approach where he could base his

decisions making process without any formal agreement within the company. This was

reinforced through the help of a reward system that remunerated individuals based on

their results. In order to reduce the heavy debt loads, Goshn had to close down five

manufacturing factories and layoff approximately 20,000 employees which was outlined

in the "Nissan Revival Plan" formulated by him. He also strived to reduce Nissan's

purchasing costs by at least 20% from its suppliers over the next three years while turning

towards global suppliers who were more price competitive in the hopes to reduce the

overall debt load by half. In addition, he wanted to employ the use of English as a

common "work language" within the company so that the cross-cultural teams within

both Renault and Nissan can improve collaboration with each other while working more

efficiently (Graham, 2003).

The "Nissan Revival Plan" had been accomplished a year earlier than expected in

2001. Through the new implantations set forth by Goshn, Nissan was able by reducing its

debt levels by half and generate profits again. In addition, due to the platform strategies,

Nissan was able to offer 28 new models in its product lines, since 1999, which also

contributed to Nissan's success. By the end of 2004, Nissan had reduced its debt levels to

zero. Due to Nissan's success, its effect trickled down to Renault's income statement. In

2002, Renault's net income was estimated to be about €2 billion of which €1.3 billion was

from Nissan. By the end of 2002, the Renault-Nissan alliance had sold 5 million

automobiles together and it had established a global presence in the markets with no

overlapping of its product lines except in Europe (Smith, 2009).

Comparison of DaimlerChrysler Merger and Renault-Nissan Alliance

Similarities

There were a lot of commonalities between the DaimlerChrysler merger and the

Renault-Nissan Alliance. For instance, both Renault and Daimler-Benz already had a lot

of experience in the European markets but didn't really have an international foothold.

Both companies didn't have a complete product line, but rather a firm specific niche

product. For instance, Daimler-Benz specialized in offering luxurious cars such as the

Mercedes-Benz and Renault in small compact cars. On the other hand, Nissan and

Chrysler focused on their own markets (Nissan in Japan and Chrysler in the US) and

were pretty much the dominant sellers on their product lines. Both companies also had a

niche product line on the side, where Chrysler offered the sporty looking SUVs and

minivans while Nissan offered larger commercial vehicles.

The merger and alliance were both done to complete each other's product lines

and to establish an international market share so that it can reach out to customers in

areas they previously didn't have access to. In addition, all four companies wanted to

achieve some sort of cost savings and generate higher profits through economies of scale

and scope. For instance, Chrysler and Nissan was in serious financial trouble before the

merger and alliance and without the help of Carlos Goshn, Nissan would have never been

able to turn its company around. Similarly, Chrysler would not have been able to do the

same with the help of Dieter Zetsche from Daimler-Benz. They were able to turn their

partner's companies around through major layoffs, closing down manufacturing facilities,

and decreasing the purchasing costs from their suppliers. In addition, both the merger and

the alliance were able to combine their R&D to share common resources such as engine

components, share information technology systems and joined their manufacturing and

purchasing processes together. And lastly, the companies involved in the merger and the

alliance were from a different cultural background and had different management styles

resulting in differences in how their business functioned. Through this, both companies

ended up keeping their own headquarters in their own country and didn't have to change

their brand image (Eppert, 2003.)

Looking more closely into the merger and the alliance, both sides were considered

to have an equal stake in the merger and alliance. For instance, the DaimlerChrysler

merger was announced on the idea that the merger was equally split between Daimler-

Benz and Chrysler because of the cultural clashes and the connotation it may hold if a

foreign company had more control over the other. In the same way, the Renault-Nissan

was considered a win-win partnership. The interesting similarity of the DaimlerChrysler

Merger and Renault-Nissan Alliance was that both companies incorporated the use of

English as the common language at the work place. This cleared the communication

issues and simplified their ability to communicate with each other, which enhanced work

flow and efficiency.

Differences

The most obvious difference between the DaimlerChrysler merger and Renault-

Nissan alliance was that one group chose to team up as a merger while the other formed

an alliance. A merger is simply defined as joining two or more companies together

usually by offering the stockholders of the other company, a premium in exchange for

their shares. A merger is considered to be more costly compared to a strategic alliance

and is usually harder to get out of. Daimler-Benz for instance had to pay Chrysler's

shareholders a $38 billion in premium in order to go through with the merger. In addition,

once a merger is formed a company, the senior partner usually has full control of the

company from a management perspective and gives the advantage of recognizing

economies of scales faster. However, in an alliance, the control is usually split up

between the companies within the alliance. This risks and rewards are usually split

between the companies. The merger also has a trickledown effect where if one company

such as Chrysler does well, it is reflected on the merged company's financial statements.

However, the same situation can be applied on its financial statements when Chrysler

does not do well, which affected DaimlerChrysler when Chrysler went through its crisis

after the merger.

Based on the McKinsey study, two out of three mergers are said to fail due to

cultural issues between the companies. In DaimlerChrysler's case, the cultural issues were

completely ignored by management from both sides. The management from Daimler-

Benz believed themselves to be better than Chrysler's. Daimler-Benz's management tried

to change Chrysler's way of business by applying their own management and production

styles. Daimler-Benz management believed their way was far superior then Chrysler's,

this forced many American managers to leave Chrysler. Daimler didn't even think about

the possibilities of gaining any benefits from Chrysler do to their arrogance. By the end

of the merger, there wasn't much shared between the two companies. The end result was

that the synergies that DaimlerChrysler wanted to achieve did not occur according to

plan. By 1999, they had generated $1.4 billion in cost savings but did not obtain the $3

billion in cost savings afterwards. The merger ended up as a failure, several years later

the companies split up and sold off the Chrysler division in 2007 (Mergers and

Acquisitions: Why They Can Fail, 2009).

In a strategic alliance, two or more companies decide to join forces towards

accomplishing the same goals for the purpose of creating and capturing value through the

mutual benefits of sharing technologies, skills, products, markets and other assets. A

strategic alliance is considered cheaper than a merger, but at the same time it functions

similarly. The Renault-Nissan alliance was formed through cross holdings of each other's

shares, they both shared the same cultural differences that the DaimlerChrysler merger

experienced. This would have been harder with the Renault-Nissan alliance as there was

a bigger distance between the Japanese and French compared to the US and German

companies. However, the results came out better than the DaimlerChrysler merger due to

Carlos Goshn, the acting COO initially, then later as president and CEO, of Nissan.

Through his influence, he was able to restructure Nissan's business style to a more

acceptable management style based on his ideology from the traditional keiretsu method

used at Nissan. The changes made led to Nissan's success, the changes were possible due

to the difficulties Nissan was facing at the time of the alliance and it needed desperate

help turning its company around. It would have been far fetched for the Japanese to think

that a foreigner would actually step into their company and turn its company around. The

alliance was in part successful by the fact that Goshn was able to turn Nissan around, but

the other factor that contributed to its success was the idea that both companies felt that

they had an equal partnership in the alliance compared to the DaimlerChrysler merger.

Through the alliance, they formed a variety of entities such as the Renault-Nissan

B.V. and other departments such as the IT/IS departments and the purchasing and

manufacturing departments where both employees from Renault and Nissan took part in.

The Renault-Nissan alliance took the cultural differences into account and tried to

manage them by creating a variety of cross cultural teams within both companies to

create a stronger corporate culture and to prevent inefficiencies through cultural

differences. These factors contributed to the success of the Renault-Nissan alliance by

creating synergies through shared R&D in technologies relating to platforms and engine

components, joint purchasing and manufacturing process, and the ability to enter new

markets through the alliance. In the end, Nissan was able to turn its company around and

ended up generating profits over its consecutive losses in previous years. It was also able

reduce its debt levels by half. In addition, through the synergies of the Renault-Nissan

alliance, it was able to surpass DaimlerChrysler's total output capacity of 4.5 million units

by generating a capacity of 5 million units in 2002. At this time, the Renault-Nissan

alliance ranked fourth in the automobile industry whereas DaimlerChrysler dropped to

sixth. Lastly, the alliance has caused their stock prices to increase dramatically whereas

the Daimler Chrysler's shares have dropped drastically throughout the merger sustaining

heavy losses to its investors (Renault, 2009).

Relating to Course Content

A company planning to expand internationally can use different strategies to

adjust to the external pressures, threats and opportunities. The two main pressures faced

by companies are the pressures to reduce costs and pressures for local adaptation. These

strategies determine whether the company is an international, multinational, global or a

transnational company. Most automobile companies are cost driven in the sense that

reducing costs are more important than the need for local adaptation. Therefore,

automobile companies believe that in general it is more important to achieve economies

of scale/scope in order to stay competitive in the international markets rather than

through a differentiation strategy. This suggests that in general most automobile would

fall under a global company where it views the world as a single marketplace and its

main objective is to create a standardized product that addresses the customer's needs.

The Renault-Nissan alliance seems to have used a different approach. The Renault-

Nissan alliance seemed to fit the characteristics of a transnational company while

DaimlerChrysler fit more as a global company. A transnational company combines the

benefits of global scale efficiencies with benefits of local responsiveness. For instance,

Daimler and Chrysler had two headquarters even after the merger with Daimler making

changes necessary to Chrysler. They did not take into consideration of what their local

customers demanded and did not consider localizing their products to meet the customers'

needs. They tried to concentrate only on the cost savings, which reflected a global

company. On the contrary, the Renault-Nissan alliance was able to combine their

decision making strategy, share resources and technologies within both the production

operating areas within the company through cross cultural teams. These implementations

allowed Renault-Nissan to incorporate both the cost efficiencies and local adaptations in

their product lines. The Renault-Nissan alliance did have two headquarters but they

ultimately formed the Renault-Nissan B.V. during the second phase. In addition the other

entities within the alliance, combined with the cross cultural teams and through shared

resources, they were able to produce a differentiated product to satisfy a country's

specific needs. They were also able to coordinate better than DaimlerChrysler and was

ready for the possibilities of change in the global markets such as a downturn in the

automobile industry. Through the comparison of the DaimlerChrysler merger and

Renault-Nissan alliance, it can be said that in order for an automobile company to

succeed internationally, it's organizational structure needs to be in the form of a

transnational company with well integrated cross cultural teams.

Renault-Nissan Update

The automobile industry is having as hard a time as ever to stay in the green.

Renault-Nissan has done better then the average manufacturer. As of the beginning of

2009 Renault-Nissan was the third largest global automaker in terms of sales while

having a global market share of 9%. They have been successful through layoffs and

factory closings. Renault-Nissan hopes to stay strong and CEO Carlos Ghosn recently

announced they are working on a fully electric vehicle. If the trend towards reduced fuel

consumption continues, Renault-Nissan will be ready.

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