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Nissan's Ghosn crisis

Nissan downgrade shows risks of Ghosn's numbers-first line

Automaker books $80m loss for payments promised to ousted chairman

Nissan's Canton assembly plant in Mississippi. The carmaker's American strategy suffered missteps including the slow release of new light trucks.   © AP

TOKYO -- The pitfalls of ex-Chairman Carlos Ghosn's fixation on numerical targets became apparent in Nissan Motor's earnings downgrade Tuesday, as chasing rapid growth led the Japanese automaker off track in such markets as the U.S. and Southeast Asia.

The pursuit of benchmarks like a collective global sales tally of 10 million vehicles with alliance partners Renault and Mitsubishi Motors left Nissan's supply chains overextended while failing to stimulate earnings. It also led the company to offer discounts in the U.S. that ate into profits without plugging a sales gap.

Two decades on from the management crisis that led Renault to come to Nissan's rescue, the partnership that was intended to make the Japanese company more efficient has been shaken by Ghosn's November arrest on allegations including misreporting his pay. Nissan finds itself facing a critical moment once more as it reckons with the cost-cutting executive's legacy.

Nissan CEO Hiroto Saikawa showed a willingness to break from Ghosn's practices at Tuesday's news conference about April-December earnings at the company's Yokohama headquarters. The company slashed its operating profit forecast by 11% for the year through March because "market conditions are poor, and we believe trying to forcibly make up for a drop in sales in the fourth quarter would lead us to repeat past mistakes," he said.

Building Nissan's corporate value "is more than a single day's work," Saikawa continued, adding that management would "take to heart that we must work consistently and patiently."

Ghosn was installed at the top of Nissan in 2001 after Renault offered the Japanese company an investment lifeline in 1999. The former executive, who is widely credited with turning Nissan around, achieved results by publicly holding it to steep numerical goals -- a style referred to as "commitment management."

Cracks in that strategy began to show in 2011, when Ghosn set particularly ambitious targets -- among them expanding global market share to 8% from 6% and widening operating profit margin to 8% -- in a "Power 88" five-year plan, even as the auto sector was still feeling the effects of the global financial crisis.

At the time, "numerical targets were understood to be absolute, and that fostered a corporate culture where numbers had to be hit at any cost," said a person involved with Nissan sales and marketing.

The price of that drive shows clearly in Nissan's recent U.S. sales slump. Ghosn ally Jose Munoz, a top U.S. executive who resigned last month, pushed the company to simultaneously chase higher unit sales and greater operating profits, and as a result Nissan's American strategy began to lose its sense of direction. Its competitive position began to erode as the company made strategic missteps such as being slow to release new models for vehicles geared toward the mass market, including sedans and light trucks.

Nissan's U.S. sales fell by 6% in 2018 even as the market expanded by 0.3%, with sedans suffering a 17% drop. In an illustration of how numerical targets affected its decision-making, the company sought to check the decline in sales by offering discounts, but failed to plug the gap, and the price-cutting dragged down profits instead.

The focus on numbers has also affected development, in a troubling sign for Nissan's growth prospects. In the electric vehicle field, for example, the company was seen as a technological leader just a few years ago. But a focus on annual targets such as sales volume and new model releases permeated into that field as well, and developers failed to keep up with the demand for rapid growth. The company, which bled staff as a result, lost any lead it may have had in the area.

Nissan's Datsun Redi-GO compact hatchback car was launched in India in 2016. The Datsun brand for emerging markets has failed to catch on as an entry-level option.   © Reuters

Similar issues plague production. In particular, Nissan has zealously chased growth in emerging Southeast Asian markets, where it had high hopes for scoring additional unit sales. Its Datsun brand for emerging markets has failed to find its feet among lower-income consumers in India and Indonesia, for example, with its Indonesian market share coming in below 1% in 2018.

As Nissan rushed to expand or build new facilities, especially in Southeast Asia and South America, "logistics grew overstretched" in the words of one company officer.

Meanwhile, Ghosn also had a more direct impact on Nissan's April-December earnings as the company booked 9.2 billion yen ($83.3 million) in costs to cover an amount equal to what it promised to pay him in the future, but never logged. The move was an effort to address allegations that Nissan, as well as Ghosn, had misrepresented his compensation in the past.

In booking the costs, Nissan appears to be acknowledging, in effect, that it misrepresented Ghosn's pay in past securities reports. The company also plans to revise allegedly misleading past reports.

Normally, booking those costs would mean Nissan has an obligation to pay Ghosn. But the automaker intends to file for damages against him, pending the findings of an internal investigation due late next month, and does not expect to proceed with the payment.

Ghosn, for his part, insists the payments in question were never set in stone, so he would have had no obligation to report them.

Nissan faces pressure to reevaluate from the ground up its strategy of pursuing rapid growth along with Renault to dominate global rankings. With sales floundering in four critical markets -- the U.S., China, Europe and Japan -- the company's Tuesday earnings report marked its second straight year of downgrading guidance.

Renault Chairman Jean-Dominique Senard, recently appointed to succeed Ghosn, will head to Japan later this week to meet with Nissan executives.

The partners face a host of issues, including a possible rethinking of their capital partnership, which Nissan views as overly favoring the French company, and the appointment of a new Nissan chairman to fill Ghosn's seat. Though leaders on both sides have made a show of harmony in order to get started on negotiations, the strain in their relationship shows through.

Nikkei staff writers Masayasu Ito and Tatsuya Okada contributed to this report.

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