Co-evolutionary troubles at the Renault Nissan alliance

Widely hailed as one of the great successes in the automo[1]tive industry, the Renault Nissan alliance sold more vehicles worldwide than any other car maker in the first six months of 2018, with an estimated 5.5 million sales. This is a far cry from the alliances origins in 1999 when the auto industry was in a period of rapid consolidation and both Nissan and Renault were struggling. Renault was just recovering from a failed merger with Volvo, and a new CEO, Carlos Ghosn, had been appointed to streamline the company. He was highly e

ective in doing so, earning him the nickname le cost killer, but Renault lacked access to the fast-growing Asian market. Nissan on the other hand was in financial trouble, with $20bn in debt and limited exposure to the European market. The aim of the alliance was for both companies to main[1]tain their own brand identities and running of their own businesses, while achieving substantial cost savings in sharing engineering, purchasing, research and production. For instance, both com panies now share common platforms for cars that allow them to use similar components for production (see figure) just four car platforms account for 75 per cent of all group production. When the Alliance started, Renault invested in Nissan to prevent its collapse and acquired 43 per cent of voting shares. Ghosn then carried out sweeping changes at Nissan over four years, firing over 20,000 people, closing five production plants, changing the corporate culture to a performance-based one, raising margins to an unheard of 9 per cent, and reducing supplier power that was harming profitability. Ghosns aim has been to focus on profitability and strengthening collaboration. However despite deepening this very successful alli[1]ance, Ghosn was arrested in November 2018 over alleged under-reporting of his earnings and misusing company assets, and is in a Tokyo jail. The Nissan board fired him shortly thereafter. This has exposed fractures in the Renault Nissan alliance, raising concerns about its future. The voting structure and shareholdings of the Alliance are shown in the figure. Nissan has a 15 per cent stake in Renault but no voting rights due to French laws preventing reciprocal control. The French government has increased its stake in Renault to 15 per cent and this has doubled their votes, due to European rules. However, Renault shares have fallen in 11.4 Strategic alliances 353 evolution. The amount of committed resources changes at each stage, but issues of trust and co-evolution recur throughout: Courtship. First there is the initial process of courting potential partners, where the main resource commitment is managerial time. This courtship process should not be rushed, as the willingness of both partners is required. Similar criteria apply to alliances at this stage as to acquisitions. Each partner has to see a strategic fit, according to the rationales in Section 11.3.2. Equally, each partner has to see an organisational fit. Organisational fit can be considered as for acquisitions (Section 11.3.4). However, because alliances do not entail the same degree of control as acquisitions, mutual trust between partners will need to be particularly strong right from the outset. Negotiation. Partners need of course to negotiate carefully their mutual roles at the outset. In equity alliances, the partners also have to negotiate the proportion of ownership each will have in the final joint venture, the profit share and managerial responsibilities. There is likely to be a significant commitment of managerial time at this stage, as it is important to get initial contracts clear and correct and it is worth spending time working out how disputes during the life of the alliance will be resolved. Although the negotiation of owner[1]ship proportions in a joint venture is similar to the valuation process in acquisitions, strategic alliance contracts generally involve a great deal more. Key behaviours required of each partner need to be specified upfront. However, a ruthless negotiation style can also damage trust going forward. Moreover, co-evolution implies the need to anticipate change. In an acquired unit, it is possible to make adjustments simply by managerial authority. In alliances, initial contracts may be considered binding even when starting conditions have changed. It is wise to include an option for renegotiating initial terms right at the outset. Start-up. This involves considerable investment of material and human resources and trust is very important. First, the initial operation of the alliance puts the original alliance agreements to the test. Informal adjustments to working realities are likely to be required. Also, people from outside the original negotiation team are typically now obliged to work together on a day-to-day basis. They may not have the same understanding of the alliance as those who initiated it. Without the mutual trust to make adjustments and smooth misunderstandings, the alliance is liable to break up. This early period in an alliances evolution is the one with the highest rate of failure. Maintenance. This refers to the ongoing operation of the strategic alliance, with increasing resources likely to be committed. The lesson of co-evolution is that alliance maintenance is not a simple matter of stability. Alliances have to be actively managed to allow for changing external circumstances. The internal dynamics of the partnership are likely to evolve as the partners build experience. Here again trust is extremely important. Gary Hamel has warned value significantly and Nissan has grown strongly, relative to Renault, in both volume of cars and profitability. There is no doubt Nissan could now easily a ord to take over Renault but it is unlikely the French government would like to see a National Champion in foreign hands. Nissan could buy 10 per cent more of Renault shares on the open market to take its stake to 25 per cent. Under Japanese law this would mean the French company losing its voting rights in Nissan, and Renault directors could be removed from its board. They would then be able to undo the alliance. Potentially Renault could take over Nissan through further share purchases, but its finances are very weak. Alter[1]natively both companies could work together to cope with the dicult Ghosn situation, try to restore trust, and rejuvenate the alliance. Sources: D. Fickling, Separating Renault-Nissan would be bloody, Automotive News, 20 November 2018; T. Leggett and D. Palumbo, Carlos Ghosn: five charts on the Nissan boss scandal, BBC, 25 November 2018.

Question: using trust, co-evolution, organizational fit and strategic fit as tools, why is the Renault Nissan alliance in trouble, What would you propose for the future of the alliance?