Global Economics

Don't Write Off Nissan Yet


The automaker's quarterly results are expected to be down, but it's boosting R&D and has a crowd of strong new models in the pipeline

Make no mistake, it has been a tough year for Nissan (NSANY) and Renault chief Carlos Ghosn. In the key North American and Japanese markets, sales have slumped, alliance talks between Nissan, Renault, and General Motors (GM) have failed, and Toyota (TM) may soon steal Nissan's crown as the world's most profitable automaker.

More bad news is expected Oct. 26 when Nissan announces quarterly results for the quarter ending Sept. 30. Hurt by the sales slump, JPMorgan analyst Takaki Nakanishi projects operating profits will fall 11.3%, compared to projected rises of 15.7% at Toyota and 13.5% at Honda.

For the financial year ending March, 2007, that could add up to a decline in Nissan's operating margin to 8.4% from 9.2% a year earlier. That would be well below Nissan's 11.1% of three years ago and below Toyota. Nakanishi projects Toyota's margins will rise from 8.9% to 9.5% for the financial year.

Failing His Midterms?

All of which will be more grist for Nissan's critics, not that many need encouraging. For all Ghosn's successes, dissenting voices in Japan have wasted no time asking if the Brazilian native is losing his golden touch. On Oct. 16, the Nihon Keizai (Nikkei), Japan's biggest business daily, suggested a "shadow is falling on the reputation of Carlos Ghosn," and asked "is Ghosn running out of success?"

Doubts have surfaced, too, about whether Nissan will meet two of three midterm objectives—achieving the top operating-profit margin in the industry, and unit sales of 4.2 million by March, 2008. Others have complained that Nissan has not invested heavily enough in green technologies, such as hybrids, or have portrayed Ghosn as a turnaround artist but not an operations guy (see BusinessWeek.com, 9/25/06, "Grading Ghosn").

None of this is to dismiss what Ghosn has accomplished since 1999, when Renault acquired a controlling stake in Nissan and dispatched him to save the Japanese automaker from oblivion. Since then, Nissan has boosted U.S. sales by 40% to more than 1.1 million vehicles annually as of 2005, slashed debt, and delivered industry-best operating margins.

Open During Remodeling

And the recent sales slump at Nissan may be coming to an end. Starting with the Versa subcompact in July, Nissan has begun introducing a host of new models which should help stem the sales drain and boost profits. Nissan's dip will likely bottom out this quarter says Tatsuo Yoshida, an auto analyst at UBS in Tokyo. From January "there will be a dramatic recovery and that pattern will continue through the next fiscal year."

The pipeline certainly looks strong. In contrast to the lack of new models over the last 12 months Nissan will release remodeled versions of the Altima and Sentra sedans—its two bestselling models in the U.S.—this fall. (Nissan's last launch before the Versa in the U.S. was the Xterra sport-utility vehicle in February, 2005.) Another new arrival in 2007 will be the Infiniti G35.

Globally, Nissan will launch 28 new or remodeled vehicles during its current three-year plan, called "Value-Up," which started in April, 2005—the majority of new models are still to be released. "The important time is from October," Toshiyuki Shiga, Nissan's chief operating officer, told BusinessWeek in an interview last month. "I have very strong confidence that we'll reach the objectives."

The U.S. debut of the Versa subcompact, on sale since September, also augurs well. The Versa is selling 4,000 units a month—1,000 more than expected. If the other new models perform as well, sales and profits won't be in a rut for long.

Rebound in Research Budget

Analysts also balk at the suggestion that Nissan isn't investing heavily enough in the technologies of the future. One regular criticism of Ghosn is that Nissan didn't invest in hybrids, enabling Toyota and Honda to become market leaders. The company's first gas-electric model—a new hybrid version of the Altima—will rely on Toyota technology.

But while it's true that research-and-development investment lagged Japanese rivals at the start of the decade, largely out of necessity as Ghosn got the business back on track, Nissan has increased its investment budget in each of the last five years. In the year through March, 2006, Nissan's R&D budget was $3.8 billion or 4.7% of sales, compared to 5.0% at Honda and 3.9% at Toyota. In 2000, Nissan's R&D as a proportion of sales was 3.8%.

Nissan may also get additional R&D synergies from its partnership with Renault. "They invest plenty," says Kurt Sanger, an analyst at Macquarie Securities in Tokyo. "[Having to put] the Toyota hybrid system in the car today means you weren't investing enough three to four years ago. It doesn't mean you're not today." Sanger raised his Nissan rating to "outperform" from "neutral" in August.

What the Talks Cost

What failing to strike a deal with GM means for Nissan is less clear cut. On one hand, the nature of the talks' collapse suggests Nissan and Renault lost out. After all, GM chief Rick Wagoner pulled the plug because he was concerned Nissan and Renault would gain too much.

On the other hand, many Nissan watchers thought the talks were a bad idea in the first place and that Ghosn should focus more closely on Renault and Nissan (see BusinessWeek.com, 7/2/06, "Quality Issues Could Stall Nissan's Plan").

Investors seem unperturbed by the talks' failure. Nissan began formally discussing an alliance with GM in early July and the talks finally petered out on Oct. 5. Nissan's share price has risen 20% from its 2006 low on July 24.

Declining Pessimism

Of course, Nissan's not out of the woods yet. During September, Japanese sales fell 13.6%, the 12th consecutive monthly fall. And in the U.S. they fell by 5.6% as the current Sentras and Altimas came to the end of their model lives. Ghosn really needs those new models to sell.

Nissan may also have to benefit from foreign exchange movements and better-than-hoped-for sales outside Japan and the U.S. if it's to meet full year targets. Analysts also harbor concerns over Nissan's quality compared to rivals Toyota and Honda.

Still, the prognosis for many is positive. "I am not so pessimistic about Nissan," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo. "Favorable sales in Asia will help soften the impact from declining sales in Japan and the U.S."

Moreover, a sense of perspective helps. Even after a costly recall in the U.S., Nissan's net profits were $930 million in the quarter ending June. This week Ford (F) announced a $5.8 billion net loss for the quarter ended Sept. 30. Writing off Ghosn—as many did when he first arrived in Japan in 1999—could leave critics looking foolish once again.


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