Ghosn Effect: Nissan, Renault set to unveil first results post-crisis

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What kind of financial blow has the widening scandal surrounding Carlos Ghosn delivered to Nissan and Renault SA? Investors are about to get a glimpse when closely watched earnings releases come out this week.

The alliance partners have spent the last two months coping with a major reputational hit from Ghosn’s arrest, indictments by Tokyo prosecutors over alleged financial improprieties and an unflattering spotlight on both companies’ corporate governance controls.

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Then there’s the sluggish sales in China and the US, Britain’s potentially jarring exit from the European Union and huge investments in electric and autonomous vehicles hovering over the entire auto industry.

Taken together, these negatives could leave the alliance partners falling behind competitors such as Volkswagen and Toyota in the race to adapt to the changing terrain. The risks may be greater for Nissan since the lion’s share of allegations against Ghosn reflect his tenure there, and its business challenges are tougher than Renault’s.

Nissan is struggling in China and the US, and it owns the largest automotive plant in Britain. The Yokohama-based company reports earnings February 12, providing the first indications of its performance since Ghosn’s arrest in November. Renault’s earnings are due two days later, just after an internal probe found Ghosn may have improperly used a company sponsorship deal to help pay for his Marie Antoinette-themed wedding in Versailles.

“Automakers are starting 2019 with a hangover,” said Pierre Quemener, an analyst at MainFirst Bank in Paris. As for the Renault-Nissan alliance, “there’s not much upside to be expected from it at this point”.

READ: Ghosn to reimburse Versailles palace for 2016 wedding costs

Nissan’s operating profit is forecast to fall 10% to 517.1 billion yen ($4.7 billion) in the fiscal year ending in March, the lowest in five years, according to analysts surveyed by Bloomberg. Renault will probably report an 8.8% decline in operating profit for last year to 3.47 billion euros ($3.93 billion).

Hans-Peter Wodniok, an analyst with AlphaValue, said he’s concerned that volume producers such as Renault and Nissan will “start a price war” in reaction to slowing demand in order to fill plant capacity. That could put a squeeze on industry profit. He’ll be watching closely for Renault’s guidance for 2019. “If it releases a profit warning for 2019, similar to Daimler’s, we will most probably see the share price of both Renault and Nissan falling further,” he wrote in an email.

For years, Nissan’s earnings dwarfed Renault’s, making a significant contribution to the French carmaker’s bottom line. A bigger global footprint and sales 46% larger than Renault’s may be motivating Nissan Chief Executive Officer Hiroto Saikawa’s push to rebalance their alliance – which includes Mitsubishi Motors Corp. – to give his company more say in strategic decisions.

Shares of both companies are down sharply since Ghosn’s arrest on November 19. Renault was little changed at mid-afternoon in Paris on Monday, and has lost 31% in the past year. Nissan fell 1.5% earlier in Tokyo and has declined 19% over the last 12 months.

Renault’s new chairman, Jean-Dominique Senard, pledged to work toward mending the partnership. He’s also expected to unveil his plans for Renault’s governance to the board next month, a person familiar with the matter said.

China

Sales for Nissan’s Chinese joint venture dropped 4% in the October-December quarter as the world’s largest auto market saw its first slowdown in decades. Nissan relies heavily on China, which is estimated to become its largest market. The company plans to invest $9 billion and introduce 20 electrified models there within three years.

Nissan has to fend off Honda and Toyota, which are accelerating their China pushes. That’s complicated by last month’s departure of Chief Performance Officer Jose Munoz, a Ghosn ally with responsibilities for China. Munoz hasn’t been replaced.

Renault is a marginal player there, selling commercial vans under the Jinbei and Huasong brands.

Pedestrians pass by a television screen showing a Pedestrians pass by a television screen showing a news program displaying a sketch of former Nissan chief Carlos Ghosn in the courtroom, in Tokyo on January 8, 2019, as the headline reads in Japanese ‘Innocence claim.’ (Photo credit BEHROUZ MEHRI/AFP/Getty Images)

The US

Nissan’s US sales plunged 19% in January after slumping 6.2% all of last year. Saikawa is renouncing Ghosn’s strategy of juicing sales by lavishing incentives and instead wants to prioritise profitability. Nissan is cutting as many as 700 workers at a Mississippi factory because of slowing truck and van sales.

It also refrained from setting a sales target for the current midterm plan. The carmaker is looking into the US business as part of its internal probe, with particular focus on how business was awarded to dealers.

Saikawa didn’t attend last month’s Detroit auto show, and his company didn’t introduce any major new production models. Renault is absent from the US.

Brexit

Brexit is a bigger risk for Nissan than most carmakers because its Sunderland plant makes three of every 10 cars in the UK. Nissan cited growing doubts about the UK’s split from the European Union in its decision to scrap plans to build the X-Trail SUV in the country. Instead, it will export them from Japan.

Renault said it wasn’t building stocks in the UK, where it sold less than 3% of its cars last year. A bigger source of worry is Europe’s pending stricter emission regulations, which weighed on sales and prompted carmakers to use discounts to reduce inventory.

Going Electric

In key technologies for the future, Nissan and Renault need to cooperate more. The alliance is working with China’s Dongfeng Motor Group to locally produce an affordable electric crossover, based on a budget SUV Renault developed for India.

This year, China is imposing minimum requirements for the production of new-energy vehicles, with the ultimate goal of banning gas-guzzlers altogether.

Nissan’s battery-powered Leaf is the best-selling electric car, spawning a wave of competing models from traditional automakers and startups like Tesla. Those rivals chipped away at the Leaf’s lead with key advancements, and Ghosn’s detention prompted Nissan to postpone the updated model’s debut in Tokyo.

Also, Nissan and Renault intertwined their efforts to develop connected and autonomous vehicles, combining functions of their IT and cloud services and jointly running a venture fund to invest in startups.

Waymo is in advanced talks to develop autonomous cars with Renault, Nissan and Mitsubishi, according to people familiar with the matter. A deal between the three carmakers and Alphabet’s self-driving unit could include making driverless taxis, one of the people said.

Collaborating with Waymo would bring leading-edge technology to the alliance. And, just as importantly, it would strike a positive note for the beleaguered trio.

“The alliance relationships should progressively get better,’’ said Jean-Louis Sempe, an analyst for Paris-based Invest Securities. “The question is: How can the alliance itself be improved?’’

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