Wednesday, November 08, 2006

End of GM talks brings relief

Monday, October 09, 2006
Christine Tierney
End of GM talks brings relief
Inside Renault, GM's cash demand signaled it did not grasp true nature of alliance with Nissan.

PARIS -- After the initial surprise, the reaction among many managers at Renault SA and investors in the French carmaker to the breakdown of the alliance negotiations with General Motors Corp. was one of relief.

Although the two sides had agreed a week earlier to keep talking until mid-October, they remained far apart in their assessments of the benefits. Concluding GM had less to gain than Renault or its partner Nissan Motor Co., the U.S. automaker's management was seeking several billion dollars in compensation to participate in a three-way alliance.

From Renault's standpoint, that demand suggested either that GM's negotiators hadn't grasped the collegial nature of the Renault-Nissan alliance, or that they were formulating demands likely to torpedo the negotiations. "They played on the fact that no one knows how the Renault-Nissan alliance works," said a Renault manager. "We don't quantify it ourselves."

The statement issued after the Sept. 27 meeting between GM Chairman and CEO Rick Wagoner and Carlos Ghosn, CEO of Renault and Nissan, was hardly encouraging: They agreed to keep negotiating until mid-October, as originally planned.

Yet Ghosn still seemed eager to come to an agreement, spending the bulk of a 45-minute presentation to analysts that afternoon talking about the alliance.

A week later, when The Wall Street Journal reported on its Web site that the talks had ended, Renault managers were taken aback by the timing. By then, many in France had realized that the talks were doomed, but there was a feeling of awkwardness, the embarrassment of being turned down by the world's largest carmaker and looking naïve.

Few in Ghosn's entourage understood the dynamics of GM's board and the tensions between Wagoner and billionaire Kirk Kerkorian, one of GM's biggest stockholders. One manager thought Kerkorian had a controlling stake in GM, as large minority investors can establish in French and Japanese companies.

Some analysts said Ghosn's credibility was damaged by the episode -- although he remains one of the most credible auto executives. "The real loser in this story is Kirk Kerkorian, the instigator of these discussions," said the French newspaper Le Journal des Finances.

A commentary in the newspaper Le Figaro said that by going along with Kerkorian's proposal, Ghosn had been able to demonstrate the potential benefits of expanding the alliance to include a North American partner. "By pressing for studies with GM and quantified synergies, he unveiled to the entire industry the spectacular economies of scale --$10 billion -- such an alliance would generate."

The surprise at the premature breakdown in the talks quickly gave way to relief that Ghosn was giving up on an alliance that he wanted but which might have been costly for Renault or Nissan.

Judging from the bounce in Nissan shares, Japanese investors thought the automaker had the least to gain from a three-way mega-alliance. On the Paris stock exchange, Renault fared better last week than its French rival PSA Peugeot Citroen.

Over the past three months, Ghosn has said the timing of Kerkorian's proposal hadn't been ideal. These are tough months for Nissan, which has lacked new models, and for Renault, which is in the early stages of a plan aimed at more than doubling its profitability by 2009.

Next week, Nissan is expected to report a drop in its half-year profit, although the company expects higher full-year earnings after a flurry of model launches.

Renault is struggling in Europe because of weak demand for some of its models as well as an effort by the automaker to reduce business that generates little profit, such as sales to rental car companies.

Renault's sales in Europe are down 10 percent this year, compared with Peugeot's 3 percent decline. Renault's share of the market has fallen by a full percentage point over the past year, to near historic lows of 8.9 percent -- well below GM's 10.3 percent share in Europe.

In that environment, Ghosn appreciated that it was hard to tout the benefits of the Renault-Nissan alliance.

Yet he remains interested in adding a North American automaker to the partnership.

In Ghosn's view, the industry will become more competitive, automakers will be under pressure to invest heavily in cleaner technologies, and design, engineering and production will be increasingly localized. Automakers belonging to larger groupings will fare better, he believes.

"From the moment you have accepted that (alliances are) a very competitive way to work, you want to extend them," Ghosn told Bloomberg News on Saturday.

Ford Motor Co. remains an obvious candidate, although both Ford and Renault are downplaying the notion.

"We need some breathing room, and our study teams are exhausted," says a Renault manager. And Ford's new CEO Alan Mulally is still getting to know the Dearborn automaker. If an approach is made, it would likely be through the companies' bankers.

With the Chrysler Group back in the red, DaimlerChrysler might rethink its ties to the Auburn Hills automaker and leave room for an outside investor.

As for GM, investors will inevitably compare its performance with that of Renault-Nissan.

World auto view You can reach Christine Tierney at (313) 222-1463 or

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