TOKYO/NEW YORK -- In the first week of October, the shutters suddenly came down at Infiniti of Hanover. The dealership in the Massachusetts town "had been losing money month in, month out for the last three years," said Christopher Sanner, a sales manager at the local retailer, but it still came as a surprise to employees when it suddenly closed for good.
Sales of Infiniti, a luxury brand owned by Nissan Motor, had been underpinned by heavy discounting that undermined profits. "Clients were getting really aggressive deals; that's not sustainable in the dealer market," Sanner said.
Perhaps a bigger problem was that the stock felt dated. Newer models lacked the technology of less prestigious brands, deterring new buyers. When customers' leases on older cars came up, they saw little reason to stick with the brand.
"If things don't change quickly, Infiniti will be to Nissan what Pontiac was to the GMC," Sanner said. General Motors killed off the 80-year old Pontiac brand in 2010.
Infiniti's struggles in the U.S. are indicative of a huge problem for Nissan. It is nearly a year since then-Nissan Chairman Carlos Ghosn was arrested on suspicion of misusing the company's assets and underreporting his earnings. Ghosn's fall from grace, and the subsequent resignation this September of CEO Hiroto Saikawa -- for receiving an improperly inflated bonus -- exposed serious governance issues within the automaker. In July, Nissan announced that its first-quarter operating profit was down 99% from last year, and announced cuts to nearly 10% of its global workforce.
On Oct. 8, Nissan finally named its new CEO and a new management structure, with Makoto Uchida, the head of the company's Chinese business, due to take on the role in 2020 at the latest. He inherits a company beset with challenges.
Internal factional battles that began before Ghosn's arrest are unresolved, as is the future of Nissan's fractious relationship with its biggest shareholder, Renault. Nissan has to rediscover its ability to innovate and compete in an automotive industry that is rapidly shifting toward autonomous and electric vehicles -- and beyond that, toward entirely new modes of mobility. And, in the immediate term, it has to move quickly to reverse the decline in its American business before it becomes terminal.
Even before the Ghosn affair dragged Nissan's governance failings through headlines around the world, the company's brand had been tarnished in the U.S. by high-profile scandals. In 2016, the company's then-joint-venture partner, Mitsubishi Motors, admitted that it had manipulated fuel-efficiency tests on several models of vehicles, including some that it manufactured for Nissan. In 2018, the company had to recall 150,000 vehicles in Japan after it found that unqualified staff had been performing final inspections before cars were sent to dealerships.
Under Ghosn, Nissan's strategy to crack the U.S. market was to buy market share through heavy discounting and a focus on low-margin fleet sales.
Starting in 2011, the company offered dealerships deep discounts on some models, in pursuit of a 10% share in the North American markets. In 2018, the company was offering incentives averaging 16.7% of the price of its vehicles, compared to an industry average of 10.6%, according to data from J.D. Power, an analytics company. Vehicle sales have more than doubled to 1.4 million in the U.S. since 2010, but profits sagged. In May, Saikawa told reporters that margins in the U.S. were as low as 1% to 2%.
The strategy angered dealers, because the deep discounting and fleet sales were seen as cheapening the brand. "It would have been more successful if the company had refreshed the product on a more timely basis, and if the company hadn't ruined the residual value on some of its products by selling into daily rental fleets as much as they did," said Richard Hilgert, senior equity analyst for automotives at Morningstar.
The Nissan network in the U.S. has also struggled due to frequent management reshuffles. There have been numerous high-level changes, including chairmen Denis Le Vot and Jose Munoz, who left to join Hyundai Motor, and Vice President for Sales, Billy Hayes, who was the point person for dealers. While Le Vot moved to another position within the Nissan-Renault alliance, Munoz, who resigned in January, was known as a Ghosn ally whose departure was seen as a bloodletting of the former CEO's loyalists. Alliance partner Mitsubishi and Nissan's luxury brand Infiniti also lost top executives this year, including Mitsubishi's chief operating officer and product strategist.
"Even with all the scandals, Ghosn had a lot of followers, and those executives were his people. All that turmoil never did well for sales," Daron Gifford, head of automotive consulting at Plante Moran in Michigan, told the Nikkei Asian Review.
"Even with all the scandals, Ghosn had a lot of followers, and those executives were his people. All that turmoil never did well for sales"Daron Gifford, head of automotive consulting at Plante Moran in Michigan
Turning the American business around will likely be a multiyear project. In May, then-CEO Saikawa announced an end to the Ghosn-era strategy. He said that the company would aim to reduce fleet sales from around 40% to under 17% of total sales by 2022, and focus on profit over market share.
Pulling back on incentives is likely to push sales totals lower -- the company's April to August figures show a drop of more than 6% in unit sales, while sales of the Infiniti luxury brand fell by more than 40% in September, year on year.
Analysts said that dealers want price stability and incentives to help cushion the blow of falling sales. "It's going to be expensive in the short term, but it's better than losing and bankrupting dealers in the long-run," Gifford said. "Dealers want to stop hemorrhaging first, then they can focus on profit."
Nissan has said that it believes profits will begin to recover from next year. Analysts are split on whether that is possible. Moody's said in May that declining profitability in North America, Nissan's largest market outside Japan, dampen hopes of an earnings recovery for the next 18 months, while S&P expects Nissan's losses to bottom out this fiscal year.
UBS Securities analyst Kohei Takahashi told reporters on Oct. 10 that, contrary to the responses he has been getting from investors, he continues to rate Nissan stock as a "buy," partly because two of the company's well-received SUVs -- namely the Rogue in North America and Qashqai in Europe and China -- are expecting full model changes next year.
Refreshing the product line has to be a core priority for Nissan in the U.S., as a regular complaint among dealers has been that the company's vehicles are dated, relative to their competitors. Of Nissan's three bestselling models in the U.S., only Altima was updated last year. The other two, Rogue and Sentra, have not been refreshed in more than five years.
"I do believe the biggest reason that we're having such a huge problem is the lack of product," said one Infiniti dealer in northern California, where four dealerships have shut in the past year. "Product is still king, and product is what drives consumers into the stores. ... You can throw money into cars, as much incentive money as you want, [but] if the product isn't there, you're not going to grab the consumer."
Analysts said that Nissan's focus on volume over innovation has led them to underspend on research and development, allowing their competitors to steal a march on them in areas such as cockpit design. Other SUV makers are increasingly replacing their dashboard dials and buttons with touch-screen displays, and integrating other services, such as Apple CarPlay, into their in-car entertainment systems. Some Nissan models do include CarPlay, but Infiniti vehicles do not. Customers often questioned this, said Sanner, the dealer in Hanover.
"It's not a matter of them actually using it, but people are questioning their dollar. I really never lost a sale to, 'It doesn't have Apple CarPlay.' I lost a sale where [they said], 'you guys are so outdated,'" he said. "What it translates as is, 'I'm not getting a good deal.'"
Nissan's challenges with innovation are particularly concerning because the whole automotive industry is undergoing fundamental shifts in technology. Even in areas where the company did manage to take an early lead, it is now falling behind.
Electric vehicles are a case in point. Nissan was something of a pioneer, unveiling the mass-market, all-electric Leaf model in 2010, well ahead of most of its competitors. That should have positioned it well for the present day, as governments begin to aggressively regulate to force a shift away from fossil fuels.
France and the U.K. have both announced plans to ban sales of internal combustion engines by 2040, and others in the EU are likely to follow suit. The Japanese government has set a target to make EVs and plug-in hybrids account for 20% to 30% of all vehicle sales by 2030. Boston Consulting Group predicts that by 2035, sales of electric vehicles will make up 40% of the automotive industry's profits, up from just 1% in 2017.
However, it is Nissan's competitors who seem better poised to take advantage. "Tesla has already overtaken Nissan," said Seiji Sugiura, senior analyst at the Tokai Tokyo Research Institute.
According to a report issued in April by the Edison Electric Institute, a trade association, Tesla's flagship Model 3, which was released in 2017, has already surpassed Nissan's Leaf in U.S. sales, with 163,971 vehicles against 132,227. While Nissan is still ahead of Tesla globally, the American company is opening up its new plant in Shanghai at the end of the year, which is expected to boost further its sales in the world's largest automotive market. In 2019, Nissan sold its battery unit, the core of any EV business, to Chinese renewable energy company Envision Group.
In May, then-CEO Saikawa forecast that EVs and hybrid cars, known at Nissan as e-Power, will account for 30% of the automaker's global sales in fiscal 2022, up from 4% in 2018.
Internal struggles within the Nissan-Renault alliance are partly to blame for the Japanese carmaker taking its eye off the ball, said one industry expert who has worked with Nissan. The companies were supposed to be collaborating on EV development, but "Nissan's road map for EVs and electrification is unclear after all this turmoil with the partner," the analyst told Nikkei.
Cracks in the alliance could also herald problems for Nissan as it faces down another major shift in demand for cars.
The advent of ride-hailing has created a new category of point-to-point transportation as a service, meaning that car ownership is less attractive to urban consumers, who now have access to affordable, always-available transportation served through mobile devices. The next generation of those services could well be fully autonomous, which would require a huge shift in the technology being developed and deployed by automakers. The immediate future of the car industry will rest as much -- if not more -- on digital innovation, rather than on the mechanical innovation that most manufacturers have focused on for the past century.
"As automobile manufacturing becomes increasingly connected and driven by artificial intelligence, many traditional automobile manufacturers will struggle," said Michael Wade, professor of innovation and strategy at IMD Business School. "Japanese automakers have been quite slow to respond to the challenges facing the industry, like full electrification, autonomous vehicles, and ride-sharing."
This evolution has opened up the auto industry to entirely new players. China's technology leaders Baidu, Alibaba Group Holding and Tencent Holdings have all invested in self-driving vehicle projects and startups, as have ride-hailing companies Didi Chuxing and Uber Technologies. Google spun out its Waymo autonomous vehicle project in 2016, but the company is still owned by the company's parent, Alphabet. These tech companies have competencies in artificial intelligence and sensors that few legacy automakers can match.
Nissan and Renault announced in June that they would partner with Waymo to develop autonomous driving services in Japan and France. The alliance automakers also invested in Chinese self-driving startup WeRide through their venture capital arm.
However, analysts are skeptical about Nissan's approach. "Today we partner with rivals for the next-generation technologies," said the industry analyst who has worked with the company, pointing to BMW's surprise announcement of a partnership with Daimler in February, and Volkswagen's $2.6-billion investment in Argo AI, a self-driving startup backed by Ford Motor. Toyota Motor has been investing in Uber since 2016.
Nissan's collaboration with Waymo lacks concrete plans, and came too late, the analyst said, adding that the Japanese company does not play well with others. "Nissan's alliance with Renault is strained. ... It is unclear if Nissan can cooperate with other players in the automobile industry."
Partnerships and cooperation are thornier problems for Nissan than they are for most other carmakers. The non-dit evident -- the elephant in the room -- for Uchida as he takes up his position is the future of the alliance with Renault, which first took a stake in Nissan in 1999, when the Japanese carmaker was close to bankruptcy. The two companies share many functions, including elements of their supply chain, and are supposed to cooperate on research and development.
Nissan has long argued that the balance of shareholdings -- Renault holds 43% of Nissan, Nissan holds 15% of Renault -- no longer reflects the companies' relative scale and importance. Renault, whose major shareholders include the French government, have resisted that, and its management have several times pushed for deeper integration, up to and including a full merger. Renault's chairman, Jean-Dominique Senard, is also in favor of the company merging with another rival, Fiat Chrysler Automobiles, to create a huge global group. Nissan's management has resisted even public discussion of a merger.
The choice of the new CEO was widely seen as an augury for the future shape of the relationship between the two companies.
Of the three men on the shortlist, Renault's favored candidate was understood to be Ashwani Gupta, the Indian-born chief operating officer of Mitsubishi Motors. Some on the Japanese side preferred Jun Seki, an insider who has worked for the company since 1986 and has been overseeing its recovery strategy. Both Seki and Gupta were given senior roles in the reshuffle.
Uchida, who joined Nissan in 2003 after a decade at the trading company now known as Sojitz Corp., is a compromise candidate. Currently the head of Nissan's Chinese joint venture, he has international experience, speaks English, and, crucially, has a degree of separation from the Ghosn era and the tangled governance in Tokyo that enabled it.
There have also been changes at Renault. Just three days after Nissan's announcement of the new management, the French company abruptly ousted its CEO, Thierry Bollore, who was considered by some Nissan executives to be too close to Ghosn.
Management changes on both sides may clear a path for the two partners to find new ways of collaborating, analysts said. Although a full merger remains a very remote possibility, the future of the two companies, which are deeply intertwined, financially and operationally, will hinge on their ability to work even more closely together.
"Nissan cannot consider a future without Renault," said the industry insider. "They have no choice but to tighten up their alliance to compete with other rivals."
Additional reporting by Nikkei Asian Review chief business news correspondent Kenji Kawase in Tokyo.