Speeding Up Renault

By Bruce Crumley / Paris

Smiling broadly and looking dapper in a powder blue shirt, pin-striped suit and bright red tie, Renault CEO Carlos Ghosn doesn't look like your typical corporate hatchet man. Back in 1999, however, Ghosn was dubbed the "samurai" and "cost killer" at Nissan Motor in Japan. As the newly appointed president, he began closing plants, slashing more than $20 billion in debt and eliminating 20,000-plus jobs to return the moribund company to profitability. Many observers--especially France's sometimes intractable unions--expected similar tough love in early February, when Ghosn unveiled his ambitious four-year plan for the European auto giant, which has had an increasingly close joint partnership with Nissan since 1999. But, quelle surprise, so far Ghosn's quality-enhancing, production-boosting, profit-focused project has avoided layoffs. "Renault is not in the same critical situation Nissan was, so the methods we're using to improve things are different," says Ghosn during an interview at Renault's Boulogne-Billancourt headquarters on the southwestern edge of Paris. "We're confident this plan will be successful. But if not, we'll assume the consequences. Everyone knows exactly what's at stake."

In the auto industry in particular--still the bellwether for a globally successful manufacturing sector in many European countries--managers have had to make tough choices that have proved politically controversial. In Europe, unions still have considerable political power, not to mention seats at the board of directors table. DaimlerChrysler has said it is looking for a reduction of 14,500 jobs at Mercedes, while Volkswagen in February announced 20,000 job cuts. In such an environment, Renault appears to be defying gravity by promising ambitious results without the pain of slashing labor costs. Indeed, Ghosn is pledging to increase annual car sales by 800,000 units by 2009, double operating profit margins and improve product and brand quality. "The lesson of the Nissan revival plan was, What's vital is the result, not the precise means of attaining it," says Ghosn, 52. "We've analyzed the opportunities and potentials at Renault and made clear commitments on the results we'll deliver." The end result, he predicts, will be the "most profitable European volume car company."

Ironically, that will mean shifting away from the European market. Renault, founded in 1898 and beloved by the French for its innovative designs and reliable cars, remains profitable with a 2005 net income of $5.39 billion, making it the third largest car manufacturer in Europe. But when Ghosn was named CEO last April, he inherited slowing European car markets, dated production and management systems and some dud car models such as the Vel Satis luxury car. With Renault sales in Western Europe dropping 7.3% in the second half of 2005, group operating profit margin shrank from 5.2% to 3.2%. Ghosn was forced to issue profit warnings for 2006 and indicated that 2007 would be slow too.

In response, Ghosn spent nine months looking at the company's international offices, assembly lines and even dealerships to map out a new business plan for Renault. He wants to lift operating profit margin to 6%, increase annual Renault car sales from the current 2.5 million to 3.3 million, relaunch 13 existing brands and roll out 13 new models. Ghosn also plans to step up Renault's activity in luxury, SUV and crossover categories and exploit its effervescent markets outside Western Europe, where two-thirds of the extra 800,000 cars are expected to be sold.

The additional activity is scheduled to improve factory utilization rates from a current 60% of capacity to 75%, which is still nothing to write home about. Ghosn is also demanding extensive collaboration among international executives from different departments on crucial development, production and marketing decisions. "You can't have marketing managers discovering a car they are supposed to sell as it's rolling out," says Ghosn, who last year delayed the launch of a disappointingly redesigned Twingo model, at the cost of a reported $104 million. "More people and more debate must go into development. Twingo is an example. It was generating resistance within the company as it was going to market. How can you ask a customer to buy a car if even people at Renault don't like it?"

Blunt talk like that is rare in corporate France, but Ghosn is used to breaking molds. Born in Brazil to Lebanese parents and raised in Beirut, he studied in Paris and graduated from the elite Ecole Polytechnique. In 1978 he went to work for tiremaker Michelin, eventually heading the group's South American operations, based in Brazil, before taking over the North American operations. Recruited to the money-losing Renault in 1996, Ghosn undertook a three-year cost-cutting campaign, ultimately saving the company more than $5.2 billion--and allowing it to take its controlling stake of Nissan in 1999.

As he remolded the company, Ghosn became a business hero and media superstar in Japan. Now spending "about 10 days a month in Japan"--where his wife Rita still owns the My Lebanon restaurant in Tokyo--and two weeks in Paris, Ghosn says he gets the "best of both worlds." The rest of his time is mostly spent overseeing Nissan's struggling U.S. business. Renault pulled out of the U.S. market in 1997, and Ghosn says it won't return "until we can dedicate all our mind, heart, guts and soul--and even then [we may] not be assured of success."

Almost everything about his plan is a gamble. Waiting until 2009 for full results means that the market may be dominated by "disappointing business news that Ghosn himself has warned of," says Christophe Laborde, an auto-industry analyst for ING in Paris. That could undermine Renault's share price, Laborde continues, and force Ghosn to respond with wider job cuts such as rivals have made. Meanwhile, Philippe Martinez, head of the automotive sector at the General Confederation of Labor, France's labor union, is pleased that the plan has avoided firings. But he would also like to see "significant numbers of new workers" hired, "to allow us to produce so many new cars at higher quality standards within the tight deadlines the plan requires."

The French state still owns 15.7% of its former property Renault, so no past CEO has expected an entirely free hand. If Ghosn is forced to renege on his promise to avoid layoffs, Renault's fortunes could become a political issue in the 2007 presidential elections. But Ghosn suggests that times--and France--have changed. He's the first Renault president selected purely for his business record, rather than for his political contacts. "If they'd wanted a yes-man at Renault," he says, "I wouldn't have been named CEO."