Does Ghosn Want GM?

On Friday, Robert Farago, editor of the irreverent automobile review website thetruthaboutcars.com, posed a challenge to his readers, a series of questions just begging for Foolish answers. In today's column, over here on our own piece of virtual real estate, I aim to come up with a few.

The abridged version of Farago's inquiries reads like this:

  • Why in the world would General Motors want to hitch its wagon to Renault-Nissan?
  • What's in it for Kirk Kerkorian, the man behind the throne at GM (NYSE: GM  ) (or at least, the man behind Jerry York's seat on GM's board)?
  • And finally, why would the world's most successful CEO, the leader of not just Renault, but also the profitable Nissan (Nasdaq: NSANY  ) , Carlos Ghosn, agree to this cockamamie plan?

Reinventing the tire
There's no point in reinventing the wheel here. So rather than answer Farago's first two questions at length, I'll just point you toward where two of my Foolish colleagues have already tackled the subjects.

  • On what GM can get out of a tie-up with Renault, Nissan, and their shared CEO, the Wizard of Brazil (distant relative to the Oracle of Omaha), Anders Bylund recently named a series of benefits that could accrue to the Detroit carmaker. The two key benefits for GM, in this Fool's view, would be, first, supply chain efficiencies. If the three companies agree to share the same underlying designs for their cars, this should permit lower development costs, buying parts in greater bulk at lower per-unit prices, and so on.
  • And second, management accountability. When Carlos Ghosn first took the helm at Nissan, he promised to turn the money-losing automaker around and earn a profit within three years -- or resign. Maybe I'm hard of hearing, but I don't recall current GM management ever making a promise to that effect.
  • And as for what's in it for Kirk Kerkorian, corporate raider extraordinaire, and author of the planned tripartite alliance, that one's both obvious and already, in large part, history. As Seth Jayson pointed out, the mere announcement that Kerkorian was pushing for the tie-up sufficed to give GM's stock a pop and stem the bleeding on Kerkorian's multibillion-dollar bet on the company's shares.

With the preambles out of the way, let's take a look at the one question that remains to be answered: Why in the world would Nissan and Renault bite at this suspiciously brown-colored Detroit-grown apple? I can think of three reasons.

Hey, are you using that?
Reason No. 1 for why Ghosn might want to ally with GM is the same reason that any company might want to buy another, poorly performing company: The buyer thinks it can use the assets to generate profit more efficiently. With GM laying off and buying out workers, slashing production, and shuttering plants, there's a lot of production capacity lying dormant here in one of the world's most attractive consumer markets. Nissan has already built six factories in the U.S. Ghosn might think it makes sense to use some of GM's underutilized capacity to build Nissans and Renaults.

Mind if I tag along?
Another GM asset that Ghosn might find useful is the firm's sales network in geographic regions where Nissan and Renault are currently weak. Although the three firms overlap in most of their markets, GM is an especially strong seller in China and South America, where Nissan has been lagging.

An even more obvious synergy exists here in the U.S., which Renault exited nearly two decades ago. Piggybacking on GM's sales force and distribution network would ease Renault's reentry considerably, should the company choose to make that move. And with GM's market share in the U.S. still four times as large as Nissan's, that company, too, could benefit from combining forces in the U.S. market.

Finally, in markets where none of the three companies is particularly strong -- India springs to mind -- they could combine their marketing efforts, and marketing spending, to break open the market more efficiently by working together rather than at cross-purposes.

Day of the undead
Now, let's consider for a moment what would happen if Ghosn does not extend a helping hand to GM -- if it instead continues down the path it has trodden so many years, the one that has every major credit-ratings agency rating its debt as "junk" or worse. Ultimately, the company could follow its parts makers like Delphi into bankruptcy.

As we've seen many times in recent years, what seems like a rival's utter demise can turn into a nightmare of the living dead for the companies that vanquished it. Take WorldCom, for example (now a part of Verizon (NYSE: VZ  ) ). WorldCom filed for Chapter 11 bankruptcy protection in July 2002. Less than a year later, it emerged from bankruptcy with a new name (MCI) and a much cleaner balance sheet. Why? Because in Chapter 11, a company gets to "restructure" (read, "write off") a significant portion of its debts, so that when it emerges from bankruptcy, it has a chance of surviving.

In contrast, rival companies who more prudently managed their balance sheets so as to avoid bankruptcy get no such benefit. If GM goes bankrupt, Nissan and Renault -- and yes, rivals DaimlerChrysler (NYSE: DCX  ) ), Ford (NYSE F), Toyota (NYSE: TM  ) , and Honda (NYSE: HMC  ) , too -- would almost certainly find themselves facing a leaner, meaner rival within a few months -- one likely released from many of the union contract obligations that have bogged it down and cost it market share in the past. This is not an outcome Ghosn would enjoy.

Foolish bottom line
Are any of these the real reason why Ghosn is pondering an alliance with GM? Maybe not. Maybe the real reason is that Ghosn just wants to beat Toyota to the punch.

(Where did that come from? Who says Toyota wants to buy GM? Read "The Toyota Files" and find out.)

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Fool contributor Rich Smith does not own shares of any companies named above. If he did, he'd have to tell you so. Fool's honor.


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