Nissan Stalls Out

FRANK GIBNEY JR.In Japan, putting your company on the acquisition block is so shameful that the expression for it--miuri--literally means selling your body. So it must have been excruciating in January for Yoshikazu Hanawa, president of Nissan Motor Co., to publicly offer for sale significant stakes in Japan's second-largest automaker (after Toyota). What must have been even more humiliating is that when Nissan's suitors looked under the hood, they became even less interested in this clunker, with its $22 billion in debt and a lineup of flashless cars. The word around the auto industry is that the $49-billion-a-year company ought to be left to wither. Says James Harbour, a leading U.S. automobile analyst: A merger with Nissan is absolutely the worst idea I've ever heard of.

Whoa. Just a decade ago, Nissan was synonymous with Japan Inc., the business goliath that was devouring America. The auto company's fuel-thrifty sedans and zippy 240Z sports car put the fear in Detroit long before the Toyota Camry or Honda Accord ever saw a drafting table. Nissan's success gave weight to the myth that Japanese companies were run by enlightened executives teamed in frictionless synchronicity with workers to produce superior cars. In his best-selling book The Reckoning, David Halberstam suggested that the U.S. auto industry, namely the Ford Motor Co., would be consigned to a never-ending game of catch-up with the likes of Nissan, a company driven by the Japanese demonic need for excellence.

These days Ford is a global predator with a $23 billion war chest and a market value several times larger than Nissan's. Racked by an economy in an eight-year decline, Japan has a demonic need for the cash and expertise of foreign bankers and takeover experts who are buying, at deep discount, chunks of the country's financial and industrial base. What has really happened this decade is the true inability of the Japanese to manage in a difficult situation, says Maryann Keller, ING Baring Furman Selz managing director, who has studied Japanese industry for 30 years. Once unthinkable, the idea that foreigners might save Japanese companies is becoming commonplace. Witness Merrill Lynch and its absorption of Yamaichi Securities, or General Electric Capital and its $6.5 billion proposed takeover of Japan Leasing Co., one of the top firms in its field. Or Goodyear's bid to control Sumitomo Rubber Industries. If it is shameful to be acquired by foreigners, at least Nissan president Hanawa is far from alone.

Only a handful of companies have ever lived up to the Japan Inc. myth, and Nissan isn't one of them. Certainly its manufacturing and engineering prowess are world-class. And Nissan still builds first-rate automobiles. It simply doesn't make the right kind, nor does it know how to sell them. We've failed to understand what the market wants, Hanawa told Time. We're reflecting upon that. Deep meditation is more like it. Nissan has been paralyzed by its own bureaucracy and a legacy of tension between its top managers and labor bosses in Japan. The company's decline illustrates why instead of being poised to vault into the fast-paced, globalized 21st century, so much of corporate Japan is still shackled to a management tradition that hasn't changed since the 1970s.

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Nissan has been running out of gas since 1985, about the time Halberstam was writing. The company's U.S. sales that year topped 830,000, and the goal was to pass Toyota within a year. Nissan never came close. Its sales in the U.S. have shrunk some 25% since then, and the company has slid to a distant third, behind Toyota and Honda. The story is much the same in Asia. Now, nearly two years into Asia's slump, the automaker's share in Thailand has been almost halved, to 9%, despite major investments in new plants.

Nissan ignored supply and demand at home, too. In the late 1980s, management shelved a restructuring plan in hopes that the company's fortunes would be bolstered by the surging Japanese economy. When the bubble burst in the early 1990s, so did Nissan's profits. In 1993, the company took its first loss and two years later became the first car manufacturer to close a factory in Japan since the end of World War II. Last December, the government-run Japan Development Bank issued $708 million in loans to Nissan. That brought resounding criticism--and inevitable comparisons to Chrysler Corp., which was bailed out by the U.S. government with $1.2 billion worth of loan guarantees in 1980.

The stallout in the U.S. market is typical of Nissan's global difficulties. Last year just about anything with four wheels and a little styling moved off dealers' lots. Yet Nissan's sales dropped off 14.7%, and the company lost money. The firm's managers somehow forgot a golden rule in the auto business: profits are only as good as the last hot product in a fast-changing cycle. The Maxima, Nissan's flagship sedan since the 1980s, is a perennial critics' favorite, but even its fans say it needs a face-lift. So does the Infiniti luxury series. The Altima, Nissan's affordable sedan (about $17,000), is chubby, boring and no match for its nemesis, the Accord, or the new Volkswagen Jetta. This year Nissan's only brand-new offering is the Xterra sport utility vehicle. Hot, say critics, but alone. They've tarnished their image, says Bill Seltenheim, an analyst with Autodata in Woodcliff Lake, New Jersey. Everyone knows if you want to buy a Nissan, all you have to do is wait for the next incentive program.

The problem: instead of allowing designers to work their magic, bureaucrats in Tokyo have been dictating, Henry Ford-like, what is good for the customer. The lesson, of course, is that in the 1920s Ford almost bankrupted his company that way. Says J. Ferron, one of the auto industry's leading consultants: There have been times when nobody even bothered to ask whether green cars were selling before they were loaded onto ships.

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To many critics, Nissan doesn't even feel like an auto company. The executive ranks are dominated by graduates of the prestigious University of Tokyo, which normally churns out Japan's top government bureaucrats. And they have managed Nissan with the same galling inefficiency. There was no long-term strategy, says former Nissan designer Yoshio Maezawa, who remembers traveling through the U.S. in the 1980s and being unable to explain to American staff what kinds of cars Tokyo planned to build--because management couldn't decide. Maezawa recalls designing the second-generation Pathfinder sport utility vehicle and having the project shelved four times before it went into production in 1995. Says the designer of his hapless bosses: They were always flying by the seat of their pants.

Nissan's consensus-driven management style and corporate structure may have been acceptable in the booming '80s, but they don't work well when drastic decisions have to be made quickly. Takao Tominaga, a special adviser to the Japan Automobile Manufacturers Association, points out that Nissan, unlike Toyota, has its headquarters in Tokyo far removed from its factories. Positions on its board of directors are sinecures, board meetings are scripted in advance, and the directors don't hold management accountable in the way American boards now do. Changing things means criticizing what you've done so far, says Iwao Nakatani, a professor of commerce at Hitotsubashi University. They simply wanted to avoid that.

Remember those mighty keiretsu, the webs of supplier relationships that improved parts quality and manufacturing flow for Japanese companies? The once-lionized keiretsu system has become a liability, says analyst Chris Redl at Morgan Stanley Dean Witter in Tokyo. These days the cost of such networks is all but strangling companies like Nissan. Its keiretsu includes 1,000 companies that employ 10 workers for every one of Nissan's.

The parent company's inefficiency is legend too. Invited to brief Tokyo securities analysts on new transmission technology recently, Honda and Toyota each sent two representatives. Nissan sent five. One gave a speech, one carried the slides, one ran the projector, one took notes, recalls an analyst there. The other watched. One reason for the overstaffing? You guessed it: lifetime employment. In a strong economy, the security of a guaranteed job engenders goodwill and teamwork. In a weak one, and Japan's is limp indeed, lifetime employment becomes a black hole of overhead. Even such powerhouse companies as Sony, Toyota and Toshiba, which fit the mighty Japan Inc. myth, are burdened with thousands of redundant workers they cannot fire. Says Keller of ING Baring Furman Selz: What amazes me still is how little foreigners understand about Japan and what it will take to restructure a company like this.

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Nothing haunts Nissan more than a history of acrimonious standoffs between its top executives and union bosses. For a time in the 1970s, the union was so powerful that its leaders were known to sign off on overseas travel requests by middle managers like designer Maezawa. In the early 1980s, union chief Ichiro Shioji nearly prevented the establishment of the company's state-of-the-art facility in Sunderland, England. His power was finally curtailed when tabloid photographers were tipped off in 1984 that Shioji was entertaining barmaids on his yacht in a marina south of Tokyo. When Shioji's leading adversary, Takashi Ishihara, stepped down as Nissan's president in 1985, he admitted to spending a stunning 70% of his time fighting the union boss.

Now Nissan's president Hanawa is struggling over what should be the most drastic restructuring effort in Japanese corporate history. So far he has off-loaded a few subsidiaries, banned corporate entertainment and sold part of the company's headquarters in Tokyo's glitzy Ginza. In a more dramatic gesture, Nissan Diesel, the group's commercial-truck division, announced last month it was closing a plant in Gunma, north of Tokyo, and eliminating 3,000 jobs in the process--a radical move by Japanese standards.

But hardly radical enough. Hanawa's critics charge that if Nissan is so close to bankruptcy that it needs a government bailout, then the company's rescue efforts should be reminiscent of Chrysler's more than a decade ago. Back then, the American company laid off more than half its workforce, closed 20 plants and reduced its supplier network to 1,000 companies, from 3,000.

Instead, Hanawa is committing miuri. In one remarkable January week, Nissan became the most talked-about company in the global auto business because everyone with a little extra cash wanted a piece of it. Even tiny Renault piped up that it had French-government backing to acquire a controlling stake in the world's seventh largest carmaker. Renault could afford it because that week Nissan's stock price had sunk low enough so that a 33.4% share (which counts in Japan as a controlling interest) was worth around $2.8 billion--or barely half of what Ford recently paid for Volvo, the world's 21st-largest carmaker.

Nissan still has a lot to offer. Its engine technology is the best in the business, say many experts. And so are its manufacturing plants. The Smyrna, Tennessee factory where it makes the Altima, Sentra and Frontier models has been ranked North America's most efficient for five years (although slow sales idled the plant every Friday for several months last year). Nissan also offers a window onto Asia's market, which could be a bonanza when it finally recovers.

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On the face of it, though, Nissan is simply too burdened to be much more than a headache to anyone. Analysts estimate that its debt nearly doubles when the financial obligations of its many affiliates are thrown in. We don't want to spend our hard-earned money buying someone else's hard-earned debt, said Ford CEO Jacques Nasser not long before he bought Volvo. Some top Ford executives were certain late last year that Nissan was worth a serious look, and they went so far as to invite Hanawa to Dearborn. But even before he got there, enough intelligence had come back from Japan that the bloom was way off Nissan. In any case, Nasser never saw the Japanese executive.

Still, the hint of a deal with Ford was enough to pull DaimlerChrysler closer to Nissan, and the German-American auto giant may still step in to save the Japanese firm. Even before Daimler chairman Juergen Schrempp inked a deal to acquire Chrysler for $37 billion last May, his Stuttgart brain trust was urging him to buy a controlling stake in Nissan Diesel. That would give Daimler, a top commercial-truck producer, a solid foothold in Asia.

Now DaimlerChrysler and Nissan are far enough into negotiations that an acquisition of the truck company, or something more complicated, is still a real possibility. Schrempp has made it clear that by 2010 he wants 25% of the company's revenues to come from Asia--and an acquisition would be the quickest way of accomplishing that goal.

In Tokyo in late January, Schrempp and DaimlerChrysler co-chairman Robert Eaton made it clear to Hanawa that they wanted Nissan to restructure further and write off some of the company's gargantuan debt before a deal was consummated. According to one insider, Hanawa balked at a debt write-down. But both sides left themselves plenty of room for a future deal. Said Schrempp at a press conference in Tokyo: Our only problem is, we're very impatient. He can afford to wait--not least because the merger between Daimler and Chrysler is already proving more difficult and time-consuming than optimists had predicted. Yet in Chicago last month, he hinted again that an acquisition in Asia may not be far off.

If nobody reaches out to Nissan, there is perhaps one ray of hope: critics raved in January when the company unveiled a new Z prototype and a sleek sport utility truck at the North American International Auto Show in Detroit. The Z, an updated version of the sexy 240Z model that captured youthful imaginations in Nissan's heyday, made the covers of several car-enthusiast magazines. What wasn't necessarily made clear was that management in Tokyo had almost blocked the prototypes. They were conceived and built in California at the urging of U.S. executives desperate for new product, using $1 million purloined from the North American sales and marketing budgets. Hanawa now has to get his managers in Tokyo to approve production of the new Z, as well as find the money to pay for it. In today's Japan Inc., that could take a while.

With reporting by Tim Larimer, Sachiko Sakamaki and Hiroko Tashiro/Tokyo and Joseph R. Szczesny/Detroit

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