DETROIT -- At first glance, the proposed alliance between General Motors, Renault and Nissan looks like a Rube Goldberg invention -- it has lots of moving parts, but it's not at all clear what it might produce.
Does an alliance make any sense? On Friday, July 7, GM's board promised to study shareholder Kirk Kerkorian's proposal to combine operations. Presumably it will be weeks before GM accepts or rejects Kerkorian's pitch.
Here are some key questions the company must consider:
- Can the partners profitably share products?
- Can they share assembly plants?
- Can Renault-Nissan borrow GM's technology?
- Can they save money on parts purchasing?
- Can Carlos Ghosn - CEO of Nissan and Renault - run three companies?
The following analysis focuses on North American operations for one reason: This is the one region where GM is losing bales of money. If the automaker can fix North American operations, it can probably survive everywhere else.
If you can't beat 'em ...
A couple of decades ago, Renault tried to sell vehicles in the United States. It did not work. Let's assume for the moment that any product-sharing in the United States would occur between Nissan and GM.
Both companies have complete product lineups. But Nissan conceivably might want to borrow GM's strongest products: full-sized pickups and SUVs. Last year, GM sold 935,468 Silverado and Sierra pickups, while Nissan sold only 86,945 Titans.
Nissan could save a pile of money by using the underpinnings of GM's pickups to produce its next-generation Titan. Ditto for Nissan's big Armada SUV.
In turn, GM might want to use the underpinnings of Nissan's well-regarded cars. For example, GM doesn't make much money selling the entry-level Chevrolet Cobalt. If GM sells a rebadged Nissan Sentra, it could trim product development costs.
But any savings for GM or Nissan would be "well down the road," warns Rebecca Lindland, associate director of the automotive group at Global Insight in Lexington, Mass.
Would it make sense for Nissan and GM to share North American assembly plants? Nissan's four North American assembly plants now are operating at 90 percent of capacity.
Nissan has no immediate need for additional production, although it might want more in a few years. And that might be an attractive proposition for GM, which has been closing unneeded plants.
Presumably the UAW would welcome proposals for GM plants to produce vehicles for Nissan, since it is trying to save jobs. If so, GM could seek some concessions from the union in 2007 to cut costs.
The partners could share assembly plants fairly quickly, Lindland says. "GM could say (to the UAW): 'We will reopen all these plants. We'll add a shift and put people back to work. But when we go to the bargaining table in 2007, you will have to do all of these things.'"
What technology would the partners share? Neither Renault nor Nissan have spent much money on hybrid powertrains, and Ghosn has even ridiculed hybrids. But Nissan now plans to buy hybrid technology from Toyota Motor Corp.
Instead, Nissan might borrow GM's new dual-mode hybrid powertrains, which are optimized for U.S. driving conditions. The partners also might want to share diesel technologies.
In any event, the partners might want to share the cost of r&d to keep up with Toyota. According to analyst Rob Hinchliffe of UBS Investment Research in New York, an alliance might allow GM to cut its r&d budget by 20 percent. That would save $1.3 billion or so a year. Likewise, Nissan could plow its savings into developing products.
Kerkorian has suggested that GM, Nissan and Renault can save money by jointly purchasing components.
But this is no slam dunk. To derive the full benefit of joint purchasing, the partners must use the same vehicle platforms. That could take years, given the complexities of coordinating product plans.
Plus, GM already enjoys the economies of scale that come with its annual global purchasing budget of $85 billion.
On the other hand, Renault and Nissan enjoyed substantial savings when they coordinated their purchasing. Before it allied itself with Renault, Nissan paid 40 percent above competitive market rates using its own in-house network of suppliers, according to Hinchliffe.
No room at the top
In the event of an alliance, few people imagine Ghosn taking a back seat. And it's hard to imagine GM CEO Rick Wagoner would agree to be Ghosn's sidekick.
Can Ghosn run GM on a part-time basis?
"I can't see (Ghosn) running all three companies," Lindland says. "People are starting to question his ability to run two companies now."
Wall Street appears to be impatient with Wagoner, but the low-key CEO has strengths of his own. Wagoner has good rapport with the UAW. That's a key issue with GM's labor contract due for renegotiation next year and Delphi Corp.'s turnaround still under way. Delphi is GM's largest supplier.
GM needs big concessions from the UAW. Could Ghosn command the union's respect?
The bottom line: The proposed alliance is a game of high-stakes poker between Ghosn, Wagoner and Kerkorian. At stake are thousands of jobs, billions of dollars and a sizable chunk of the U.S. economy.
You may e-mail Jamie LaReau at [email protected]