- Nissan suffering from weak sales
- Nissan marred by financial misconduct allegations
At a time when the global auto-market is reeling with demand slump as well as disruption from new technology, Nissan, in particular, going through a rather tumultuous time. The automaker recently announced cutting down close to 12,500 jobs globally, or about a tenth of its workforce in order to manage costs and improve weakened margins. Nissan announced that job cuts would be enforced globally by the year 2022. Additionally, the company plans on reducing its global production capacity as well as product line-up by c. 10% by the end of FY 2022. Nissan has reportedly stopped assembly lines at 8 sites, as well as reduced headcount in Indonesia, India and two plants in Japan. This is in addition to the already-announced measures in Spain, Mexico, U.K. and the U.S.
So, what has brought upon such daunting times for Japan’s number 2 automaker? Sluggish sales, rising costs and scandals concerning findings of financial misconduct have led the company into a full-blown crisis.
The starting point of the current financial issues began with an aggressive and a rather faulty growth strategy adopted by Mr. Ghosn in 2011. His ambitious aim to expand the company’s market share to 8% in its countries of operation by merely offering deep discounts to buyers and boosting sales to vehicle rental companies hit both margins as well as the company’s brand image. Nissan’s sole focus on trying to simply capture market share, specifically in North America ended up eroding the company’s margins. While the strategy paid off in increasing the sales volume solely by focusing on fleet sales and shopper incentives, it weighed on the brand appeal of the company for US customers, known to be Nissan’s key market. Years of deep discounting impacted the vehicle resale values whereas an aging line-up, including the likes of Murano & Juke models further dampened appeal for Nissan cars, thereby impacting its overall performance.
Nissan’s misfortunes were exacerbated when Mr. Ghosn was jailed in 2017 for financial misconduct, allegations regarding understating income and misappropriating Nissans funds. This further dented Nissan’s image thereby deepening its financial woes. He was succeeded by Saikawa (Ghosn’s former aide) who, in his new role, saw shares tumble as Nissan found itself embroiled in a car-inspection scandal and a weakened global automotive sales scenario.
Handed over with the daunting task of turning around the company, Mr. Saikawa’s calibre was often questioned wherein a continued set of dismal quarterly results announced recently had further added pressure on him to turn around Nissan’s performance. The recently released first quarter earnings report of FY2019 witnessed operating profit plunging by 99%. Operating profit tumbled down to 1.6 bn Yen in Q1 2019, down from 101.1 bn Yen a year back. Revenue shrivelled down by 13% to 2.37 tn Yen (steepest drop since the global financial crisis a decade ago) in the 3 months period, amidst retail volume slumping by 6% to 1.2 mn vehicles. Operating profit margins were down to 0.1% in comparison to 4% a year prior. Net income decreased by 95% to 6.4 bn Yen. Nissan has not posted such poor results ever since the 2008-09 financial crisis. The company has reportedly reduced its annual sales target by 2.3% in Japan.
In what could have made matters worse, Mr. Saikawa was very recently found guilty of being overpaid as part of stock-related payment plan. Investigations revealed on how the payment plan was intentionally manipulated in order to receive the additional pay. Even though he denied any wrongdoing on his part and agreed to repay the excess pay received by him, the board decided on 16th September to be Saikawa’s departure date from Nissan. In addition, the investigation further revealed misconduct on Greg Kelly (a former director) & Ghosn’s part which had cost the company a significant amount in damages – certain payments were unearthed that were deferred and never paid (approx. 35 bn yen). What began as an investigation into Mr. Ghosn’s financial misconduct back in 2017 is now unravelling money scandals that are bound to have severe implications for Nissan’s future. For now, Yasuhiro Yamauchi has replaced Saikawa as acting CEO until a permanent successor is decided upon.
In all this mess, Nissan is trying to reinvent itself wherein the company has now reduced its shopper incentives. It has also cut back on production along plans for complete overhaul of several of its popular models. As part of Nissan’s 6-year midterm plan (Nissan M.O.V.E to 2022) implemented in 2017, the company is aiming to grow its revenues to 16.5 tn yen, up from 12.8 tn yen, an operating margin of 8%, along with generating a cumulative FCF of 2.5 tn yen. Although Nissan has already implemented its M.O.V.E plan, its poor first quarterly results along lack of a strong leadership and tainted image have added significant pressure on the company to turnaround its performance while operating in a rather gloomy automotive industry.
There are also expectations that Renault, Nissan’s biggest shareholder (43% stakes) is reportedly attempting a resumption of talks for a full merger and take control of the company. In the wake of key managerial arrests and Nissan’s continued weak performance, the negotiating power of its current board with Renault seems cramped in case the former wants to move ahead with this thought. For now, on a standalone basis, while the automotive industry experiments with autonomous cars, EVs and flying cars, Nissan has surely hit rock bottom with multiple financial scandals coming to fore. The company has revised its expectations to generate just 230 bn yen in operating profit by March next year (2020) instead of the previous estimation of 457.7 bn yen, an average number that was previously estimated by more than 20 analysts. Given the full-blown crisis that Nissan finds itself in, it would not be an exaggeration to say that the company might take quarters or even years for the company to get back to normalcy.