Take one small auto company that in recent years has transformed itself from the maker of some of the ugliest cars on earth into a profitable niche player. Take another car maker with $30 billion in debt and $1.5 billion in losses, production capacity so far out of line with demand as to make one think its executives believe that extraterrestrials are going to land at any minute and really want cars, and an almost complete lack of a coherent corporate strategy.
Mix well, and what you’ll almost certainly end up with is two companies in real trouble instead of one.
You might have thought that when DaimlerChrysler walked away from a deal to acquire troubled Japanese auto manufacturer Nissan–that’s the $30 billion debtor–it would have scared everyone else off. After all, Daimler’s chairman, Juergen Schrempp, had been interested in Nissan for some time, and appeared to want to make a deal that would give his company a firmer foothold in the Japanese market. DaimlerChrysler has a solid balance sheet, lots of cash, and a rising market share. If it couldn’t figure out how to salvage Nissan, why would anyone else think they could?
And so Renault came to the rescue. Yesterday, the French auto maker, which just three years ago lost $1 billion but is now enjoying record sales and profits, said it had made an offer to buy 35 percent of Nissan for between $4 and $5 billion. Up to this point, Renault has done almost all of its business in Europe, with a small, almost curio-like presence in the United States and essentially no sales in Asia. A deal with Nissan, Renault execs seem to believe, would immediately give the company international credibility and a global platform from which to market cars.
But it’s far from clear what credibility Nissan really has, and that platform looks awfully shaky. Nissan’s greatest assets are its factories abroad, most notably the one in Sunderland, England, which is the most efficient in the world, and the one in Smyrna, Tennessee, which is a showpiece for Japanese production methods. But efficient factories do not a healthy corporation make, especially when that corporation has $30 billion in debt and a bloated bureaucratic decision-making process.
In fact, the Renault deal is even worse than it looks, precisely because Renault will be only investing in the company and not actually acquiring it. Although the size of Renault’s stake will give it veto power over major changes in the company’s structure–like mergers or acquisitions–it will not have any real power to remake the company on an internal level. And even if Nissan’s management agrees to give Renault some measure of oversight as part of any deal, one has to be highly skeptical that the Japanese government will sit by idly if Renault steps in and begins effecting the kind of radical change that Nissan needs.
On the simplest level, the question has to be: “Are you really telling me you can’t find a better way to spend $4 billion?” But there’s also something deeper going on here, which is that auto makers have been listening too closely to their own complaints about overcapacity. Yes, the auto industry does have too much capacity, and yes, that is a problem. But the truth is that the auto industry almost always has too much capacity, since you never want to be unable to deliver a car when a customer wants it. And in any case, ill-considered mergers are not a solution to overcapacity. Who even knows if a Renault-Nissan merger will actually take any capacity offline? If anything, this may just allow Nissan to float along for a few more years without ever making any tough decisions.
Renault has a nice business as a niche auto maker right now, and it should mine that niche for as much as it can. There’s nothing wrong with making $1.4 billion, as Renault did in 1998. That’s enough profit for a company to thrive. The idea that you need to do $100 billion in sales to be a real car company is a myth, and a bad one at that. Renault should give up on the global ambitions, and leave Nissan to repair itself on its own.
