And So We Drive

Reuters: "Nissan cuts profit forecast after 70% quarterly plunge"

Nissan Motor Co (7201.T) reported a 70% drop in quarterly profit on Tuesday and cut its full-year forecast to an 11-year low, hit by a strong yen and falling sales, and highlighting the turmoil at the Japanese automaker after the ouster of Carlos Ghosn.

The latest weak showing from Nissan, which also slashed its interim dividend by 65% after its worst second-quarter performance in 15 years, illustrates the scale of the work ahead for its new executive team, which is due to take over on Dec. 1.

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The company’s global vehicle sales fell 7.5% to 1.27 million in the quarter. Sales in China, its biggest market, fell 2.5%, while those in the United States fell 4.5%.

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Years of heavy discounting and fleet sales, particularly in the United States, has cheapened the automaker’s brand image while lowering vehicle resale value and denting profit.

Nissan is implementing a global recovery plan under which it will axe nearly one-tenth of its workforce and cut global vehicle production by 10% through 2023 to rein in costs which it has said ballooned when Ghosn was CEO.

News as expected, but I think commentary has mischaracterized the problems at Nissan. It’s not just the strong yen, ballooning costs, or fleet sales that have hurt Nissan’s earnings: it’s that over the last five years, Nissan borrowed from its future and has left that debt unpaid for too long.

The company right now has a three-part problem:

(1) The lack of new, exciting models means that Nissan is not attracting new drivers to the brand.

(2) For those drivers who are interested in the brand, there isn’t enough motivation to buy a new car, because the lack of model updates leaves used cars less distinguishable than they’d otherwise be. Even if you want a Nissan, there’s less incentive to buy a new one as opposed to a used one.

(3) And finally, because of the fleet sales mentioned above, the market is saturated with used examples. Not only are used Nissans already more desirable than would be typical, they’re also cheaper than Nissan would like, making the value proposition of a new Nissan even worse right now.

Pushing fleet sales, and delaying new models, both increased Nissan’s sales and decreased its research expenses; but that lack of investment is now precisely the cause of the current trouble. It’s a shame, more so because the very thing that enabled Nissan to borrow from its future is this way was the fact that its cars were quite good. The GT-R, for example, was far enough ahead of its time when it launched that it’s still Nissan’s halo car — 12 years later.

You can borrow against your brand equity for a bit, and companies do it all the time. That’s how you earn the money you need to invest in the next model cycle, and so it’s not only ordinary but necessary. The problem is that you can only push off reinvestment for so long — hence the “global recovery plan,” under which new management now needs to catch up.

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by Tyler Carbone