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Nissan-Renault alliance

Twin storms batter struggling Nissan-Renault-Mitsubishi alliance

French automaker reports record $8.6bn net loss for H1 hit by coronavirus and Nissan plunge

The new coronavirus pandemic is making it even harder for the three allied automakers to recover. (Photo by Kei Higuchi) 

TOKYO -- It has only been a few months since the carmakers that form the Renault-Nissan-Mitsubishi alliance announced some of the most dire annual results in their history -- but anyone who thought that marked the end of their trials has been roundly disabused of the notion.

Renault announced Thursday that it posted a record net loss of 7.3 billion euros ($8.6 billion) for the January to June period, 65% of which was due to Nissan Motor's loss -- the French company has a 43% stake in the Japanese automaker.

"We are in a complex, difficult situation. We all are, but Renault took the COVID heat once we were already feverish," said Luca de Meo, Renault's chief executive, who took over the role earlier this month, in an online news conference.

"We will move the whole system from volume to value," de Meo said, adding that the automaker will unveil its new business plan for the next six to seven years in January next year.

Renault reported its first net loss in 10 years in fiscal 2019. Although it still has not given guidance for this fiscal through December, it is highly likely that its net loss for the full year will exceed last year's 141 million euros.

Nissan Motor acknowledged this week that its loss for fiscal 2020 was on course to be every bit as bad as the 671 billion-yen ($6.2-billion) net red ink it posted last fiscal year, with a huge deterioration expected in its operating loss, from 40 billion yen to 470 billion yen.

Meanwhile, fellow Japanese automaker Mitsubishi Motors has also warned the market that it expects a 360 billion-yen net loss, the largest since fiscal 2004 when its failure to announce recalls shook the company.

The combined announcements show how production disruptions and sluggish car sales triggered by the novel coronavirus pandemic have hammered many global automakers. But the Franco-Japanese alliance is being hit particularly hard just when it is trying to chart a new course with an overhauled corporate strategy and a swerve away from the go-go approach of former leader Carlos Ghosn.

Nissan's estimated 470 billion-yen operating loss for this fiscal year is "more than expected," Toshihide Kinoshita, a senior analyst at SMBC Nikko Securities said in a report, adding that the company's "struggle is likely to continue for a while." Nissan shares were down 10.4% Wednesday.

Comparing share prices at the end of 2019 before the coronavirus began to spread in earnest and as of July 28, the decline was highlighted by a 37% drop in the market capitalization of the three-company alliance, compared to an 11% drop for Toyota Motor and a 13% fall for Volkswagen.

And this year offers no respite. The overall business will again be "very severe," acknowledged Nissan chief executive Makoto Uchida at a news conference Tuesday. Figures show that Nissan's vehicle sales have been impacted from the virus more than its peers. Its sales in the U.S. were down 47% in June. That is in contrast to Toyota's sales, which fell 26% in that month, and Honda Motor's decline of 16%, which seem to suggest a bottoming out for both companies.

Under the leadership of Ghosn -- who was arrested by Japanese authorities in November 2018, indicted on charges of financial misconduct and fled to Lebanon in December 2019 while out on bail -- Nissan's sales ambitions resulted in excess production capacity in emerging markets. It also cheapened the brand over the past few years, particularly in the U.S., due to its dependence on discounts, and reduced investment for new car development. The lack of brand strength is likely to still be impacting current lackluster sales.

The company is seeking to sell 4.12 million vehicles this year, down 16.3% from the last fiscal year. The company says vehicle demand will "slightly surpass" previous year levels in the January-March 2021 period, according to Uchida, suggesting the impact of the virus will be long-lasting. According to FactSet, the market expects Toyota and Honda to go from operating losses in the April-June period to profitability in the July-September quarter.

Nissan's sales weakness directly impacts to the alliance cash flow. The Yokohama-based company posted a negative free cash flow of 815 billion yen in its auto business in the April-to-June quarter, and expects that to turn positive only in the second half of fiscal 2021. The cash loss would further jeopardize the automaker's investment in growth areas including autonomous driving and electrification, the company's core technologies which are expected to lead the tripartite grouping.

"The 20-year-old alliance has failed to show its value, and the performance of the member companies is worse than typical automakers," said Seiji Sugiura, a senior analyst at Tokai Tokyo Research Institute. Sugiura stressed that the companies have been involved in each other's production only on a limited basis, and there has not been major cost savings in their capital investment that could be reduced under one company.

The alliance in May unveiled a midterm plan to deepen cooperation, seeking to cut investment costs per vehicle model by up to 40% through greater use of common platforms and parts. It has also put different members in charge of specific regions, vehicle development and technology, using the "leader-follower" scheme.

Mitsubishi, meanwhile, took a step to make more use of the alliance. It announced on Monday that it will halt new car launches in Europe and said in its newly revealed midterm plan that it will focus on Southeast Asia, the company's core region indicated within the alliance's plan. The automaker sold its plant in the Netherlands in 2012 and continued to export cars to Europe, but the pandemic triggered it to make a further push for rationalization. It sold 215,000 vehicles in Europe in fiscal 2019, nearly 20% of its total.

Nissan and Renault, on the other hand, have not stated clear strategies outside their leading areas. While Nissan will lead the business in China, North America and Japan, ambiguity remains in its business in Europe, for example.

In its midterm plan unveiled in May, Nissan said it will reduce production capacity by 20% by fiscal 2023 and launch 12 new models globally in over 18 months. While it also aims to cut 300 billion yen from its fixed costs, Sugiura says more drastic cost-cutting measures will be needed for the company to navigate the virus-hit industry landscape.

"This plan was established before the impact of the pandemic became apparent," Sugiura said. "Considering the company and the alliance are already lagging behind competitors and the impact of a potential second wave of infections has not been included, much more should be required" for Nissan to weather the twin storms of COVID-19 and business restructuring, he added.

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