The world according to Ghosn

After the collapse of alliance talks with GM, the globetrotting CEO is going it alone - at least for now.

By Alex Taylor III, Fortune senior editor

(Fortune Magazine) -- Life was already complicated for Carlos Ghosn before last summer. Complicated, but under control.

Running two auto companies, Renault and Nissan (Charts), half a world apart, Ghosn (rhymes with phone) was living a life that would push most executives into early retirement. He would spend ten days to two weeks with Renault in Paris, a week to ten days in Tokyo at Nissan, and then a couple of days in the U.S. overseeing Nissan's North American activities, or jetting among plants, dealers, distributors and more, managing the dual businesses from 30,000 feet.

King Carlos: Despite a relentless monthly commute, Ghosn has a firm grip on Renault and Nissan.
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Exceptionally disciplined - Ghosn, 52, carries one briefcase for Renault, another for Nissan - he claimed that the job organized itself. It helped that Ghosn's quantitative, results-oriented approach of setting numerical targets and then holding staff accountable for them doesn't depend on excessive handholding.

But Ghosn's compact, well-organized world fell apart like a Yugo with an expired warranty earlier this year when Kirk Kerkorian, General Motors' big and very impatient shareholder, pulled Ghosn into his running battle with GM CEO Rick Wagoner.

At Kerkorian's invitation, Ghosn started talking with GM (Charts) about forming a three-way alliance. While it was never stated baldly, Kerkorian's subtext was all about getting Ghosn in position to become GM's next CEO. Suddenly he was no longer just a globe-girdling executive running a couple of second-tier auto companies. Ghosn had become an industry phenomenon, the ultimate Mr. Fix-it.

And then all that momentum stalled. The alliance talks with GM failed, as the huge automaker, well advanced in its own turnaround plans, concluded that working with Ghosn would be a distraction.

There were serious financial issues too: GM wanted Renault Nissan to put up several billion dollars to equalize the benefits of an alliance (which Ghosn found distasteful), while Renault Nissan wanted an ownership stake in GM with an option for more (which GM found outrageous).

Meantime, the performance of Ghosn's existing charges sputtered. At once-torrid Nissan, operating profit for the six months ended Sept. 30 fell 15.3 percent from a year earlier, as margins dropped to 7.7 percent from 9.2 percent. At Renault, sales have fallen 8 percent this year in Europe where, short of new models, it has been losing market share for four years.

Suddenly, the question is no longer "Can the Golden Boy of the auto world run three firms at the same time?" Instead it's "Did the euphoria over a GM alliance mask the fact that Ghosn's turnaround efforts at Nissan and Renault are running out of gas?"

As Morgan Stanley analyst Noriaki Hirakata wrote recently, "We see greater potential from management's concentrating more on improving its own automaking than from seeking outside investment opportunities."

For Ghosn, who has never lacked for confidence, any such skepticism is wildly misplaced. "In 1999 Nissan was in trouble and Renault was a very small regional company," he explains during an exclusive - and expansive - interview in mid-November. "Joining forces and working together, today [Renault Nissan] has the second-largest market capitalization in the car industry and the second-most-profitable car conglomerate in the industry."

Ghosn is in the tiny sitting room of a suite in New York's Peninsula hotel, the kind of high-luxe, service-intensive residence where he spends much of his ground time these days. And he is in the middle of one of his typically insane travel weeks.

After two full days of management meetings in Nashville at Nissan's North American headquarters, he endured a bumpy flight into New York that afternoon. The following morning he will head off to Detroit - his first trip there since July - for a speech to the Economic Club and then jet back to Tokyo for the weekend. In all, he would be away from his Paris home for 17 days.

Yet despite the cramped quarters and the crammed schedule, Ghosn is patient and focused on explaining the strengths of the two companies he runs - and the weaknesses of the auto business.

"I think the industry as a whole is going through tough times," he says. "It isn't limited to the Big Three. I think all car manufacturers are facing an environment which is unfavorable." He cites shifting technology and consumer preferences, high oil prices, even the entry of new Chinese and Indian competitors.

An alliance with GM, he says, would have helped: "We know through the analysis that we have done that the synergies are significant if the alliance is managed well."

And he holds the door open to GM - or Ford (Charts) - for an alliance in the future. Chrysler, which some analysts speculate that DaimlerChrysler (Charts) may set free from its 1998 merger after its $1.5 billion third quarter loss, may be another option. "In one year down the road, two years or five years down the road, we can have a third partner if it makes sense."

For now, though, Ghosn is getting back to the not-so-simple job of running two companies - to improve Nissan's profitability through a slew of new models, and to gradually improve margins at Renault, which he doesn't expect to hit its stride until the product pipeline is filled out in 2009.

Global success

Ghosn began shuttling among three countries and three cultures as a kid. After his birth in Brazil to Lebanese parents, he moved to Lebanon at 6. Educated by Jesuits in Beirut, he attended college in Paris, graduating from two of France's most prestigious universities. In 1978 he joined Michelin, the French tire manufacturer. By 1990 he had risen to head North American operations and oversaw Michelin's restructuring following the acquisition of Uniroyal Goodrich.

Despite his success, Ghosn recognized that his advancement at the family-owned company had come to a halt, so he moved to Renault in October 1996 as executive vice president for purchasing, manufacturing and R&D. Following a string of cutbacks and plant closings that he engineered, he became known, affectionately, as "le cost killer." In 1999 he was sent to Japan to run Nissan, in which Renault had obtained a 36.8 percent stake.

After years of bad management, Nissan was all but bankrupt. Ghosn came in and upset traditional practices, becoming a major celebrity and a comic-book superhero in the process. He announced the end of seniority promotions and cross-shareholdings with other companies, set strict financial targets and declared he would resign if he didn't meet them.

Nissan not only reached Ghosn's targets, it exceeded them. Once again Ghosn was promoted, this time to president and CEO of Renault, which he took over in May 2005. His global commute had begun.

"He's not a superman, only a human being, but he gets results," says Garel Rhys of the Cardiff University Center for Automotive Industry Research in Wales. "He sets goals and holds people accountable."

Today he is as focused on the global competition as he is on alliance possibilities. "There is no doubt they will be coming to the U.S.," says Ghosn, leaning toward his listener to make a point. He is referring to the Chinese and Indian vehicle manufacturers that will soon hit the U.S. market.

He's even planned a strategy for them: "I was sitting down with my team and I said, 'If I were a Chinese company, how would I come to the U.S. market?' It's very simple. I would come with a very cheap car. There is practically no car selling at less than $10,000 in the U.S. market."

Cracking the U.S. market

Ghosn himself has nothing to sell at that price point, where it is nearly impossible for Western carmakers to make money. (Analysts expect the Chinese and Indians to have difficulty developing reliable supplier networks, achieving Western quality standards and lining up dealers.)

"The U.S. market is tough," Ghosn explains, "which means you're going to have to invest for a good period of time and accept that you're not going to have a return."

One reason he has thought through all these tradeoffs: Renault, which retreated from the U.S. market 20 years ago. Ghosn is clearly itching to bring back the brand in the States. But without having stabilized its position in the European market, Renault is hardly robust enough to meet the U.S. market challenge, he admits. He keeps pushing back the likely date of Renault's return.

Ghosn also spends much of his time thinking about Toyota (Charts). Since he believes he can't know what Toyota will do in the future, the most important thing is for Nissan to go its own way.

In an industry that produces 65 million vehicles annually, Ghosn argues, there should be room for most of the players. "I think in our industry, when you do the right thing, you get the right results," he says. "I don't think there is anything miraculous."

What is miraculous to him is Toyota's consistent ability to execute in an operationally complex business without making many mistakes. "From time to time when you miss something, you're getting punished for it. If you miss two things, you're getting harshly punished. If you miss more than two things, then you start to be in serious trouble."

Not Toyota. Without mentioning the company by name, Ghosn ticks off the list of qualities that make it successful: a learning organization, humble in front of its customers, using profit as the only meaningful indicator.

Building his portfolio

Ghosn knows about mistakes. He championed Nissan's decision to locate its newest U.S. plant in Mississippi and then violated several industry principles by starting production of four all-new vehicles with an all-new workforce. Quality problems surfaced immediately and continue today; Consumer Reports refuses to recommend any of the four vehicles built there because of poor reliability. Ghosn says that the quality problems stem from three or four years ago and that he's confident they will be erased.

With alliance plans on the back burner, you'd think that Ghosn might be shopping for smaller companies to add to his portfolio. Part of the car market is heading upscale, with customers seeking out luxury brands like BMW and Audi, while others are attached to low-priced models.

Ford Motor has put Aston Martin up for sale and might be induced to part with Jaguar, Land Rover or Volvo. Yet Ghosn says he isn't interested. He'd rather invest in new models for the lines he has: "The main challenge is not so much adding new brands; it's bringing new products and re-enhancing the Renault brand," he says.

That includes getting on the hybrid track, and Nissan plans its first model next year - nearly a decade after Toyota. "I am trying to position both Renault and Nissan in a situation where we do not impose technology on the market but we try very quickly to address what consumers want. We're not trying to say, 'Well, we think that hybrids are going to be better than diesel, or diesel is going to be better than gasoline, or gasoline's going to be better than fuel cell or fuel cell is better than electric car.' We don't do that."

That will save him money in R&D but lose him the marketing advantage of being a technology leader. Yet it's a bet that's looking smarter all the time. Toyota, Honda (Charts), BMW and others increasingly believe there won't be a single replacement for the gasoline-powered internal combustion engine.

"The U.S. seems to be going more hybrid," says Ghosn. "Europe is definitely going diesel. You don't see any hybrids in Europe. South America is going bio-ethanol. As a global car manufacturer, you can't just stick with one thing. It's very dangerous."

What Ghosn does next will be anybody's guess, but the auto world will be watching. Other executives - Chrysler's Lee Iacocca, DaimlerChrysler's Jürgen Schrempp - had ambitious global plans, only to be brought down by time and circumstance. If Ghosn succeeds, he will have earned his hard-won superstardom - and will enjoy every second of it.

Research Associate Joan L. Levinstein contributed to this article.


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