Nissan faces mounting problems on its turnaround path, analysts say
The shocking arrest of its former Chairman Carlos Ghosn last November has brought a series of headaches to Nissan Motor Co., such as conducting an internal investigation into that matter and reforming its weak corporate governance.
But the earnings report and forecast disclosed Tuesday by the Yokohama-based automaker underscored a bigger problem — stabilizing its auto business.
Nissan’s operating profit for the fiscal year ended in March plunged by 44.6 percent to ¥318 billion ($2.9 billion) from the previous year. The figure is projected to decrease further to ¥230 billion for the current year, which will be the lowest in 11 years.
For the company to maintain its business, Nissan needs to tackle mounting challenges. Major issues include improving its performance in the U.S. market and streamlining its excessive production capability and operating costs through its alliance with Renault SA and Mitsubishi Motors Corp., analysts interviewed by The Japan Times said.
Due to the Ghosn scandal, Nissan’s sluggish earnings may have caught more attention, but analysts said this was well-expected.
“This is basically a backlash” to a growth plan from the past that was difficult to achieve, said Takaki Nakanishi, analyst and CEO of Nakanishi Research Institute.
Ghosn wanted to retain his post as Renault CEO in 2018, so he outlined an aggressive strategy and pushed Nissan to show that the alliance could achieve steady growth, said Nakanishi.
“I think the result would have been the same even if Mr. Ghosn was still in charge,” he said.
The Tuesday earnings report highlighted Nissan’s poor bottom line. Its operating profit margin was 2.7 percent for the 2018 business year, compared with 8.2 percent for its major rival Toyota Motor Corp. in the same period. Nissan’s figure will be even lower this year at an estimated 2 percent.
A primary factor damaging the profit margin is its performance in the U.S. market.
Under Ghosn’s leadership, Nissan aimed to boost market share in the U.S. market but spent too much on financial incentives aimed at bolstering consumer and fleet sales. Nissan has acknowledged that this has hurt its brand image and profitability.
“I think Nissan has pushed itself too much to market in the U.S.” amid fierce competition, said Katsuya Takeuchi, senior analyst at Mitsubishi UFJ Morgan Stanley Securities.
“If you see many Nissan vehicles lining up as rental cars at places such as an airport, people would think that they are cheap cars,” he said.
On Tuesday, Nissan set a plan to shift its U.S. strategy from pursuing volume to improving its brand image to increase profitability.
But retooling the U.S. business is likely to take time, as brand image cannot be improved within a short period of time, analysts said.
Nissan also said it will improve production efficiency by 10 percent and cut its excessive production capability by 10 percent.
“I think this is the minimum” that Nissan has to do, said Nakanishi.
The automaker said it has been working on production adjustments for factories in the U.S., Mexico and Europe. Nissan also plans to slash 4,800 jobs.
“The break-even point needs to be pushed down, otherwise, Nissan won’t be able to produce necessary cash” to realize a healthy investment-and-return cycle, Nakanishi said.
When it comes to the issue of the alliance, Takeuchi said it is critical that Nissan makes the best use of it to maximize cost-cutting efforts.
However, the power game between Nissan and Renault is unlikely to be settled soon.
“It seems Renault wants an integration as soon as possible, but Nissan’s priority is its turnaround, so I think this issue will continue for a while,” said Keisuke Konishi, senior analyst at Quick Corp.
In March, Nissan, Renault and Mitsubishi announced a new management system for the alliance that appears to value more equality between the three partners.
But the French automaker reportedly proposed an integration of the two firms to Nissan in mid-April, which the latter firm rejected.
Takeuchi said it is understandable that Nissan would be reluctant to accept the integration, as it may have to give up its independence over pressure to cut costs.
“The motivation for engineers would be totally different if they can freely create vehicles that they want rather than being under heavy cost-cutting pressure,” which will affect product competitiveness, said Takeuchi.
In addition, analysts said Nissan has a lot of homework to do on other markets as well.
In Europe, it posted a loss for the 2018 business year and its recovery strategy for the European market is “not clear,” said Masayuki Kubota, chief strategist at Rakuten Securities.
That market is a difficult one, as German automakers are popular and the potential for growth is low, he said.
Kubota said since Renault has a higher share than Nissan in the European market, even withdrawal could be a possible option for Nissan to streamline operation costs.
Konishi of Quick said Nissan may be doing fairly well in the Chinese market but it needs to get its hands on other emerging markets, such as Southeast Asia and India, since its presence there is still weak.