On the rocky road to marriage

A year ago it looked like mission impossible:rescuing Nissan after Renault had bought a controlling stake. Now Carlos Ghosn's recovery plan may be working, putting a full merger on the cards.

Since last July, Mr. Ghosn's job has been to rescue Japan's ailing car manufacturer; he is chief operating officer, but collects the title of president after this summer's general meeting. With the title goes a heavy responsibility. Nissan's plight is awful:losses in seven out of eight years, a domestic market share that drifted to an all-time low of 19% last year, and a pile of debt, totalling 1.4 trillion, plus 1.2 trillion in its financing division. 'It looked like mission impossible,' he admits, but we are on track to make profits in fiscal year 2000, ending next March. If we don't do that, we won't be credible.' [In 1999, Nissan's revenue was 6.3 trillion, and it made a loss of 30 billion.]

You do not have to be a rocket scientist to realise that a car maker able to make 2.4m vehicles a year in Japan, but producing fewer than 1.3m, is running its plants at a disastrously low level. To reach 75% utilisation, at which point most car firms break even, capacity needs to shrink by at least 30%. Under Mr. Ghosn's plan, Nissan's domestic capacity is to drop to a more realistic 1.65m units a year by 2002, maybe raising utilisation to 82%. First to go, by March 2001, will be the assembly plants at Murayama near Tokyo, the Nissan Shatai factory in Kyoto and the Aichi Kikai Minato plant in Nagoya. Next will be the Kurihama engine plant in Kanagawa and the Kyushu engine shop in Fukuoka.

Buttressed by his Renault experience, Mr. Ghosn is likewise ignoring internal opposition to his changes at Nissan. His view is that the situation had become so desperate under the old regime that it had lost all credibility, so he has carte blanche to sort things out. But he is no autocrat. When he arrived last July, he formed nine cross-functional teams (CFTs) of middle managers to come up with plans to transform the company. According to Kiyoaki Sawada, a senior finance manager leading one team, these are not like ordinary project teams. 'We had those before, but everybody just represented their department's interest,' he says. The new teams are different.

The CFTs were a device that Mr. Ghosn first used in America to bring about the merger of Michelin and another tyre company, Uniroyal Goodrich. He also installed them in Renault four years ago. He is hooked on the cross-functional approach, for several reasons. It works in a crisis, he says, because people can understand the need for rapid action. It makes people act outside their specific areas. 'In most companies people make a specific contribution to the company in their function,' he says. 'But it is not expressed in terms of profit, only in terms of performing their function better.' Instead Mr. Ghosn, who meets all the teams monthly, gets them to focus on profit creation, which he reckons lies in the interstices of different company functions. 'Profit is the most global aspect of a business, and it is crossfunctional.'

The first product of the teams helped to form the basis of the Nissan revival plan unveiled last October. In the land of lifetime employment (at least for many workers in big companies), Mr. Ghosn shocked Japan by announcing the closure of five factories employing over 16,000 people in Japan alone, cutting capacity by 30% to bring it more into line with sales and boosting utilisation rates to around the 80% rate.

Already machinery is being moved out of the doomed plants into those that will survive, and some workers have been transferred.Strong demand in the American market (and to a lesser extent in Europe) meansthatproductionisactuallyrunningabout10% higher than last year, so extra labour is needed in some other Japanese factories. Mr. Ghosn hopes to avoid actually sacking workers, which is expensive in Japan. The second phase of his plan - to rationalise the Nissan and Renault distribution and dealer networks in Europe - has just been announced, and aims to produce savings of about $1billion. Mr. Ghosn hopes to cut costs at Nissan's British plant, already Europe's most efficient, by 30%, butthinks more pain is inevitable.

Questions Assume: a. The second phase of the Ghosn plan does not come into effect until after the year 2000. The target operating profit for 2000 is 100 billion yen. Nissan earns 70 per cent of its revenues from vehicle sales and that other operations break even and will do the same in 2000. Average prices of vehicles sold are kept at the same level as 1999. Taxes are not included in the figures given.

Be sure to use credible resources during your review.

1 Calculate the average price of vehicles sold. Calculate average variable costs for 1999 and the target for 2000. Calculate the size of the overall Japanese vehicle market in 1999. If Nissan can reduce its variable costs in vehicle production by 5 percent in 2000 compared with its target, estimate the effect on profit and return on sales.