While he educates the people of the world why it's a good thing

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Detroit Economic Club
“Inside the Alliance: The Win-Win Nature of a Unique Business Model”
President and CEO, Carlos Ghosn
Nov. 16, 2006

Detroit is a city whose name is – and will always be – synonymous with the automotive industry. Indeed, the world recognizes the influence of Motor City. It is a pleasure to join you here today.

I wanted to speak to you about the meaning and value of the alliance business model. I believe that this century marks the unfolding of a new era of global capitalism. In today’s global business landscape, the creation of transnational partnerships is becoming a familiar and valid practice. And even though there are numerous accounts of ineffective alliances between companies – and the auto industry alone provides several case studies – I firmly believe that it is possible to create significant, sustainable value through strategically designed and effectively managed business partnerships.

I can speak to this subject with some degree of assurance because I have been working within the context of the Renault-Nissan Alliance for the past seven years. My understanding has been proven through experience. I can offer a perspective from inside the house. Some who are outside looking in may not have the same understanding.
Based on the media articles I have read over the past six months, I recognize that some observers have varying definitions of what “alliance” means.

For example, one article likened the proposed alliance among General Motors, Nissan and Renault to a game of “high-stakes poker.”
After the talks with GM had terminated, an executive at a competitor automaker noted, “It’s not easy to build a brand through mergers and acquisitions.”

Both statements are far from the reality of what was under discussion at the time. The strategic directions we were considering were not akin to chips on a poker table… and there was never any thought given to merger or acquisition.

The definition of an “alliance” business model leaves no place for gamesmanship or merging one entity into another. In fact, you cannot merge two brands any more than you could “merge” oil and water.

So what is the Alliance exactly?

For Nissan and Renault, you can think of the Alliance as a fundamental document, like a constitution, that exists to formalize the management structure and governs the relationship between the two companies.

The Alliance is not a holding company. It is not a merger or acquisition. It is not a joint venture with limited scope. The Alliance does not own anything and is not obligatory.

The Alliance is a structured, disciplined partnership. Each company has its own executive board and its own business strategy, its own business plan. Each is accountable for specific results to its board of directors and, ultimately, of course, to its shareholders. Brand identities are separate. There is no blurring between Nissan and Renault.

What are the goals of the Renault-Nissan Alliance?

Simply put, the Alliance is a tool to enhance performance, and it is based on three simple, yet profound and sacred principles – namely:
▪ Respect and preserve the brand, product and corporate identities of each member;
▪ Accept and maintain autonomous management structures; and
▪ Seek and develop synergies.

The Alliance structure is cemented by cross-shareholding, giving both parties a vested interest in each other’s success. And this is understandable – why would any functional group be transparent with the partner company if you had no assurance that it would be around tomorrow? Cross-shareholding is a lever that makes the Alliance work.

When the Alliance began in March 1999, Renault acquired 36% of Nissan shares, and its stake has since increased to 44%, which is the maximum amount of shares that can be acquired. As its profitability has strengthened over time, Nissan has acquired 15% of Renault shares. The value of Renault is tied to the value of Nissan… and vice-versa. We have a community of shared interests.

How does the Alliance work on a practical level?

The Alliance is tool that enhances the role of the companies to build synergies… and the mechanism for building synergies is through cross-company teams.

Currently, there are 18 teams made up of employees of both companies. Each has a limited number of people from the respective functions of finance, powertrain, vehicle engineering, logistics, and so on. These are the Alliance opportunity hunters and problem solvers. The teams meet regularly and share ideas to maximize value for each company. The discipline that keeps them in line is milestones, which include a series of commitments and targets.

We also have nine functional task teams that assist the work of the cross-company teams and contribute to synergies in support functions, such as quality, cost management and control, or corporate planning.

These teams explore opportunities, draw up joint projects and monitor their implementation, and also report to the senior management member responsible.

I mentioned earlier that the automotive landscape has been littered by ineffective alliances between various automakers over the years. The sole exception is the Renault-Nissan Alliance, which is working very well and bringing results, against all the odds.

So why has this Alliance succeeded where others have failed? I believe there are three main reasons.

First, it is based on the fact that the two companies remain distinct and autonomous. We never tried to fuse the two together, and that distinction has been honored from the very beginning.

When Nissan and Renault signed the Alliance, there was no winner and no loser. Even though Nissan was financially weak at the time, the executives at both companies were extremely aware that if this partnership were to be successful, it would be vital to respect the identities and self-esteem of all the people involved. The reason was very simple: In the final analysis, the only real asset that a company has is its people. And people will not give their best efforts if they feel that their company is being taken over by another… or if they feel that their identity is being consumed by a greater force. If it becomes obvious that one partner is making all the decisions, then the motivation of the other team will surely decline significantly.

So a guiding principle of the Alliance is that the two companies operate side by side. Nissan is a peer for Renault, and Renault is a peer for Nissan. The identity and autonomy of each company is respected.

A second guiding principle for success is that we make sure that we always do what we say. Nissan has a culture of commitment, like no other automaker. Since the start of the Nissan revival in 1999, we have been extremely transparent about our plans. We have had a series of clearly announced three-year business plans, with clear operating commitments. First was the three-year Nissan Revival Plan, which was fully delivered in two years’ time. Next was NISSAN 180 – also fully delivered. Today we are in the midst of NISSAN Value-Up, the plan through fiscal year 2007.

Renault, too, has its own strategy and commitments, as expressed in “Renault Commitment 2009,” the growth plan whose ambition is to make and sustain Renault as the most profitable European mass-market car company. In fact, what other companies in the world will give their main business commitments up to four years in advance?

We do this to give our employees a clear direction to follow and our shareholders a yardstick to measure our progress. The formula and principles are not secret; they are entirely transparent. But, as with anything else, execution is the real challenge.

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The bottom line? If we say it, we will do it. Nissan and Renault are both very disciplined organizations, and the culture of commitment has been – and continues to be – key to Alliance achievement.

Finally, the third reason for success is that we get results. You can have remarkable principles and follow them, but if you don’t produce results, they don’t work. Plans without results have no value.

In the Alliance, synergies are not developed for the sake of developing synergies, but only for the sake of the performance of each company. All decisions are profit-driven. Every single synergy is sought and developed to enhance the performance and total profitability of each partner.

Consider the Renault-Nissan Purchasing Organization. Today, 72% of procurement is pooled together, accounting for $60 billion in purchases… and the annual savings are significant.

We can show you synergies realized from sharing key technologies, common powertrains and common platforms. By 2010, our target is to have 10 common platforms and eight common powertrains shared between Nissan and Renault vehicles worldwide.

This does not at all mean that only the badges will be different. Engines and transmissions can be tuned differently to achieve an authentically Nissan or Renault feel and driving performance. Exteriors and interiors can likewise be tailored to achieve distinction. But by working together on future technologies… and through joint procurement of things you can neither see nor feel… we can achieve important synergies.

In addition to vehicle projects, we are exchanging best practices in manufacturing efficiency and in logistical effectiveness, and we are taking the same pragmatic approach to research and development. For instance, Renault is leading the development of diesel engines that can be adopted by either company, and Nissan is taking the lead in the development of gasoline-fueled engines. For example, when Nissan wanted a diesel engine in Europe, it approached Renault, which had available capacity. Nissan performed some additional engineering, but at a minimum investment. In less than a year, Nissan had diesel engines in Europe. We don’t waste resources or engineering capabilities by duplicating efforts.

Other evidence of results?

In March 1999, Renault’s market capitalization was – in dollars – $10.7 billion. Today it has tripled, to $32.6 billion.

Nissan’s market capitalization went from $9.7 billion to $52.3 billion – multiplied more than fivefold.

Put in the context of performance in the global automotive industry, the total market capitalization of the world’s major automakers increased by 27.1% between 1999 and today. That number includes a doubling in the market value of Japanese automakers, a flat performance among European automakers and a decline by more than half among U.S. automakers.

Collectively, the market capitalization of the Renault-Nissan Alliance has quadrupled, giving us the second-highest market capitalization in the global auto industry. We are also #2 in profitability.

Right now – halfway through NISSAN Value-Up – Nissan is earning a 7.7% operating profit margin at the lowest point in our product cycle… but that’s about to change. Our U.S. product offensive began this summer with the Versa, followed by the all-new Sentra that went on sale in mid-October and the new Infiniti G35 that had only a few days of sales in October. And this month we launched the all-new Altima sedan, our best-selling model.

In fact, the Altima, Versa and Infiniti G35 make up three of the 11 cars in consideration for 2007 North American Car of the Year, which in itself is a statement about the appeal of our current lineup.

So far, our new models are off to a solid start… but we are facing the same headwinds that the rest of global automakers are facing. And the realities of the business world keep us humble: At the end of the day, we have to recognize that, for many observers, it doesn’t matter how much you delivered in the past, we’re only worth our last three months’ results anyway!

Even so, if you look at results over the seven-year span of the Alliance, you see that Nissan has launched attractive, competitive products… grown in size… expanded revenues… added employees. The same will happen to Renault.

You can look at the facts and judge the results for yourself… but I believe that the Renault-Nissan Alliance is a model that works.

The future of the Alliance

As to the future of the Alliance, it remains an open proposition. For Renault and Nissan, we are satisfied to continue together as two separate companies, as long as this Alliance continues to provide measurable value for both companies and all our stakeholders.

A securities firm recently asked, “Why doesn’t Nissan just buy Renault? Or why doesn’t Renault just take the majority of Nissan?”

It’s true that some sort of fusion of the two companies might give investors a quick windfall. But the lasting result would be a huge disruption over many years to come. So there will be no merger, no fusion. Nissan will continue to be Nissan, and Renault will be Renault.
But what about adding a third partner to the Alliance? My response is, “Why not?” The Renault-Nissan Alliance is a credible reference. Why not use it if there is an opportunity in the industry?

In truth, there is no need for a third partner. The Alliance is going very well. But we expect that we could gain from a third party the same benefits that we have already found in our current partnership – benefits such as greater international scope… better supplier prices… faster development times… broader product lines… increased revenue and profit… and a broader, diverse talent pool.

To enlarge the Alliance to a third partner, we would have to make sure that it is compatible with the commitments of the two existing companies – that is, NISSAN Value-Up and Renault Commitment 2009 – and that the opportunity would be far outweighed by the risks. It would have to be an opportunity, not an obligation. We would never do anything hostile, but only something based on opportunity and cooperation.

Today, the Alliance is made up of an Asian partner and a European partner. Expanding the Alliance to include an American partner makes sense in terms of geographical complementarities. But geography is not a sufficient basis for expanding the Alliance. If an opportunity were to develop for a healthy, win-win partnership… with potential synergies that could be quantified… then we could consider next steps.

But we are in no hurry. We can wait for the next opportunity to emerge and it may take some time.

I remain committed to the principle of alliances as an effective model for business or other applications. And I am not here expressing some esoteric belief. The Renault-Nissan Alliance has proof in hard numbers – with large losses converted into billions of dollars of profits and tens of billions of dollars of market capitalization since 1999. We know how much value an alliance can create if and when appropriately managed.

I would also propose that the Renault-Nissan Alliance is a structured, natural actor in the evolution of globalization. In this partnership, you see different groups of people working together in a constructive way, which is totally compatible with the diversity that exists in a global enterprise.

I am always bemused by those who feel threatened by the emergence of new countries on the global level. But the premise of a global marketplace is that all who contribute are accepted. Economic development and diversity are constructive and normal consequences of globalization. The very definition of “diversity” means that all players are welcome. Those who can contribute… are welcome to compete.

The vision of the global economy of the 21st century could be aided by the values and strategies that have proven successful in the Renault-Nissan Alliance: Diversity is an opportunity. Respect for different identities is at the basis of a successful globalization.

For the moment, the Renault-Nissan Alliance is a unique business model. But I hope this position will someday become commonplace. Alliance principles are strategic foundations for future direction and future possibilities – principles between groups that can form the basis for meaningful, lasting and peaceful success.

Thank you for your attention.