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Five things to know ahead of Nissan's shareholders meeting

Financially battered carmaker tries to win over investors with midterm plan

Nissan CEO Uchida will lay out the automaker's plans, including restructuring steps such as cuts to production capacity, at its annual shareholders meeting on Monday.   © Reuters

TOKYO -- Nissan Motor will hold its annual shareholders meeting on Monday, after releasing on May 28 its midterm plan through March 2024 under the direction of CEO Makoto Uchida, who has been in charge at the Japanese automaker since December last year.

Nissan posted a net loss of 671 billion yen ($6.2 billion) for the year ended March, its worst result in 20 years. While Nissan will try to persuade investors to stick with the company with the newly announced restructuring measures, the market consensus is that the financially battered carmaker still faces challenges.

Here are five things to know ahead of the meeting.

Why has Nissan performed so badly?

Nissan continues to wrestle with former Chairman Carlos Ghosn's ill-fated expansion strategy; the massive annual loss last fiscal year was driven by 603 billion yen in costs associated with restructuring and impairments.

Ghosn, who was arrested by Japanese authorities in November 2018 and fled to Lebanon in December 2019 while out on bail, built up Nissan's production capacity in emerging markets, including India and Indonesia, over the previous decade, aiming to lift sales.

But these markets failed to become a pillar of Nissan's business, with sales in Asia excluding Japan and China remaining small. North America, China and Japan are the automaker's three largest markets.

In North America, Nissan relied heavily on dealer incentives, hoping to win market share. But this undercut its profitability and cheapened the brand, leaving it unable to shift cars without massive discounts.

Outdated models compared with those of its competitors have also alienated Nissan dealers and customers, and global sales have continued to fall from a peak of 5.77 million vehicles for the fiscal year through March 2018. In the latest fiscal year it sold 4.93 million cars.

Confusion over Nissan's alliance with France's Renault, and a management reshuffle, created more turbulence. The alliance came under strain following Ghosn's arrest, and Renault's proposed full merger of the two companies. The French carmaker owns a 43.4% stake in Nissan, while the Japanese company holds 15% of its French partner but no voting rights.

The outbreak of the new coronavirus has hit Nissan hard, shrinking demand and disrupting supply chains. But the automaker was already suffering from sluggish sales before the pandemic.

What does the new midterm plan focus on?

The new plan aims to rationalize Nissan's business. The company will slash its global annual capacity by 20% to 5.4 million vehicles and aim to run its plants at 80% of capacity.

According to research compiled by Koichi Sugimoto at Mitsubishi UFJ Morgan Stanley Securities, the automaker's factories ran at 70%, on average, worldwide in 2019; its factories in China ran full-tilt, at 103%. But those in Thailand and South Africa operate at well below 50%, underlining the automaker's excess capacity.

The company will drop a fifth of its current models, bringing the number to less than 55. It also aims to launch 12 new models globally in the next 18 months and shorten their life cycle to less than four years. It will also try to cut 300 billion yen from its fixed costs by focusing on core areas.

The automaker, together with Renault and third alliance member Mitsubishi Motors, unveiled a plan to deepen their cooperation, seeking to cut investment costs per vehicle model by up to 40% through greater use of common platforms and parts.

The alliance has put one automaker in charge specific regions, vehicle development and technology. Nissan will take the lead in China, North America and Japan, as well in as autonomous driving. The company revealed it also plans to close plants, including one in Spain.

The company is positioning itself for a rebound. On Tuesday it will launch the Kicks crossover utility vehicle in Japan, its first new model in two and a half years, excluding ultrasmall kei cars. It will unveil a new electric vehicle, the Ariya, in July.

How will Nissan deal with Asia in the coming years?

Nissan is pinning much of its hope for future growth on China. Uchida described it as "the region where [the company] is continuing to operate in the healthiest way." The company, which has a joint venture in China with Dongfeng Motor Group, had a share of 6.4% in fiscal 2019, up 0.5 point from the previous year, while the auto market as a whole shrank 8.6% in the country.

Japan also counts as a core region for the alliance, but the biggest changes for Nissan will come elsewhere in Asia. It plans to close plants in Indonesia and consolidate production in Southeast Asia at its hub in Thailand.

Ghosn saw Indonesia as a strategic market for Nissan's expansion, opening its second plant there in 2014 at a cost of 33 billion yen ($310 million). The plants, with an annual capacity of around 250,000 vehicles, made models such as the Datsun, a brand for price-sensitive customers in emerging markets.

But the Datsun and all other Nissan models combined only managed a market share of just under 2% in Indonesia in 2019, according to data from the Association of Indonesia Automotive Industries (Gaikindo), well below Toyota Motor's 32% or Daihatsu Motor's 17%.

Nissan will also withdraw from the South Korean market and pull back in Southeast Asia.

Nissan plans to shutter its two plants in Indonesia, consolidating production in Southeast Asia at its hub in Thailand.   © Reuters

Is recovery possible under the midterm plan?

While analysts believe the restructuring demonstrates Nissan's determination to stop the bleeding, the consensus is that it falls short of what is needed for the automaker to bounce back.

The impact of the restructuring may be "not as big as it appears," said Seiji Sugiura, a senior analyst at the Tokai Tokyo Research Institute, as the planned reduction in capacity includes much that is already idle, including the Indonesian plants that have already been shut down.

The company produced just under 65,000 cars last year at its plants in Spain, which ran at just 31% of capacity, according to Mitsubishi UFJ Morgan Stanley's Sugimoto. Its Barcelona plant, which the company seeks to close, makes commercial vehicles and small trucks.

Nissan's restructuring costs are likely to rise, including those related to job cuts on top of the 12,500 already announced last year. At the May 28 news conference, Uchida said the automaker will negotiate with labor unions and local authorities over the reductions.

How does the market see Nissan's streamlining effort?

Nissan's stock price has risen slightly since the announcement of the midterm plan, as investors assumed all the negative news about the carmaker was already out.

However, looking at the broader trends among automaker stocks in Japan, which have sold off since the start of June due to the stronger yen, Nissan has fallen more sharply than Toyota or Honda Motor. Nissan is seen as less resilient than its peers.

According to QUICK FactSet, analysts believe Nissan will not return to profitability until the second half of the year ending in March 2022, as the automaker revealed that its free cash flow in its auto business would turn positive only then.

Tomonori Ohata, an analyst at Mizuho Securities, believes Nissan's operating profit margin on sales will only reach 0.5% that fiscal year, compared to the company's forecast for 2%. While the recovery from the pandemic and new model sales will contribute to higher profits, "costs will also increase" as the company looks to compete in advanced technologies, Ohata said in a recent report.

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