Posted by: David Kiley on July 22, 2005
Did anyone notice that in June, the month that General Motors wiped out the industry with its “employee pricing” promotion (which garnered GM a 40%+ sales gain over the previous year and added almost 7 points of market share), that only one auto company besides GM gained market share? Yup…Nissan. And that was in a month when Nissan’s incentive spending was down from a year earlier.
Let’s look at this. Nissan has an operating margin of about 10%. You know how great that looks? BMW’s operating margin is 6.9% while Toyota’s is 9%. And those companies are the industry models for profitable sales growth.
As this week’s Business Week/Interbrand ranking of the Top 100 Global Brands shows, Nissan is gaining fast on all fronts relative to its competition. It’s global brand value was up 13% last year to $3.3 billion. That still trails Honda and Toyota by a wide margin. But let’s not forget that as recently as the leate 1990s, even 2000, I would say Nissan hardly even had a brand value outside Japan.
What CEO Carlos Ghosn has done at Nissan is pretty savvy. Besides jettisoning businesses that Nissan had been caretaking as part of the old, sick Japanese business culture, Ghosn decided that it was nuts for the company to try and outdo Toyota and Honda on reliability. Yes, Nissan would have to improve its quality and be competitive. But worrying about outscoring Toyota on J.D. Power quality rankings would be a losing proposition. He was, and is, correct.
Instead, Ghosn decided that Nissan would become known for design like no other Japanese company had been. And it’s worked. The Altima sedan. The Murano SUV. The Infiniti FX45 SUV. The Maxima sedan. Even the Quest minivan and Titan pickup, while not runaway successes, have set design standards in their segments. The company’s entry-level Sentra is darn near eight years old, and overdue for its redesign. Why? Insiders say its because the design Nissan was close to greenlighting wasn’t good enough, and the CEO decided the company would earn more over the life of the car if the design was better executed. That doesn’t sound like much, but there are hundreds of people in a car company, when that decision is being weighed, who tell you how many tens of millions will be lost, if not hundreds of millions, by delaying a product intro by a year. All those people have to be stared down. And Ghosn did that.
The profit in design? Consider that Chrysler has been marketing the 300C sedan for about 16 months with only a $1,000 rebate, and that’s an incentive paid out by Chrysler Credit if the buyer finances with the company’s captive finance unit. In other words, no rebate from the factory for 16 months. Why? The design is so compelling that roughly 75,000 people in the first six months of this year had to have a 300C instead of a Buick LaCrosse or Honda Accord. Take the $2,500 that most new four door sedans require just three months after they launch, and the fact that Chrysler is not spending that…it adds up to real dollars. Chrysler will pocket $375 million this year based on the $2,500 per 300 it won’t have to spend on rebates.
Nissan has several vehicles with lower incentives than its primary competition in the same product segments. Just $500 on the Murano. $1,500 on Altima. $2000 on Titan (more than Nissan wanted but it’s tough when the domestics are spending what they do on rebates and Nissan is brand new to the category). The Z has no incentives. And the Infiniti G35 consistently challenges BMW in head-to-head comparisons in the respected buff books—Car & Driver and Automobile.
What Ghosn figured out is that people will pay more for products if they are seduced by them; even if the competitor is cheaper and of higher quality.
Yes, Ghosn has hammered costs, which have improved Nissan’s margins. But he’s also getting far more revenue per vehicle than the company used to or than most of Nissan’s competition. And its not the quality consumers are paying for, because Nissan lags Toyota and Honda and is about even with General Motors. It’s the designs.