What may happen next in Renault’s 20-year alliance with Nissan

Renault SA and Nissan Motor Co.’s two-decade partnership is hurtling toward a reckoning, their carmaking alliance shaken by the arrest of former chairman Carlos Ghosn in November and fruitless merger talks with Fiat Chrysler Automobiles NV.

Forged in 1999 when Renault bought a stake in the struggling Japanese carmaker, the group – which now includes Mitsubishi Motors Corp. – employs more than 350,000 people worldwide. While the automakers aren’t fully integrated, they share car platforms and factory assembly lines to produce more than 10 million vehicles per year.

Ghosn, who was charged with financial crimes and is facing trial next year, had long sought to merge the companies in order to take on Toyota Motor Corp. and Volkswagen AG. Renault was poised to strengthen its hand just a couple weeks ago, when Fiat proposed a combination of the two European automakers. Instead, Nissan’s reluctance to back further negotiations triggered the deal’s collapse.

Now, Nissan Chief Executive Officer Hiroto Saikawa is seeking to calm tensions after Renault Chairman Jean-Dominique Senard threatened in a letter to block critical board appointments at Nissan’s shareholders’ meeting on June 25. The letter could become a bargaining chip for Nissan to extract concessions from Renault, as well.

“They are back to the starting point,” said Koji Endo, an analyst at SBI Securities Co.

Going forward, here are the potential scenarios for the automakers:

Keeping the Status Quo

The most probable outcome is that things will muddle along, with Nissan unable to gain more independence from Renault while remaining under the yoke of the French automaker’s 43% stakeholding in the Yokohama-based company.

“It will be difficult for them to split up,” said Takeshi Miyao, an analyst at Carnorama in Tokyo.

Nissan probably will continue to push for the right to be able to leverage its 15% stake in Renault, which currently carries no voting rights. One step that could help ease tensions is for Renault to grant one of Nissan’s main wishes by selling down its stake or restoring its voting rights. Another contention point is the alliance agreement that gives Renault the right to appoint Nissan’s chairman and chief financial officer.

Any of these points could turn into concessions that Nissan could demand in exchange for granting Renault more say in the makeup of its board, as outlined in Senard’s letter.

It’s also doubtful whether combining the companies under a single entity would add benefits of scale because they already share purchasing and development costs. The partnership saved as much as 5.7 billion euros ($6.4 billion) from their manufacturing, purchasing and engineering costs in the 2017 financial year, according to the companies’ estimate.

Given Nissan’s top priority to boost its profitability, keeping product launches on track is key. Nissan is planning to spend 47 billion yen ($433 million) during the next three years to refresh all core models and introduce 20-plus new ones.

“It’s better for Nissan to work with Renault,” Endo said. “Billions of yen will be blown so it’s better for Nissan to maintain the relationship.”

Inch Toward a Merger

The monumental task of adapting to an industry that is embracing electrification and self-driving vehicles also adds pressure on Nissan and Renault to merge. Although Nissan and Renault collaborate, they will have to spend billions of dollars to compete against Toyota and Volkswagen, which have become increasingly willing to embrace new technologies.

Although the French automaker agreed in 2015 not to interfere in decision-making by Nissan’s board, the Japanese company’s recent financial weakness could give Renault an opening to push harder for a merger.

Senard first made an informal merger proposal to Nissan’s CEO in April. There’s a discussion document outlining potential terms, and Renault has signaled it’s ready to step up discussions whenever Nissan is ready.

The proposal calls for a holding company structure, which would provide for equal ownership and board representation for Renault and Nissan. This new entity wouldn’t be based in Japan or France, people with knowledge of the matter have said.

“Nissan makes up almost 100% of Renault’s corporate value, so obviously Renault won’t let it go,” said Kota Mineshima, an analyst at Morgan Stanley MUFG. “Renault wants to have a full-fledged merger.”

A Grand Partnership

Although unlikely, Fiat also could reopen merger talks by negotiating directly with Nissan in addition to Renault. By painting a picture of a grand alliance to take on larger rivals, Fiat may be able to entice the Japanese automaker with offers of more say in a Fiat-Renault-Nissan-Mitsubishi global auto group.

Early signs of direct talks emerged this week, with reports that a representative for Fiat met with Nissan’s Saikawa. The Japanese CEO said Monday he had communicated with a Fiat adviser, without elaborating on the substance.

French Finance Minister Bruno Le Maire, in Japan for G-20 meetings, said it was important for the alliance between Renault and Nissan to be “solid and sustainable” before any merger with Fiat. He cited rising competition in the global auto industry, especially from China.

A Breakup

Before the Fiat saga, Nissan resisted closer capital ties with Renault, saying the priority was to put its own business on solid footing after reporting its lowest operating profit in a decade. With the deal scuttled, the question is whether Nissan can forgive Renault’s short-lived affair.

“Overall, it is a mess and just makes a tricky situation worse,” said Janet Lewis, an analyst at Macquarie Capital Securities (Japan) Ltd. in Tokyo. “It had appeared that Senard was trying to make the alliance work. I no longer believe that.”

If they part ways, it wouldn’t be the first split between European and Japanese automakers. Suzuki Motor Corp.’s partnership with Volkswagen ended in acrimony in 2015, with Suzuki buying back $3.8 billion yen of its own shares from Volkswagen. They initially planned to cooperate on small, fuel-efficient cars for emerging economies, but relations deteriorated in 2011 after the Japanese company agreed to buy diesel engines from Fiat.

Nissan may not really want to be part of a European or global automaker, and it may be inevitable that Renault eventually exits Nissan, said Max Warburton, an analyst at Sanford C. Bernstein & Co.

“Renault needs to let the Japanese go,” Warburton wrote in a June 6 report. “It should sell its Nissan stake (to the Japanese government or Japanese banks). Then, with billions in the bank and a higher share price, call Elkann again.”

He’s referring to Fiat Chairman John Elkann, who pulled the Renault merger proposal when the French government intervened, citing Nissan’s reluctance.