Does a GM-Nissan-Renault Alliance Make Sense? Skepticism Abounds, but Let's Hear What Carlos Ghosn Has to SayPublished: July 12, 2006 in Knowledge@Wharton
On July 7, General Motors' board of directors voted to study the pros and cons of entering into a three-way alliance with automakers Nissan and Renault. The alliance was proposed by GM shareholder Kirk Kerkorian who sees it as a way to revive the struggling company and expedite the restructuring taking place under GM's current chairman and CEO, Rick Wagoner. Another central figure in this drama is Carlos Ghosn, CEO of Nissan and Renault, who is credited with turning around Nissan and who is seen by Kerkorian and others as holding the keys to GM's future. What would a three-way alliance mean for GM, and for the auto industry in general?
Wharton management professor John Paul MacDuffie spoke with Knowledge@Wharton about the potential deal. There is plenty to be skeptical about when it comes to blending these organizations, MacDuffie says -- but Ghosn, he notes, is a voice worth listening to. "I have enough respect for Carlos Ghosn to want to hear his vision of what this could be," MacDuffie says.
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Knowledge@Wharton: There's great interest this summer in what is occurring with General Motors and the possible three-way alliance with both Nissan and Renault. Joining us to discuss this recent three-car pileup is John Paul MacDuffie, a professor in the management department of Wharton who also is the School's leading researcher on the auto industry.
John Paul, can you briefly explain what brought this all about for GM, and where does the situation stand today?
MacDuffie: The situation comes about because of the actions of Kirk Kerkorian, who is the largest investor in GM. He owns just under 10% of the stock. He's been very publicly impatient with the slow pace of the restructuring of GM. He's had some strong opinions. A representative of his views, Jerry York, is now on the board. Jerry made a strong speech around Christmas time saying what he thought GM should do, and one thing he said is GM should do more things like Carlos Ghosn did in turning around Nissan.
So, now it emerges that Kerkorian thought getting Carlos Ghosn actually involved in turning around GM would be a very good idea. He proposed the idea to Carlos Ghosn over dinner in mid May, and the next thing the world knew of it was a filing with the SEC that announced that these proposals were going to the boards of all three companies. That brought us to the dramatic news of the last couple weeks.
Knowledge@Wharton: What's Kerkorian's history with GM? Is he a fairly recent aggregator of stock there?
MacDuffie: Fairly recent. He's been a long-time investor in the auto industry. He acquired quite a large stake in Chrysler at an earlier point in time and gave Lee Iacocca headaches with very activist investor demands. I believe in the end he made out very well with that investment. He has mostly lost money on all of his GM investments so far and would like that to change.
Knowledge@Wharton: Where do things stand right now? GM is in a due diligence period to do research to determine the validity of actually pursuing this alliance?
MacDuffie: The first step was to get agreement from the Renault and Nissan boards. That happened quite quickly. And both boards said they would only proceed if GM's board fully supported it. GM's board met Friday and they did support a study going forward. Kerkorian, it's known, preferred that the board organize the due diligence itself, possibly with outside independent financial advisors. GM management wanted to control that process. So far they won that one. Wagoner himself will be the one directing the study.
Knowledge@Wharton: And how long has Wagoner been president of GM?
MacDuffie: Oh boy, quite a while. I'd say eight or nine years now.
Knowledge@Wharton: And how would you sum up his success there, or lack of success?
MacDuffie: Well he's a lifer. He came up through the finance Function, as did his predecessor, Jack Smith. He's relatively young. He's well regarded within the company and generally within the industry. One of the biggest challenges for GM obviously has been their relationship with the UAW, the high healthcare costs and pension costs, and he has led some successful discussions, negotiations with the union and is seen as having a good relationship with the union.
Just a few days before all of this blew up, GM announced that a total, I think, of 35,000 production workers including workers at Delphi, which used to be part of GM, are going to leave the company with severance packages. They also negotiated a big decrease in healthcare costs. So he's had some successes in this restructuring plan. So far GM's performance on his watch has been up and down, but recently down -- and that's of course the reason for all the pressure and all the attention.
There are critics of GM's product lineup and the level of excitement that consumers have about that. One thing that he did recently was sell off part of GMAC, the financing arm, which in many years has produced a lot more profit than the automobile industry. When you start selling off your prized jewels to keep paying the bills that's...
Knowledge@Wharton: Portfolio suffers.
MacDuffie: Yes, exactly. So he's had a lot of critics, I think -- some admiration for the way he's pushed this restructuring process so far, but a very striking contrast with Carlos Ghosn, who in each of his restructuring phases at Nissan, and more recently Renault, has announced a very clear plan, very clear goals, very clear timelines. Wagoner has done none of that.
Knowledge@Wharton: In light of Wagoner's restructuring plan, what would be the pros of getting into this kind of alliance, or would there be cons?
MacDuffie: I think you can analyze this from a sort of analytic Perspective -- in each separate area, what are the gains you could get or the possible downsides. Product development, production, marketing, supply chain, etc. I can run through a list.... There's a set of power dynamics here, which are also kind of interesting and maybe part of what makes it so dramatic. Besides the personal dynamics with the two CEOs, Toyota is just on the verge of overtaking GM as the world's largest auto company. And maybe there's a sense of "Who can stop Toyota?" in a lot of people's minds as they consider the possibilities of a tie up.
Knowledge@Wharton: Very often the best way to kill an idea is to appoint a
committee to look into it. How serious do you think this exercise of GM asking to study this issue is? Is this just something that is being done to keep Mr. Kerkorian happy, or is something actually likely to come of this whole exercise?
MacDuffie: Well, obviously this did not start with a meal between Rick Wagoner and Carlos Ghosn [whereas] other big global mergers like Daimler Chrysler started with a conversation between two CEOs. This is being forced on Wagoner and GM, and they're scrambling to respond. I think one of the big questions is, does Carlos Ghosn have a vision of this that he can make very persuasive to Wagoner, to the GM board. Some things that maybe we aren't seeing or we aren't putting as much weight on as he is at this moment might turn this from a power struggle into something that looks more positive. Right now, if you add up the pros and cons of each of the little pieces of the puzzle, it doesn't look like it makes much sense. But I have enough respect for Carlos Ghosn to think it would be worth hearing him out. It would be nice to be a fly on that wall when some of those conversations happen.
Knowledge@Wharton: I would assume with an alliance that there's a huge economy of scale in terms of purchasing and buying power and cutting costs. You mentioned that there's going to be some cost cutting anyway. Is that probably one of the big pros, that you've got an ability there to really centralize the things that work and curtail the things that don't and pass them on to the other partner?
MacDuffie: Usually one of the very first things that you look at in this kind of alliance or merger, is all the economies of scale you can get. And this is an industry where economies of scale have traditionally been hugely important. They certainly loom very large in managers' minds. A lot of decisions get made on that basis. Frankly, GM is already so big they don't need anymore purchasing power. They've got all the leverage that they need in terms of economies of scale for purchasing now.
One thing we know is that a lot of suppliers are unhappy with GM. GM's pressure for price cuts, GM's relative looseness about sharing supplier ideas with other suppliers, this kind of thing. You hear these criticisms. There are some supplier surveys that show those negative attitudes and show some suppliers are starting to say, "We don't really want to give GM our best technology anymore." Or "We don't always even want to bid on their jobs." It's a little hard to say no when you're asked to bid...
Knowledge@Wharton: Because of the monopolistic nature of them?
MacDuffie: Well, cause of what a big customer they are.
MacDuffie: But maybe you agree to put in a bid, but again you don't want to necessarily give them your best stuff. So is GM losing access to some of the world's best suppliers? Could they get better access through Renault and Nissan? I guess it's possible, but I don't think access is the issue. It's not like somebody needs to open a door for GM. It's just more about the way they manage the relationship and would a Renault and Nissan tie up change the way GM approaches its supplier relations. I doubt it.
Knowledge@Wharton: You look at GM as you're driving around and you see a lot of GM cars that are now coming and being brought back from the stone age, the classic car era. That's not something that I think Nissan pursues. I think on the product development side, Nissan looks towards the future and it looks as though GM traditionally now is pulling out models that worked in the past and is trying to reengineer them for the public. Is that something that you see as a conflict, or could that be a benefit to GM?
MacDuffie: If they had some kind of tie up. GM is badly in need of new ideas and help on product development. I think trying to evoke some of the great American car designs of the past is one thing they've tried. Ford is trying it, too. It had limited success. It's not enough to carry your whole product line.
Knowledge@Wharton: It's been very successful in movies. I'm not sure it transfers over to the auto industry, though.
MacDuffie: Yes. GM has done a great job of revitalizing Cadillac as a brand, but that's been more through pushing towards bold new styling and really changing...
Knowledge@Wharton: To a younger market...
MacDuffie: Marketing, yes. Changing the marketing message completely. GM already has a lot of brands. They certainly don't need any other brands. Renault tried to come to the U.S. once in the past and completely failed. It's not clear how a tie up with GM helps Renault be more successful with that.
Knowledge@Wharton: What's the relationship between Renault and Nissan?
MacDuffie: It started in 1998, I think . . . One very important point is that it is an alliance. I think that Renault owns about 44% of the stock, so it's less than a controlling share. A few years later, when they recovered some financial health, Nissan bought about 15% of Renault's stock to have it be cross-shareholding. They're very strong and proud, I think.
They talk about it a lot: We are two independent companies. We are not a merged entity. There was no acquisition here. We have separate boards. We have separate identities and we're just leveraging what we can from learning from each other. Now they've got one CEO for both companies, so how independent are they at this point?
Knowledge@Wharton: You could debate that.
MacDuffie: But Ghosn has had ideas about how to make alliances work that are different from some of the approaches we've seen, and that's again maybe why people give him some credit with having ideas for this one.
Knowledge@Wharton: When Daimler and Chrysler got together, they decided to merge, whereas in this case it's being done as an alliance. Is there an advantage to doing it as an alliance rather than as a merger, purely as a business arrangement? And a related question is, what do you think Carlos Ghosn could do for GM that Rick Wagoner isn't doing right now?
MacDuffie: The Daimler Chrysler merger, which followed some big acquisitions that Ford made -- Volvo, for example, Land Rover, Aston Martin -- gave a lot of people some doubts about big mergers in this industry. Both of those companies seemed to have a lot of trouble getting the benefits out of that. And so GM itself has chosen over the past several years not to do acquisitions, not to do mergers, but in fact to have a bunch of alliances. So there's always pros and cons of these two different approaches, and people tend to pick certain examples that they think are the critical ones -- either success stories or failure stories -- to justify their next action.
GM's alliances have not been particularly successful. They had a big one with Fiat that was probably the one that got the most Attention, because when GM decided it wasn't working for them they had a clause which required them to pay a huge amount of money to Fiat to get out of it. But they did it because they didn't see the advantages going forward. So we don't see so much skill with alliances out of GM to give us a lot of confidence, but we do have Renault-Nissan as a very successful alliance, and we know that Ghosn has very clear ideas about how you make an alliance work.
He also has very clear ideas, to your second point, of how to manage a turnaround situation. He did it at Michelin before he came to Renault. He did a lot of things at Renault before he took the Nissan job, and now he's leading a turnaround at Renault, a revival plan, as well. He expects and asks for complete control. He does delegate a lot of things down into the organization. He picks young leaders, gives them a lot of responsibility, creates cross-functional teams. It's hard to imagine if he were being asked to fix GM that he wouldn't want to do it in a similar way but with a similar amount of control, which then obviously right away poses the question, "Well, what about Wagoner?"
Knowledge@Wharton: Where this could be perceived as a takeover to some degree?
MacDuffie: We should remember it's easy for us to jump way ahead on this. Right now all that's proposed is that Renault and Nissan each take a 10% stake of GM. And so at the beginning it's just an infusion of cash, which GM can certainly use.
Knowledge@Wharton: Are we talking hundreds of millions or in the billions? How much
cash do you think?
MacDuffie: It's about three billion, I think.... But with that investment obviously will come some desire for certain kinds of control. We don't know exactly what that would be. It would be a considerable road before it would be Ghosn pushing Wagoner aside as CEO. But these are the issues that are on everybody's mind, including Wagoner as he decides how to respond.
Knowledge@Wharton: What are you predicting as the next step? What do you think will come out and when? Is this a process that could take weeks before we hear something?
MacDuffie: Well you've got the parties with different interests in this. As you said earlier, the committee can be a way to slow down the process and try to make it go away. Kirk Kerkorian will be pushing, and Jerry York on the board will be pushing for speed. You can certainly argue that there's a lot of numbers to crunch in order to evaluate all these different things, or you can say, well, we need to get the decision more quickly. So I don't know. It's summer. GM just went on their summer break, which is two weeks for everybody in the company. I doubt we'll hear a resolution before fall, but there may be some other factors creating urgency that I don't know about.
Knowledge@Wharton: The market responded favorably to the announcement for that day. How is it responding now?
MacDuffie: It jumped up at first, and then it has come down some. With each confirmation from the respective boards that they're willing to go forth, it's tended to nudge it up again a little bit. I think there was a modest positive nudge on Friday. I think at some level a lot investors could be saying, hey if all this does is light a fire under Rick Wagoner and the current restructuring plan, maybe that's enough. Not that Kerkorian isn't serious about wanting Carlos Ghosn's input into running GM. But if he doesn't get that, at least he gets a lot of things moving because of this action.
Knowledge@Wharton: Looking down the road, how could this alliance change competition in the auto industry? And I guess the second question there would be, what does it take to stop a Toyota?
MacDuffie: I think that issue of Toyota seeming to have a kind of unstoppable momentum recently is probably at the heart of that. Toyota executives seem to be saying recently that they focus more on Hyundai, and Kia, the Korean company that merged those two companies recently. That's their biggest worry as a competitor. They're not that worried about GM. They're not that worried about Ford or any of the Europeans per se. There may be a feeling by Ghosn and others that, hey, we want to be one of the serious players to be a contender with Toyota.
One piece of that calculation which I think is legitimate is just R&D and technology investments going forward. The last few years and probably the next 15-20 are going to see more technological change, I think, in the automobile than anytime since maybe the 1930s. Drive trains are going to be the first place where there's a lot of action. Hybrids, clean diesel, ultimately fuel cells, flexi fuel -- there's a lot of things on the table, each of which has a lot of development costs associated with it.
There are already a bunch of alliances going on around those, but on a project basis, and maybe the appeal of having a really big R&D budget out of an alliance like this, to work on all those things and be strong in a portfolio of them is worthy. There's also all the electronics coming into the vehicle. This is not only navigation and entertainment and mobile office, but this is all the things that electronics control in the vehicle's functions. Safety features, user control, each driver being able to pick the driving characteristics they want. Push a button and get it to drive more sporty, or more luxury.
All these things are coming. The technologies are there. Commercializing them and getting them into the product line is what's necessary. Anyway, it all costs a lot, and how many car companies are going to be able to stay in that game?
Knowledge@Wharton: So in wrapping up, as an analyst in the industry, what's your opinion here? Are you lukewarm to the [alliance] concept here? Do you think it's got merit? Is it something you would like to see happen? Or, impact-wise, you're not really too impressed with it?
MacDuffie: When I look at the list of the objective areas and what I would see as the benefits for the parties, I end up skeptical. When I look at the power dynamics and the sort of barriers that that it will create, both the interpersonal and organizational challenges of combining these companies and their cultures, that leaves me skeptical. So I guess, on balance, I'm more of a skeptic.
But I will repeat one point I made earlier, which is I have enough respect for Carlos Ghosn to want to hear his vision of what this could be. We could see his ambition and even hubris talking here in terms of thinking, "Hey, I already did a great job at Renault and Nissan. I'm running two companies. I got a little spare time. Let me take on GM." Or it could be that he really has something that can be persuasive and make us see another side of this.