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Nissan: A Letdown On The Lot


In late September, Nissan Motor Co. () reached a milestone, beating a self-imposed deadline with just days to spare. Within three years, Japan's second-largest carmaker had managed to lift global sales by a million vehicles, to 3.6 million -- the final target of an ambitious plan whose other goals were to eliminate the company's debt and fatten margins to 8%. It was a triumph for Chief Executive Carlos Ghosn, who now runs both Nissan and, since last April, France's Renault.

But Nissan execs had little time to savor their achievement as they started to fret about problems building in the U.S., their biggest and most profitable market. High fuel prices are denting sales of trucks and sport-utility vehicles. The introduction of Nissan's new models has been delayed. And its first hybrid gas-electric car won't hit showrooms until late 2006. All that comes as many forecasters expect demand for cars overall to cool off. "I haven't been very bullish on the U.S. market recently," Ghosn told reporters on Sept. 29. "I've been expecting some kind of slowdown."

His worries seem justified. On Nov. 1, Nissan reported October U.S. sales down a steep 13.3% from a year ago for Nissan and Infiniti brands combined. By contrast, Toyota Motor Corp. () chalked up a 5.2% rise in October sales, while Honda Motor Co. () added 4.2%. High gas prices are hammering sales of Nissan's full-size pickups like the Titan and big SUVs like the Armada. Sales of truck-based vehicles alone fell 14.9%. Surprisingly, mainstay Nissan and Infiniti car models didn't fare much better, falling 11.9% in October despite good numbers in the preceding months. The sudden drop led Nomura Securities to predict that Nissan will fall short of its own earnings targets for the year. "The next six months are going to be very slow for Nissan," says Credit Suisse First Boston () analyst Koji Endo in Tokyo.

Maintaining Nissan's white-knuckled growth trajectory was never going to be easy. Since Renault bought a controlling stake in 1999 and sent Ghosn to take charge in Tokyo, he has relentlessly driven Nissan to higher earnings and sales targets via cost cuts and hit products. Once near bankruptcy, Nissan was reinvented under Ghosn. Average profit margins have been the best in the industry.

The problem, analysts say, is that the impact of the big reforms is wearing off. Look no further than Nissan's latest earnings for evidence that post-turnaround growth is getting harder to come by. This year the company forecasts operating profit will climb 3.3%, to $7.5 billion, on a 4.9% rise in revenues, to $76.6 billion. That's less than the 4.4% profit gain over the past fiscal year, and much less than the heady double-digit annual increases in the three years before it.

Some trace Nissan's problems to the the fact that Ghosn now divides his time between Nissan and Renault; they ask whether Toshiyuki Shiga, Nissan's chief operating officer, is up to the task of running the company day-to-day. Company officials defend Shiga, who has only been on the job seven months as COO. "He's seen as one of the Japanese executives who has done the best job of integrating the company's global staff," says Nissan spokesman Simon Sproule.

Investors seem content to give Shiga and Ghosn the benefit of the doubt as they see how Nissan rides out this rocky period. Nissan's share price hit a two-year peak in early October and is up 5% this year. Fans of the stock point to strong first-half earnings, released on Oct. 28.

Nissan officials say a simple dearth of new models is the biggest reason for the slowdown in U.S. sales. That marks a significant shift from the past few years. Beginning in 2002, Nissan unleashed roughly two dozen new models -- 14 in North America alone -- to keep sales heading skyward. But by March, 2006, Nissan will have gone 12 months without a car launch in the U.S. "I don't understand why Ghosn concentrated so many new models in such a short period," says Takaki Nakanishi, an analyst at UBS Securities Japan Ltd. "Nissan is paying for that strategy now."

The drought will end in May, when the Versa subcompact hatchback, sold in Japan as the Tiida, hits American showrooms. The $12,000 car will be Nissan's answer to Toyota's Scion brand, aimed at Gen Y consumers. It's a turn away from Big Metal toward smaller, more fuel-efficient vehicles: compacts, subcompacts, and mini-SUVs such as the popular Murano. Besides the Versa, Nissan plans a late spring revamp of the quirky Quest minivan,a dud since its late-2003 launch.

By next autumn, the Sentra and Altima sedans, Nissan's two largest-volume sellers in the U.S., will undergo model changes, too. Nissan will also introduce a gas-electric hybrid version of the Altima next fall using technology supplied by rival Toyota. "We've asked for more product -- more Sentra, Altima, and Murano, fewer full-size trucks and SUVs," says John E. "Jed" Connelly, Nissan North America senior vice-president. "I wish they were here now."

TRY, TRY AGAIN

So do Nissan's dealers, who must try to lure American car buyers with a rapidly aging lineup. Nissan had been counting on rolling out an all-new Sentra sedan by this autumn. But at an invitation-only preview in the U.S. for a group of Nissan customers last year, the Sentra got panned, prompting Ghosn to postpone the launch and send designers back to the drawing board. The delay has forced Nissan to stick with its current Sentra for a sixth year, an unusually long stretch. The carmaker has had to provide incentives of nearly $3,000 per vehicle to move them off the lots, all but eliminating profits, according to UBS. Compare that with Toyota, which has kept incentive spending in check on its competing Corolla sedan.

Even if the new Sentra turns heads, Nissan's bigger dilemma is what to do about sluggish sales of its big, gas-guzzling, but high-margin trucks and SUVs. "If gas prices go back to around $3 a gallon, there is a chance that Nissan won't get the volume gains from trucks," says Credit Suisse's Endo. "Ghosn might have to reconsider his business model."

To get through the lull, Ghosn is turning to a well-rehearsed strategy from his playbook: cost-cutting. He has ordered Nissan to abandon its snazzy Tokyo headquarters and move to cheaper digs in neighboring Yokohama by 2010. He has also been pondering moving Nissan's American headquarters from a Los Angeles suburb to Smyrna, Tenn. Those sort of cuts could buy Nissan time until growth is revved up by new rollouts, for which Ghosn has high hopes. "The brand will be much stronger than it has ever been in the past," he says. Nissan's U.S. dealers only hope he's right.

By Kenji Hall, with Ian Rowley in Tokyo and Christopher Palmeri in Los Angeles


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