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The tieup deal between Nissan Motor Co. and Renault SA, which will be officially announced on Saturday,
is about to change the face of the world auto industry. The French carmaker has decided to take a
controlling stake of 35 percent in Nissan. The money Renault will pay for Nissan shares, estimated at 500
billion yen, will help the Japanese automaker to remove its debt overhang and put its house in order.

With combined production of over 4 million vehicles a year, the Nissan-Renault alliance will create the
world’s third-largest auto group behind Toyota Motor Corp. and Germany’s Volkswagen. The linkup will also
give them a global presence in production and sales, with Nissan operating mainly in North America and
Asia and Renault in Europe and South America.

The two firms apparently are counting on that complementary production and marketing setup, along with
sharply expanded output, to survive the mounting competition in the global car market. But the road ahead
looks far from smooth. For one thing, Renault’s profit position, its massive investment in Nissan
notwithstanding, appears to be anything but strong. There are also an array of cultural differences that
could throw a monkey wrench into the two companies’ cooperative venture.

The Nissan-Renault deal comes at a time when a wave of global competition is sweeping not only the car
industry but also other key industries such as financial services and the petroleum business. To be sure,
Nissan has only itself to blame for many of its problems. Still, the fact that Japan’s No. 2 carmaker is
finding it difficult to hold out on its own is proof that, without getting bigger, it cannot possibly
ride out the storm lashing the world auto industry.

The world car market remains sluggish not only because demand in developed markets is leveling off, but
also because the developing markets in Asia and elsewhere are shrinking amid economic and financial
crisis. With factories running far below capacity, carmakers around the world are locked in cutthroat
competition.

Automakers also face new challenges to offer products that are more environmentally friendly — cars that
generate fewer exhaust gases and consume less gasoline, as well as electric cars that cause no pollution.
In the background is the growing threat of global warning, a climatic disaster that could play havoc with
the world’s weather patterns.

Of course, it is hugely expensive to develop and build new types of cars, and possible, therefore, only
for companies that can raise the necessary funds. Therein lies a dilemma of sorts: More cars will have to
be produced in order to cut unit environmental costs. That is why car firms are going for mergers,
acquisitions, business tieups and capital affiliations in search of economies of scale.

Economies of scale — mass production leading to lower cost — enable car builders to use common
components, such as chassis and engines, or use each other’s factories and sales networks. All this helps
to cut manufacturing costs and boost operating efficiency.

It is said that only about five companies will be able to survive as integrated makers that can produce a
full range of cars around the globe, from minicars to large autos to luxury models. Currently, each of
the five top firms makes more than 4 million vehicles a year. In 1998, Nissan produced 2.5 million units
and Renault 2.2 million.

In order to survive, Nissan faced just two choices: Join one of the top five or team up with another firm
of about the same size. It has chosen the latter route. But it has yet to clear several high hurdles,
including huge interest-bearing group debts of 2.5 trillion yen. Since last May, the company has sold a
big chunk of its assets and overhauled its production plans. It will have to do much more to restructure.

The aborted tieup talks with DaimlerChrysler added salt to the company’s wounds. Nissan stock dropped and
its credit rating was downgraded, cutting into its ability to raise money. Driven to the wall, Nissan
seemed to have only one option left: an alliance with Renault.

The French carmaker, however, has its own problems. With its operations concentrated in Europe, Renault
needs to establish a global foothold. With the advent of the euro, the common European currency, it faces
escalating sales competition on its turf, not only from its European rivals but from American and
Japanese makers as well. So Renault, too, has been looking for a partner. It has found one in Nissan,
which also faces a urgent need to globalize. Their future depends on whether they can make the most of
the benefits of scale from their partnership.

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