January 12, 1999
DaimlerChrysler Sees a Good Deal
In Mess That Has Become Nissan
By ROBERT L. SIMISON and LISA SHUCHMAN
Staff Reporters of THE WALL STREET JOURNAL
Is DaimlerChrysler AG about to buy into Nissan Motor Co.? The answer increasingly looks like yes, and it may say as much about the ambition of one company as it does about the staggering problems of the other.
For weeks, DaimlerChrysler executives have said they are interested in an alliance with Nissan's heavy-truck affiliate, Nissan Diesel Motor Co. But on Sunday night in Detroit, DaimlerChrysler Chairman Juergen
Schrempp opened the door to something more. "We do not exclude an equity participation" in Nissan Motor itself, Mr. Schrempp said, in response to questions at an industry conference. Monday, Nissan replied to Mr.Schrempp's comments by saying it would be willing to conclude a deal with DaimlerChrysler on the truck unit or any other arena of cooperation. No deal or decision has been made, Mr. Schrempp cautioned. But Mr.Schrempp noted that "the spirit is good" between the two companies, and added that his company "will have to come to a decision soon."
A Trip to Tokyo
Conveniently, Mr. Schrempp and DaimlerChrysler's other chairman, Robert J. Eaton, had been planning for some time to be in Tokyo next week for an exhibition of DaimlerChrysler products and technology. In addition, Mr. Schrempp is scheduled to meet next week with Nissan President Yoshikazu Hanawa, according to an individual close to the situation. If Mr. Schrempp does engineer a partnership with Nissan, he would at one stroke solve his own company's problems in tapping the future growth of Asia; ease many of Nissan's troubles; and put DaimlerChrysler in position to compete more aggressively world-wide with Ford Motor Co. and General Motors Corp. Speculation that a deal is in the works sent the price of Nissan Motor's American depositary receipts, trading on the New York Stock Exchange, to $7.25, up 53 cents, Monday, and shares of DaimlerChrysler to $107.125, up $1.50.
And as bad as things are at Nissan, DaimlerChrysler's exposure would
probably be limited. Nissan has lost millions in five of the past six years, and its debt stands somewhere between $22 billion and $30 billion -- more than any other auto maker owes. Nissan would be bankrupt if it were an American company. But, according to one individual close to the situation, a company taking a minority but controlling position of 34.5% in Nissan wouldn't be taking on the whole debt. If Nissan subsequently failed, the only risk would be the investment in Nissan shares, which could be in the billions of dollars but would fall well short of that towering total debt.
On Nissan's Plus Side
The allure of Nissan, on the other hand, is that the No. 2 Japanese auto maker has an extensive retail distribution network in Japan, Asia's biggest market, and in some of Asia's potentially hot developing markets. Moreover, even though Nissan turned itself into the basket case of the auto industry as a result of bad marketing calls in the U.S., stultifying bureaucracy and trans-Pacific tensions, the company still runs some of the world's most efficient factories and produces some of the highest-quality vehicles.
"It could be a very good partnership," observed Roland Klein, one of
DaimlerChrysler's senior spokesmen, in Stuttgart, Germany.
Regardless of the outcome of talks between Nissan and DaimlerChrysler,
it has been obvious for some time that Nissan would need a partner to
compete in the consolidating world auto industry.
In a failure as grand as Nissan's rapid decline from being an icon of Japan Inc., there are many causes. Nissan executives confess to a series of blunders over several years. But much of what went wrong stems from one mistake: Nissan never fielded an effective competitor in the crucial U.S. market to the Toyota Camry and the Honda Accord, sticking instead with the smaller Altima. "The difference between Nissan's performance and that of Honda and Toyota boils down to the Altima vs. the Honda Accord and Toyota Camry," says Tetsuo Tabata, Nissan's executive vice president in charge of international operations.
Seeds of Failure
Getting it so wrong is all the more stunning given that Nissan got so much right for so long. Nissan started exporting cars and compact pickups to the U.S. in the late 1950s. Honda was first by several months to open a U.S. plant, but Nissan started turning out pickups at its Smyrna, Tenn., factory five years before Toyota had its first U.S. plant in operation. Nissan was also the first Japanese auto maker to set up a factory in Europe. But even as Nissan flourished, the seeds of failure were sprouting. Because of doubts that American workers could meet Japanese quality standards, the Smyrna plant's first job was the relatively simple one of assembling small pickups. Nissan added small Sentra sedans within two years, as the American work force proved itself. One problem with both vehicles was their slim profits. Another was the competition from back home. For their first U.S. factories, both Honda and Toyota chose larger, more profitable, midprice cars: the Accord and the Camry, respectively. Both
also dedicated their factories to only one vehicle, and so gained an edge over Nissan on economies of scale. Nissan's strategy cost it untold hundreds of millions of dollars in lost profits.
"It's hard to make money with a low-value-added sedan and pickup," says Jerry Benefield, the bluff, folksy president of Nissan's U.S. manufacturing unit. Meanwhile, the Camry and Accord picked up steam through the mid-1980s and 1990s. So why didn't Nissan ever field a competing model? For one thing, Nissan executives thought the brand's strength lay in its sporty cars, such as the 240Z and its successors, and the somewhat less expensive 240SX and Pulsar NX models. Nissan did produce a high-powered sedan called the Maxima, but that car wasn't right for the burgeoning midprice, family-car market that the Accord and Camry tapped. But Nissan's bureaucratic culture also contributed to the company's slow reaction time. Sales, manufacturing, design and research units in the U.S. all reported separately to Japan and weren't really supposed to talk to each other. The setup kept any contributions from the U.S. fractured and diluted, making it nearly impossible for any strong product opinion or contribution from America to get through to Tokyo. The system also was the opposite of the nimble management structures that Honda, Ford and others were developing.
One American executive, however, set out to compete with the Camry
and Accord in the 1990s. He was Thomas D. Mignanelli, a former Ford
marketer who was in charge of Nissan's marketing and sales operations
from 1987 until 1990, when he became president of Nissan's U.S. sales
arm. His starting point was the redesign for the 1993 model year of the midsize Stanza, a tired old Japanese design of which just 50,000 a year were selling in the U.S. He wanted to upgrade it to appeal to families. Grand-Slam Home Run'
"Mignanelli called me and said, 'We need a little grand-slam home run,
something bold,' " says Gerald P. Hirshberg, the president of Nissan's
design studio in La Jolla, Calif. (Mr. Mignanelli, who left the company in 1993, declined to be interviewed for this article.)
To produce the compact, elegant design Mr. Hirshberg developed, Nissan
invested $490 million to double the capacity of the Smyrna plant and
earmarked more than $100 million to promote the car as an "affordable
luxury" compact sedan. Under Mr. Mignanelli's "sandwich strategy" for
competing with the Camry and Accord, the new Stanza, soon to be renamed the Altima, would nibble away sales at the low end of the market, and the Maxima would skim off sales at the top end.
Nissan executives credit Earl Hesterberg, a longtime Nissan marketing
executive who left Nissan earlier this year after a stint in Europe, for the successful launch of the Altima in 1992. It was soon selling at around 150,000 a year, three times the rate of the Stanza. However, the sandwich strategy was crumbling. Together, the Altima and the Maxima generated only about 275,000 sales a year. By the mid-1990s, the Camry was selling at 350,000 a year, and the Accord at 400,000. And while its rivals each had the costs of only one product, Nissan had the costs of two entirely different cars -- including engineering,
parts, manufacturing and marketing, giving up economies of scale on each. And it was importing the Maxima from Japan.
Executive Revolving Door
The departures of Messrs. Mignanelli and Hesterberg -- both well
regarded in the industry -- underscore another problem: an executive
revolving door at Nissan's U.S. headquarters in suburban Los Angeles.
Dealers complain about the constant changes in direction and Nissan's loss of identity. Several top executives over the years were forced to resign as a result of poor sales results, which some of these executives attribute back to decisions made in Japan that stacked the deck against their efforts. The 1993 Altima, for which funds were committed in 1989, was Nissan's last big investment in the U.S. and seemed to be the high-water mark for American executives' influence on midsize cars. Realizing that the sandwich strategy wasn't working, Nissan's American executives made a push in 1994 for a radical overhaul of the Altima. Leading the charge was Robert J. Thomas, who was then president of Nissan's U.S. sales and marketing unit, backed by Mr. Hirshberg at the design center and Mr. Benefield at the factory. Mr. Hirshberg's studio designed a larger Altima that would have been about the size of an Accord. Executives argued that a bigger Altima would attract 50,000 more customers a year. In the end, after a series of meetings at various levels in Japan, the call was up to Yoshifumi Tsuji, an owlish executive known for being risk-averse, who was then the president of Nissan. He ruled that the 1998 Altima should be a relatively limited update of the previous design.
Courage or Cost?
Some present and former Nissan officials in the U.S. and some of Nissan's rivals see the call as reflecting a lack of courage, but to Nissan officials in Japan, the explanation is simple: cost. Only a year earlier, with Japan's economy ailing, Nissan had launched a cost-cutting campaign, closing a plant in Japan and ordering that lights and air conditioning in Nissan offices be turned off at lunchtime. Nissan simply couldn't afford the sort of $1 billion makeover that more successful auto makers were funding, and its
engineering capabilities were stretched too thin. Citing "limited resources," Keiichi Tsuboi, a Nissan spokesman in Tokyo, says: "Nissan thought it didn't need to spend so much on the new Altima."
Another factor, says Mr. Benefield, the Smyrna chief, was that a bigger Altima would compete with the Maxima. Any move that might cut the number of Japanese-made Maximas being exported to the U.S. --therefore threatening Japanese jobs -- could have had political ramifications. As Japan's 1990s recession began dragging out, a hot issue was the "hollowing out" of the home economy, or the shifting of jobs overseas.
Mr. Hirshberg tried to "let the belt out a little" by making the new Altima roomier inside, and sales officials hoped to promote it as "right sized." It wasn't. By the time the new Altima was launched in the fall of 1997, both Honda and Toyota had fielded bigger cars at lower prices. Now the Accord and Camry were essentially the same size as the Maxima but priced about the same as the Altima. "It was genius. We couldn't do anything about it until the next redesign,"
says Tom Orbe, a Nissan veteran who is vice president in charge of the
U.S. Infiniti division. Now, Nissan is scrambling to make up for lost time and money. At Nissan's U.S. headquarters in California, Minoru Nakamura, a hard-nosed Nissan executive and board member who arrived in July 1996, is cleaning house. His slogan, "Back to Basics," is painted on the speed bumps in the headquarters parking lot. He is finishing off the merger of Nissan's sales unit into a North American umbrella organization, which he says will eliminate overlap and produce quicker decisions. Before the combination, he says, he would work until 4 p.m. at one unit and then drive a half-mileto the other one for the rest of the day.
Mr. Nakamura also has a plan to fix the Altima and finally compete with the Camry and Accord. In the next redesign, the car will be wider and will get a six-cylinder engine -- as was proposed in 1994; it will share a chassis with the Maxima; and both will be built at Smyrna. Mr. Hirshberg's shop is hard at work on the design. He hints: "Camry and Accord are vulnerable-they're bland." At the factory, Mr. Benefield says the new strategy will give him a chance to operate more efficiently, running the Altima line at 250,000 cars a year instead of the current 175,000.
The bad news is that this won't happen until the 2002 model year, which starts in the fall of 2001. |
