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Nissan Profit to Drop Below Renault's for First Time in Decade

Ma Jie
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Nissan Needs a Makeover to Kickstart Profits Again

(Bloomberg) -- Nissan Motor Co. is on track to miss its full-year profit goal, earning less than alliance partner Renault SA for the first time in a decade and underscoring the challenges they face in charting a post-Carlos Ghosn future.

The Japanese carmaker, which has been struggling to reignite earnings and sales while dealing with the fallout from the arrest of its ex-chairman, slashed its preliminary operating profit for the second time to 318 billion yen ($2.8 billion) for the year ended March, from 450 billion yen. The Yokohama-based company cited higher costs related to U.S. warranties, an “adverse operating environment” and the “impact of recent corporate issues on sales.”

Even before the arrest of Ghosn, the architect of the global auto alliance with Renault and Mitsubishi Motors Corp., Nissan was reeling from an emissions scandal, a slide in profitability and an aging product lineup. November’s surprise jailing of Ghosn exposed deep rifts over control and decision-making. With Nissan bringing less profits into the venture, it may be harder for the Japanese automaker to rebuff calls for a full merger or closer integration.

“It’s negative,” said Tatsuo Yoshida, an analyst at Sawakami Asset Management Inc. “Nissan’s profits were inflated in the past few years. Sales were stretched in the U.S. and they sold more cars than they could, mainly by pushing fleet sales. Now it’s the real Nissan and it’s natural their profits are coming down.”

Nissan shares fell 4 percent in Tokyo on Wednesday, their biggest decline this year. The stock fell 22 percent in 2018 and is up slightly this year. Renault, which owns 43 percent of Nissan, fell as much as 5.5 percent in Paris, its biggest intraday drop of the year.

What Bloomberg Intelligence Says

“Nissan cutting guidance by 30 percent for 2019 operating income could knock 1.5 euros, or about 10 percent, off Renault’s earnings per share, further highlighting the underlying weakness at the French carmaker’s most-valuable asset.”

-- Michael Dean, auto industry analyst Click here to view the piece.

The maker of Altima and Pathfinder vehicles said its preliminary revenue was unchanged at 11.6 trillion yen, while the operating margin outlook was cut to 2.7 percent from 3.9 percent. The cut is mainly due to a provision of 66 billion yen for an extension of warranties on 3 million cars in the U.S., Chief Financial Officer Hiroshi Karube said.

It was also the first time Nissan blamed the Ghosn scandal for a drop in auto sales. Domestic buyers are hesitating to buy Nissan cars because of it, according to Karube.

Complicated Relationship

With the latest preliminary profit figure, which probably won’t change much when Nissan reports earnings on May 14, the automaker will earn less than Renault on a dollar basis for the first time since both posted losses in 2009. Renault reported 3 billion euros ($3.4 billion) in operating profit for the latest year. When Renault first took a stake in Nissan in 1999, the French automaker was more profitable than Nissan.

Nissan, which swiftly removed Ghosn as chairman days after his first arrest, is seeking to turn over a tumultuous chapter in its ties with Renault. Nissan has long rebuffed overtures for a full merger, and the detention of the former global auto titan threatened to derail their partnership, the world’s biggest auto alliance. Since then, Nissan has won more autonomy under a new governance structure, led by Renault Chairman Jean-Dominique Senard, designed for smoother and more equitable decision-making.

Even so, Renault appears to be interested keeping the idea of a merger on low simmer. Just last month, Senard asked Saikawa to reconsider a merger, which Nissan rejected, people with knowledge of the matter said. A Nissan spokesman declined to comment, as did a spokesman for Renault.

It will take more than a year of weak operating profit to fundamentally change the relationship between Nissan and Renault, according to Janet Lewis, an analyst at Macquarie Capital.

“Far more important is the plan to turn things around, particularly in the U.S.,” Lewis said. “One weak year of sales, especially given the circumstances, doesn’t change the balance of power that much. They aren’t going to get anywhere if the tone of negotiations is ‘my profit is bigger than yours.’”

Management Revamp

Nissan Chief Executive Officer Hiroto Saikawa, Ghosn’s protege-turned accuser, has been shuffling management at the automaker as the entire industry faces complex issues such as the U.K.’s potentially jarring exit from the European Union and huge investments in electric and autonomous vehicles.

The latest change at the top is the appointment of Yasuhiro Yamauchi, 63, as chief operating officer, announced late Tuesday. A longtime Nissan executive with ties to Renault, Yamauchi is filling a position that had been left open for several years, with the duties shared by Yamauchi and others including departed Chief Performance Officer Jose Munoz.

“He can be viewed as a safe pair of hands,” Lewis said of Yamauchi. “He’s a Nissan lifer but has also held an executive role with the alliance.”

Yamauchi, currently chief competitive officer, will take on the role starting May 16. He also sits on the board of the French carmaker, which will help bolster management ties between Nissan and Renault. The decision to promote him to COO gives Nissan a clear number two behind Saikawa, who has sent conflicting signals over whether he plans to remain in the position long-term.

Ghosn Saga

Ghosn has been in jail in Japan for the better part of five months, with the latest indictment accusing him of redirecting $5 million of Nissan money to personal accounts. He has denied all the charges of financial misconduct.

The former chief of the three-way alliance was last detained on April 4, cutting short almost a month of freedom on bail. On Monday, prosecutors brought new charges against him and his lawyer immediately applied for his release. When he was rearrested, authorities had said they detained him because they thought he might destroy evidence. Prosecutors have yet to announce whether they will release Ghosn.

Another extended stay in jail for Ghosn could put the spotlight back on the workings of Japan’s criminal justice system.

The slew of Nissan-related news coincided with a meeting between French President Emmanuel Macron and Japanese prime minister Shinzo Abe in Paris, where they discussed issues related to upcoming Group of Seven and G-20 multilateral meetings. Ghosn’s wife urged them to talk about the “shameful treatment” given to the jailed former auto executive.

“What is happening in Tokyo to my husband worries me and all those who legitimately ask for respect, equality and protection from the justice system,” Carole Ghosn said in an emailed statement. Carlos Ghosn deserves “the most basic rights to defend himself and a fair trial.”

(Updates with merger discussions.)

--With assistance from Kae Inoue.

To contact the reporter on this story: Ma Jie in Tokyo at jma124@bloomberg.net

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net, Reed Stevenson, Ville Heiskanen

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