Global Economics

Nissan Gears Up for U.S. Race


This has not been a stellar year for Nissan (NSANY). At a time when most Asian auto makers have been staging a market-share grab at the expense of General Motors (GM), Ford (F), and DaimlerChrysler (DCX) in the U.S., Nissan has been losing ground. Starved for new models, Nissan's U.S. sales have dipped by 0.6% to 263,227 in the first quarter of 2006, while Toyota (TM) and Honda (HM) have posted 7.4% and 8.3% respective gains.

The performance in Japan has also been uninspiring. Sales fell 15.9% in March compared with a year earlier -- the sixth straight monthly decline. Other worries include Nissan's slow penetration of the gas-electric hybrids segment, an arena Toyota dominates, and continued quality problems with some of its vehicles assembled at its plant in Canton, Miss. The sales stall has some wondering whether Nissan CEO Carlos Ghosn (who for the last year has also held the CEO title at French auto maker Renault (RNSDY), a strategic Nissan investor) has perhaps lost his touch or stretched himself too thin.

It is always risky to bet against a proven and uniquely driven auto executive like Ghosn. He has set an ambitious target to increase Nissan's global unit sales by about 17% to 4.2 million by March, 2008, vs. levels in September, 2005. And this week at the New York Auto Show, Nissan will be unveiling revamped versions of the Infiniti G35 and Nissan Altima that are part of a larger product assault on the U.S. this year and in 2007.

CRUCIAL MODELS. The company's "potential will likely start outweighing the elements of concern," says Tatsuo Yoshida, an analyst at Merrill Lynch in Tokyo. He has a buy on Nissan's stock. And though he has revised downward Nissan's projected operating profit by about $85 million to $7.4 billion for the year ended in March, he forecasts earnings of $8.5 billion by March, 2008, thanks largely to a beefed-up product line. Investors sense a period of regained momentum ahead. Nissan's stock price isn't far off the high of September, 2003, and has risen 27% in the last 12 months.

New models slated for launch in the vital U.S. market will be crucial if Nissan is to get its groove back. In New York, consumers and rivals will get a peek at the remodeled versions of the popular Infiniti G35 and Nissan Altima sedans. Both vehicles will be on sale before the end of 2006. "These are truly important models," Shiro Nakamura, Nissan's chief designer said during a Mar. 31 interview with automotive journalists in Tokyo. With sales of over 234,000 in the year to March, 2005, the Altima is Nissan's best selling model in the U.S.

In June, Nissan will debut the Versa subcompact -- known as the Tiida in Japan -- and revamped versions of the Quest minivan and Maxima mid-sized sedan. In the fall, the new Sentra will follow, and a sedan version of the Versa will go on sale before the end of the year.

DESIGN DELAY. "We think the effect of those launches could carry over into 2007 as well," noted Noriaki Hirakata, an analyst at Morgan Stanley recently in a report to investors. Nissan will also add new models in Japan, and begin offering new models including the Note subcompact and a remodeled X-trail SUV in Europe in the next 12 months.

The successful launch of the new Sentra is critical for Ghosn. Nissan's second-best-selling vehicle in the U.S. after the Altima, its introduction was delayed a year after test customers balked at the original design. That meant extending the current Sentra into an unusual sixth year which didn't help Nissan's lack of new products even if it was a sensible move.

"If you look at the economics, the costs to fix a problem while the car is in development, vs. losing 20%-30% of your volume for four or five years once it hits the showroom -- there's no discussion," said Nissan executive vice-president Carlos Tavares in a recent interview with BusinessWeek (see BW, 3/27/06, "The Quickening At Nissan").

AMBITIOUS PLANS. Despite the slowdown since, analysts are confident that Ghosn will meet the goals of Nissan's new three-year plan. Even taking into account Nissan's recent blip, the company posted an operating margin of 9.5% for the quarter to Dec. 31, 2005 -- marking out Nissan as a world leader in the auto industry. Investors also welcomed the sale of most of Nissan's stake in Nissan Diesel to Volvo on Mar. 21, which raised $193 million.

"Nissan is chasing a top position in the world market as a maker of passenger cars, and Nissan Diesel is not a core strategic component of this goal," adds Morgan Stanley's Hirataka. "This is a timely move." Under the new plan, called Value-Up, Nissan aims to launch 28 new models by March, 2008, achieve global sales of 4.2 million, and gain the best margins in the industry.

And concerns over Ghosn's dual role as head of Renault and Nissan? Analysts say despite investors regularly raising the issue, there are few signs the two-headed CEO can't cope. Merrill's Yoshida notes that Ghosn still manages Nissan's North America operations, which account for more than 60% of Nissan's earnings. "As long as he chairs Nissan's North American committees, in essence Nissan is controlled by Carlos Ghosn," Yoshida says.

RELIABILITY ISSUES. That's not to say Nissan has no concerns. First and foremost, the new models have to be hits. Meanwhile, Nissan has some catching up to do when it comes to hybrids. Though Ghosn is somewhat skeptical that hybrids will be a profitable market segment, Nissan continues to invest in the technology and will release a hybrid version of the Altima sedan -- its first gas-electric vehicle -- this year, albeit using Toyota technology.

And in the U.S., at least, Nissan must also restore its image for reliability. According to the latest issue of Consumer Reports, the influential consumer testing magazine, four Nissan and Infiniti vehicles built at its Canton plant are among the least reliable in the industry. Nissan is in the process of overhauling its manufacturing methods at Canton. It's a concern, but given Ghosn's 24/7 work ethic, the betting is that those problems will be ironed out.


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