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Apr 18, 2015

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PAYA-004 06.04.2007

RENAULT NISSAN: AGAINST ALL ODDS

Professor Piero Morosini prepared this case as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation.

It was late March 1999 when General Motors vice-chairman Bob Lutz learned that French carmaker Renault had spent USD 5.4 billion to buy a 36.6 percent stake in Japanese Nissan, to form an alliance between the two companies. His response to a journalist made instant news:Renault would be better off buying USD 5 billion of gold bars, putting them on a ship and dumping them in the middle of the Pacific. 1

Bob Lutz was not the only one who viewed the merger between such two companies from such culturally different nations and distinctive countries as Japan and France with a large degree of scepticism. There was very little dissent in the voices of the international financial press, company executives, management academics and consultants all over the world: pessimism prevailed. A selection of comments on the alliance gives a sense of some of their main concerns:Much has been made of the culture clash between [the May 1998 merging partners] Daimler and Chrysler but it will be nothing compared to Nissan and Renault. At their core, they are both nationalistic and patriotic, and each believes its way is the right way to do things. We will have quite a teething period for the first year or two as they feel each other out. Two mules dont make a race-horse. I would have preferred Renault to take 51 percent even if it meant having to assume Nissans debt on its balance sheet. That way Renault could have become the real boss and set some firm direction, rather than having to negotiate.

Copyright 2007 of this case is the property of Paya Srl - Lausanne, Switzerland (www.commonglue.com). Its content may not be used, copied, translated in another language, emailed to multiple sites or posted to a listserv without written permission directly from Paya Srl

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French taxpayers might be left footing the bill for Renault, whose top managers were perhaps blinded by the brilliance of their own vision. Even the most optimistic observers reckon that the payoff horizon assuming that the alliance could overcome its enormous business and cultural hurdles would be long-term, not short. 2

Mainstream managerial theories dictated that a large percentage of mergers and alliances are destined to fail. And Renault and Nissan themselves werent exactly star pupils in the automotive industry. On the one hand, Renault had just been taken off the losers league of automakers following a remarkable comeback that was turning losses of USD 680 million in 1996 into combined profits of USD 1.65 billion in 1998 and 1999. At the same time, Renault was still recovering from a highly publicized failure to merge with Volvo in 1995. A distinctively French and European carmaker, Renault had never run a global operation: in 1998 the company sold no cars in the U.S. and only 2,476 units in Japan, the worlds two largest automotive markets. Nissan was nearly bankrupt in 1999. Since 1991 it had been losing money and market share continuously, and car production had dropped by 600,000 units. The latter meant that Nissans factories were running at 53 percent capacity utilization. The companys product portfolio was aging, and it had ten times the number of suppliers and four times the number of manufacturing platforms as Ford and Volkswagen respectively. Its USD 20 billion debt mountain was more comparable to that of a medium sized developing country, than that of a large automaker. The joining companies were quite complementary in geographic scope and skills. Renault had a flair for marketing and design, and was strong in Europe and Latin America. Nissan was an engineering powerhouse with a strong market presence in Japan, North America and Asia. However, these two companies had no history of working together. To complicate matters, in March 1999 the French state had a 44 percent controlling stake in Renault, and Nissan, as Japans second largest automaker, was a highly emblematic symbol of that countrys industrial strength. Not surprisingly, after its alliance with Nissan was publicly announced, Renaults share price fell and three separate rating agencies issued negative reviews of the companys debt. It was on a sunny afternoon in mid-March 2004 in Paris, almost five years to the day that the Renault-Nissan alliance had been so universally written-off, that Renaults president Louis Schweitzer was preparing to retire. Seated comfortably behind his office desk at Renaults headquarters, he told a journalist:The future is rosy. Clearly we have the pieces in place that are required for growth [] Renault-Nissan has been an incredible, and in many ways unexpected, success [] Someday, maybe I hope so Nissan may help [Renaults re-entry into] the United States [market]. 3

Renaults original USD 5.4 billion investment in Nissan was worth USD 18.4 billion in March 2004. This made Renaults 36.6 percent stake in Nissan (which Renault increased to 44.4 percent in 2003), worth more than the total market value of the French carmaker itself. Nissans head of Europe (and former Renault executive) Patrick Pelata called it: the biggest return on investment in the history of the automotive industry. The Japanese companys profits of USD 7.6 billion

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and 11 percent operating margins were the highest in the automotive industry. As indicated by these results, in March 2004 the Renault-Nissan alliance was universally regarded as a successful model by competitors, practitioners and business schools around the world.

II. The Social Initiation Stages of the AllianceIn early 2004, an observer wrote:Renault-Nissan alliance was called a marriage of desperation for both parties when it was announced in March 1999. A more precise description, however, should have heralded a successful corporate [tinkunacuy] period turning into a long-term marriage.4

This observer was referring to tinkunacuy, a Kichua word denoting an ancient conjugal practice of social initiation in Perus Andean civilizations of millennia in age. Within certain Andean communities, whenever a young couple contemplates future marriage, they move in together for a number of months. If the experience of living together is satisfactory, they go on to marry. In any other case, the couple gives up their marriage hopes to once more become single individuals ready for tinkunacuy with another partner in the community.5 There is more than what meets the eye in tinkunacuy. The partners expect and are expected by the community - to marry, and so they prepare mentally and emotionally as individuals beforehand. Then both partners give the best of each other openly, truthfully and respectfully, to experience life together and share their dreams as a married couple. Tinkunacuy thus resolves for the Andean people the timeless paradox of building solid conjugal relationships. On the one hand, a couple does get the chance of building its shared dreams together. On the other, they get to know, take risks and experience first-hand the practicalities and uncertainties of cooperating with each other as a couple before entering a life-long commitment. During July to December 1998, Renaults and Nissans top executives (joined by a selected number of managers from both companies), went through a six-month living experiment of working together with the aim of forging a formal alliance between the two companies. What these companies did during this period of social initiation explains much of the subsequent success of their alliance. In June 1998 Renaults Schweitzer disregarded advice from investment bankers against a direct approach and wrote to Nissans President Yoshikazu Hanawa proposing broad strategic co-operation. He sent a similar letter to the president of Mitsubishi Motor Cars (MMC). Unlike MMC, Hanawas answer was quick and enthusiastic. A framework for co-operation was sketched by an internal support team in July 1998. Schweitzer and Hanawa met a dozen times over the ensuing months to learn to trust each other and imagine a future alliance between their companies. Hanawa gave an insight into the atmosphere the two leaders created during these initial stages:With many people around, it is difficult to tell each other the truth, that is why I decided to negotiate alone [] Ibelieve the process leading up to an alliance is all about telling the truth; dishonesty only makes the process longer [] I was

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impressed with Mr. Schweitzers courageous decision to embrace a new business opportunity.6

As a next step Schweitzer and Hanawa picked 100 engineers and managers from both companies to work together in joint study teams without any formal objective. Instead, these people were encouraged to drop their mental stereotypes about France and Japan and concentrate on hard business factfinding. Free from cultural stereotypes and from following pre-conceived goals, the teams set a discovery trip of sorts in motion. Some of the executives involved in the teamwork recall the prevailing feelings:The kind of information that we were sharing with each other prior to the alliance agreement was a very rare casesince both sides had strong individual needs to make themselves stronger, the joint study took place sincerely. It was extraordinary in terms of synergies. We really believed in it [] Quite frankly, we were so complementary in terms of geography, products, personality so we had great confidence. 7

By working together with neither prejudices nor pre-established goals, the teams found a common ground as well as concrete opportunities for collaboration between the two companies. Armed with this hard business data, in October 1998 Schweitzer prepare

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