Nissan Calls For A Tow

By FRANK GIBNEY JR.

In Japan, putting your company on the acquisition block is so shameful that the expression for it--miuri--means "selling your body." So it must have been excruciating last month for Yoshikazu Hanawa, president of Nissan Motor Co., to publicly offer for sale a controlling interest in Japan's second largest automaker. What must have been even more humiliating is that when Nissan's suitors looked under the hood, they became even less interested in this clunker, with its $22 billion in debt and a lineup of flashless cars. The word around the car industry is that the $49 billion company ought to be left to wither. Says James Harbour, a doyen of automobile analysts: "A merger with Nissan is absolutely the worst idea I've ever heard of."

Whoa. Just a decade ago, Nissan was synonymous with Japan Inc., the business goliath that was devouring America. The auto company's fuel-thrifty sedans and zippy 240Z sports car put the fear in Detroit long before the Toyota Camry or Honda Accord ever saw a drafting table. Nissan's success gave weight to the myth that Japanese companies were run by enlightened executives who worked in frictionless synchronicity with workers to produce superior cars. In his best-selling book The Reckoning, David Halberstam suggested that U.S. industry, namely the Ford Motor Co., would be consigned to a never-ending game of catch-up with the likes of Nissan, a company driven by the Japanese "demonic need for excellence."

These days Ford is a global predator with a $23 billion war chest and a market value ($34 billion) almost four times as big as Nissan's. Racked by an economy in an eight-year decline, Japan has a demonic need for the cash and expertise of foreign bankers and takeover experts who are buying, at deep discount, chunks of the country's financial and industrial base. "What has really happened this decade is the true inability of the Japanese to manage in a difficult situation," says ING Baring Furman Selz managing director Maryann Keller, who has studied Japanese industry for 30 years. Once unthinkable, the idea that foreigners might "save" Japanese companies is becoming commonplace. Witness Merrill Lynch and its absorption of Yamaichi Securities, or General Electric Capital Corp. and its $6.5 billion takeover of one of Japan's biggest leasing companies. Or Goodyear's bid to control Sumitomo Rubber Industries. If it is shameful to be acquired by foreigners, at least Nissan president Hanawa is far from alone.

Only a handful of companies have ever lived up to the Japan Inc. myth, and Nissan isn't one of them. Certainly its manufacturing and engineering prowess are world-class. And Nissan still builds first-rate automobiles. It simply doesn't make the right kind, nor does it know how to sell them. "We've failed to understand what the market wants," Hanawa told TIME early this month. "We're reflecting upon that." Deep meditation is more like it. Nissan has been paralyzed by its own bureaucracy and a legacy of tension between management and labor in Japan.

Nissan has been running out of gas since 1985, about the time Halberstam was writing. The company's U.S. sales that year topped 830,000, and the goal was to pass Toyota, the market leader, within a year. Nissan never came close. Its sales in the U.S. have shrunk more than 30% since then, and the company has slid to a distant third, behind Toyota and Honda. The story is much the same in Asia, where in Thailand Nissan's share has almost halved, to 11%, despite massive investments in new plants.

The U.S. market is typical of Nissan's global difficulties. Last year just about anything with four wheels and a little styling moved off dealers' lots. Yet Nissan's sales dropped 14.7%, and the company lost money. Nissan's managers somehow forgot a golden rule in the auto business: profits are only as good as the last hot product in a fast-changing cycle. The Maxima, Nissan's flagship since the 1980s, is a perennial critics' favorite, but even its fans say it needs a dramatic face-lift. So does the Infiniti luxury series. The Altima, Nissan's affordable sedan (about $17,000), is chubby, boring and no match for its nemesis, the Accord, or the new Volkswagen Jetta. This year Nissan's only brand-new offering is the Xterra sport utility. Hot, say critics, but alone. "They've tarnished their image," says Bill Seltenheim, an analyst with Autodata in Woodcliff Lake, N.J. "Everyone knows if you want to buy a Nissan, all you have to do is wait for the next incentive program."

The problem: instead of allowing designers to work their magic, bureaucrats in Tokyo have been dictating, Henry Ford-like, what is good for the customer. The lesson, of course, is that in the 1920s Ford almost bankrupted his company doing that. Says J. Ferron, one of the auto industry's leading consultants: "There have been times when nobody even bothered to ask whether green cars were selling before they were loaded onto ships."

Nissan's consensus-driven management style and corporate structure may have been acceptable in the go-go '80s, but they don't work well when drastic decisions have to be made quickly. Positions on its board of directors are sinecures, and the boards don't hold management accountable in the way American versions now do. "Changing things means criticizing what you've done so far," says Iwao Nakatani, an economist at Hitotsubashi University. "They simply wanted to avoid that."

Remember those mighty keiretsu, the web of supplier relationships that improved parts quality and manufacturing flow for Japanese companies? These days the costs of keiretsu are all but strangling companies like Nissan. Its keiretsu includes 1,000 companies that employ 10 workers for every 1 of Nissan's. And then there is the lifetime-employment tradition. In a good economy, the security of lifetime employment engenders goodwill and teamwork. In a bad one, and Japan's is bad, it becomes a black hole of overhead. Even powerhouse companies, like Sony, Toyota and Toshiba, that fit the mighty Japan Inc. myth are burdened with thousands of redundant workers they cannot fire. Says ING Baring Furman Selz's Keller: "What amazes me still is how little foreigners understand about Japan and what it will take to restructure a company like this."

Hanawa is indeed struggling over what should be the most drastic restructuring effort in Japanese corporate history. So far he has off-loaded a few subsidiaries (leasing and advertising), banned corporate entertainment and sold the company's 15-story headquarters on Tokyo's glitzy Ginza. In a more dramatic gesture two weeks ago, Nissan Diesel, the group's commercial-truck division, announced it was closing a plant in Gunma, north of Tokyo, and eliminating 3,000 jobs in the process--a radical move.

But hardly radical enough, which is one reason why Hanawa is committing miuri. In one remarkable January week, Nissan became the most talked-about company in the global auto business because everyone with a little extra cash wanted a piece of it. Even tiny Renault piped up that it had French-government backing to acquire a controlling stake in the world's seventh largest carmaker. Renault could afford it because that week Nissan's stock price had sunk low enough so that a 33.4% share (which counts in Japan as a controlling interest) was worth around $2.8 billion--or barely half of what Ford recently paid for Volvo, the world's 21st largest carmaker.

Nissan still has a lot to offer. Its engine technology is the best in the business, say many experts. And so are its manufacturing plants. The Smyrna, Tenn., factory where it makes the Altima, Sentra and Frontier models has been ranked North America's most efficient for five years (although slow sales idled the plant every Friday for 16 weeks last year). Nissan also offers a window onto Asia's market, which could be a bonanza when it finally recovers.

Yet on the face of it, Nissan is simply too burdened to be much more than a headache to anyone. Analysts estimate that its debt nearly doubles when the financial obligations of its many affiliates are thrown in. "We don't want to spend our hard-earned money buying someone else's hard-earned debt," said Ford co-chairman Jacques Nasser not long before he bought Volvo last month. Some top Ford executives were certain last fall that Nissan was worth a serious look, and they went so far as to invite Hanawa to Dearborn. But even before the Japanese executive got there, enough intelligence had come back from Japan that the bloom was way off Nissan. In any case, Nasser never saw him.

Still, the hint of a deal with Ford was enough to pull DaimlerChrysler closer to Nissan, and the German-American auto giant may still step in to save the Japanese. Even before CEO Juergen Schrempp inked a deal to acquire Chrysler Corp. for $37 billion last May, his Stuttgart brain trust was urging him to buy a controlling stake in Nissan Diesel. That would give Daimler, the world's largest commercial-truck producer, a solid foothold in Asia.

Now DaimlerChrysler and Nissan are far enough into negotiations that an acquisition of the truck company, or something more complicated, is still a real possibility. In Tokyo last month, Schrempp and co-chairman Robert Eaton made it clear to Hanawa that they wanted Nissan to restructure further and write off some of the company's gargantuan debt before a deal was consummated. According to one insider, Hanawa balked at a debt write-down. But both sides left themselves plenty of room for a future deal. Said Schrempp at a press conference in Tokyo last month: "Our only problem is, we're very impatient." He can afford to wait, since Nissan faces a long haul on the road back to prosperity. Yet in Chicago last week, he hinted again that an acquisition in Asia may not be far off.

If nobody reaches out to Nissan, there is perhaps one ray of hope: critics raved last month when the company unveiled a new 240Z prototype and sleek sport utility truck at the North American International Auto Show in Detroit. The 240Z made the covers of several enthusiast magazines. What wasn't necessarily made clear was that management in Tokyo had almost blocked the prototypes. They had been conceived and built in California at the urging of U.S. executives desperate for new product, using $1 million purloined from the North American sales and marketing budgets. Hanawa now has to get his managers in Tokyo to approve production of the new Z, not to mention find the money to pay for it. In Japan Inc., that could take awhile.

--With reporting by Tim Larimer and Sachiko Sakamaki/Tokyo and Joseph R. Szczesny/Detroit

With reporting by Tim Larimer and Sachiko Sakamaki/Tokyo and Joseph R. Szczesny/Detroit