Renault’s Russia Crisis Might Finally Force Nissan Alliance Action

If Renault is forced to hand its Russian assets back to the Putin government this wouldn’t necessarily be a crippling financial blow, but it badly needs to find a partner for an alliance or merger, given that its tie-up with Nissan seems to be sputtering.

Nissan has long believed the alliance with Renault is unbalanced because the French company and its government masters have most of the power. The battering Renault’s prospects have taken following the blow to its Russian operation could finally bring this argument to a head.

Mercedes, Stellantis and China’s Zhejiang Geely Holding Group are suggested as possible partners if the alliance finally breathes its last. Investors say Renault needs an active partner to stay competitive in the global automotive business currently in turmoil from the after-effects of the coronavirus pandemic, the semiconductor and supply-chain crisis, and the electric car revolution.

But given Renault’s strategic plan calls for a concentration on higher-profit sales and less selling ‘em cheap and stacking ‘em high, leaving the Russian market might be a sensible option. It’s an ill wind that blows nobody any good.

Late last month Renault, apparently reluctantly, said it was suspending its Russian business and assessing its stake in AvtoVAZ because of the Russian invasion of Ukraine. Renault initially decided to restart production at its AvtoVAZ factories but was forced to back down when other western sanctions participant governments protested. All the more embarrassing given France effectively controls Renault with its 15% stake.

Renault said because of the AvtoVAZ problem, it would cut its forecast for profit and cash flow this year and was considering a $2.42 billion write-down to reflect the costs of suspending operations in Russia.

Reuters Breaking Views analysts assumed this meant the decision had been taken to pull out.

“Renault is reversing out of Russia, with a €2.2 billion dent in its bonnet (hood). The French carmaker’s exit, which involves a near-total write-off of its investment in the country, winds the clock back on Chief Executive Luca de Meo’s strategic turnaround after years of losses and conflicts with Japanese partner Nissan Motor. But the alternative – staying put – was grimmer. Renault would have been cobbling together cars without crucial imported components. It would then have been trying to sell them into an economy set to shrink 10% or more this year,” Breaking Views said.

Renault generated 10% of its revenue and around 12% of its operating profit margin in Russia in 2021. Renault has owned 51% of AvtoVAZ since 2016, along with Rostec State, a Russian government-owned corporation headed by Sergey Chemezov.

According to French auto consultancy Inovev, Renault sold nearly 500,000 vehicles there in 2021, including 358,000 Ladas and 135,000 Renault branded cars, mainly for its Dacia value company.

De Meo launched a recovery program last year called the “Renaulution”, which sees the launch of 24 new vehicles by 2025 and more electric cars. Renault reported an annual profit for the first time in 3 years for 2021 and said it aimed to improve the operating profit margin to 3% or better this year.

Frank Schwope, analyst with Norddeutsche Landesbank Girozentrale, said AvtoVAZ profits only play a minor role for Renault and the Nissan alliance is more important, but has been in difficulties for years.

“Renault is in one of the worst crises of recent decades, and a helping partner is not in sight. Renault is in danger of being left behind as a result of the disruption of the car industry. The new Renault paradigm of “value over volume” is likely to be difficult to implement for a mass manufacturer,” Schwope said.

“(Renault) is in urgent need of reliable partners – whether for an alliance or a merger. Options could be Daimler, which still holds a 3.1% stake in Renault, or Stellantis,” Schwope said.

Stellantis was formed just over a year ago and brings together brands like Peugeot, Citroen, Opel/Vauxhall, Fiat, Jeep, Lancia, Chrysler, DS, and Alfa Romeo. Renault was close to merging with Fiat Chrysler Automobiles (FCA), but the talks collapsed in 2019 because the French government vetoed it.

Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) in Duisberg, Germany, said Renault should have embraced FCA and now faces more powerful, better capitalized competition.

“The big competitor Stellantis has significantly better costs, significantly newer models, significantly higher scales. In its important markets, Renault has Stellantis as its main competitor… and the risk of losing this competition is extremely high. Just one number: without Russia, Renault still has 2.2 million sales and that in the volume market. Stellantis has 6 million and is now highly profitable,” Dudenhoeffer said.

“The wisdom of former Russian President Gorbachov was “He who is late will be punished by life”. And Renault came too late because it could have gone into the future with FiatChrysler. Nissan itself is weak and two weak ones will have a very, very difficult time in the car market with the large investment required in the next 10 years” he said.

Investment researcher Jefferies agrees the Russian problem should prompt another look at its strategy be it with Nissan, or perhaps a new one with maybe Geely of China. The upheaval raises questions about Renault’s long-term prospects.

“Recent developments should revive concerns about the relevance of Renault in the transformation of the auto industry and how to make better use of existing or new alliances, considering how the value of the Nissan stake still provides financial flexibility despite core balance-sheet weakness,” Jefferies analyst Philippe Houchois said in a report.

Renault’s long-term strategic plan sacrifices sales in favor of profits. “Renaulution” will cut output to about 3.1 million vehicles in 2025 from 4 million in 2019, lower R&D spending by €500 million ($605 million) a year to €2.5 million ($3 million) by 2023, and gradually raise operating profits to 5% in 2023.

Midway way through 2020, the Renault Nissan alliance and its Mitsubishi Motors partner also unveiled a 3-year strategy to focus on profit not sales, cut costs by €5 billion ($5.6 billion) annually, slash nearly 30,000 jobs and reorder its responsibilities to allow the companies to take charge of producing vehicles for regions to avoid duplication.

Former alliance leader Carlos Ghosn sought to placate Japanese concerns that France had an overwhelming and unfair share of the power in the alliance and wanted a long-term full merger of the companies. His arrest and escape from Japan put an end to that plan. Nissan at the time not only wanted more power in the alliance, it wanted the French government to sell its 15% stake in Renault.

None of these core issues of contention has gone away. Renault bailed Nissan out of bankruptcy in 1999 and holds a 43% stake. Nissan has a 15% non-voting stake in Renault.

Some commentators have said Renault should sell part of its 43% stake back to Nissan, which would help smooth the uneven power balance. This would help restore Nissan’s power and raise lots of money too but requires French government approval. Any decision is unlikely this side of the French Presidential election, with the first round scheduled for April 10, and the 2^nd round April 24.

CAR’s Dudenhoeffer sees a bleak future for a weakened Renault.

“The big challenge is the software-defined car, autonomous driving, huge investments. The light at the end of the tunnel (for Renault) cannot be seen,” Dudenhoeffer said.