Carlos Ghosn has already turned Nissan around in Japan. Now he has his sights on China... unfortunately for him he's not the only one
Brazilian-born and employed by a French company, Carlos Ghosn seemed an unlikely agent of change in Japan when he arrived from Renault SA three years ago to reinvent Nissan Motor. Since then, he has artfully proven the sceptics wrong. Question: Will he do the same now in China?
This is not a man who thinks small. Ghosn's new venture on the mainland is huge, in size and implications. The $1bn Nissan just agreed to pay for a half-interest in a new venture with the state-owned Dongfeng group is among the biggest investments any foreigner has made in a Chinese company.
Nissan is buying into Dongfeng directly and will be among the first foreign investors to share management control with local executives.
China hinted it was thinking along these lines just a couple of months ago. Previous joint ventures with foreign companies were limited to the manufacture of designated product lines and involved no handover of management responsibilities.
Dongfeng Motor, as the new company is to be called, is scheduled to begin producing passenger cars at a plant in Guangzhou next spring. We should watch for indications of a Ghosn-class makeover from day one. Management appointments will be split evenly. Nissan will name the chief executive and Dongfeng the chairman.
I hope Ghosn succeeds. No foreign executive has ever had this kind of power in China. It will be a big step for an executive who sees the mainland as his 'No. 1 geographic priority.'' It will also be a leap forward for China if a foreign executive restructures a domestic company to survive in the open environment that is supposed to emerge with China's membership in the World Trade Organisation.
'There has never been anything like this in China,'' says Kenneth Courtis, the vice chairman in Asia for Goldman Sachs, which did the merchant banking on the deal. 'This will become the model for holistic restructuring in post-WTO China.''
It could be, I'll go that far. Dongfeng Motor could become a globally competitive company within the Nissan-Renault group in a matter of years, so fulfilling China's ambitions for what it considers one of its strategic industries. A deal such as this could even go some way to improving the souring tone in Sino- Japanese relations.
We're stuck with 'coulds'' at the moment, however, given the hurdles the Nissan-Dongfeng venture faces. Ghosn is stepping into a hotly competitive market. China's entry into the WTO may have eased the way for this deal, but it will also make the way forward tougher for the new company.
Dongfeng was the apple of Mao Zedong's eye when it was created in 1957. It is now among the leaders in the Chinese auto industry. It's chief executive, Miao Wei, harbors Ghosn-like ideas for his company and has a similarly energetic profile. Dongfeng, most important, is designated as one of the 'big three'' carmakers through which China intends to consolidate an industry fragmented among more than 120 manufacturers.
There is no question that Ghosn and his ambitions to restructure Dongfeng are welcome. China has always admired Japanese technology and production processes, but not its management. Beijing officials approached Ghosn some months ago because they liked what he did at Nissan, which is 44% owned by Renault.
And what was that? Ghosn has turned the loss-making Nissan into a top Japanese company while keeping it just that, a Japanese company. It's the same in China.
Ghosn isn't charged with making Dongfeng Motor something other than a Chinese company; the job is to upgrade a Chinese manufacturer into a premier performer in the global era. It will be interesting to see how he proceeds to remake a company with state-owned affiliates and state workers.
There are potential problems aplenty. Ghosn seems to have the same stars in his eyes as to the Chinese market's growth prospects as every other foreign car exec who has looked at it. From a modest initial production target, Dongfeng Motor is expected to produce 220,000 cars by 2006 and 330,000 commercial vehicles. By decade's end, the new venture is supposed to turn out a total of 900,000 units.
True, the Chinese market is now the world's fastest growing: Passenger car sales in the first seven months of this year rose 44%. But that makes the mainland a market of 600,000 cars. Now look at Nissan's numbers again: They don't seem realistic.
Price-cutting in China is already severe and can only get worse from a producer's point of view. Overcrowding in this market has already left 40% of China's capacity idle. Import tariffs are also due to drop substantially due to China's WTO entry. As a consequence, some industry analysts anticipate price cuts of 10% to 15% annually over the next several years.
Where does this leave Dongfeng? With a 12% share of the Chinese market, primarily in commercial vehicles, the company brings an 8% profit margin to its venture with Nissan. But given the outlook for the industry, that will be tough to maintain.
Ghosn's numbers tell us his plan is to take on Volkswagen, which, with more than 40% of the market, is so far the only foreign auto company to make a serious go of it in China. There is only one problem with this ambition: Nine other foreign carmakers share it; everyone, including VW, is looking for new business in China, and there simply isn't enough of it to make everyone a winner.
Dongfeng Motor may turn out to be a management template for post-WTO China. A success engineered by a Japanese company, if not a Japanese executive, may help turn a distrustful Sino-Japanese rivalry into something closer to friendly competition.
Business does that in Asia often enough. But a triumph for Ghosn on the mainland is no shoo-in.
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