Renault-Nissan alliance pushes economies of scale to new level

March 5, 2014: 10:57 AM ET

The two auto brands aim for 70% joint development of vehicles under the "common module family" method.

By Doron Levin

140305095107-nissan-logo-620xaFORTUNE -- Fifteen years ago, Renault SA dispatched a relatively unknown auto executive named Carlos Ghosn to lead a triumphal turnaround at Japan's nearly bankrupt Nissan Motor Corp. Renault's feat is still studied at business schools worldwide.

Survival in 2014 demands a new skillset. For French automaker Renault and Nissan, it means recruiting more automotive allies, while devising an innovative system of vehicle development -- both are tactics to share and absorb the immense cost of advanced technology and regulatory compliance.

Renault and Nissan, though they remain separate companies and brands, are inching closer. Each maintains a big equity stake in the other and relies on a single chief executive, Ghosn. Increasingly, they seek new levels of cooperation. The latest is their intention to develop 70% of their vehicles jointly, according to a so-called common module family method, known as CMF.

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"We have to cooperate in the areas that can lead to economies for both companies, while making sure that our models are distinct and separate in the eyes of consumers," said Christian Mardrus, managing director of the Paris-based alliance.

Volkswagen AG and Toyota Motor Corp. (TM) have devised their own systems of common engineering and design to minimize cost for models sold in different markets and sizes, and with various levels of equipment. Volkswagen describes its method openly; Toyota has been coy.

Under CMF, the major categories of vehicles, by size, are developed according to common engineering of front underbody, engine, cockpit, rear underbody, and electrical/electronic architecture. For example: The wand that controls headlamps and highbeams will be the same in all future Nissan and Renault subcompacts, allowing both companies to benefit from large-scale purchases from fewer suppliers.

Nissan's Infiniti line of luxury cars has been exempted from this discipline, owing to the demands of customers for premium products.

Early this year, Nissan began building its Datsun Go minicar model at a factory in Chennai, India. It is the first vehicle to be built according to CMF-A, the new framework for all minicars developed and sold worldwide by Renault or Nissan.

The Renault-Nissan Alliance has formed partnerships with Germany's Daimler AG, Japan's Mitsubishi Motors, and AvtoVAZ of Russia. Daimler, which builds Mercedes-Benz, and the alliance are jointly developing a small, luxury car architecture that will also be sold under Nissan's Infiniti luxury brand.

Mitsubishi and Nissan are cooperating on the development of a small electric vehicle and a global small car, according to Osamu Masuko, Mitsubishi chairman and chief executive officer. "Then the next step would be to expand with Renault," he said, "maybe a D-segment [compact] car from Renault that would be sold in the U.S."

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"I believe that because of the changes in the world, we are becoming closer and closer every day," Masuko said. "Limited resources mean we can't do everything. If you don't have enough volume, costs can't come down."

Mitsubishi sells 1.3 million vehicles worldwide annually, far short of the 8 million or so a single automaker must sell to spread costs across enough vehicles and also generate sufficient profit.

"In 1989," Masuko said, "we used to talk about the 4 million club," meaning the volume needed at that time to be profitable without one or more substantial partnerships.

Daimler tried to achieve worldwide scale in terms of sales volume with its 1999 merger with Chrysler Corp. The spectacular failure of that transaction has led many in academia and consulting to point out the prevalence of failed mergers and destruction of capital.

By comparison, the method that Renault used -- a reciprocal equity stake with Nissan, while respecting its independence -- has succeeded impressively. The two companies -- siblings, really -- sold more than 8 million vehicles last year. Their combined market capitalizations of $66 billion make them as valuable as Honda Motor (HMC).

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