Reinventing Nissan The 1 990s, however, were disastrous for many Japanese firms. The collapse of Japan's so-called bubble economy at the end of the 1980s condemned Japan to a decade of slow growth, stagnant stock markets, and loss of confidence. Among Japan's corporate elite, Nissan perhaps suffered the greatest fall of all. Although Nissan had prospered during the 1980s, the 1990s were far less kind. Expansion of its domestic auto-making capacity during the 1980s left Nissan with far too many factories and workers, and it was forced to battle for market share in the crowded Japanese domestic market by keeping its prices low. (Japan has more major domestic automobile manufacturers than any other country.) The company suffered from excess capacity in its European operations as well. And the high value of the yen during the first half of the 1990s made it difficult for the company to export its way out of its difficulties. The Asian currency crisis of 1997-1998 dried up that region's demand for the company's products in the waning years of the twentieth century. Confronted with these diverse challenges, the company eked out a small profit in 1991 but lost money in 1992 and 1993. To restore the company to profitability, Nissan's executives announced a major cost-cutting program in 1994. As one part of this program, Nissan pledged to slash the number of suppliers the firm would buy from in the future. It hoped this would result in better prices for auto parts by increasing the size of its orders to individual suppliers. Nissan also decided to trim its workforce and to reduce the number of parts used in the company's cars, thereby simplifying its procurement operations and reducing its inventory costs. Unfortunately, these efforts did not work, in part because the program's targets were not met. As a result, Nissan continued to lose money in 1994 and 1995. Although the company earned a modest profit in 1996, its profits turned negative once again in 1997. Profit performance for 1998 and 1999 was no better. Unable to overcome its mounting problems, Nissan suffered the ultimate humiliation for a Japanese company: It was taken over by a foreigner. In May 1999 Frances Renault SA purchased 37 percent of Nissan's common stock for $5.4 billion, effectively transferring control of Japan's second-largest auto manufacturer to the French firm. Renault empowered one of its most highly respected executives, Carlos Ghosn, to clean up the mess at Nissan. Ghosn first spent five months carefully reviewing Nissan's operations. In October 1999 the Brazilian-born Ghosn announced a "revival plan" for the company designed to reduce Nissan's annual costs by nearly $10 billion. To reach this goal, five Nissan factories in Japan would have to be shuttered and 21,000 jobs eliminated. About 16,000 of the job cuts would occur in Nissan's domestic operations. Mindful of Japan's distaste for layoffs and Japanese labor laws that make firing employees expensive, the employment reductions were to be implemented via attrition, which averages about 2,000 domestic employees per year. Other options, such as voluntary retirement programs, were initially shelved because of opposition from Nissan's union leaders, although the options have not been permanently ruled out. Further cost reductions were to be implemented by eliminating regional offices in such cities as New York and Washington and cutting the number of different vehicle models produced and marketed by Nissan. To ensure that no one misunderstood the importance of cost cutting to revive the company, Ghosn announced that "No one in purchasing, engineering, or administration will receive a pay raise until they [show] what their contribution is to this [cost cutting].66 Ghosn recognized the need to hack away at Nissan's mountain of debt-some 2.4 trillion yen (in early 2001, 117 yen were worth 1 U.S. dollar)-and set a target of halving it by 2002. Ghosn also sought to streamline Nissan's dealership networks in Japan and North America. In Japan, for example, Nissan owns about half of its distributorships. Unfortunately, many of its distributors act like employees, rather than entrepreneurs, an attitude that Ghosn hoped to change by trimming company-owned outlets. Review of the firm's marketing operations unearthed another set of problems. Ghosn quickly recognized that Nissan's product image differed from country to country, making it hard to launch cost-effective cross-border advertising campaigns. Far worse, he discovered that Nissan suffered from a "brand deficiency," causing consumers to value rivals' vehicles over those produced by Nissan. In the United States, for example, comparable cars sold by Honda, Toyota, Chrysler, and Ford might sell for $1,000 more than Nissan's product. To sharpen its brand identity and develop a uniform global image for its products, Nissan contracted with TBWA Worldwide to handle all of its advertising throughout the world-an account worth an estimated $1.1 billion in annual billings. Perhaps the most controversial of Ghosn's initiatives dealt with parts procurement. He estimated that Nissan's parts procurement costs were 10 percent higher than those of Renault. Ghosn believed that by combining, centralizing, and globalizing Renault's and Nissan's parts procurement, these costs could be cut by 20 percent. To accomplish this, however, Ghosn needed to overcome a key element of the Japanese environment-the keiretsu system. The keiretsu system, in which members of a keiretsu group own shares in each other, has been a mainstay of the Japanese economy since World War II. The system is designed to build trust and promote stable, long-term cooperative relationships among suppliers and customers. Under this system Nissan funneled orders for parts and components to keiretsu affiliates, many of which were partially owned by Nissan. Ghosn's criticism of the keiretsu system was blunt. He believed that Nissan's purchase of parts and components from keiretsu affiliates promoted inefficiency and mediocrity. Because they were guaranteed business from Nissan, Ghosn felt that many of Nissan's keiretsu members failed to continue to innovate and cut costs: About 60 percent of our costs are in the suppliers. You have to have suppliers that are innovative. You want suppliers offering products to many customers so there is a flow of information about best standards. That won't happen with keiretsu companies.67Accordingly, Ghosn announced he would liquidate Nissan's holdings in all but four of its 1,394 keiretsu partners. In a separate but related announcement he also said Nissan would halve the number of its suppliers to about 600. Instead of purchasing the same part from several suppliers, Nissan would now concentrate its purchases among a smaller number of suppliers, allowing them to achieve economies of scale and reduce their costs. Offering a carrot and a stick, he announced that suppliers cuffing their prices to Nissan by 20 percent would get more of Nissan's business. Those failing to do so, however, risked losing Nissan as a customer. Not surprisingly, these tough measures were not embraced by everyone. For example, the then prime minister of Japan, Keizo Obuchi, promptly denounced Ghosn's plan, fearing job losses in the tens of thousands as Nissan cut back parts purchases from inefficient affiliates and suppliers. Perhaps an even bigger challenge to Ghosn was to change Nissan's corporate culture. He learned that too many Nissan executives were focused on protecting their turf rather than on promoting the company's objectives. Moreover, he discovered to his horror that communication among divisions was nonexistent: Country [organizations] were not talking to each other, people were not talking to each other.... This company is very territorial, very divisional; this goes deep into the history and tradition of Nissan. There is nothing that upsets me more than turfism.68Ghosn knew he needed to redirect the company's managers, refocusing their efforts on improving profits and enhancing customer satisfaction. To implement this objective, he created a network of multinational, cross-functional teams to reexamine and reinvigorate each of the firm's activities, from research and development to purchasing to manufacturing to distribution. These teams were also charged with spreading the restructuring gospel and tearing down the walls that have divided Nissan's operating divisions. Further down the line Ghosn plans to implement U.S.-style compensation schemes, such as stock options and bonuses based on profitability and performance, for managerial and nonmanagerial employees alike. If implemented, compensation will no longer be based merely on seniority, as it traditionally has been in Japan. And to drive home the point that Nissan could no longer operate as it did in the past, he made English Nissan's official language. Not all of Nissan's critics were convinced that Ghosn's strategy would work. One skeptic noted that many of the senior managers surrounding Ghosn were the same ones who were in charge of Nissan's operations while it hemorrhaged red ink during the 1990s. Others believed that any outsider-even a Brazilian from a French company-lacked the understanding of the Japanese business culture and the credibility necessary to motivate domestic managers and workers. Eventually, though, things seemed to be headed back in the right direction. In 2008, for example, Nissan posted record profits. And in 2010 the firm announced a joint venture with Daimler in which Nissan would provide transmissions for some of Daimler's models and Daimler would provide engines for some of Nissan's Infiniti automobiles. Sources: Hoovert Handbook of World Business 2013 (Austin, TX: Hoover's Business Press, 2013), pp. 242-243; "Nissan set to announce record $6.1 billion profit," Financial Times, April 23, 2003, p. 18; "Look! Up in the sky! It's Nissan's chief executive," Wall Street Journal, December 27, 2001, p. B1; "Feared 'cost killer' who became a corporate hero," Financial Times, December 17, 2001, p. II; "Renault's Nissan deal begins to come up trumps," Financial Times, July 18, 2001, p. 20; "Nissan sizes up TBWA for $1 bil global ad prize," Advertising Age, December 6, 1999, pp. 1ff; "Remaking Nissan," Businessweek, November 15, 1999, pp. 7011; "The circle is broken," Financial Times, November 9, 1999, p. 18; "'Le cost-killer' makes his move," Financial Times, November 9, 1999, p. 15; "Nissan's ambitious restructuring plan delivers a blow to Japan's longstanding system of corporate families," Wall Street Journal, October 20, 1999, p. A20; "Nissan's cost cutter shows how he got his nickname," Financial Times, October 19, 1999, p. 20; "Nissan outlines restructuring to get into the black," Wall Street Journal, October 19, 1999, p. A18; "Nissan's Ghosn faces obstacles in carrying out 'revival plan'," Wall Street Journal, October 18, 1999, p. A37; "'Killer' to make unkindest cut," Financial Times, October 18, 1999, p. 14; "Can Japan keep 11 carmakers?" Financial Times, July 22, 1998, p. 13; "Nissan finds the road is rough despite cost cutting," Wall Street Journal, April 4, 1994, p. B4; "The world's top automakers change lanes," Fortune, October 4, 1993, p. 7311.
Question
What benefits will Nissan gain if its procurement of parts is combined with Renault's parts procurement on a global basis? Are there any costs to this change? What problems does Nissan create if it abandons the keiretsu system for purchasing parts? In what ways might the Internet facilitate this change?