Rescuing Nissan

By Ichiro Suzuki Before the coronavirus brought down the global economy, Nissan was already in a deep trouble. Ousting of CEO Carlos Ghosn in the fall of 2018 had exposed Japan’s second largest car maker to a governance crisis. Nissan is 43% owned by France’s Renault that is 15% owned by the French government. The “alliance” structure, including another struggling Japanese car maker Mitsubishi Motor, was looking increasingly fragile without Ghosn who was the chief architect of the structure. The new Nissan management team, and the Ministry of Economy, Trade and Industry (METI), tried to upend the structure, with little scope for success so far. Then, the pandemic hit the economy, dragging the industry into the deepest downturn since the Depression. For the year to March 2020, Nissan reported a net loss of 670 billion yen ($6.3 billion) though the virus affected only the final three months of the fiscal year. The March 2020 numbers were considerably worse than a loss of 285 billion yen ($2.6 billion) for the previous year. Nissan was suffering from severe bleeding well before the outbreak of the pandemic, and not surprisingly, Nissan’s shares are in tatters, lately trading at levels comparable to those seen in the bottom of the Global Financial Crisis in early 2009. Its equity market capitalization at much diminished 1.5 trillion yen ($14.1 billion) is only 6% of Toyota’s, or 3% of Tesla. Such metrics don’t suggest a bright future for the ailing car maker. The Development Bank of Japan (DBJ), a quasi government institution, has recently announced that the bank invests 180 billion yen ($1.7 billion) into corporate bonds issued by Nissan, of which 130 billion is guaranteed by the government. It looks the government is determined to save the country’s No.2 car maker. The government lamented its inability to act the last time Nissan was pushed to the brink of bankruptcy in the late 1990s. It had no authority to bail out a struggling private corporation at that time, and that brought almost half the Nissan stake into the hands of Renault. Since then, the DBJ is able to act as a player at the time of private corporations’ difficulties. Rescuing of Nissan reminds us of bailing out of General Motors and Chrysler in 2008-09 in the middle of the GFC. The U.S. government allowed GM an access to the Troubled Asset Relief Program (TARP) that the Treasury Department has created for the purpose of bailing out financial institutions whose balance sheets were plagued by collateral debt obligations (CDOs) of increasingly deteriorating quality. The Treasury Department invested $50 billion into GM for a 61% equity stake, preferred shares and loans. With the majority of shares in the hands of the Treasury, the new GM was dubbed as Government Motors. The Treasury divested its equity stakes slowly, taking advantage of a rising stock market, and sold the last tranche near the end of 2013. The government lost $11.2 billion on investments in GM. While the Treasury earned profits from the vast majority of TARP investments, GM turned out to be one of the several cases that did not return the money back. It was estimated that 1.5 million American jobs were saved by rescuing GM and Chrysler. The latter received $12.5 billion but Ford did not have to ask the government for help. In the event of a wave of bankruptcies in Detroit, hundreds of thousands of workers would have been thrown out to the streets not only from GM and Chrysler factories but also from sprawling support industries that serve car makers. Costs associated with such large scale job losses would have been far greater than $11.2 billion loss on the TARP. Saving 1.5 million jobs for $11.2 billion is approximately $7,500 per every job saved. Total costs would have been much, much worse than this if these car makers had collapsed. The automobile industry, or the internal combustion engine car industry to be specific, have made a great contribution to the economy in the 20th century, with its ability to create relatively high paying jobs for a mass of blue collar workers. This blessing of the last century is increasingly becoming a curse today when the limits of the industry are being felt acutely, with the advent of electric vehicles that requires a much, much simpler production process and fewer number of parts than internal combustion engine cars. With the rise of EVs, the industries of the last century needs to be downsized and eventually phased out gradually, and this process would not go without pains. The U.S. did its first stage more than ten years ago, and Japan is doing it with Nissan. China would have to face this problem sooner or later, too, since its car industry is already sizable. Holding onto a large car industry is not consistent with the recently announced goal of reducing carbon emissions by 2050. Worse, pains felt so far are likely to be just the beginning of what lies ahead in the future. This is why the market is giving Tesla far greater valuation than the established car makers.


About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan. 

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