Underwhelming News for Nissan Investors

Reports that the Japanese automaker and Chrysler are making a deal to build cars for each other helped to push Nissan's stock price even lower

by Ian Rowley

Nissan's Versa

Some reckon it could be the first steps toward a full-blown alliance, but reports (see BusinessWeek.com, 1/10/07) that Nissan (NSANY) and Chrysler are mulling over a deal to make vehicles for each other failed to get investor pulses racing in Tokyo.

After news arrived overnight claiming Nissan will supply small cars to the ailing U.S. automaker, and Chrysler, in return, will build full-size trucks for the Japanese company, Nissan's stock price continued its recent slide. By the market's 3 p.m. close, Nissan's shares, which have lost 11.3% in 2008 including a stomach-clutching 9% fall on Jan. 4, were down a further 0.5%, to 10.01. Nissan confirmed talks are taking place but declined to elaborate further.

Late into Friday evening Japan time, Nissan and Chrysler shed some light on the situation. The two automakers confirmed that Nissan will begin supplying Chrysler with a new car for limited distribution in South America based on the Versa sedan from 2009. "This partnership will give Chrysler nearly immediate access to vehicle segments in which we do not currently compete," noted Chrysler President and co-Chairman Tom LaSorda in a statement.

However, there was no mention—at least not yet—of plans for Chrysler to supply Nissan with full-size trucks, although the two companies have "agreed to maintain an open dialogue to explore further product-sharing opportunities."

Tokyo analysts played down the impact of the proposals. Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo, said Nissan would stand to benefit from not having to develop a new generation of large trucks on its own. That's an area where Nissan has struggled, with Titan full-size pickups showing weak sales. The deal to supply Chrysler with around 30,000 Mexico-built Versa subcompacts (known as the Tiida in other markets) would also help Nissan spread costs.

On the downside, Yoshida says Nissan risks "diluting" its brand reputation by selling Nissan-badged Chrysler trucks and that it may also have a hard time making Chrysler-originated products meet Nissan's design standards. "If the news is the case, it is positive for Nissan but only marginally," noted Yoshida, speaking ahead of Nissan's announcement.

Others were more upbeat. Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo, reckons the setup "would surely create a win-win situation benefiting the both of them."

Ghosn the Dealmaker

What is clear, though, is that Nissan CEO Carlos Ghosn is keener than most auto execs on alliances with rivals. That's perhaps unsurprising given Ghosn's track record of eking out huge savings synergies at Nissan and Renault (RENA), where he is also CEO. After the French automaker took a controlling stake in a near-bankrupt Nissan in 1999, Ghosn inspired a turnaround of breathtaking proportions, briefly delivering higher profit margins than Toyota (TM).

Even after high-profile plans for a cross-shareholding agreement with GM failed in 2006, seeking new alliances remains a feature of Ghosn's leadership. In September, Nissan entered a deal with Renault and Bajaj Auto, an Indian motorcycle maker, to develop a cheap car to compete with Tata's (see BusinessWeek.com, 1/10/08) (TTM) $2,500 auto.

Another successful alliance includes the Nissan Almera Classic sedan, sold in Russia and Ukraine and built in South Korea by Renault Samsung Motors, which is 80% owned by Renault. And this year, Nissan will build a midsize pickup for Suzuki at Nissan's factory in Smyrna, Tenn. Then in Japan there's ample evidence that successful supply agreements, even large ones, need not lead to closer relations. Last year about 15% of Nissan cars sold in its home market were 660cc minicars. All of them were built by Mitsubishi Motors (MMTOF) and Suzuki, but all three companies' ownership and management remain fully independent.

Still, all the deal-making isn't risk free for Nissan or its charismatic CEO. During talks with GM in the summer of 2006, Ghosn was criticized in Japan for chasing the U.S. company when he should have been fixing weakening sales at Nissan. Those voices grew louder when the talks collapsed. And on Jan. 8, Mahindra & Mahindra suddenly pulled out of a plan to build a 400,000-unit plant with Nissan and Renault in Chennai just 11 months after the three issued a statement that they were "committed to investing a minimum of $902 million in the site during the next seven years, with an equity holding of 50% by Mahindra and 50% by Renault and Nissan." Reports in India claim Mahindra management was displeased with Nissan-Renault's cozying up to Bajaj. (Nissan and Renault say they will now build the factory alone.)

Ghosn no doubt hopes that the tie-up with Chrysler, although relatively small in terms of volume, will have a happier ending.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.