He was among the most celebrated chief executives around the world. A master at scripting turnarounds, blessed with a sharp mind and astute business sense, 64-year-old Carlos Ghosn was the toast of the global automobile industry.
In 2017, the grand Franco-Japanese Alliance of 19 years, Renault Nissan, with the addition of Mitsubishi that was merged in 2016, stumped global pundits by emerging as the largest automaker in the world, leaving Toyota, Volkswagen and General Motors in its wake. Ghosn's stock was at an all time high.
In an interview with Business Today in July from Tokyo, Ghosn talked of what made the partnership tick. "We have a very special way of working together. In this Alliance, we are extremely strict in the management of resources. We do a lot of things together where the rule is we do not duplicate things in engineering, manufacturing, purchasing, supply chain and in many other important areas where we collaborate. But at the same time we retain the autonomy of each of these operating companies with its own culture, brand, history, and priorities in terms of markets. This way we have the unity of one company and diversity of multiple companies," Ghosn said, explaining the unique success of the Alliance.
Yet, all it took was a few hours on November 19 for the fairytale story to take a bitter turn. As Ghosn landed at Japan's Haneda airport in his private jet for what was a routine work trip (he divided his time between Paris and Tokyo), he was arrested. An investigation by Nissan showed that he had under reported his salary to the Tokyo Stock Exchange securities between 2011 and 2015.
At the time of going to print, his custody was extended to December 10, with another arrest warrant expected to be issued. Media in Japan reported that Ghosn is likely to face another accusation of under reporting his salary by about $35.5 million, between 2015 and 2017. Another arrest may mean detention for him till the end of the year.
According to prosecutors, Ghosn and Greg Kelly, a one-time Nissan human resources manager and current board member, under-reported Ghosn's compensation by more than $44.5 million. Ghosn declared a pay of just under $44.5 million during these years, which was half the nearly $89 million he actually earned. Nissan's annual securities report shows Ghosn received annual remuneration exceeding $8.9 million until fiscal 2016, when shareholders voted against his pay package and his annual pay dropped to $6.5 million a year in 2017, down more than 30 per cent.
Fall from grace
Under-reporting salary is the bigger of the two other allegations that Nissan has made against Ghosn, who has been credited for turning around the auto company in the late 90's and who was its chief executive till last year. The other allegations include misuse of company assets for personal use and misrepresenting the purpose of spending the company's investments. These two allegations pertain to the six residences in Tokyo, New York, Beirut, Rio de Janeiro, Paris and Amsterdam, that Nissan had provided to Ghosn and an advisory contract to his sister for $100,000 a year.
Locked away at an austere detention centre, Ghosn could potentially face a jail term of up to 10 years in Japan if the charges against him are proven in court.
There is, however, much more to this than meets the eye. Ghosn's jet setting flamboyant lifestyle and perceptibly high salary often raised eyebrows among those in the Alliance. In 2016, he got into a tiff with the French government when it joined 54 per cent of the shareholders in the company refusing to authorise a $8.53 million. That vote was overruled by the company's Board but Ghosn eventually had to settle for a pay cut when Emmanuel Macron, then the Finance Minister of France and now its President, threatened to bring in a new compensation law. Earlier this year too, Ghosn was pulled up in the company for his $8.53 million pay package for 2017 but managed to narrowly win the vote.
His salary and lifestyle were even more out of sync in Japan. Last year, as chairman of Nissan, his reported income of $6.5 million, though 30 per cent lower than in 2016, far outstripped those of his counterparts, and was more than four times the pay of Toyota's chairman, Takeshi Uchiyamada ($1.6 million in 2017).
"For such a celebrated CEO, the issue of his high salary has cropped up from time to time," agrees Felipe Munoz, a global automotive analyst at JATO, a research firm. "It is a very political topic."
Taken in isolation, Ghosn's overall salary of $8.5 million from Nissan, $6.5 million from Renault and another $2 million from Mitsubishi, may seem a lot but it is still less than what some CEOs of other auto companies earn. In 2017, GM CEO Mary Barra's compensation package was almost $22 million while Ford Motor Corp.'s former CEO Mark Field drew a similar $22.1 million in 2016. Ford Motor's current CEO Jim Hackett also had a comparable $16.7 million-package in 2017. The late Sergio Marchionne of Fiat Chrysler had an even higher salary of $40 million per annum.
At stake: Alliance's future
The scandal marks a spectacular downfall for Ghosn but it is much more than just the vilification of one individual. The apparent success of the Renault-Nissan Alliance that was forged in 1999 when Renault lent a helping hand to the struggling Nissan and picked up about 37 per cent stake, masks the simmering discontent between the two companies. In the very first year of the turnaround plan, Nissan's consolidated net profit after tax climbed to $2.7 billion from a consolidated net loss of $6.46 billion in the previous year. Within three years, the car maker had become one of the industry's most profitable auto makers globally.
Nissan is the bigger company, both in terms of outright sales and revenues as well as profits, and there is a long-standing feeling within the Nissan camp that it deserves more say in the boardroom. Renault has two seats on Nissan's Board, while the Japanese company has no voting rights on Renault's Board.
Nissan has far outgrown Renault; in the last decade it accounted for more than half of Renault's net income. The bone of contention is the maze of cross-holdings that underpins the Alliance. Renault holds 43.4 per cent stake in Nissan Motor Corp., which in turn has 15 per cent share in the French company. The two companies have equal share in the common Renault-Nissan Alliance Board. Nissan has 34 per cent stake in Mitsubishi, which it picked up in 2016. Being the largest shareholder in Nissan gives Renault considerable clout in Mitsubishi as well.
Throw in the Alliance's relationship with German luxury car giant Daimler, which makes the Mercedes brand of cars, and the partnership becomes even more curious. Renault and Nissan have an equal 1.55 per cent stake in Daimler, which has a 3.1 per cent stake each in both the French and the Japanese companies. Further, the French government's 15.01 per cent share in the parent Groupe Renault gives it a lot of say in who leads the Alliance and how it is run.
In March this year, Ghosn was trying to push through a plan to merge the two companies into a single entity to bring more permanence into the relationship. France wanted a proper succession planning and deeper ties with Nissan to provide more stability to the Alliance. It was at this time that Ghosn took a 30 per cent pay cut, in return for a four-year extension at the top job at Renault and a chance to cement his legacy. Nissan vociferously opposed the idea, which it saw as a ploy to reiterate its minor partner role in the Alliance. Hiroto Saikawa, who replaced Ghosn as the chief executive at Nissan in 2017, and who was handpicked by Ghosn himself, was at the forefront of the protest. He hinted at a reshuffle in the cross-shareholdings to give Nissan more power in the boardroom, and even suggested that the Alliance should not need a person like Ghosn in future.
"There is no fact to the effect that we are negotiating any merger," Saikawa said in May. "What is important is that the Alliance is functioning with autonomy and efficiency. The greatest homework for us is how to carry that on to the next generation. Its possible to just hand it over as it is to the next generation. But in doing so, Mr. Ghosn - or a next-generation Mr. Ghosn - has to be there. Otherwise, the current mode of work cannot be kept."
"We have to ensure something which will not necessitate a new Mr. Ghosn in the next generation," Saikawa had said. "The capital structure and distribution is included in the scope of our discussions. An equity structure change is possible to be included in the homework." Nissan is yet to appoint a replacement for Ghosn, but it has started a process with a final outcome expected on December 17.
The scale of the disagreement forced Ghosn to backtrack and quell any speculation that Renault was trying to undermine Nissan's autonomy or make it a subsidiary. In hindsight, one can say the die had been cast. "I don't think you're going to see it this year or next," Ghosn said in May as a reaction to the comments from Japan. "Anybody who will ask Nissan and Mitsubishi to become wholly-owned subsidiaries of Renault has zero chance of getting a result. Lots of mergers collapse and destroy value - the strength of any company is the ability to motivate people, and how are you going to do that if some of these people consider themselves second-class citizens. This is something on which we need to bring a solution that is specific. Let's try and find something that will reassure the stakeholders that this will continue, but at the same time maintain the identity of each brand."
The divergence became more apparent in their reactions to Ghosn's arrest. The most caustic sound-bytes came from Japan. In a press conference that lasted 90 minutes, Saikawa said, "I felt not just that it is regrettable, but much more strongly than that - I felt indignation and personally, I keenly felt despair. He achieved much that many others could not do in reforms, especially in the beginning. But over these 19 years we have been developing many things. He was a part of that but it was the result of hard work by many people."
Saikawa spoke about governance too. "There are problems in terms of governance. When the top of Renault is concurrently serving as the top of Nissan with 43 per cent of shares, one person has too much authority and that was the problem. I think this was one of the causes. It is too premature but in future we will look for a more sustainable structure."
Saikawa's words were promptly followed by action when Nissan formally fired Ghosn as its chairman on November 22, three days after his arrest. But the reaction from France as also from Mitsubishi was a lot more measured and cautious. "I don't think there is anyone else on Earth like Ghosn who could run Renault, Nissan and Mitsubishi," said Osamu Masuko, CEO, Mitsubishi Motors. "The immediate problem is that while we still have people at the top of two companies, there is no one at the third (Mitsubishi)."
Right after Ghosn's arrest French President Macron said his government, "will be extremely vigilant to the stability of the Alliance and the group". The French Finance Minister Bruno Le Maire said the next day that Ghosn was no longer capable of leading Renault. However, at its Board meeting on November 21, Renault, unlike Nissan, did not fire Ghosn; it instead appointed Groupe Renault's COO Thierry Bollore as a temporary replacement. Like Saikawa at Nissan, Bollore was also handpicked by Ghosn as his replacement once he retired from the company.
"It is very clear that Nissan did not keep Renault in the loop as far as the investigation into this case is concerned so the response from Renault is obvious; they won't toe Nissan's line but would want to decide for themselves based on the facts," says Ashim Sharma, Principal and Division Head, Business Performance Improvement, Nomura Research Institute Consulting and Solutions. "The relations between the two companies are obviously strained as Nissan felt that it earns much more in the Alliance but it is Renault that owns more of it. This issue can divide them more and the next few months would be very challenging."
The possibility of the Alliance falling apart may seem far-fetched but is being discussed in hushed tones. Over the past decade, Renault and Nissan have deeply conjoined themselves - setting up factories and buying components together while investing in common R&D and vehicle platforms. More importantly, the Alliance has used its scale to develop electric and autonomous driving technology that can be used by both companies. A clean divorce, should the need arise, is out of the question.
"I don't think it will come to that. The companies will look at their own interests and weigh their options. If we look around, every other company is consolidating with others. Parting ways after doing all the hard work and reaping the benefits for 19 years, at this juncture will not benefit anybody," says Sharma. "But yes, they would be discussing a parting of ways within themselves as well. That is how you go to the negotiating table-prepared for any eventuality."
With Ghosn gone, it is clear that Nissan now has an upper hand. His larger than life image in Japan and the significant fan following he has earned in the country in the last two decades prevented Nissan from becoming ruthless in its talks with Renault. Now that Ghosn's reputation is in tatters that would not be a hindrance anymore.
"Right now, Renault is growing faster than Nissan but overall you have to say it stands to lose more. Nissan is the bigger company making more money but more importantly it has sizeable presence in the major markets around the world - China, the US and Japan. Renault is weak in all three, so getting into those markets on its own will be necessary for it but very difficult," says Munoz of JATO. "In the end, though, both stand to lose. I do not think it will happen."
Ghosn, too, had acknowledged the significance that each company had in different geographies, while speaking to BT. "Each company is totally free to chose its own priority. For example, for Nissan, the priority is mainly Japan, China and US; for Mitsubishi it is mainly Japan; and for Renault it is Europe and now starting in China and going forward in India."
The only definitive fallout of the scandal is that Ghosn's reputation, carefully built over decades, is now blown to smithereens. His journey from the shop floor to becoming CEO of not one but three global automotive firms at the same time, is the stuff of legends.
Early on in his career, Ghosn had quickly made a name for himself as an expert at restructuring and turning around operations. In his first job at Europe's biggest tyre company, Michelin, he turned around the operations at the company's South American division within two years of taking over. He followed it up with a restructuring of the North American arm that had just acquired an ailing Uniroyal Goodrich tyre company.
He replicated those successes at his next job in Renault, which gave him the moniker "le cost killer" for his ambitious yet effective cost-cutting measures. But it was the turnaround of Nissan, where Renault picked up a 36.8 per cent stake to form the Alliance in 1999, that was his crowning glory. The Japanese car maker had a debt of more than $17 billion in 1999 and only four of its 43 car models in Japan were profitable. Even by Ghosn's standards this was a herculean task, but he promised a return to profitability by 2000, a profit margin of more than 4.5 per cent of sales and a 50 per cent reduction in debt by 2002. Ghosn's turnaround plan was radical for Japan at that time - five factories were shut down, 20,000 workers were laid off and the stranglehold of keiretsu suppliers, which had cross holdings in Nissan that forced the company to buy components only through them, was broken.
"The revival plan included a target of reducing the total number of trading partners by half. At first, the number of suppliers decreased. But when Nissan's fortunes turned the corner after 2000, the number of our business partners actually rose," Ghosn wrote in his autobiographical account in My Personal Story, posted on the company's website. "We had to close five plants but have since opened 15. We also had to cut 20,000 people from a workforce of around 150,000, but today we have a headcount two times the size after the initial reduction. Nissan had $17 billion at current rates in debt, but now has $13 billion in cash."
What followed after he became the chairman and CEO of both the companies and the Alliance in May 2005 was a period of success. In his stewardship of more than a decade, the Alliance's annual sales have grown over 70 per cent while profits have nearly trebled. At a time when consolidation became the buzz word in the industry, Ghosn was at the centre of the successful amalgamation of two disparate companies.
"We have been together in the Alliance for 19 years now but the most spectacular achievement has to be the revival and complete turnaround of Nissan," Ghosn had told BT during a call from Tokyo in July.
Ghosn was, however, also clearly aware of the Alliance's vulnerabilities. His attempt at merging the companies, which Nissan strongly opposed, was one way of making the partnership concrete as also securing his own legacy. "My most important achievement has been to grow the Alliance. From the beginning it was shrouded by scepticism. Some said ultimately it will be a classical merger situation. But that did not happen. We have surprised the world by presenting a template where two companies, now three, can work as partners independent of their size, culture or level of shareholding. This is not the most spectacular but for me it is the most significant one," he said during the call in July.
India plans unclear
Ghosn's departure could also come as a blow to the Alliance's plans in India, the only major market where it has a negligible presence. The Alliance cumulatively commands less than 4 per cent share in India's more than 3.2 million unit annual car market - a far cry from its 11 per cent global marketshare. This is something that has rankled Ghosn for long. The Datsun brand that was conceptualised as a spearhead of the group's India strategy, has not achieved much in four years. In 2017-18, it found only 40,391 customers for its cars. This was less than the 2 months' sales tally of Suzuki Alto, the bestseller it competes with.
"Datsun did not meet the expectations but I knew that establishing ourselves for the long-term in India would require a long-term effort. I was hoping for quick and sustainable results but we did not get that and we are learning it the hard way, through product and technology introduction, dealer management," Ghosn said in July. "We still have not found a road for a convincing and sustainable performance in India but Nissan and Renault bypassing the Indian market is not an option. We consider India as a high priority market because without any doubt it will become one of the top 3-4 markets in the world. We have to prepare ourselves for that even if we have to suffer in the short term. There is no way we are going to give up on our efforts to be present and be competitive in India."
In its new, post-Ghosn avatar, the Alliance's determination to crack the Indian market will be tested. Either way it would be difficult to replace Ghosn who has been a long-time admirer of India's frugal engineering prowess and a fan of the Tata Nano.
A man of numbers and targets, Ghosn was not planning to slow down but was readying himself for another challenge, turning around Mitsubishi, and charting the most definitive electric car story. He had laid out solid markers for the Alliance for the next four years - a combined revenue of $240 billion from $180 billion in 2016, sales of 14 million vehicles - 9 million from just four common platforms - and combined synergies between the companies of 10 euro billion from 5 euro billion in 2016. Most of all he wanted a secure future to the partnership he helped to build.
"It (the Alliance) will work even when I retire. We need to put in place an organisation with processes and people that will reassure all the doubters and sceptics that this can continue independently of who is leading the different organisations," Ghosn said. "I have a mandate till 2022 so till that time I am here. The objective is to make sure that before that we eliminate all the doubts that the Alliance can work with different people and organisations. People will be more at ease with the permanence and sustainability of the Alliance. That is what matters."
As the binding force of auto industry's most successful partnership makes an ignominious exit, Renault Nissan is destined to change forever.