International Business Law Case Study
For the third time in seven weeks, Carlos Ghosn, multiply awarded chairperson of Groupe Renault (Renault), Nissan Motor Co. Ltd. (Nissan), and Mitsubishi Motors (Mitsubishi), was arrested and detained by Tokyo district public prosecutors—this time on the grounds of breach of trust. Instead of greeting 2019 in one of his luxurious homes in Beirut, Brazil, or France, Ghosn found himself in a five-square-metre detention cell in Tokyo, Japan. It was a fate that 64-year-old Ghosn had not expected.2 In 2017, the three companies had produced 10 million cars, making the alliance one of the largest automakers in the world.3 Ghosn was responsible for the turnaround of Nissan in the late 1990s, and he was also featured in comic books due to his popularity. He had been preparing an implementation plan that would cement, in 2019, the alliance among the three automotive firms into a holding company structure that would make him the overall chair.
The 2019 arrest and subsequent indictment of Ghosn, a Brazilian-born French citizen with Lebanese blood, triggered a great uneasiness among all of the companies’ shareholders and was reflected in erratic trading.4 It threatened a formula that would have allowed each of the three companies to gain ground in the automotive industry,5 even though Mitsubishi was a late entrant to the alliance and implementation plans were still afoot. The indictment raised many questions about corporate governance reforms in Japan that Prime Minister Shinzo Abe had been instituting since 2010. It challenged the relationships not only between Japan and France, which had a vested interest in Renault, but also between the nations in which Ghosn had grown up: Brazil and Lebanon.6 Ghosn was not only the celebrated gaijin, or foreigner, who defied Japan’s long-term employment and keiretsu (informal company group) system, but he was also an international figure who rubbed elbows with government leaders, especially where automotive companies were located.7
Relationships were uncertain. What could Nissan do in its corporate governance structure to restore investor trust and prevent the recurrence of another Ghosn scandal? What would happen to the alliance between Nissan, Renault, and Mitsubishi?8
THE BIRTH OF THE ALLIANCE AND THE ROLE OF CARLOS GHOSN
Century-old Nissan was the largest manufacturer of electric vehicles by 2018. However, the stellar performance of the company would not have been possible had it not been able to overcome the financial hurdles of the 1990s.9 Nissan sought out partners that included Daimler Chrysler and Renault, but it was the latter that Nissan partnered with. In 1999, Renault purchased a 36.8 per cent stake in the company. Renault then assigned Ghosn to help revive the firm. Yoshikazu Hanawa, the president of Nissan at that time, agreed on the condition that Ghosn would come in as a Nissan and not as a Renault executive.10 Ghosn recalled,
For the exclusive use of M. Hu, 2020.
This document is authorized for use only by Meiyi Hu in International Business Strategy Winter Semester 2020 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona from Jan 2020 to May 2020.
At the time, Nissan was in a desperate situation. The company’s share of the Japanese market had been steadily falling for 26 years. Financially, it had been in the red for seven of the eight years through 1999. Interest-bearing debt was more than 2 trillion yen (US$17 billion at current rates). Because of this, the release of new models had slowed almost to a stop.11
Despite the predictions of doomsayers, profit margins improved within three years, and obligations to creditors were halved under the leadership of Ghosn.12 From chief operations officer (COO), Ghosn assumed the presidency in 2000 and the chief executive officer (CEO) position in 2001.13 The year after, Renault’s stake at Nissan increased to 44.4 per cent, while the latter gained a non-voting 15 per cent equity share of Renault. At this point, Renault-Nissan BV was formed to manage this alliance. In 2010, the stake of Renault in Nissan was lowered by 1 per cent.14
The cross holding between Nissan and Renault allowed the two auto-manufacturing firms to operate separately, with different sets of boards, yet gain from manufacturing and distribution synergies.15 Further, the two firms shared in common their research into building electric, hybrid, and self-autonomous vehicles. That strong alliance brought forth even more conquests for the two companies, both together and alone. There was a venture with Germany-based Daimler AG, makers of the Mercedes Benz, Dongfeng Motor Group in China, and Russian automaker, AvtoVAZ. A proposed tie-up with General Motors in 2006 did not materialize.16
Meanwhile, in 2015, the French government enacted the Florange Act, which effectively granted equity owners of two years or more double voting rights.17 The Renault board succeeded in limiting the rights of the French government, which owned 15 per cent of the company. Under a Restated Alliance Master Agreement, Nissan would be allowed to increase its holdings in Renault if the French government interfered in Nissan’s business decisions. The move served to protect the interests of Renault and Nissan and had the effect of further strengthening trust between the two companies.18
In 2016, Nissan purchased a 34 per cent interest in financially troubled and scandal-riddled, Mitsubishi, and Nissan-Mitsubishi BV was formed the year after.19 Almost immediately, Mitsubishi improved financially, turning losses into profits, benefitting from the management expertise of Nissan-assigned executives and shared operations under the leadership of Ghosn, who was named chair of the Mitsubishi board in that year. The tripartite alliance produced and sold 10 million cars annually20 (see Exhibit 1 for the state of the relationship as of January 2019).
CARLOS GHOSN, THE CELEBRATED HERO, AT NISSAN
Ghosn’s entry into the automotive industry was fortuitous. Encouraged by his sister, Ghosn joined French tire maker Michelin soon after graduating from the École Polytechnique. He started from the factory floor, rose to become a plant manager, and then was assigned by the co-owner of the family business, to manage the company’s Brazilian plant. His successful turnaround of operations led to his assignment as CEO of the North American division. Again, Ghosn was able to revive the business by acquiring Uniroyal Goodrich in the 1990s.21
In 1996, Ghosn was recruited by Renault. Realizing he would never assume the top position at Michelin— it being a family business—he moved to financially troubled Renault in 1996.22 He was appointed executive vice-president and, in that capacity, began to restructure the operations of the French carmaker, which had been suffering from the merger with Volvo. In the process of restructuring Renault, Ghosn gained the moniker of “Le Cost Killer” for his strategy of cutting costs. When Renault purchased a substantial stake in Nissan in 1999, Ghosn was assigned to revitalize the firm.23
The rehabilitation of Nissan came in phases. The first phase was dubbed Nissan’s Revival Plan.24 At this time, the 43-year-old Ghosn was bold and determined. “I asked for trust and backed it up by saying that if we did not return to profit after a year, I would resign, as would my executive committee,” he had declared in front of Nissan employees.25 He formed cross-functional teams to identify solutions and then introduced changes
For the exclusive use of M. Hu, 2020.
This document is authorized for use only by Meiyi Hu in International Business Strategy Winter Semester 2020 taught by ERIC HUTCHINS, California State Polytechnic University – Pomona from Jan 2020 to May 2
that were considered un-Japanese. Instead of favouring seniority and lifelong employment, the new president of Nissan closed unprofitable plants and terminated the employment of 21,000 personnel.26 He then shifted to a merit-based system that disregarded age, gender, and nationality and brought in foreign managers—initially, about 30 executives from Renault, most of whom he handpicked. Ghosn also challenged the keiretsu and awarded contracts based on terms favourable to the company.27
Nissan began to see some changes in profitability in the immediate years that followed, and Ghosn did not have to resign as he had promised to do if things did not work out. In 2001, Ghosn was named Nissan’s CEO.28 He then entered the second phase of the rehabilitation, referred to as the Nissan 180 plan. The Nissan 180 goals were to increase sales by one million units, increase operating margins by at least 8 per cent, and reduce interest-bearing debt to zero by 2015. The company achieved its one million sales goal29 (see Exhibit 2).
In 2005, Ghosn was appointed president and CEO of Renault, making him the first CEO to lead two Fortune 500 companies.30 As Renault CEO, he also became the default