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Nissan's Ghosn crisis

Five things to watch for in Nissan's results

Sales slowdown in China to challenge annual profit forecast

Slowing auto sales in China are a worry for Nissan.   © Reuters

TOKYO -- Nissan Motor will announce results for the quarter ended Dec. 31 on Tuesday, marking its first earnings announcement since then-chairman Carlos Ghosn was arrested and charged with financial misconduct.

Besides that continuing case and the tensions it has precipitated with French automaker Renault, Nissan, like other Japanese carmakers, is facing the fallout of the trade clash between the U.S. and China, the world's two biggest car markets. How are all these factors affecting Nissan's profits and management?

Here are five things to look for:

How is Nissan treating Ghosn's deferred pay?

Nissan is expected to book Ghosn's underreported pay of about 9 billion yen ($82 million) as an expense in the fiscal year ending in March. Such a move could be reflected in revisions to the company's forecast annual net profit, currently 500 billion yen.

Ghosn is alleged to have underreported his income in Nissan annual reports for the eight fiscal years through March 2018. Nissan itself has also been indicted on a charge of false disclosure of company information.

While Ghosn's remuneration is small compared with Nissan's overall earnings, the company's treatment of payments deferred until after his retirement could affect his case. Ghosn has said he was not obliged to disclose the underreported amounts because he never signed a binding contract with Nissan fixing the size of the deferred payments. However, if Nissan books the costs this year, that could suggest that the company considers the pay part of his contract. This would not support Ghosn's claim.

How is China's slowdown affecting financial results?

When it announced its global car sales for 2018 at the end of January, Nissan said sales in China had risen 2.9% to 1,563,986 vehicles. While that was a record total for the company, sales declined each month from September to December on a year-on-year basis.

Weaker car demand in China would inevitably affect Nissan, the top Japanese brand in the country. New car sales in China declined in 2018 for the first time in 28 years, sliding 2.8% from the previous year to 28.08 million vehicles. An economic slowdown and the end of tax incentives for small car purchases were blamed for the decrease in sales.

China accounted for 27% of Nissan's global sales last year, surpassing the 26% generated in the U.S. Tang Jin, senior research officer at Mizuho Bank, noted that Nissan's Sylphy is the second-best selling sedan in China. "Japanese carmakers have succeeded in cutting costs by standardizing their car platforms and their share of sales in China have risen," he said.

Nissan's position in China looks relatively steady, but a slowdown in the biggest market for the Japanese carmaker is still a concern in relation to its financial results.

What is the company's financial outlook?

Analysts will be watching to see if Nissan maintains its full-year profit guidance. Toyota Motor revised down its forecast last week because of write-downs of cross-held shares but maintained its full-year operating profit outlook.

Nissan's operating profit in the first half of the fiscal year was 210 billion yen, down 25% from a year before and only 38% of its full-year forecast of 540 billion yen. That was far off the pace it had expected.

Takaki Nakanishi, chief executive of the automotive-focused Nakanishi Research Institute, said: "There is the possibility of a downward revision. Ghosn didn't like to admit failure. As Ghosn is now out, the company's attitude may change."

In addition to China's slowdown, delays in the planned rebuilding of its brand in the U.S. remain an issue. Nakanishi said Nissan needs to free itself from the "bargain brand" reputation it has in the country. "Rebuilding in the U.S. market takes a long time, at least five years," he said.

Nissan Chief Financial Officer Hiroshi Karube will attend the results briefing on Tuesday, rather than Chief Executive Hiroto Saikawa. Markets will be watching to see if there is any change to Ghosn's high-dividend policy.

Is Nissan's brand being affected?

The Ghosn crisis highlighted Nissan's corporate governance shortcomings. Adding to the scandal with its chairman, Nissan in December also revealed a fourth incident of cheating on vehicle inspections. How these issues are damaging Nissan's brand and ultimately its sales are key points of interest.

Nissan's Note model had the top sales position in the domestic market in 2018 and the company has indicated domestic sales through the year were satisfactory. Nissan sold 615,966 vehicles in the home market in 2018, up 4.2% from 2017. But in December, sales declined 2.8% from a year earlier to 36,884 vehicles. This may indicate the company has some trust issues to overcome with consumers.

What happens to the three-way alliance with Renault and Mitsubishi Motors?

Ghosn was the chairman of Renault and Mitsubishi Motors as well as Nissan and essentially was the glue holding the alliance of the three companies together. Renault holds a 43% stake in Nissan while Nissan has a 15% in Renault. Nissan holds a 34% stake in Mitsubishi.

The alliance put the group into the top three auto players globally, alongside Volkswagen Group and Toyota Motor. The alliance companies work together closely on areas such as research and development and procurement.

Executives of the three companies have agreed on a committee decision-making system and to continue strengthening the alliance. But the outlook for the alliance seems uncertain with no strong leader moving into Ghosn's shoes amid tensions between Nissan and Renault.

Tensions between the two carmakers surfaced after Ghosn's arrest. Renault sought to name his replacement as Nissan chairman, but Nissan rejected this. Ghosn had been considering a merger between Renault and Nissan and he and others have speculated that his arrest represented a coup d'etat within Nissan to block the unification of the companies.

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