US auto major General Motors may initiate discussions with Nissan and Renault to form a three-way alliance and would create a group which would control nearly one-fourth of the global auto market.
General Motors, world's largest automaker, may take a lifeline from rival automakers Renault SA and Nissan Motor and form a three-way alliance to reverse its rapidly declining fortunes. The company's board is expected to meet later this week to consider initiating discussions with Renault and Nissan.
The boards of Japanese car major Nissan and French auto manufacturer Renault have already authorised Carlos Ghosn, CEO of both the companies, to explore an alliance with General Motors.
A three-way alliance between GM, Nissan and Renault would create a very dominant player globally. With a combined output of nearly 15-million units per year, the alliance would have a global market share of close to 25 per cent.
Renault currently holds a 44-per cent stake in Nissan, which in turn holds a 15-per cent stake in the French company. Renault controls Romanian auto maker Dacia and also has a minority stake in Swedish truck maker Volvo. Renault may possibly sell its Volvo shareholding to acquire the GM stake, if an agreement is reached.
Billionaire Kirk Kerkorian, whose investment company Tracinda Corp holds a 10-per cent stake in GM s reported to have mooted the idea of the three-way alliance to rescue the ailing auto giant. Jerome York, former CFO of Chrysler and IBM and Kerkorian's nominee on the GM board, met Carlos Ghosn and initiated the discussions on a possible alliance. This was followed by a meeting between Kerkorian and Carlos Ghosn where Ghosn reportedly indicated willingness to acquire up to 20 per cent of GM.
GM has been struggling for more than a decade now as the company has steadily lost its wheel share on the US roads to Japanese and European automakers. It is also saddled with huge welfare costs from liberal agreements with labour unions.
To improve its fortunes, GM tried to expand globally by forging alliances with smaller auto companies like Fiat, Subaru and Suzuki. These alliances failed and GM had to sell its investments in these companies to generate cash. It even paid $2 billion to Fiat to break the alliance.
GM acquired the passenger car business of the failed South Korean conglomerate Daewoo. Some of the successful GM models in the lower end of the market in recent years, like Aveo and Optra sold under the Chevrolet badge, have come from GM Daewoo.
Over the last few years, GM has been trying to drastically reduce costs by shutting down plants and shedding thousands of jobs. Last month, the company announced a reduction of 35,000 jobs and plans to shut down 12 plants to help save up to an estimated $1 billion per year.
But these savings are not going to be enough to revive the fortunes of GM which posted losses in excess of $10 billion last year. Sales volumes of GM for the first six months of 2006 have declined more than 12 per cent as compared to the same period last year.
The company needs to launch new models which would help re-build market share while continuing to restructure its operations to bring down costs. GM also has to ensure that the new models fetch better margins, which makes sharing of parts and technology with other manufacturers all the more important.
However, some analysts are taking the interest shown by Nissan-Renault as a clear indication that GM has a lot of hidden value and can be nurtured back to health. Otherwise, they contend, someone as hard nosed as Carlos Ghosn would not be interested in an alliance. Chances of a full acquisition of GM by Renault-Nissan are low as Ghosn has earlier expressed reservations about full fledged auto mergers like the one between Daimler and Chrysler.
Not so good for Nissan-Renault
The benefits of an alliance are evident for GM, but not for Nissan and Renault. Nissan is in a very healthy shape now after Ghosn nurtured it from the brink of bankruptcy in the late '90s. Ghosn is currently spearheading a restructuring programme at Renault.
The French government, which holds a minority stake in Renault, is reportedly not very keen on an alliance with an ailing company like GM. The French industry minister has asked Renault to proceed with caution. French auto companies like Renault and Peugeot-Citroen have no presence in the US market at present and an alliance with GM would facilitate a re-entry by Renault into the world's largest auto market.
But shareholders would be worried about the problems at GM that could be extremely difficult to tackle even for a turnaround artist like Ghosn. Besides, there are also fears that Ghosn would have to struggle to give enough attention to GM while handling the top job at both Nissan and Renault.
Possible Indian scenario
A Nissan-Renualt-GM alliance would create an interesting situation in India. GM India is slowly bouncing back after nearly a decade of struggle, trying to push the Opel brand. The company has decided to discontinue the Opel brand in India and would now focus on Chevrolet instead. Its recent launches like the Optra and Aveo have been relative successes and the company is all set to launch a small car, the Spark from GM-Daewoo.
Renault has formed a JV with Mahindra & Mahindra to launch the low-priced sedan Logan by next year. Logan was developed by Renault subsidiary Dacia and has been very successful in developing markets. Renault holds a 49-per cent stake in the JV with M&M. When launched, Logan would compete against entry level sedans like Tata Indigo, Ford Ikon and Maruti Esteem.
Nissan currently markets only an SUV model, X-Trail, in the country and has never achieved any significant volume because of a very high price tag. The company announced last month that it would source small cars from Maruti Suzuki. Though the sourcing from Maruti would be mainly for the European markets, Nissan may also market the model in India.
GM was the single largest shareholder in Japan's Suzuki, the majority shareholder in domestic market leader Maruti Suzuki, till recently. Though GM has reduced its stake in Suzuki to just 3 per cent to raise cash, it can increase the stake at a later date. Suzuki still values its partnership with GM as the company is marketing some of the GM-Daewoo models under the Suzuki badge in some markets including the US.
If Nissan-Renault brings in sufficient cash, GM can buy back its Suzuki stake and possibly bring Suzuki also to the alliance. Suzuki still holds an 11- per cent stake in GM-Daewoo of South Korea.
Such a four-way alliance between GM, Nissan, Renault and Suzuki would create an auto behemoth in India. The alliance would control more than 60- per cent of the market with a very wide range of models from entry-level small cars to large SUV's. Other leading players like Tata Motors, Hyundai and Ford would be watching the GM-Nissan-Renault talks with considerable interest. Or concern, perhaps?