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Tuesday, July 04, 2006

GM and Renault and Nissan

I was planning on doing a series on what people drive in Dubai, and their place in the city's caste system, but because of this enormous piece of news, I must make a comment.

As most of you know by now, Renault/Nissan and the infamous Carlos Ghosn (le Cost Cutter as he is known in France) has begun talks to purchase a stake in General Motors. Kirk Kerkorian, the Las Vegas mafia front man who owns 10 percent of General Motors is said to be instigating this move by Ghosn and Renault.

My initial reaction to all of this has been some shock. But now that I work in a large corporation, I can see what issues are at play, and why Ghosn would be interested in this move.

From a corporate perspective, it would mean short term benefits for Nissan. Nissan and even Renault would be able to build their cars in the US, paying for them in dollars, which are worth less than Euros. That would save them money.

From a historical perspective it would feed Ghosn's ego. He would head by far, the largest car conglomerate in the world. At least for a while.

For Kerkorian it would mean a considerable rise in the stock value of GM, and a nice short term profit. Then Kerkorian, an 89 year old man, could go to his grave with a smile on his face. The future of either company is of little concern to him.

The long term problems would be considerable though from a merger expense perspective. The expenditures to make GM parts and Nissan parts be the same would be enormous. The cost to convert factories to one system would be enormous. Vehicles would start to look the same across the board. Look at Nissan and Renault now, especially the Tiida and the Megane. Both are quite similar, yet one is supposed to be Japanese and the other is supposed to be French. Customers notice these things, and sales have dropped for both companies.

In the end car companies sell essentially the same product, but must make an effort to superficially differentiate what they sell. They do that with different types of ride and handling, and of course design and power. Engines are the most expensive part of a car, and so you can expect this merger to immediately unify all engines produced by the company. That will mean noticeable similarities between 4 cylinder engines in Renaults and Pontiacs. That is probably not a good thing.

At the end of the day, this is the fault of GM's management. Cautiousness, ineptitude have ruled the day in Detroit, and driven down the stock price to such a low level that it is now conceivable that the world's largest car company will be purchased by a second rate player like Renault/Nissan. Regardless of what happens, Wagoner's head should roll.

More on this later.

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