Renault-Nissan-Mitsubishi alliance: what you need to know
Joshua Warner
What you need to know about the Renault-Nissan Alliance. Where next for Renault and Nissan shares?
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Source: Focus2move, company reports. Individual figures for Nissan, Renault and Mitsubishi collectively add up to the total for Renault-Nissan-Mitsubishi Alliance and should not be counted in addition to the total of the Alliance.

From power struggle…

The Alliance’s corporate structure is messy. Unlike a joint venture that sees participants pool resources into a separated entity, the Alliance is a much looser arrangement that is largely governed by each of them owning shares in the other.

Although it has persistently been dubbed as an ‘alliance of equals’ by the trio, the balance of power between the three is severely lopsided. Renault owns a huge 43% stake in Nissan, but the Japanese carmaker only owns 15% of its French counterpart – and has no voting rights. Mitsubishi was added to the programme by Nissan, which injected much needed capital into Mitsubishi to take a 34% chunk of the business in 2016.

The Alliance is also somewhat of a political pawn because each is partly-owned by their respective national governments. The French state owns a 15% stake in Renault but carries double that in voting rights, while Japan’s government pension investment fund also holds stakes in both Nissan and Mitsubishi, although it wields less power in these two firms than the French state does in Renault.

The integral piece of the jigsaw and the person who held these different businesses and cultures together was Carlos Ghosn. Renault sent its head honcho Ghosn to rescue Nissan when it fell into trouble and then Nissan did the same when it went on to partner up with Mitsubishi a few years ago, culminating in Ghosn becoming chairman of both Nissan and Mitsubishi, as well as being chairman and chief executive of Renault – and the ultimate leader of the Alliance.

With Ghosn at the helm of the entire operation, the structure of the Alliance meant each individual firm was able to benefit from the scale provided by working together while maintaining their independence and autonomy over their respective brands.

But while the imbalanced corporate structure suited when it was originally formed, it had been slowly fracturing the foundations of the Alliance as time went on. While the structure still favours Renault in terms of control, Nissan has become the larger partner that sells more cars and makes more money, having delivered growth over the years that has far outpaced Renault. In fact, Nissan has become a huge contributor to Renault’s bottom-line, accounting for over €1.5 billion of the French firm’s 2018 net income of €3.45 billion.

With Nissan having become the main driver of the Alliance by accounting for more than half of its total unit sales last year but with Renault still firmly in control, the imbalance of power needed addressing. Ghosn’s answer was introducing further integration and cooperation between the companies before ploughing ahead with a full-blown merger to bring the Alliance under one roof.

… To power vacuum

But this plan ultimately took those fractured foundations of the Alliance and rocked them further. Markets were stunned when Ghosn was arrested in Japan in November 2018 for allegedly under-reporting his pay and using Nissan funds to cover large personal losses he had incurred from trading derivatives back in 2008, when the financial crisis began to unfold.

Nissan CEO ousted after financial misconduct allegations

Ghosn has vehemently denied the allegations and has since been released on bail. He has claimed his arrest and subsequent ousting from the Alliance and the three businesses was part of a plot in Japan to stop his proposed merger between Nissan and Renault because the Japanese side feared it would ultimately hand over Nissan to the French. Ironically, while the Japanese began to think Ghosn was favouring the French, there were also plenty of grumbles from the French side that Ghosn had favoured Nissan in the past, believing he blocked Renault’s expansion into China to pave the way for Nissan.

Ghosn offers Nissan stock as bail collateral

His arrest left a huge gaping hole in the Alliance and the boards of each individual business, creating something of a power vacuum in which all sides have tried to capitalise on. Ghosn’s role as the glue that held the Alliance together was loosening, but now had now come unstuck altogether.

Where to next after Ghosn scandal rocks foundations of Alliance

The situation may still be fraught with tension but the Alliance has put on a brave face and tried to steady the ship since Ghosn’s departure, introducing a ‘consensus-based’ board that is supposed to spread out control more evenly. However, while a new joint board has been established (comprised of one member from each of the three firms) it is chaired by Renault chairman Jean-Dominique Senard as a fourth member – meaning Renault (and to some extent, the French) still wield control. Nissan’s chief executive, Hiroto Saikawa, has supported Senard as the man to help stabilise the business and usher in a new era after 20 years of power being concentrated under Ghosn.

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Senard’s job is to allay concerns over corporate structure and the imbalance of power, reinstall trust between the three businesses, and push the Alliance forward to benefit all that are involved. But that is hard to do considering his loyalties ultimately lie with Renault. He has tried to demonstrate he does not want the same level of control as his predecessor by quickly ruling out the possibility he would also become chairman at Nissan. Some argue an external, independent person needs to be appointed to lead the Alliance to neutralise any claims one firm is wielding more power than the other.

Although not confirmed, it is expected that the new board will scrap many of the previous goals of the Alliance that had been set by Ghosn in order to embark on the ‘new start’, as described by Senard, that it needs. Under Ghosn’s rule, the Alliance was aiming to up combined unit sales to 14 million vehicles by 2022 from 10.8 million in 2018 and was aiming to make 9 million of those using just four foundational platforms and use the same powertrains in three-quarters of all vehicles. It was also planning to significantly accelerate its cost-saving synergies target to €10 billion by the end of 2022 from around €5.7 billion in 2017.

All those ambitions are on hold for now, with investors hoping the new management of the Alliance will release a new strategy and plan before the end of this year.

Will Renault keep pushing for an 'irreversible' Alliance?

Although it might seem like the Alliance is keen to bin Ghosn’s ambitions and reset the venture to reinstall trust between the carmakers, comments from Renault’s new chief executive officer (CEO) Thierry Bollore have echoed those of Ghosn. 'Our goal within the alliance has not changed, which means we want to make it irreversible, the CEO said, claiming 'possible talks [about the structure] could resume again' – which, in layman’s terms, means merger discussions could be revived sooner than many thought.

But Renault must tread carefully with any attempt to restart merger discussions with Nissan, which is still looking at its performance and size and questioning why it’s still under the French firm’s thumb.

Caution about strengthening the Alliance when it’s most needed

Merging the businesses while overhauling the complex corporate structure to rebalance control is not easy, but the need for further cohesion is only growing as the automotive industry slowly transforms - from one built on the combustion engine to one based on self-driving electric vehicles, and one where people will increasingly rely on car-sharing services and less on car ownership.

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These technological breakthroughs are not cheap, but no company can afford to wait because they will simply be left behind the competition. The need to cooperate with one another is therefore crucial, not only to accelerate development but to share the cost burden. That need is exacerbated by the new kids on the block like Uber and Alphabet’s Google, both of which are flush with cash and represent a new breed of competition from the traditional carmaker.

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Plus, the traditional automotive business is challenging. Global car sales fell 0.5% in 2018 after key markets – including the US, Europe and China – either stagnated or slowed, according to automotive supplier JATO Dynamics.

Electric vehicles sales are growing fast but still represent a small proportion of the overall market. Global sales rose 64% last year to 2.1 million vehicles, according to S&P Global, suggesting it accounts for less than 2.5% of the market. While the Alliance is one of the largest electric vehicle sellers in the world, having shipped 735,000 vehicles (driven by models like the Nissan Leaf and Renault ZOE) last year to imply it holds over one-third of the market, it simply isn’t large enough to offset the softening demand for traditional vehicles. Margins are tightening too: both Renault and Nissan saw their operating margin squeezed last year to 6.3% and 4.3%, respectively, compared to larger rivals Volkswagen and Toyota which boast margins of 5.9% and 8.6%.

Nissan cancels plans to build the new X-Trail in UK

New technology, a stagnating market tipping into a slowdown, lower profitability and other issues such as the threat Brexit and the US-China trade war pose to supply chains and the hit to demand for diesel following the emissions scandal, means working together is needed more than ever. But it still might not be enough to convince the likes of Nissan that allowing Renault to piggyback off its technology and business is in its best interests. However, the mood could change as others rapidly team-up, whether that be Ford and Volkswagen’s deal to accelerate development of electric and self-driving vehicles, or Daimler and BMW's decision to merge their car-sharing businesses to fend off new rivals like Google. Plus, many argue that after two decades of collaboration that the only way for the Alliance to yield further synergies and benefits is by merging.

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Is the Alliance getting ahead of itself with talks of merger with Fiat Chrysler?

The Financial Times recently reported that the Alliance is planning to launch a bid to add a fourth carmaker to the venture once or if it has overhauled its own corporate structure. The favourite is Fiat Chrysler, the owner of the Jeep and Alfa Romeo brands which has openly said it is looking to work with partners to bulk up its presence.

For the Alliance, the point of the acquisition would be to cement its position as the world’s leading carmaker and better compete with Volkswagen, Toyota and other rivals that dwarf them on an individual basis. Reports suggest the idea is being pursued by Renault after it was revealed for the first time that Ghosn had held talks about merging the French carmaker with Fiat Chrysler within the last three years - but was derailed by the French government.

But any deal with Fiat Chrysler is far from certain. The company has reportedly met with several other potential partners, including PSA, and already has a working relationship with BMW in self-driving cars. The argument that the Alliance is incapable of sorting its own structure out before Fiat Chrysler finds an alternative deal is justified, but some believe the Alliance could still pursue a tie-up with the French firm even if it has already completed another deal in the meantime.

The other potential barrier could be the price. Fiat Chrysler produces about 5 million cars per year, placing it in between Nissan and Renault in terms of production, but it boasts a market cap of over $23 billion – compared to $35 billion for Nissan and $21 billion for Renault.

Renault vs Nissan: how to trade the partnership

According to broker recommendations provided by Reuters, the overall mood toward the automotive industry is still rather bullish, with Nissan, Mitsubishi, Volkswagen and Toyota all currently rated at Buy, with Renault and Fiat Chrysler sat at Hold.

However, it is worth noting that there is a more bearish mood among the market for all six stocks compared to three months ago, with ratings generally moving downward.

Automotive industry: broker recommendations as of April 3 2019