By Reid Kirchenbauer
Always one step behind Toyota, Nissan (OTCPK:NSANY, TYO:7201) also lags behind in sales as it desperately tries to capture the fast-growing economies of emerging Asia. Deciding that it was time to shift gears and try non-traditional methods, Carlos Ghosn, CEO of Nissan, has given the green light to buy a 34% controlling share in the scandal-hit Mitsubishi Motors (OTCPK:MMTOF). The goal is to revive sales and turn around the negative margin that Nissan was making on every motor sale in ASEAN.
The company has produced discouraging results in Asia's emerging markets. Despite aggressive investments in production facilities, marketing, and distribution, Nissan has yet to make a dent in countries such as Vietnam, Indonesia and the Philippines.
Doing Business in Asia Difficult for Nissan
One example of poor results can be seen in Indonesia, ASEAN's most populous country with over 200 million people. Even though Nissan revived its low-cost brand, Datsun, to capture the more cost-conscious customers, its market share is only a dismal 2.5%.
Another country where Nissan is falling behind is India. The company tried to use a low-cost model to capture the market, but car sales in India grew at the fastest pace in five years as consumers increasingly demand higher-quality vehicles. The result was that Nissan's choice of using poor-quality materials in the manufacturing of low-cost models instead backfired on the company.
Losing out to its competitors in key markets such as Indonesia and India, Nissan has developed an even more critical need to boost its presence in these emerging markets.
Mitsubishi Having Better Luck in ASEAN
On the other side of the equation, and despite a recent scandal, Mitsubishi has had better results than Nissan. In 2015, the company boasted an impressive 7% operating margin in the ASEAN region - something that Nissan has tried to achieve, yet is still experiencing negative margins. The company also has a longer standing reputation in Southeast Asia, especially with its long history of producing and marketing high-quality trucks.
There are many reasons why a strategic alliance between Nissan and Mitsubishi makes sense. First of all, with the addition of Mitsubishi, the already existing Renault (OTC:RNSDF)-Nissan partnership will be the fourth-largest automobile alliance. This will lead to cost savings by combining procurement activities, sharing of powertrains, and jointly developing new car models. Analysts at BMI research opined that this is indeed the right call to make.
Not only are there a lot of potential cost savings to be had, the potential sales that can be realized are also noteworthy. These would result from two things - the combination of distribution networks and the synergy from complementary products is because of its better distribution network.
The two companies also have complementary products. Mitsubishi's portfolio, which is dominated by SUVs, would help Nissan capture Asia's growing middle-income customers.
This merger comes at a perfect time for Nissan. Mitsubishi has recently gone through a scandal, which left its share prices crippled. Even though it creates quite a lot of work in terms of regaining its customers' trust, the benefits of having a controlling interest far outweighs the cost of US$2.2 billion price tag for Nissan.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.