Should the old, multi-faceted and chaotic Alliance be replaced by five new specialised entities?

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As Florence Lagarde underlined on Friday, the speech on the method made by Luca De Meo and his teams at dawn on Tuesday seemed to convince the press but did not really seduce the analysts and the markets. This is bad timing because, obviously, it is first of all them who were targeted since it is the fate of the Renault share that the project aims to ward off. Behind the reorganisation, it is the endorsement of a weakening of the Alliance which is at stake.

By isolating, albeit fictitiously, the electrical activities in Ampere, Luca de Meo and his teams think that they can make the new entity be valued at 10 billion euros (the equivalent of the value of Renault on 11/11/2022) even though it would be a very small minority in terms of activity and workforce and destined to be rather loss-making for a few years. If this were to be the case, the shares of Ampere which would be bought by the partners or by the public would make it possible to bring in new money at the time of the IPO without increasing the company's indebtedness and without destabilising the shareholder structure of Renault, renamed Power in the project.

Thus, if Power decided to hold 55% of Ampere and only offered the remaining 45% to other shareholders (Nissan, Mitsubishi, Qualcomm, funds, the public...), the operation would generate 4.5 billion euros of new money. In the current state of Renault's capitalisation, obtaining the same amount through a capital increase would mean offering shares representing 50% of the current value of the company and 33% of its value after the increase... If the State and Nissan did not subscribe to the capital increase, they would see their shareholding drop to 10%.

This part, which is a matter of financial engineering and bets that, without necessarily seeing Ampere as an alter ego of Tesla with the same promises, investors could treat Ampere better than they treat Renault, is rather well perceived by the analysts.
They know, however, when they look at the multi-year electric investment plans of the world's leading carmakers that Renault will need much more than €4-5bn to stay in the race.

In this respect, Tuesday's announcements were obviously associated with a disappointment: the other entity that will host the factories and engineering activities associated with combustion and hybrid engines will not bring in any new money. Indeed, it will not be a question of Renault sharing its technologies and industrial means with Geely in return for a payment that will give it the right to 50% of the shares in Horse. Geely will have 50% of the Horse joint venture by contributing its own assets (employees, factories, customers, technologies, etc.) but without paying a single euro. If Renault needs to finance its transition, it will have to find money elsewhere.

Here comes the part of the dossier that Luca de Meo would have liked not to tackle but which he obviously had to report on to indicate that, contrary to what - like the analysts - he would have liked, nothing had yet been decided: the Alliance and the evolution of Renault's participation in Nissan. As some Anglo-Saxon newspapers have written, the question of the Alliance in this story of a split-reorganisation has been "the elephant in the room" from the start: it is obvious that everything refers to it but nobody says so.

In fact, if we think about the financing needs of the transition to electric vehicles, they are obviously not of the same order depending on whether it is necessary to develop its platforms, engines or battery technologies alone or with Nissan. Similarly, if one envisages borrowing to meet the said financing needs of the transition, one will wonder what profits Renault will make in the future to repay them and the said profits will not be the same according to whether or not the company retains its 43% in Nissan and consequently receives the dividends associated with the Japanese company's profits.

It is known that the famous "rebalancing" that the Nissans are calling for will be implemented. The 28% of Nissan that would then be sold is the elephant in the room that the Ampere IPO would like to hide: in the current state of Nissan's capitalization, this 28% is worth less than 4 billion euros. This corresponds to a Nissan share value of 3.5 euros, down 37.5% compared to a year ago. By not rushing to sell them and by waiting for the share price to rise and/or for the euro/yen exchange rate (which has lost 25% of its value in 2022) to be more favourable, Power could obtain from these disposals enough to finance a significant part of its needs.

Luca De Meo and the Nissan managers have started a communication strategy which consists of saying that both parties are very attached to the Alliance and intend not to devalue this asset that 23 years of collaboration have allowed to be built. It would be precisely in order to give new impetus to the said Alliance that this rebalancing, often mentioned and never carried out, would finally be decided. Thus, we are offered a paradoxical rhetoric which claims that it is by distancing ourselves capitalistically from Nissan and by depriving ourselves of the essential means of putting pressure on its managers that we would maximise the chances of making them cooperative and attentive to the interests of Renault.

At Renault, it is argued that, with the adjustments to the RAMA (Restated alliance master agreement) that had to be made to swallow the pill of double voting rights in 2015, the 43% is of little use because Renault representatives and managers have limited control over Nissan. In Le Figaro, after stressing that the idea of a merger had been definitively rejected since the arrest, B. Bayart supports this thesis and writes: "We must even mourn the idea of Renault controlling Nissan. An illusion since the 2015 agreements, which neutralised the Losange's governance rights in the Japanese."

Yet at Nissan, they insist that with Renault's 43.4% stake acquired over 20 years ago, Nissan's management feels constrained and it is quite clear that when he was running the whole thing, whenever Carlos Ghosn had to make trade-offs to the detriment of Nissan and to the benefit of Renault, the 43% was, at least implicitly, in the balance.

In the same way, when it comes to describing the current state of cooperation, we readily point out the lack of enthusiasm shown by the Nissans to keep the existing ones alive and to launch new ones. As for the 'convergences' on which the structure dedicated to the Alliance used to work, they are no longer even mentioned. Thus, both sides are asked to take note in 2022 of a loss of substance of the Alliance which would oblige Renault and its managers to conceive a strategy on their own to which the ally would contribute at the margin.

In the same way that the hybridisation solutions designed and adopted by the two companies are not the same, it is not certain that the Alliance will work on battery chemistry and, in particular, on "solid batteries": what Nissan discovers in this field may not be available to Renault, which will then have to make its own investments with other partners. If this is the case, it is of course because, for the last 4 years, the Alliance has not been as animated as it was. A. Guillet entitled an article on the subject in October: "The alliance is a combat sport".

This captures the idea that the choice made since 1999 was not to use Renault's dominant position on paper to impose decisions and methods on Nissan, as would have been the case in a simple acquisition. This has obliged the team to work in tension and often in conflict but, under these constraints, cooperation, convergence and synergies have often been found at the price, it is true, of an expenditure of energy and a mobilisation of the management which could not be weakened without compromising the sustainability of this organisation operating in imbalance.

The state of the Alliance in 2022 is only the result of the choices made since the departure of Ghosn: Jean-Dominique Senard had, on his arrival, in the midst of the turmoil, envisaged a solution with FCA which many of us had considered as a refusal to face the difficulty leading to 'letting go of the prey for the shadow'. Since then, he has played the appeasement game by agreeing to let the Nissans do, in their corner, what they want to do; Luca De Meo considers himself as the boss of Renault who must find a sustainable strategy for his company independently of what the ally brings - or, he would no doubt say, does not bring. Clearly, the incessant struggle to keep the Alliance afloat was no longer conducted and it seems more reasonable to reason without it.

Analysts have always been sceptical of the Alliance's organisational oddity and have argued for a merger which would have given the whole a more standard organisation. Luca De Meo only half satisfies them since, unwilling to engage in the combat sport that Carlos Ghosn and a large part of the Renault and Nissan management teams have long been fond of, he came to defend before the analysts last week an organisation that is at least as baroque in which the constructor is "scattered like a jigsaw puzzle" between entities that are each likely to form their own alliances in order to find the resources that the partner no longer brings.

The "narrative" of this very original horizontal organisation, which leaves many observers and players sceptical, is summarised by a sporting metaphor repeated over and over again by De Meo and reported by Le Monde last week as follows: "Before, the car manufacturers only did one sport. Today, we are asked to excel in at least five disciplines. I prefer to coach five athletes or five teams if you like, rather than one... Renault is becoming a team of teams."

T. Piéton, chief financial officer, adds that by combining its new activities with the best partners available, "Renault hopes to win medals in these different sports rather than staying at an average level in the five.
Analysts are rightly concerned about the duplication of effort that management has struggled to eliminate in a drastic restructuring at the end of 2020.

For example, Romain Gillet, an automotive analyst at S&P Global, tells Reuters that it was not clear from an operational perspective where cross-functional functions such as human resources and customer support would fall. RBC's Tom Narayan reinforces this, pointing out that "the boundaries may not be as clear-cut as they have been presented", while questioning the extent to which the electric vehicle business can be separated from the combustion engine business, given that it shares some manufacturing and design activities and therefore, according to almost all other manufacturers, does not deserve to be isolated.

Thus, one wonders if it is not to get rid of an Alliance in which they have not invested as they should have for the last two to four years and to find ways to finance a "solo transition" that the Renault managers are launching a very large-scale reorganisation which follows a series of others. In fact, apart from the fact that, financially, the hypotheses adopted seem rather fragile, the financing needs and the means of covering them appear to be very different depending on whether or not one is betting on the durability and the vitality of the Alliance.

As for the very imaginative new organisation in five distinct but linked entities, it struggles to convince because the idea that from now on the constructors have to play sports which are too different from each other for the traditional multidivisional organisations to be able to cope with them is very fragile and is not accepted by the vast majority.

Renault is doing much better because the work done in the old renovated organisation is paying off and allows them to offer a convincing range. Nissan is doing better despite the phenomenal drop in volumes that the company is experiencing.

It was time to do nothing else but to relaunch the Alliance. If this is indeed what all this energy is being spent on, it is to be welcomed. If it is by cultivating the hope that the scattered Renault will do better than the united and allied Renault, one can rightly doubt the relevance of the proposals.

14/11/2022

The weekly column by Bernard Jullien is also on www.autoactu.com.

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