Is a Nissan-Renault plan good for GM?

Investment would bring in cash, could help auto giant compete
ANALYSIS
By Roland Jones
Business editor
MSNBC

Updated: 4:32 p.m. PT June 30, 2006
News that General Motors' largest shareholder is urging the automaker to consider an alliance with France's Renault and Japan's Nissan has piqued investor interest, but would a deal help boost GM’s flagging fortunes?

The proposal from Kirk Kerkorian and his Tracinda Corp., disclosed Friday, may be little more than a shot across the bow of GM’s management, but it certainly increases the pressure on GM Chairman and chief executive Rick Wagoner to hurry and fix its internal problems, said John Casesa, automotive analyst and managing partner of Casesa Strategic Advisers.

“This ratchets up the pressure to accelerate change at this company,” Casesa told CNBC. “There may never be a deal with Renault. … It may just catalyze internal change [at GM], and that’s what this shareholder is doing."

“Time is of the essence at GM, and the longer market share goes down, the weaker this company is going to be and the less valuable it’s going to be to a potential suitor," Casesa said.

The deal being proposed would involve Nissan and Renault, which are closely allied, each buying a 10 percent stake in General Motors. Even so, a deal would rank among the industry's most significant of recent years along with the 1998 merger of Daimler-Benz and Chrysler, and the business alliance of Renault and Nissan in 1999.

An alliance, which could bring GM a cash injection of $3 billion or more, could prove helpful in an increasingly competitive global environment, in which Japan's Toyota is rapidly ascending ascending and could soon eclipse GM as the world's biggest automaker, Casesa added.

“I think Rick Wagoner and GM management has to ask itself this question: Is our mission to grow globally, and if it is, are we better together with a partner like Renault-Nissan, or are we better apart?” Casesa said. “I think the answer is yes, it's better to grow together, and that would be a reason for GM to consider this alliance.”

While GM leads the world automotive market with a 14.2 percent share, its supremacy is under threat from Japan’s Toyota, which has a 13.8 percent market share. The combination of GM, Renault and Nissan would have a world market share of 23.7 percent, according to numbers from automotive forecasting CSM Worldwide, leaving Toyota a distant second runner.


The main advantage to a three-way alliance among GM, Renault and Nissan would be the ability to merge some of their manufacturing processes, notes Kevin Reale, an automotive analyst at Boston-based AMR Research.

“From an overall cost leverage perspective, these three companies can share components across their manufacturing platforms and brands like never before,” Reale said. “Both companies have huge global supply networks, plus GM gets access to the innovation we’ve seen at Nissan in the last few years — one thing we’ve seen at Nissan is an ability to sense market demand for a product.”

Another advantage would be the inclusion of Carlos Ghosn, who runs both Nissan and Renault, to GM's strategic team. Nicknamed “The Icebreaker,” Ghosn is largely credited with turning around Nissan’s fortunes this decade. Ghosn reportedly expressed interest in acquiring up to 20 percent of GM a dinner with Kerkorian about 10 days ago, according to Reuters.

Ghosn’s turnaround expertise would be even more valuable than the cash infusion, Reale said.

Reale noted that on average Nissan makes $2,200 in pre-tax profit from each of its cars, while GM’s health care and pension liabilities mean it loses about $2,000 per vehicle, or about $500 when those liabilities are stripped out.

“Ghosn can help them to reverse that loss — he understands how to drive profit margins from cars,” said Reale. “It’s not that GM can’t do it on its own, but the expertise will help them to do this and get on the path to profitability.”


GM and Nissan also have complementary product strengths, notes Reale. While GM has a very strong foothold in the truck market, Nissan is struggling in the sector. GM is struggling in the sedan sector, where Nissan has fared well with its Maxima and Altima models.

Still, GM, which lost over $10 billion in the United States last year, is showing marked improvement, Reale said. Recent data show it has closed the productivity gap with its Asian rivals and is able to develop desirable new vehicles. It is also working to develop new hybrid technologies with BMW and DaimlerChrysler and has led the way in pushing for more ethanol-based fuel, like E85.

GM, which lost just over $10 billion in the United States last year, needs to regain its standing in the U.S. automotive market, the world’s biggest. Good products are essential to a carmaker’s fortunes, notes Reale.

“They are leading the way in alternative fuel, and they have lots of things in place to make them profitable, but this partnership would help them pull themselves up even faster, and Ghosn has a good track record here,” Reale said.

Indeed, the simple fact that Renault and Nissan are showing interest in GM confirms the company is accelerating its restructuring efforts, said John Murphy, an analyst at Merrill Lynch.

“The fact that the alliance with GM is even being considered by Renault-Nissan is confirmation that there is significant value in GM,” he said.

Source: Renault to meet over GM deal
French finance minister says board to meet Monday.

July 2 2006: 7:13 PM EDT

PARIS (Reuters) -- Renault's board is to meet on Monday over a proposal by one of the largest investors in General Motors Corp. to consider a three-way partnership with Nissan Motor Corp., a French minister said on Sunday.

"We must pay attention that the governance is being clearly respected," French Finance Minister Thierry Breton told Europe 1 radio, saying a Renault board meeting was planned in "the hours to come," possibly on Monday.

Billionaire investor Kirk Kerkorian urged GM (Charts) on Friday to consider a three-way partnership, sending GM shares sharply higher on prospects of speedier turnaround.

Nissan and Renault Chief Executive Carlos Ghosn expressed interest in acquiring a stake of up to 20 percent in the world's largest automaker at a dinner with Kerkorian several days ago, a source familiar with the situation said. Renault, based in France, has a controlling 44 percent stake in Nissan of Japan.