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Grading Ghosn


Carlos Ghosn is the auto industry's rock star. Kirk Kerkorian thinks the globe-trotting, job-juggling chief executive of Renault-Nissan is brilliant enough to help fix General Motors Corp. (GM) in his spare time. And if the proposed alliance between GM and Renault-Nissan doesn't happen, Ghosn might still strike a deal with Ford Motor Co. (F) "We are concentrating on the present talks," Ghosn said in his office in the gritty Paris suburb of Boulogne. "A North American partner would make sense."

As Ghosn and GM near their early October deadline for coming up with an alliance or walking away, all of the attention raises a weighty question: Does Ghosn really deserve his reputation as a miracle worker? There's no denying that Ghosn performed a remarkable feat at Nissan Motor Co. (NSANY), reviving the troubled Japanese carmaker faster than anybody dreamed possible. "Turnaround on the scale of [Nissan's] has hardly been equaled in Western capitalism, and especially not across cultures," says Piero Morosini, professor of strategy at the IMD business school in Lausanne, Switzerland.

If Ghosn were to cut a deal with GM or Ford and work his magic, he would join the ranks of industry legends such as Alfred Sloan, Lee Iacocca, and Eiji Toyoda. But truly changing the way big American automakers do business would be harder than anything Ghosn has accomplished so far. Some of his fix-it moves in Japan would be tough to replicate in the U.S., and recent stumbles call into question whether his turnaround has staying power. "He's played the first inning," says James N. Hall, vice-president of AutoPacific Inc., a Tustin (Calif.) forecasting firm. "Now he has to back up what he's done and develop some vehicles that people really want to buy."

While Ghosn is a turnaround genius, his long-term record as an operating executive is mixed. Consider the recent performance of Nissan, where he built his reputation. After Ghosn's arrival in 1999, the automaker boosted U.S. sales by 40% over five years, to more than 1.1 million vehicles annually in 2005. But this year, growth has stalled. Through August, sales are down 5% in the U.S. and 13% in Japan. Sales and margins are also down at Renault.

The main reason Nissan's early performance in the U.S. fizzled is that it failed to gain significant market share after launching a raft of new vehicles such as large pickup trucks and sport-utility vehicles. Nissan entered those segments during Ghosn's tenure, and since it had never sold such vehicles before, sales growth looked great. But the 85,000 Titan pickup trucks and 40,000 Armada SUVs Nissan sells annually are only one-tenth the number sold by GM. And the styling on Nissan's biggest success, the Altima sedan, was largely complete when Ghosn signed on. He admits that Nissan's current malaise stems from the fact that he didn't keep up the pace with new models, but he says he has the problem licked. "The product drought at Nissan is coming to an end," Ghosn says. "It will never happen again. We're out of the desert."

Questions have also arisen about whether the CEO cut too many corners to gain U.S. market share. In his eagerness to reinvigorate Nissan, Ghosn challenged workers to launch a parade of new vehicles in his first four years at the company. Three -- the Titan pickup, Armada SUV, and Quest minivan -- had new platforms and engines. They were built by inexperienced factory hands in a new facility in Canton, Miss. Even some of the parts suppliers were new to Nissan.

All of the new trucks and vans built in Canton turned out to have flaws. Customers griped of squeaks and rattles, the rooftops of some Armadas weren't welded on securely, and the side doors on some Quest minivans opened at highway speeds. JPMorgan Securities (JPM) says warranty costs per vehicle have nearly tripled in the past two years, to almost $500, and may go even higher. While Nissan still has the industry's best profit margins, the cost of improving quality could cause it to lose that crown to Toyota Motor Corp. (TM) and Honda Motor Co. (HMC) Despite recent gains, J.D. Power & Associates Inc. (MHP) ranks Nissan's quality below average. "In 2004 and 2005 we made significant progress on quality," Ghosn says. "We'd like to move faster, but sometimes you have to change specs or change designs to do it."

The CEO must also wrestle with the tough situation he inherited when he took the helm at Renault in April, 2005. The French company's share of the European market has fallen to 9.1%, from 10.3% a year ago. Luxury brands such as BMW, Audi, and Mercedes (DCX) have stolen buyers from Renault with small luxury cars costing under $30,000. Renault's attempts to counter with gussied-up sedans such as the Vel Satis and Laguna haven't worked. To get back on track, Ghosn is preparing a raft of new models to hit showrooms starting next year and is aggressively targeting new markets, particularly in Asia. A key part of his plan: change Renault's product mix so that its lineup features more higher-margin vehicles.

Steep competition, a slowdown in new launches, and rising materials costs have eroded Renault's former high margins, now a mediocre 2.7%. Although Renault and Nissan together have saved about $600 million by sharing engines and have jointly developed small and midsize cars, Renault's operating profits will barely top $1 billion this year, about one-third of last year's number, according to Morgan Stanley. More than half of that comes from Renault's 44% Nissan stake. But even now, he points out, Renault is making money. "We're at the low point of our product cycle," Ghosn says. "If you're profitable at the low point you'll be in good shape" as sales pick up.

PROMISE MAKER

GM or Ford would present challenges different from those Ghosn has tackled in the past. Consider labor unions. When he slashed 21,000 jobs globally and closed five plants in Japan, he faced a public outcry. But it will be tougher to slash the $1,000 or more per-vehicle that American carmakers pay in retiree benefits. He couldn't cut into those the way he forced layoffs in Japan. And after multiple failed attempts at unionizing Nissan plants in the U.S., animosity between the United Auto Workers and Ghosn runs deep.

The hard-charging CEO vows to boost sales and profits at both companies. If there's one thing that makes him stand out among auto industry brass, it's that he delivers on promises. He made good on all his targets at Nissan and pledged to quit if he failed. Now, Ghosn swears that Nissan's profits will start rising this fall when the new models arrive. At Renault, where his drive to boost performance kicked off earlier this year, he has more new models being prepared for showrooms next year, which might bring him closer to his goal of increasing margins to 6%. Meanwhile, the Logan, a $6,500 subcompact, is beating all sales targets. Though the car was developed before Ghosn took over at Renault, it will help him meet a target of boosting global sales by 800,000 vehicles by 2009. Few would bet against Ghosn -- with good reason. But if a Detroit alliance develops, his legend is sure to face new scrutiny.

By David Welch, with Gail Edmondson in Frankfurt and Ian Rowley in Tokyo


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