Sayonara, General Moteurs
Jul 6th 2006 | DETROIT AND PARIS
From The Economist
General Motors' biggest shareholder tries to arrange a marriage
THE timing could not have been more pointed. As Americans prepared to celebrate Independence Day, Kirk Kerkorian, a billionaire investor who owns nearly 10% of the world's largest carmaker, suggested that the best hope for General Motors was to join Renault and Nissan. A symbol of American commercial might needed rescuing by France and Japan.
The reclusive Mr Kerkorian is GM's largest shareholder?and a restive one, too. For over a year, he has been pressing GM's chairman, Rick Wagoner, to turn the firm around. In particular, Mr Kerkorian and his sidekick Jerry York?veteran of turnarounds at Chrysler and IBM?wanted Mr Wagoner to endorse targets and a timetable for reversing GM's decline. At the Detroit Auto Show in January, Mr York ****ed Mr Wagoner with faint praise and eulogised Carlos Ghosn, chief executive of Renault and Nissan, for saving Nissan with ambitious targets that he hit early.
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Mr Ghosn's secret is to form cross-functional teams, have them draw up detailed plans and then enforce them. He made it work at Michelin in Brazil and America, at Renault in France (where he was called ?le cost killer?), and most famously at Nissan in Japan, where he was parachuted in after Renault took a stake in the ailing company in 1999. At the time, Bob Lutz, now GM's vice-chairman, likened the investment in Nissan to filling a container with $6 billion in gold bullion and sinking it in the Pacific. GM's losses have since far exceeded that sum, whereas Nissan has notched up the best profit margins in the industry.
With GM's sales and domestic market share sliding, Mr Kerkorian decided to act. His filing with America's Securities and Exchange Commission outlined a plan that would make GM the third leg in the alliance between Renault and Nissan. The stockmarket value of Renault alone is nearly double GM's, so the duo could easily afford a joint 20% stake. ?Such a global alliance,? the filing declared, ?has the potential to materially strengthen the competitive positions of all three companies.?
Mr Kerkorian's declaration underscored the enmity between the investor and his chief executive. At first, it seemed as if Mr Wagoner and his lieutenants had been unaware of the proposal. In fact, he had been prodded into setting up a meeting with Mr Ghosn for July 14th?aptly, the closest France has to Independence Day. Mr Kerkorian's filing made the plan public, obliging GM to take it seriously or risk a lawsuit from its shareholders.
Mr Ghosn has not hidden his interest in adding an American leg to the Euro-Asian alliance. He said as much last month, at a ceremony to mark the construction of Nissan's new American headquarters outside Nashville, Tennessee. He later dined with Mr Kerkorian in Nashville to discuss the plan, having met Mr York in London. This week the boards of Nissan and Renault said they would talk. GM's other investors also liked the idea: its share price rose nearly 10% on news of the scheme. Some industry analysts like it, too. John Murphy of Merrill Lynch said the plan was ?confirmation that there is significant value in GM?. But does the marriage make sense?
Although the car industry has undergone much consolidation in the past decade, most of it has been disastrous. Two unprofitable smaller firms, Jaguar and Saab, were swallowed by Ford and GM respectively only to cost billions in further losses. After Daimler-Benz snapped up Chrysler in a messy deal, first portrayed as a merger of equals, it took six years to get the combined firm on an even keel. The tie-up between Nissan and Renault does not follow this sorry trend, perhaps because it is a cross-holding alliance, rather than a full merger. ?Where there are synergies, we work together,? says a senior alliance executive. ?Where there aren't, we work independently.?
GM's experience so far with alliances, however, has been nothing short of awful. Starting in the mid-1990s it took small stakes in Asian and European firms with a view to building a GM federation that would encompass a quarter of the world market. The idea was that GM would gain access to small-car know-how, while sharing in the success of its affiliates in their local markets. But it didn't work. GM has sold its stakes in Suzuki and Fuji Heavy Industries and had to fork out $2 billion to extricate itself from an obligation to buy the 90% of Fiat that it did not own.
Mr Kerkorian and a number of analysts see more opportunities in an alliance with Nissan and Renault. This is partly because of its size. CSM Worldwide, a market-research firm, notes that the three carmakers will collectively sell around 14.3m cars and trucks this year, so that together they would dominate the European, American and Chinese markets.
Nevertheless, CSM questions Mr Kerkorian's estimates of the potential cost-savings. GM's suppliers have already been squeezed hard. Given the company's size today, further economies of scale may be elusive. Product overlaps are another worry: the partners could end up competing with each other as much as with Toyota or Volkswagen.
Moreover, GM has world-beating troubles to match its world-beating size. Though it reported a modest first-quarter profit, last year's $10.6 billion loss still looms large. GM recently announced that more than 30,000 American workers had accepted a buy-out offer, but it has still not secured a settlement at its former parts unit, Delphi, where a devastating strike remains a possibility. And its sales in America last month plunged by 26% compared with June last year, forcing it to bring back costly sales incentives.
Mr Wagoner has reasons of his own to be wary?not least because any deal would involve Mr Ghosn taking control. Although Nissan has staged a miraculous turnaround over the past eight years, it has lost some momentum in recent months and sales, particularly in America, are slipping. Renault has problems, too. Because nearly all its factories are in western Europe, it is under pressure from the Japanese and new low-cost factories in eastern Europe. Yet Mr Ghosn cannot move production eastwards without incurring the wrath of France's powerful unions.
Then again, perhaps Mr Kerkorian's real goal is to find a way out of GM, an investment that has cost him a lot of money. The 89-year-old billionaire has said he is committed to the carmaker. But he said that about MGM, a film studio, shortly before selling it. Maybe Mr Kerkorian's long-term plan is really designed to be a short-term kick to GM's share price. It is a possibility Mr Wagoner, Mr Ghosn and other investors would be foolish to ignore.