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Nissan Searches For Balance Between Pushing Growth And Protecting Profits

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Among major automakers, Nissan has weathered the downturn in U.S. auto sales better than most. It’s one of the few carmakers to see an uptick in volume in 2017, with sales up 1.6 percent through October, vs. a 1.7 percent decline industry-wide.

But that’s not necessarily great for business. To achieve growth amid fierce competition, the Japanese carmaker has turned to some proven-but-costly tricks like hefty discounts and bulk sales to rental car agencies. The results have been predictable: Nissan’s North American operating profit fell nearly 50 percent during the three months ending September 30, and 42 percent for the first half of its fiscal year ending in March 2018.

Nissan’s North American chairman, Jose Munoz, is acutely aware of why that’s unsustainable. His other title is chief performance officer for Nissan Motor’s worldwide operations, a title that conveys how much pressure he’s facing.

“I love it,” he joked in a recent interview. “I wake up every day and there’s something new.”

Lately, the crisis has been in Nissan’s home market of Japan, where the company had to recall 1.2 million vehicles and temporarily shut down all of its Japanese factories in the wake of revelations that uncertified inspectors were signing off on vehicle checks required by the government. Acknowledging in a report last week that the practice had gone on for decades, Chief Executive Hiroto Saikawa said he and other Nissan officials would take pay cuts to accept responsibility.

While the scandal doesn’t impact cars outside of Japan, the recall alone will cost an estimated 25 billion yen ($223 million), and last week Nissan lowered its full-year operating profit forecast to cope with the fallout, and to pay its share of a massive U.S. recall of faulty Takata airbags.

It all comes as Nissan and its alliance partners, Renault and Mitsubishi Motors, push to sell 14 million vehicles annually by 2022, a 40% increase. Nissan alone is aiming for revenue of 16.5 trillion yen ($147 billion), a 29 percent increase, and 8 percent operating margins (up from 5 percent currently) by 2022.

It’s Munoz’ job, as chief performance officer, to make sure it all happens. Pressure, yes, but he’s optimistic Nissan is getting back on track on multiple fronts.

“The first thing is to ensure the situation in the domestic market is fixed,” he said, referring to the Japanese inspection scandal. “I’m glad that the final report has been delivered, and I’m also glad to see the Japan team has put together a very strong plan to recover. “

Another hot spot is China, where Nissan and its state-owned partner, DongFeng Motor, are pushing for growth, especially through their jointly owned domestic brand, Venucia. It competes at the low end of the market, where much of the sales growth in China is occurring.

In the U.S., where Nissan (including its Infiniti luxury brand) has 9.3 percent market share, the company has already taken corrective actions to restore momentum, Munoz said.

In August, Nissan cut production at its huge Smyrna, Tenn., factory, slowing the pace of the assembly line and eliminating weekend overtime to cope with bloated inventories, especially of its mid-sized Altima sedan.

“Our strategy is profitable steady growth, not growth by any means,” he said, targeting incentive levels that are at, or below, the industry average, and fleet sales limited to 15 to 20 percent of its total volume.

But if that's the target, Nissan has been been way off the mark through the first nine months of 2017. Registration data shows that 27 percent of Nissan vehicles sold through September went to fleet customers, mostly rental agencies (including three out of five Altima sedans), a fleet mix that is among the highest in the industry. Sales to rental companies tend to hurt profits because they drive down resale values.

Nissan’s sales incentives, which include consumer discounts and dealer bonuses, have also been running nearly 50 percent higher than the industry average, according to J.D. Power PIN data.

Munoz says Nissan expected stronger industry sales when it began its fiscal year in April. But as the industry plateaued, and consumer preferences continued to shift toward crossovers and SUVs, passenger sedans like Altima began to pile up (which is true for other carmakers too).

“When you make a miscalculation with production, you end up with too much inventory and have to increase incentives,” he acknowledged. But he added that sales recovered somewhat in September and October, driven by consumers' need to replace hurricane-damaged vehicles. New models like the Rogue Sport crossover and Titan King Cab pickup are also showing promise. “If the recovery continues the way it has in November, we will be in much better shape for the second half of our fiscal year.”

And Nissan is already talking about adding a U.S. factory in the next few years to facilitate further growth. "We are maxed out," Munoz said, at Nissan's existing factories in Tennessee and Mississippi. "If we continue to grow, and the strong market continues, at some point, we're going to have to look at adding capacity."

 

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