Ichiro Suzuki
In his 1986 book “The Reckoning”, David Halberstam wrote a parallel history and study of the U.S. and Japanese automobile industry, using Ford and Nissan as examples. Halberstam spent five years for research for this book and explained why Japanese car makers were winning,
The five year period he spent on this book, as it turned out, was the height of Japanese car makers as export machines. Cars were the focal point of trade frictions between the U.S. and Japan in the late 20th century. Japanese car makers began to expand into the U.S. market in the 1960s. Then amid surging gasoline prices in the 1970s, their fuel-efficient, subcompact cars gained market share in the U.S., whereas Detroit’s Big 3 sat back on gas-guzzlers that gave them fat profit margins. The legendary Ford president Lee Iacocca delivered the Mustang in the early 1960s, and captured the heart of American men but its low gas mileage affected them negatively in the following decades.
While Nissan dazzled during the period he wrote the book, the company’s fortune took a turn in the 1990s. The Japanese yen kept rising since the time the book was published. Non-Japanese competitors began to catch up with Japanese car makers in terms of fuel efficiency. Worse, Nissan failed to deliver cars that appealed to customers. With slumping sales, losses mounted on Nissan by the mid 1990s. Nissan's management was at a loss, unable to make a move. It was that time when Renault bought a large stake in them. It was before the Japanese government created a fund to bail out ailing companies. Without Renault, Nissan would have failed, throwing tens of thousands of workers onto the street without a job.
Upon acquiring over 40% stake, Renault sent Nissan Carlos Ghosn as COO, who was a reputed cost-cutter. Ghosn just did the job he was expected to do. Aggressive plant closures and layoffs lowered Nissan’s cost base dramatically, restoring the company’s profitability. Well done. What he did, however, wasn’t particularly spectacular. Anyone could have drawn that plan on paper. What needed to be done was evident, but Nissan’s management wasn’t able to axe their workers. Ghosn just did it.
Lowered breakeven point brought profitability back, but Nissan’s recovery proved to be rather one-off. After the first few years of turnaround, profit margin expansion has stalled. Nissan’s share price hasn’t exceed the levels seen in that turnaround period since then. Though the car maker survived the 2007-09 Great Recession its financial performance had been lackluster, without product offerings that captured the hearts of car buyers. Ghosn was a great cost-cutter but not a product man after all.
In November 2018, Ghosn was arrested for his alleged misconducts at Tokyo’s Haneda Airport upon his arrival from an overseas trip. He probably breached a law or two but the arrest has been believed as a coup by Japanese members of Nissan’s top management team. Without Ghosn, an anchor on Japanese executives was lifted and then political infighting began. Nissan’s business began to sink. For a six month period through September, 2024, Nissan reported a stunning 90% fall in its operating profits, burning alomost $3 billion in cash.
Near the end of 2024, Nissan and Honda announced a plan to consolidate their businesses to create the world’s third largest car maker. ‘Consolidation’ is a euphemism in Japan’s business world for takeover, making it blurry on the surface about who has the upper-hand. A month later, however, the deal was called off when Honda made it clear who had the upper-hand. Not consolidation, but takeover, this deal was going to be, Honda said, with a plan to make Nissan a subsidiary of Honda. This sounds pretty reasonable since Honda’s equity market capitalization was five times as large as Nissan’s. Honda was skeptical about Nissan’s cost-cutting plan, especially on laying off workers at factories in Japan. Management’s indecision to slash workforce is rather a common problem in Corporate Japan even amid their extreme difficulties.
The takeover proposal incensed Nissan’s management. They are too proud of their history. Nissan, originally meaning ‘Japan Industries’, was ‘the’ car maker in pre-WWII Japan. For Nissan, Toyota and Honda are upstarts in the post-war era. Nissan has gone back to where they were 30 years ago, bleeding badly, perilously close to the brink of bankruptcy, unable to make investments for its future in an industry that is changing rapidly. Acutely needing a helping hand from someone Nissan still is too proud to be acquired by anyone.
On the other hand, the trajectory of Ford, relative to Nissan, has improved since the book was written, and is proving to be far better than that of Nissan today even if the company hasn’t been doing spectacularly well. In 2006, Ford recruited Alan Mullaly from Boeing as CEO. He skillfully guided Ford through the sharpest economic downturn since the 1930s. Among Detroit 3, which was by then a correct name for what was formerly Big 3, Ford was the only American car maker that survived without taxpayers’ money. The U.S. government didn’t fully recover the fund it injected into GM through TARP (Troubled Asset Relief Program) upon its Chapter 11 filing in 2008. Ford is still holding onto investment grade rating on its bonds whereas Moody’s has recently cut Nissan bonds to junk with a negative outlook. Forty years later, the two car makers operate in two different worlds.
About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.
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