Saturday, July 15, 2006

Toyota's clout looms over alliance talks

Monday, July 10, 2006
Toyota's clout looms over alliance talks
A Renault-Nissan, GM marriage would bring in cheap manufacturing, slow Japanese growth.
Kae Inoue / Bloomberg News

TOKYO -- Carlos Ghosn's Nissan Motor Co. and Renault SA decided last week to pursue an alliance with General Motors Corp. to slash development and production costs. The real motivation may be to take on a common enemy: Toyota Motor Corp.

"Toyota is so dominant in the global car industry and they are growing so fast and so steadily that no one can really catch up," said Atsushi Osa, who helps oversee $4.1 billion at Sumitomo Mitsui Asset Management Co. in Tokyo. "Ghosn may want to use GM's assets and resources against Toyota."

Toyota, the world's biggest automaker by market value, is speeding up its expansion as GM and Ford Motor Co. close factories and cut jobs. The Toyota City, Japan-based company will spend an average of $1.3 billion every month this year to build at least six factories, including plants in Texas, Russia, Canada, Thailand and China.

Ghosn, 52, could use GM's idle manufacturing capacity to increase production cheaply. An alliance would also help him compete in China, share the cost of developing fuel-cell and gasoline-electric hybrid vehicles and fend off Toyota's expansion in Europe. Billionaire Kirk Kerkorian, 89, GM's fourth-largest investor, proposed the tie-up to help revive the Detroit-based automaker, which had $10.6 billion in losses last year.

General Motors' board on Friday authorized Chief Executive Officer Rick Wagoner to study the proposed link. Ghosn, CEO of Nissan and Renault, on July 3 received permission to begin talks.

Nissan and Renault may buy a combined 20 percent of GM, people familiar with the talks said. The stake is valued at $3.3 billion.

Toyota moves in on Renault

Toyota and its affiliates plan to sell 10.3 million vehicles by 2010, up from 8.85 million in 2006. Nissan and Renault together sold 6.13 million cars and trucks in 2005.

In Europe, Toyota is attacking Boulogne-Billancourt, France-based Renault with small cars it makes with PSA Peugeot Citroen in the Czech Republic. In the first five months of 2006, Toyota increased its market share in Europe by 0.2 percentage point to 5.7 percent. Renault's share fell by 1.1 points to 8.9 percent.

"Toyota knows how to sell, how to make a good car and at a good price," said Edwin Merner, who runs $1 billion as president of Atlantis Investment Research Corp. in Tokyo. "At this time Nissan and GM cannot catch up; at best they can just hold their own."

Nissan spokeswoman Mia Nielsen declined to comment on Toyota's influence on Nissan's strategy.

Tokyo-based Nissan vied with Toyota to be Japan's No. 1 automaker in the 1960s. By the time Ghosn took charge in 1999, the company was close to bankruptcy after selling bland vehicles. Ghosn stopped building cars such as Pulsar NX compact, dubbed the Ugly Duckling in Japan, and closed 10 percent of the dealerships.

Return on capital

Ghosn aims for a return on invested capital of 20 percent. That's led to a strategy of buying technology and vehicles from other automakers when it's cheaper than in-house development. Nissan may team with GM to develop hybrids, diesels and cars powered by hydrogen fuel cells, said Norihito Kanai an analyst at Meiji Dresdner Asset Management Co. in Tokyo.

"One of the biggest benefits out of a possible alliance will be the ability to share the massive financial burden for developing advanced technology," Kanai said.

Toyota had 1.57 trillion yen of cash and stocks at the end of March, almost four times what Nissan had. It used some of those funds to buy GM's stake in Fuji Heavy Industries Ltd., the maker of Subaru cars, last year. Toyota plans to make 100,000 Camry sedans a year at Fuji Heavy factory in Indiana, without the expense of building a new plant.

Unused capacity

Nissan may emulate Toyota by converting space at GM's underused factories to build its own cars and trucks in North America. GM is planning to shutter 12 North American plants by 2008. The company's U.S. market share slumped 2.8 percentage points to 24.3 percent in the first half.

"The only major attraction to GM I can think of is its huge and soon-to-be idle production capacities in the U.S. and its relatively strong foothold in emerging markets, particularly in China," said Amir Anvarzadeh, director of Japanese equity sales at KBC Financial Products in London.

GM's profit in China, the world's third-largest vehicle market, doubled in the first quarter. Nissan would be able to supply small cars to GM in China, while GM could sell its Buick minivans through Nissan, Koji Endo, a Credit Suisse analyst said. Nissan became the last of Japan's three biggest automakers to start producing vehicles in China in 2003, six years after GM.

Nissan and Renault could buy auto parts and raw materials jointly with GM, Endo said. The two companies already save about $868 million annually by combining $59 billion of purchasing, he estimates. Nissan and Renault don't disclose how much they save.

Ghosn, dispatched from Renault in 1999, has led Nissan from a record loss to six straight years of record earnings.

"Ghosn's role has always been turning around something bad," said Ichiro Takamatsu, chief investment officer at Alphex Investments Co. in Tokyo. "Ghosn doesn't want to end his career with a failure, so he wouldn't take any bets if he thinks he would lose."

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