Nissan Earnings Take a Fall

Carlos Ghosn

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Pratfalls are central to comedy, and the snickering could be heard all the way fromTokyo to Detroit to Stuttgart last week when Nissan reported a 22-percent drop in earnings from October through December.

Carlos Ghosn, Renault/Nissan chief executive, said the results were unacceptable and vowed they would get better. Nevertheless, some analysts were beginning to speculate about how much longer Ghosn could retain the CEO jobs at both Nissan and Renault.

In addition, the lapse underscored the weakness in Renault/Nissan’s overall competitive position, which like Ford has it caught between larger rivals such as Toyota and niche-oriented rivals such as Honda and BMW.

Ghosn had become one of the most recognizable figures in the automotive industry by turning around Nissan’s fortunes and taking it from brink of bankruptcy. The success at Nissan had turned Ghosn into an oft-quoted celebrity, given to sweeping comments about management practices across the car business.

The magic, however, seems to be wearing off.

Honda recently passed Nissan to become Japan's number-two automaker. Both Honda and Toyota continue to post record profits. Nissan was still profitable in the third quarter, earning $870.8 million despite the sharp decline in net income.

“We have today a performance crisis and we need to fix it as soon as possible,'' president and chief executive Ghosn said in a conference call from Paris. “We don't take this lightly...it's really an interrogation for us, about our management ways.''

The unexpected decline in third-quarter earnings also forced Nissan to revise its outlook forward for the full year downward by 12 percent. The revision also means that Nissan's earnings will decline during the full fiscal year for the first time in seven years.

Nissan sales climbed a meager 1.8 percent from a year earlier to $19.7 billion on a three-percent fall in unit sales to 795,000. The company also indicated it was unlikely to meet its sales target of 3.7 million units and that sales in the U.S. also were short of the company's targets. In the past, Ghosn had also stressed the importance of the stretch sales targets in managing the company.

Ghosn also said the company was hurt by rising raw material prices. Ghosn had dismantled Nissan's keiretsu, or in-house supplier network in the late 1990s as part of his dramatic cost-cutting drive. However, the shift to open sourcing has left Nissan more vulnerable to fluctuations in commodity prices, like copper and steel.

Nissan had cited material savings as one of the key reasons for pursuing a partnership with General Motors. The talks with GM came to naught and Los Angeles mogul Kirk Kerkorian, who was instrumental in getting them started, has since sold his interest in GM.

Ghosn also expressed frustration that the six new models Nissan launched in the third quarter didn't have more of an impact. For example, Nissan's unit sales in the United States inched up just 0.9 percent to 243,000 vehicles in the latest quarter, though they had dropped 6.9 for the first three quarters of the fiscal year. Nissan sales in Japan and Europe dropped both in the quarter and for the first nine months.

“We are expecting 2007 to be better than 2006, in terms of growth, profit, and net income. The question is how much better,'' Ghosn said. “If Nissan is not capable of growing with this product pipeline, then the situation is really tragic. This we don't think.''

“We are not going to deviate any of our attention or energy outside,'' Ghosn said. “We want to re-establish the growth in profit and sales for Nissan, and establish a good pattern of growth at Renault, before envisioning anything else.''

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