The return of Ghosn

WALKING UP AN INCOMPLETE CABLE-STAY bridge across the Arabian Sea connecting Mumbai’s suburbs to the city, Carlos Ghosn mirrored the centuries-old sentiment of invaders, traders, and marauders who first set foot in the country—amazement. It was 2007, and he was here to launch Renault’s first sedan, the Logan. Ghosn spoke of the immense opportunity of doing business in India: He could sell a lot of his cars, use local talent for research and development, and, in a first, learn India’s frugal engineering and manufacturing skills to change the way Renault-Nissan made cars globally.

Those were heady days for auto makers, and Ghosn was riding at the top of the wave. Still fresh from turning around the fortunes of Japan’s Nissan Motor, Renault-Nissan’s chairman was the most admired car executive in the business. When local partners, SUV maker Mahindra & Mahindra (M&M), shaved off 15% in manufacturing costs from an already stripped-down Logan, Ghosn saw the allure of using the trick in his $40 billion (Rs 1.9 lakh crore) global business.

In the past five years, Ghosn has been Renault-Nissan’s evangelist of emerging markets, selling the story to doubtful shareholders and the developed world. Renault holds 43% of Nissan, while Nissan owns 15% of Renault. In 2008, Renault picked up a 25% stake in Russia’s leading vehicle manufacturer, AvtoVAZ, which has a 23% share of the market. This means capacity for over 1 million vehicles, which it shares with Nissan. In the future, Nissan may also buy into AvtoVAZ. More recently, Renault invested over $1.5 billion in Brazil, and has also entered Morocco.

Ghosn’s philosophy is based on economics. “If the yen remains at today’s level, I say publicly that it will be difficult to justify any new project in Japan,” he told Fortune in October, after announcing Nissan’s Brazil investment (see interview). “Seventy-six yen to the dollar isn’t competitive for us. We’ll have to move jobs; we’ve said this to the [Japanese] government. We have to make decisions on new projects all the time. They’re going to go to China, Thailand, Brazil, India, [and] the U.S.”

Meanwhile, analysts voice concerns about the sustain­ability of European manufacturers’ growth in Latin America and Asia. “Europe is almost saturated; if you want to expand, develop your business, and apply your R&D to a larger base, you have to be exposed to the BRIC markets,” says an influential Paris-based auto investor.

In the BRIC region, Renault-Nissan doesn’t lead in any of the markets. And in India, there are more questions than answers. The two experimental tie-ups with local companies—one with M&M, and the other with motorcycle maker Bajaj Auto to make ultra low-cost cars—have fallen through. Visiting India to attend the country’s maiden Formula 1 race, Ghosn arrived late at night after Renault unveiled its small car, the Pulse. Late by two years, the car has to compete with Ford, Toyota, Volkswagen, and Honda, all of which have already launched similar cars. At a time when Ghosn ought to be fighting for pole position, he’s trying to ensure he’s still in the race.

Check out a key stat: Renault-Nissan sales, estimated at less than Rs 2,000 crore in India, are less than half the target of Rs 4,500 crore for 2012. Company officials refused to comment on revenue.

It’s not as if the alliance has been sitting idle in India. In four years, Renault-Nissan has built one large factory; developed an all-new small-car platform, the Nissan-V, which supports two new cars, Nissan’s Micra and Renault’s Pulse; launched several other models (Nissan Sunny, Renault Fluence, and Koleos); forged a now-defunct alliance to make engines with M&M; tied up with Ashok Leyland to make light commercial vehicles; besides, of course, the aborted partnerships with M&M and Bajaj to make cars.

Renault-Nissan has so far invested close to $1 billion (Rs 4,500 crore) in India, much of it into the factory at Oragadam, near Chennai. While all this appears compelling, at the end of it, the company has little to show for itself.

RENAULT STARTED OUT VERY DIFFERENT from what it is today,” says Sudhir Rao, chief operating officer of Renault India. “Customers are a little hesitant about our brand assurance. They love our product, but wonder what the company is going to be like. We have to rebuild their trust.” The Logan was a failure—it sold 44,000 cars in three years rather than the 50,000 the company expected to sell in the first year; the design did not appeal to buyers, and M&M was reluctant to share its dealer network as promised. (M&M declined to comment.)

Marc Nassif, Renault India’s CEO, who spent two years studying India out of the Paris headquarters before moving here in 2008, says Ghosn continues to be bullish. “He has a deep belief about India, and has spent time understanding what is peculiar to the country.”

Ghosn has understood the importance of cutting his losses. When it became clear that the Logan was a blot on Renault’s reputation, he decided to end the alliance. If the sedan was to be a success, Renault would have to pump in significant amounts in redesigning its aesthetics. Any such investment would have taken away the savings frugal engineering had imparted. M&M has since re-launched the sedan as the Verito.

Similarly, when Bajaj wanted to restrict its involvement to designing the car and not manufacturing it as originally understood, Ghosn cut ties. Investing money in such a project defeated his philosophy of how to use India. Though Ghosn wasn’t available for comment, Carlos Tavares, Renault’s chief operating officer, explains that India’s attraction lies in its ability to “optimise costs in sourcing, tooling, and manufacturing. That’s something the West has been discovering from India in the last few years. Ghosn calls this frugal engineering”.

India—as Ghosn has learned the hard way—is a market where every car maker (local or multinational) fights for itself. No quarter given, and none taken.
What may be particularly embarrassing for the Renault folks is that their old enemy, Volkswagen, has bested them. Ghosn must now redo his calculations, while pushing his brands in other BRIC markets. What he does from here on will determine if his penchant for the emerging economies is just lip service, or whether he still has some tricks up his sleeve.

Nissan may just be the brand to show the way. In 2009, when Ghosn admitted that Renault’s India plans had been hit by the previous year’s slowdown, Nissan stuck to its script and ensured that the Micra was launched the following year as planned. Though Micra’s sales here have been just over 21,000 cars since its July 2010 debut—that’s barely 1% of the compact car segment—it has exported more than five times that number. In some ways, this validates Ghosn’s faith in frugal engineering: India makes the Micra over 15% cheaper than it would cost to make it in the West. Tavares, who was with Nissan till this February before moving to Renault, says frugal engineering is a mindset, where you stay extremely close to customer needs. “You don’t go overboard in features beyond what the customer wants. It’s a matter of being extremely accurate, of creating engineering that is matching, and not more. That accuracy is something we can use anywhere in the world.” Nissan has sourced and exported over 1,600 components from India so far.

Some in the industry predict that Indian buyers will take to Nissan’s designs, over and above their existing leanings to the Japanese technologies of Suzuki and Honda. In the long run, it may even emerge as the successor to Maruti Suzuki. “It is not a threat currently,” says a former Ford India manager. “In terms of localisation and dealer reach, Nissan is not competitive against similar cars today. But its investments will show up well—it has the potential to be a big player in India. It also has a range of products globally.”

The combined weight of Renault-Nissan will make a difference in bulk input and components sourcing, and common production lines, like at Oragadam, where Micra, Sunny, and Pulse are produced. It should be able to eke out efficiencies of scale better than its peers.

AFTER 33 YEARS WITH Nissan, Kimonobu Tokuyama hasn’t lost his enthusiasm and curiosity. Back in 1978, in Tokyo, his one-point agenda was to go global despite not knowing English. The spirit was in the air, as the Hondas and Nissans sought a footprint in the U.S. Tokuyama, then all of 23, took aim carefully. “They said, ‘English is a must’,” he says recalling a conversation with Nissan’s recruitment team. “I said, ‘I am confident that I can pick it up’.”

Nissan hired him, and sent him to work in exports to West Asia. The experience gave Tokuyama his first insight into working with Pakistanis, Lebanese, and Indians in oil-rich U.A.E., Bahrain, Kuwait, and Oman.

Thirty years later, his appointment as CEO of Nissan Motor India was against the backdrop of the 26/11 attacks in Mumbai. It worried his family in Tokyo no end, but Tokuyama’s focus was on the Micra project. And while things have gone according to plan so far, the higher ratio of exports to local sales has also positioned the company as being indifferent to India.

Colin Dodge, who sits on the Nissan board, refutes this notion. He agrees that the Micra is cheaper to make here, but points out that an export strategy isn’t driven by costs alone. The frugal-manufacturing gains are often offset by lack of free trade agreements between India and the markets where Nissan exports the Micra.

Tokuyama adds that after China, India is very important for Nissan. “The U.S. and Japan are struggling; Russia is now recovering, and Brazil expects to increase. Nissan has been very successful in China. And Ghosn-san is closely watching our progress in India—not just with the Micra, but how quickly we can develop our dealer network because we know we can build high quality cars.” Tokuyama’s admiration for Ghosn is understandable: The Japanese feel innately grateful to him for having brought Nissan back into the reckoning.

The problem for Nissan—and Renault—will be the front end, considering their late starts. Ford and Toyota have been here more than a decade, while Volkswagen’s growth in sales and retail expansion have been spectacular. “Making the car is the easy part,” says Kapil Arora, partner, automotive advisory services of Ernst & Young, referring to overseas car makers’ conundrum in India. “They already have the engineering ability, the know-how, and a globally-admired product. The question is how you can get it out to this market, and convince people to buy it. Do the new entrants have the right focus on the front end?”

Dinesh Jain, CEO of Hover Automotive India, which markets and sells Nissan cars, defends the Japanese car maker. “There are American car makers that touched 50 dealerships after eight years.” But isn’t the small car market more competitive today than eight years ago? “Yes, the Japanese way of planning and taking decisions is meticulous and long drawn. There are no knee-jerk reactions, no on-the-spot decision making, but careful evaluation, and attention to detail and data before taking decisions,” he says.

There are virtues in Nissan’s slow-but-steady approach. In North America, it made inroads with small cars in the early 1960s. The Tennessee plant came up only in 1983, but even before that, Nissan had responded to the opportunities thrown up by the 1973 oil crisis, when its small cars rose in popularity. Today, it is among the top three car manufacturers in the U.S.

Is Nissan unhappy about the Micra’s indifferent sales in India? “I am satisfied with the progress so far,” says Tokuyama. “Compared to exports, yes it doesn’t look so good. But that is simply because the export market is much bigger for Nissan right now.” Nissan, he insists, is in India for the long haul.

Jain points to the discussions between Hover and Nissan. “It’s like a stairway: at every level, there is cross connectivity. Our operating people are in touch with Nissan’s operating people on a regular basis. If you look at the head office and back office, everybody from Hover speaks with somebody or the other at Nissan.” The jury is out on whether this kills Nissan’s agility or its decisions will be sounder on the long run.

Nissan’s other challenge is that few here really know what it stands for. Competitors Volkswagen and Toyota go to town with advertising and marketing initiatives, but not much is seen of Nissan. Ghosn, for one, believes in monozukuri, or the power of craftsmanship. In July 2007, Nissan started the Monozukuri Caravan in Japan as a way to share its passion in manufacturing with schoolchildren. The company organised lectures and activities with fifth graders. Nissan India has yet to bring in such levels of engagement. A Delhi-based auto consultant notes the value of such focussed brand positioning: “India had 2.4 million car buyers last year. It is likely to touch 5 million by 2015, and 9 million by 2020. What kind of share does Nissan want out of that? How will they build their brand to own their share of that sizeable car buyer base?”

Nissan depends on Hover to understand local needs. “If the owner has a chauffeur, rear-seat comfort is very important, even in a small car,” says Tokuyama. “Indians prefer lighter colours than dark tones; they like the lighter beige interiors than dark brown, apart from light exterior colours.” Hover had pointed out that dual sound horns work better, and the need to display the chrome on the steering wheel with the Nissan logo. Both inputs were accepted.

Nissan is also taking the battle to competitors through covert means. Take, for instance, its equal partnership with Ashok Leyland. The first offspring of this, aptly enough called Dost (friendship), a light commercial vehicle (LCV), will compete with Tata Motors’ bestselling LCV, the Ace. But the next, codenamed ‘X11M’, will be a utility vehicle, to be launched in mid-2012. The X11M is meant to be Nissan’s contender in the competitive multi-utility vehicle (MUV) segment, dominated by M&M, Tata Motors, and Toyota. These two, and a third vehicle nobody is willing to talk about just yet, will be manufactured from the Nissan-Ashok Leyland joint-production facility at Pillaipakkam in Tamil Nadu.

Nissan’s taking the same, stolid approach here as well. The development of each variant of Dost (ambulance, goods carrier, etc.) has taken nearly 18 months. But as V. Sumantran, executive vice chairman of Hinduja Automotive, holding company of Ashok Leyland, says, agility, or its lack thereof, is an industry-wide phenomenon. “Are we agile enough? No,” he says. “Our industry still has the problem that the Chinese don’t: We invest on the basis of commercial cost of capital. So, we have this balance between what we build and what we harvest. Agility takes a while.” He adds that Nissan, unlike others he has seen, prefers to painstakingly build the right product, rather than rush in to capture the market.

SINCE THE ALLIANCE WAS formed in 1999, Renault and Nissan have mastered the art of supporting each other in different markets, though they often compete as well. Tavares talks about how Renault sought the help of Nissan’s Chinese partner, Dong Feng Motor, to make headway there. “We are hoping to sell 25,000 Renault cars there this year.” Usually the more dominant player supports the other one. So if Nissan is the bigger brother in America or China, it’s Renault in Europe. Each analyses the other. “We both gain because we have an internal benchmark without any complacency,” says Nassif, adding that Nissan makes for a good internal competitor that the French car maker trusts.

The alliance extends to production as well. A Renault plant can be re-engineered to make Nissan cars, and vice versa. So, Renault’s plants produce Nissan vehicles in Korea (Almera Classic) and Brazil (Livina), whereas Nissan assembles Renault vehicles in South Africa (Sandero), Mexico (Clio), and Spain (Trafic). The Koleos, a premium crossover recently launched in India, had been designed by Renault, but developed by Nissan, and uses advanced Nissan 4x4 technology. It is sold by Renault globally.

Expect the same spirit in India plus more. The partnership has been deepened as never before with Renault-Nissan Automotive India, the company that owns the Oragadam facility. “The factory in India has turned out to be an experimental showcase for Renault and Nissan globally,” says Dodge. With one manufacturing line of the first phase in India, Renault and Nissan can today make up to 200,000 cars every year. The second line will be up before 2013, for another 200,000 cars.

Originally, both companies were to share the investment equally, but after the slowdown in the West, Nissan picked up 70%. Both auto makers will simultaneously produce cars on the same manufacturing line. It is possible to make up to eight outer shells of cars across four platforms because of Renault-Nissan’s ‘Alliance Integrated Manufacturing System’. They have also jointly set up the Renault Nissan Technology and Business Centre in Chennai that’ll carry out engine design and research.

“Nissan’s specialty is petrol engines for big and small cars; it provides inputs on the small-car engine to Renault, and that is how we have supported each other. Renault is a specialist in diesel engines,” says Kou Kimura, MD and CEO of Renault-Nissan Automotive India. For example, the diesel Micra has a Renault engine beneath its hood. This worked sweetly for Nissan: When petrol prices soared, it sold more diesel Micras. After India, the collaboration will be replicated in Morocco.

A lot of the common insights are gleaned at the engineering centre in Chennai. The commonalities extend to the supplier base for input purchases. And the shared workforce in Oragadam is also crucial. “When I came here, I saw many things were completely different from Japan,” says Kimura, reinforcing the theme of frugal engineering. “Indians enjoy the circumstance [of limited resources]; they don’t cry and crave. I am impressed by their mindset of how to avoid spending too much money. This country thinks a lot before spending money. I have learned frugal engineering from Indians.”

The Japanese systems have matured—everything is standardised, everything is clean, quality is excellent, he adds. “But by Japanese standards, we may take three or four stages to achieve a specific result. The Indians can do it in one.”

THE NEXT FEW YEARS will be critical if Ghosn is to maintain his reputation as auto’s wunderkind. The Paris-based auto analyst and investor says that investors will back the frugal investment policy only as long as it is not at the expense of business development. “Right now, it is a case of Renault going too far with frugal engineering. We are seeing a lack of product momentum.” Others ask Ghosn to explain why jobs are moving out of Europe to developing markets.

Unfortunately for Ghosn, given the state of the markets and economy in the West, such questions don’t have easy answers. After a calamitous 2008, sales in France declined by 4% in early 2009, while the fall in Britain, Italy, and Spain ranged between 27% and 30%. While the North American market has shown some positive growth in recent quarters, Europe has stayed flat, with fears of a further downturn. In this context, Ghosn may not have a choice but to make bets like India work.

Tavares wouldn’t like to characterise any of this as ‘pressure’, but rather as ‘strategy’. “We are developing our portfolios and presence in the world as fast as we can.” After what happened with M&M and Bajaj, much of Renault-Nissan’s journey will be solo. And if there is one thing Ghosn has learned from India, it is that there is many a slip between the cup and the lip.

After Red Bull Racing’s Sebastian Vettel won the maiden Indian Grand Prix, Ghosn beamed every time someone came up and shook his hands. Vettel’s car, after all, ran on a Renault engine and Ghosn lapped up all the praise. Now, his twin outfits will have to do their own Vettel in India.