The Indian education of Renault-Nissan’s CEO

Joseph Campbell, in his The Hero with a Thousand Faces, explained the making of a hero. The hero starts out ordinary; gets a call to adventure; undergoes severe tests and on survival gets a great boon. After this, he returns to an ordinary life and uses that boon to improve the world. In the past 40 years, the world of business would have produced a handful of leaders who can truly fit the concept of a hero. These would be Lee Iacocca, Jack Welch, Lou Gerstner, Steve Jobs and perhaps Ratan Tata.

And then there is Carlos Ghosn. He is a hero who is still stuck in the ‘call to adventure’ phase. He manages two car companies, one French (Renault) and the other Japanese (Nissan), and has made both profitable. And yet he is passing through his severest test in two markets — India and China — that will determine his legacy. In both these markets Renault, and to a lesser extent Nissan, are non-entities. In China, at least Nissan, in an alliance with Dongfeng Motor, has managed to make some headway, but in India Ghosn has little to show. A man who is known to rescue sinking companies, who can navigate extremely complex alliances can only show the lessons he has learnt.

To be sure, some of those lessons are reflected in his recent decisions. He has a new target for India. “The objective is for both companies [Renault and Nissan], from 2011 to 2016, to reach a 10 percent market share. Why 10 percent? Because this is the average market share we have, globally. Renault and Nissan globally represent 10 percent market share so there is no reason that in India we don’t do the present average of the two,” he says. Ghosn is after the Holy Grail of building a small car, one that will be popular in India. But that will take time. So, right now he is focussing on localisation and rolling off as many different models.

Amit Verma/ Forbes India

In the past 12 months, both Renault and Nissan have laid out a product strategy of launching five vehicles each by 2013. At the alliance’s manufacturing plant in Chennai, work is on in full swing to execute this, which entails significant amount of work in localising engines and transmission components.

In February 2012, Renault will launch the Pulse, a premium hatchback which is based on Nissan’s V platform, on which the Micra has been built. Another assembly line is being set up to ready the manufacturing of the Duster, Renault’s offering in the entry level sports utility vehicle segment.

Another small car, called the A platform has reached a critical stage where the purchasing team is actively working on building a supplier base.

Nissan, on its part, is working on building a small car especially for India. A sports utility vehicle is also on its way, which the company is building on the ‘Dost’ platform, the Light Commercial Vehicle (LCV) from its alliance with Ashok Leyland. The alliance (Nissan Ashok Leyland) will launch another LCV later in 2012. Ghosn says the goal of the India strategy is to localise more than 85 percent of the products and expand dealer network.

But it is going to take more than just that to achieve a 10 percent market share. Being a marginal player in the country for about four years, he now knows exactly who the alliance is competing against. “We know their products very well, we know the price, we know the engine and you know the name of the game in India is fuel efficiency. That’s No. 1. Price, that’s No. 2 and third is design and functionality. If you come with an offer that is better than the competition, then you have a shot at it. We have nothing [to lose] in India. Here, we are the challengers,” he adds. Much of this confidence comes from the lessons Ghosn has learnt in India.

Demanding Partners

Carlos Ghosn admits Logan, which was Renault’s first foot forward in India, was not its best. “Oh, the Logan was too expensive. Second, it was not sufficiently localised,” he says. Logan was launched in 2007 and the Union Budget of that year changed the duty structure on cars that were more than 4 metres in length. Logan was 4.247 metres long and was taxed at 20 percent, while cars up to 4 metres were taxed at 8 percent. “This was absolutely not expected,” says a Renault India official.

M&M, Renault’s JV partner in the Logan project, wanted the Logan’s length to be reduced to less than 4 metres, but Renault did not agree. “How can you cut a global platform just like that? And we were not sure if that was the only reason the sales were floundering,” says a Renault India official.

M&M was tired of the stubbornness of the French car company. Renault was not sure if M&M’s communication and sales strategy was right.

To make matters worse, negotiations between Renault-Nissan and M&M on the Chennai manufacturing facility was not going too well either.

Mahindras wanted to have full power. Renault-Nissan was upset. The point of contention was that M&M would get management power equal to the amount of investment they brought in.

Finally, in November 2009, it was agreed that Renault would license the Logan to Mahindra. In April 2010, the Mahindra Renault JV officially came to an end.

Logan is now clocking numbers of above 1,500 units every month. For Renault, it is a big blow. According to senior M&M officials, independence from the JV has brought in “a feeling of ownership for the brand”. M&M has done well to rename Logan as Verito and the car no longer sports anything Renault.

New Alliances and Concepts

Can you imagine an iPod being created through an alliance? Totally new products need a team that truly believes in it and is willing to put everything on the line to see it through. The ultra low cost car (ULC) is a bit like that. Bajaj and Renualt haven’t been able to agree on what the new innovation should look like.

Partnerships are always complex and few people understand alliances better than Ghosn. Both in China and Russia, the Renault-Nissan alliance has local partners, Dongfeng and AvtoVAZ, respectively. So why has India been difficult?

With Dongfeng and AvtoVAZ, the governments of those countries are the largest shareholders.Those governments need the skills of a great manager like Ghosn. In India, Ghosn’s alliances have been with entrepreneurs who are strong personalities and hands-on themselves. “Frankly, you don’t find it of the same level in any of the other countries. Very smart people, at the same time extremely family-oriented, proud of their enterprise and would do anything for it,” says Ghosn. Add to it that Indians are extremely shrewd and smart businessmen. “They never take no for an answer.

You know this mentality of creating value out of nothing,” he says.

In more ways than one, that’s exactly what Ghosn wanted the Renault-Nissan alliance to learn the first time he came to India — frugal engineering. For that he joined hands with Rajiv Bajaj.

The Renault design studio in Mumbai was given the mandate to design the concept car. The teams were working together and a senior Renault executive who has seen the concept car pictures says, “It was a peach of a design.” Rajiv Bajaj, though, didn’t think so. In 2008, he communicated to Renault-Nissan that it wouldn’t work.

According to sources, by July 2008, Bajaj had a change of heart and seemed to think that it would be difficult for him to do such a project and make profits on the low cost car. “He was one of the first among us to say that the Nano would not get the promised volumes,” adds the Renault official. By late 2008, Gilles Legassor, a senior Renault officer who was involved with the project, was frustrated and decided that it was time to leave. Renault’s design team posted at Bajaj’s Chakan plant also decided to pack up. “We downloaded everything on the Renault IP and took it off Bajaj’s mainframe,” adds another senior ex-Renault official.

It was followed by eight months of silence. Bajaj informed Renault-Nissan that it was working on something, but didn’t specify exactly what it was. It was only at the World Economic Forum in November 2009, when Ghosn was in New Delhi, that things cleared up a bit. Bajaj asked for a one-to-one meeting with Ghosn at the Taj Palace. By the time the meeting was over (5-6 p.m.), the structure of the alliance had changed. Ghosn announced that Bajaj Auto will now take up the design and manufacturing of the vehicle while the Renault-Nissan alliance will oversee the marketing and sales activity.

It seemed that both parties had come to a mutual agreement and the ULC would see the light of day in 2011. Except that it hasn’t. Over the past one year, tempers have been running high at both Renault and Bajaj. Both Rajiv and his father, Rahul Bajaj, have made public statements to the effect that Bajaj Auto is not building a car. “We are very clear that we are building a commercial vehicle that will be shown at the Auto Expo next year,” says a senior Bajaj Auto official requesting anonymity. Internally, Renault officials believe that Bajaj never really wanted to do this project and the silence tactics and media statements were just attempts to buy time.

That the Renault-Nissan ultra low cost car project is in a limbo is clear. But Ghosn, on his part, is not giving up yet. “With Bajaj, we continue to co-operate and as we see it we asked Bajaj that you gonna do the car, you gonna engineer it, you gonna develop it, you know the Indian market, show it to us! And when you show it to us we will decide, in our opinion, if it fits or not. You know what I would love to tell you that it is done, but we need to see the car,” says Ghosn. But Renault has already kick-started a back-up ultra low cost car project in Chennai. While not much is known, the car, called the A platform, is now with the purchasing team to set up a sourcing base. Ghosn says this is critical and the ULC is not just one car, but several cars — a segment or a category.

Alliances to Thrive

Peugeot and Toyota have an alliance to make small cars for Europe. It is not that Peugeot needs Toyota’s technology or Toyota needs Peugeot’s network. They find synergy and value and invest in efficiencies in pooling their resources together developing a unique product for Europe and using both their networks. This is more an opportunity-based partnership.

The Nissan-Ashok Leyland alliance is built on similar lines. “We really wanted to go into the LCV segment, Nissan also felt we want to go into the LCV segment. We didn’t have competing product lines; they are not into heavy trucks, we are not into passenger cars. And we said, in this domain, let’s come together,” says Dr. Sumantran, non-executive chairman of Hinduja Leyland.

Ghosn is pleased with the way this alliance has grown. Dost, the product, is in the market and seems to have the feature-price combination right.

BRICs Are Different

Brazil, Russia, India and China (BRIC) are so different that a company cannot have the same approach. “So, you have to learn your way into each one of the countries. In India it took us some time,” says Ghosn.

In Russia, for instance, the company’s Avtoframos JV is thriving and the market has taken well to the Logan. However, the brand’s standalone prospects will depend heavily on how well the Renault and AvtoVAZ manage to demarcate the Renault, Lada and Nissan branded models that the companies are planning to manufacture in Russia on the Logan’s B0 platform.

In Brazil, Renault has just overtaken PSA Peugeot Citroën in the January-September 2011 period and looks set to take on the 5th largest brand by volume in the region for the full year (excludes Nissan’s volume).

Final Lesson: Humility

Ghosn now understands that “you cannot be in a situation where the relationship with your partner is a little bit vague or a little bit fuzzy or the responsibility is not very clear.”

He also knows that he cannot look at all emerging markets with the same lens. A low cost car (like Logan) might be low cost for Russia, but not for India. “I think the only thing BRIC has in common is the growth rate. They are completely different worlds,” says Ghosn. He himself was born in an emerging market: Brazil.

He says that he was born and bred with the emerging market mentality and that he understands what people want in a car, what’s important for them, because he has lived that life through his childhood and through his friends. “But today when I look at Russia and China and India, they are not the same. It is completely different from what I knew in my childhood. And it is very important for a car manufacturer to see that BRIC is B-R-I and then a C. It is not one word. No,” he adds.

To be fair, Ghosn has had a fairly rough year. He lost his close aide, Patrick Pelata, COO of Renault-Nissan, in the false spying scandal earlier this year. Pelata had accused three executives of orchestrating an “organised, international network” to obtain information on Renault’s flagship electric car programme.

Ghosn came under intense criticism. French President Nicholas Sarkozy and French industries minister Eric Besson asked Ghosn to spend more time in Paris instead of at Nissan’s headquarters in Japan.

Ghosn was also told that Renault should take a stronger lead in its alliance with Nissan and that Renault’s factories in France need to produce more cars.

“Renault is hampered by the involvement of the French government — its largest shareholder — which has become increasingly involved in the running of its business,” says Paul Newton, senior analyst at IHS Automotive UK, a automotive forecasting and consulting firm. But Ghosn downplays the incident.

“Europe demands additional attention right now: Western Europe is grappling with stagnant demand and the entire continent faces a currency crisis that threatens to break apart the Euro zone. Such a threat requires the steady focus of every CEO of a multinational industrial company and I’m certainly no exception,” he says. This is why it is absolutely important for Ghosn to get his emerging market strategy right.