Danger Caution Ahead

By Daren Fonda

Nissan CEO Carlos Ghosn admits he's nervous. His company just launched its most important car in years, the redesigned 2007 Altima sedan. The model it's replacing was one of the best-selling cars in 2005, a monster hit for Nissan, and Ghosn has no idea if the latest edition will fare as well. "We have so many new products," he told TIME in an interview in New York City, "that it's a very tense period for us."

Indeed, after an extended drought, Nissan is roaring back with what Ghosn calls a "product offensive." New models include the redesigned Sentra sedan, the subcompact Versa hatchback and, coming next year, a crossover called Rogue. At the Los Angeles Auto Show on Nov. 29, Nissan plans to unveil a coupe version of the Altima, due to go on sale next summer. "When you put so much energy and investment in, you're always nervous," says Ghosn. "Until you see the first few months of sales, you have doubts."

He's not the only one with doubts. Investors and industry watchers are wondering whether Nissan can rev up its sagging sales with the new models. The company has hit some speed bumps lately, after a long run of posting record sales and profits, largely engineered by Ghosn's multicontinental managing act (which has included running Renault since last year). In the first six months of Nissan's 2006 fiscal year, operating profits fell 15.3%, to $3 billion. Vehicle sales fell 6.9% worldwide, and revenues have been flat, at about $39 billion.

In the U.S., where Nissan earns the bulk of its profits, full-size vehicles like the Armada SUV and Titan pickup need generous incentives to sell, even as gas prices have come down. Armada and Titan drove Nissan into new segments but not without picking up some dents. Both models have scored dismally in consumer surveys of vehicle reliability, tarnishing Nissan's image as a high-quality Japanese brand.

None of this has gone un-detected by investors. While Nissan boasts a market capitalization of about $53 billion--more than triple that of General Motors--the stock has fallen well behind shares of Japanese rivals Toyota and Honda in the past two years. And some of the air has come out of the chief's reputation. "Ghosn's strategy has been all about cost cutting," says Koji Endo, an analyst with Credit Suisse in Tokyo. "He needs to prove that he can bring real growth to the company's top line. We've yet to see that."

If Ghosn is running a little rough these days, it would be understandable. Seven years ago, Nissan was practically scrap metal: it had a fleet of dull cars, a tangled mess of suppliers, unproductive plants and $20 billion in debt. Ghosn was given the job of salvage man after his bosses at Renault bought a controlling stake. Born in Brazil and reared in Lebanon, Ghosn found his way to tire giant Michelin, where he developed his restructuring chops. But he had never run a car company, let alone a Japanese one, and almost everyone bet against him: a foreigner with a funny name tackling Japan Inc. He proved them spectacularly wrong, turning Nissan into an auto power with industry-leading profits and such stylish vehicles as the 350Z sports car, Murano SUV and Altima. Ghosn's success made him a mythic figure in Japan. In France they crowned him Le Cost Killer. And in 2005 he added a couple more job titlespresident and CEO of Renault.

But can one man, even a dynamo like Ghosn, successfully run two carmakers? He could keep his hands full with Renault alone. Like other European carmakers, Renault is grappling with high labor costs, slim profit margins and surging competition on its home turf from Toyota. Yet Ghosn, characteristically, has set ambitious goals for Renault, aiming to add new models, lift profit margins to 6% in 2009, from 2.5% today, and sell an additional 800,000 cars a year. "Everybody knows what I mean by commitment," he says, "and I'm very serious about that."

He's also serious about finding a North American partner for his two-headed animal, despite a very public and unsuccessful mating dance with General Motors this summer and fall. Kirk Kerkorian, a large GM shareholder, wanted the flailing auto giant to join the Nissan-Renault family, hoping Le Cost Killer could wield le knife at GM and help boost the stock. Having witnessed the leaps that two former mediocrities like Nissan and Renault could make by partnering, Ghosn found the idea of pooling forces with GM appealing. And he figured GM could help his carmakers save billions of dollars on everything from power trains to transmissions. But the talks fizzled when Ghosn and GM chairman Rick Wagoner couldn't agree on terms--to the relief of Nissan and Renault shareholders, who didn't want Ghosn moonlighting in Detroit. The upshot: Ghosn hasn't given up on a partnership, but for the time being he says he just wants to run his brands. "We're concentrating on putting Nissan back into a position of strong growth and Renault on track to hit its targets for 2009," he says.

In the U.S., however, that won't be so easy, since success seems to have tamed Nissan's tolerance for design risks. Nissan's latest models aren't as distinctive as the first round Ghosn launched. For the latter, Ghosn gave Shiro Nakamura, the director of design, a mandate to be different, to craft a bold look for the brand. Nakamura delivered with models like the 350Z and Murano. In this latest cycle, designers weren't given as much free rein, according to James Sanfilippo, an analyst with Automotive Marketing Consultants. "They were worried about screwing up a good thing," he says.

That's why the new Altima and Sentra look more evolutionary than revolutionary. Analysts too are worried that Nissan is losing its styling edge, ceding ground to Honda and Toyota (whose Camry was named Motor Trend's 2007 Car of the Year). "Once you get into the trap of saying 'If it ain't broke, don't fix it,' that's very dangerous," says John Casesa, an auto-industry consultant. "Nissan has to innovate to grow."

Nissan may be losing the technology race too. The company plans to launch its first hybrid model next year, about a decade after Toyota put hybrids on the market. Nissan's tardiness is no accident; Ghosn has long believed that hybrids are money pits for manufacturers. Still does. "I'm skeptical of the business case," he says. Nonetheless, Nissan is playing catch-up in a hot automotive area. Hybrid sales overall are booming, up 23% this year, and even Porsche and BMW are getting into it.

So here's the dilemma: If Nissan doesn't knock out consumers with beautiful, sculpted steel or impress them with new technologies, how will it stand out? Some analysts think it won't. "Ghosn came in and turned a carmaker on the verge of bankruptcy into a company with operating margins around 8%," says Tatsuo Yoshida, an auto analyst with UBS in Tokyo. "He turned the company into a sustainable one. That is a huge improvement, but that is perhaps the limit of Nissan."

Ghosn, of course, thinks Nissan isn't anywhere near hitting its speed limit. Those slumping quality scores may have slowed sales, for instance, but the problems are being addressed. Nissan has streamlined the way it deals with quality issues, creating teams to focus on specific complaints, like squeaks and rattles or wind noise, and nip them in the planning stage or on the assembly line. The Armada and Titan are scoring better in Consumer Reports surveys. "We're putting in the resources," Ghosn says. "It takes time, but we're working on it." He's also promising to smooth out the product cycle, aiming to launch models on a more regular basis, and he says Nissan will eventually sell diesels in the U.S., offering fuel-economy gains similar to those of hybrids.

And what if he doesn't make his numbers? Ghosn has in the past declared that he would resign if he fell short. He's not going so far now, saying only that his job is in the hands of shareholders. "The day you're stretched too thin is the final chapter of your book," he says. "But you're usually the last person to know that."

THE NEW ENTRIES

Under CEO Ghosn, above, Nissan played it safe with the 2007 Altima, left, a fairly conservative redesign of the popular sedan. Versa, a hatchback launched in July, is flying off lots. Nissan focused on interior roominess and cargo space for this small car and seems to have a hit

THE COMEBACK KIDS

Boldly styled and widely praised, the 350Z sports car, top, and Murano SUV fueled a sales revival in the U.S. They're now a few years old, however, and due for redesigns. The Murano is still going strong, but 350Z sales have slipped

THE MISFIRES

Nissan entered a new segment with the Titan full-size pickup truck, top, and went for coolness with the Quest minivan. Both models have sold poorly this year and dinged Nissan's reputation for quality and stylish design

With reporting by Toko Sekiguchi/Tokyo, Joseph R. Szczesny/Detroit