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Dangerous Liaison: Renault and Nissan
It could be 8 to 10 years before the deal yields a return

French auto maker Renault wound up its 1998 centenary year with profits jumping 63%, to $1.5 billion, and sales soaring as buyers snapped up nifty new models such as the Megane Scenic minivan. Now, Chairman Louis Schweitzer is betting all his chips on a megadeal to propel his company into the global big leagues. The tall and intense Schweitzer announced on Mar. 16 that he is negotiating to buy a 35% stake in Japan's ailing No. 2 auto maker Nissan Motor Co. (NSANY) for $4.3 billion. Combined, the two would be the world's fourth-largest auto maker. ''It's a fast-track route to become a global player,'' says Arthur Maher, head of European forecasting at J.D. Power-LMC Automotive Services in Oxford.

It's also a marriage of desperation for both parties. Other big Japanese outfits rejected Renault's advances, while Nissan's attempts to cuddle up to both DaimlerChrysler (DCX) and Ford Motor Co. (F) flopped. But each of the two perpetual wallflowers has something the other needs. The $41 billion Renault, which sells four out of every five of its cars in Europe, gets a valuable entree into the key U.S. and Asian markets, plus access to Nissan's strong engineering and production technology. Nissan, currently staggering under a stupendous $22 billion of debt, gets a life-saving cash transfusion and the use of Renault's European design flair to revamp tired, uninspired models.

CULTURE CLASH? But for a recently turned-around Renault, the Nissan link is a dangerous liaison. Auto-industry experts figure it could be 8 to 10 years before Renault saw a real return on its investment, if all goes well. Meanwhile, potential conflicts over everything from management control to cost-cutting loom large--even though Renault's 35% stake would enable it to veto decisions it doesn't like. If the deal fails, the wasted investment could kill Renault's chances of remaining independent.

As he goes into the final rounds of negotiations with Nissan President Yoshikazu Hanawa, Schweitzer could still pull the plug on the deal. Many analysts wish he would. ''You can do a lot of other things with $5 billion,'' says Steve Haggerty, auto analyst for Schroder Securities in London. He figures that if the deal goes through, the 56-year-old Renault boss has just a one-in-five chance of making it a big success. Chances are that the combined company will bump along with indifferent results. That could be a major drag on Renault, whose earnings are likely to take a 20% hit annually if a deal takes place. That's one reason even Schweitzer has been saying recently that the alliance was only worthwhile if Nissan can be turned around rapidly.

But to do that, Renault might have to empty its own executive benches. Industry insiders say Hanawa has agreed to make Renault's managing director and ace cost-cutter Carlos Ghosn his No. 2 at Nissan with the title of Chief Operating Officer. Renault would also get two or three seats on a slimmed-down Nissan board and draft 30 to 40 executives to Tokyo to help restructure Nissan. But Nissan's problems are enough to daunt even a prodigy like the Brazilian-born Ghosn. The $53 billion auto maker is expected to report consolidated net losses of about $455 million for the year through Mar. 31, quadruple last year's. ''Nissan probably shouldn't even be in the auto business,'' insists one London analyst.

Significantly, both DaimlerChyrsler and Ford rejected an alliance with Nissan in recent weeks. ''They had no visible restructuring plan,'' sniffs one DaimlerChrysler insider.

But Schweitzer really has little alternative. As rivals built world-scale companies in quick-paced mergers, they were edging Renault towards ultimate oblivion as an independent company. ''We have to be as efficient as the Japanese and keep our knack for innovation,'' says Schweitzer. He also needs to keep his nerve. Melding two very different cultures while fending off ferocious competition from global rivals will be tough. But dodging the challenge altogether would have been suicidal.

By Gail Edmondson in Paris, with bureau reports


The Alliance


Renault is strong in Europe. Nissan has a presence in Asia and the U.S.

Design is Renault's strong suit, while Nissan's production and engine technology could benefit Renault. Nissan's plant in Britain is the most efficient in Europe.

Combining platforms and purchasing will cut costs.


Renault's ability to exert management control with a 35% stake will be shaky. Nissan may resist more forceful restructuring, including layoffs.

Nissan'sU.S. market share is eroding: Reversing the trend will be costly.

Nissan's corporate culture is highly conservative, so clashes with the French are likely.



The Shuttle Diplomacy of a Car Deal

In little more than five hours on Mar. 13, Nissan Motor Co. President Yoshikazu Hanawa cut a preliminary deal with Renault Chairman Louis Schweitzer for the French auto maker to buy a stake in Nissan. But the alliance was no bolt from the blue. Hanawa met with Schweitzer over nearly two years before reaching an agreement. Masaaki Sato, chief editorial writer of Tokyo-based Nikkei Business Publications Inc., tracked the long courtship. Here are translated excerpts from his report, which appears in full in Nikkei Business, a leading business weekly.

After a 13-hour flight from Tokyo on Mar. 13, Hanawa landed at Paris' Charles de Gaulle Airport. Escorted through a special VIP exit without customs checks, he was greeted in an airport hotel by a smiling Schweitzer. The two had met many times already.

Renault had made the first approach in the spring of 1997--and to Toyota, Honda, and Mitsubishi as well. Nissan alone showed any interest. Hanawa had seen Renault's cost-cutting strategy at work during visits to its plants and felt that Nissan could learn a lot from Renault. Initial talks on an operational and technical hookup progressed well. An equity link wasn't a factor at that stage.

But in August, 1998, Schweitzer put a new proposal to Hanawa. Arguing that an alliance would be mutually beneficial, Schweitzer said: ''We have a firm and trusting relationship. To make our alliance even stronger, why not think about holding each other's shares?'' Hanawa was pleased but had to decline. ''Nissan, frankly, has no money to spend on buying Renault stock,'' he told Schweitzer. Replied the Frenchman: ''We can talk about this again in the future. From Renault's point of view, there is no future for us if we cannot work together with Nissan.''

Soon afterwards, though, talk turned to Renault simply buying a stake in Nissan. Hanawa outlined the four conditions any foreign buyer would have to meet: keep the Nissan name, protect jobs, promote restructuring under Nissan's lead, and pick a CEO from Nissan's ranks. Schweitzer didn't raise objections. Then, Hanawa revealed just how much cash Nissan would need--about $6 billion. That was too rich for Renault, for which $3 billion was the limit.

Events took a new twist when Hanawa paid a courtesy call on DaimlerChrysler's HQ in Stuttgart in November 1998, during which he suggested that the German-U.S. company buy Nissan Diesel Motor Co. To his surprise, Co-Chairman Jurgen Schrempp proposed investing in Nissan itself. DaimlerChrysler's deep pockets would make it an ideal partner, so Hanawa wavered in his loyalty to a Renault deal. He flew to Paris the next day to tell Schweitzer about Schrempp's approach and his plan to follow up by negotiating. A downcast Schweitzer told him Renault couldn't ante up the cash Nissan needed. ''If Renault cannot tie up with Nissan,'' he added, ''we will eventually be driven out of the market.''

But there was one ray of hope. Schweitzer revealed that the French government, still a big shareholder in Renault, was pressing him to finalize talks with Nissan. ''Can something be done?'' asked Schweitzer. That worried Hanawa. If he agreed to talks, Nissan would have to sign a ''freeze'' agreement preventing it from approaching other carmakers until talks with Renault were completed or called off.

Hanawa didn't want to tie his hands as long as Schrempp was a potential buyer. But on Mar. 10, Schrempp flew to Tokyo to tell Hanawa he couldn't go through with a deal. His options narrowing, Hanawa pondered a direct approach to Ford Motor Co. CEO Jacques A. Nasser, with whom he'd had earlier, inconclusive contacts. As Hanawa mulled that idea, Schweitzer sent him a confidential note. ''There is hope,'' he wrote, ''that Renault will be able to make a larger investment than we proposed earlier.'' Renault's board would discuss exact numbers at its Mar. 16 meeting, but only if Nissan signed a freeze agreement no later than Mar. 13.

Hanawa flew to Paris to meet the deadline. After quickly inspecting the freeze documents, he signed them. But he still couldn't pin down the exact scale of Renault's investment. ''Please trust me,'' said Schweitzer. After months of talking, a key step in Nissan's future had been taken in a seven-hour stopover in Paris. Hanawa even caught the day's last plane back to Tokyo.