Nissan: Be patient on U.S. sales changes

YOKOHAMA, Japan — Nissan's CEO is urging patience with his fitful fight to break the automaker's addiction to incentives in the U.S., but warns that sliding sales are the inevitable short-term cost.

Hiroto Saikawa said a new U.S. management team has begun to unwind what he called years of bad practices that prioritized volume over profitability.

"In the U.S., we had an old habit of pushing sales and overstretch," Saikawa said here last week as Nissan presented its quarterly earnings. The company posted a 25 percent gain in quarterly operating profit.

"We are trying to enhance overall brand value. That is a big piece of homework."

Saikawa said he is confident his new U.S. team can do it, with time. But first there will be more pain.

Nissan cut its fiscal-year U.S. sales outlook last week to reflect the challenge. It now expects its U.S. sales to fall 8.6 percent to 1.46 million vehicles in the fiscal year to March 31.

"Unfortunately, a temporary decline in volume is unavoidable," Saikawa said. "It will take time to deliver results. The top management should be patient enough to wait for this."

Leading the turnaround is Jose Valls, named vice chairman of Nissan North America in December and taking the top sales job previously held by Dan Mohnke for 14 months. Mohnke now leads an effort to prepare Nissan for new connected-vehicle technologies.

"I'm counting a lot on Mr. Valls," Saikawa said of the man who has been in charge of Nissan's Latin American business. Valls remains chairman of Nissan Latin America.

"In the past, he has done a very good job of delivering results," Saikawa said. "He excels in selling based on value. That's why we appointed Mr. Valls."

The new U.S. sales chief has a tall order.

Since last year, when Saikawa began reversing the U.S. strategy of his predecessor Carlos Ghosn, now under indictment in Japan for alleged financial improprieties, Nissan's U.S. performance has been in decline.

Nissan Group's U.S. retail sales fell 6.3 percent to 1.49 million vehicles last year in an overall market that rose 0.6 percent. Nissan Group's U.S. volume further tumbled 18 percent in January.

That is a big problem for a Japanese automaker that gets 40 percent of its profits from the U.S.

Nissan's global operating profit margin withered to 4.3 percent in the first nine months of the fiscal year that ends March 31, from 6.1 percent a year earlier. Nissan expects full fiscal year operating profit margin to slide to 3.9 percent, from 4.8 percent the previous year.

"The margin of Nissan is not something we are proud of," Saikawa conceded. "The North American operation of Nissan is the major cause of that."

Valls reports to Nissan North America Chairman Denis Le Vot. Saikawa chose the two to undo the volume race ramped up by previous North America Chairman Jose Munoz at Ghosn's direction. Munoz, who also was chief performance officer, resigned last month.

Saikawa is trying to pivot the company away from profit-draining fleet sales and incentives in the U.S. to shore up brand value and margins.

Saikawa said Nissan is prepared to sacrifice some volume to bolster margins. Early last year, the company began pulling back fleet deliveries, culling bloated inventories and easing pressure on dealer sales-incentive programs, even as the U.S. light-vehicle market softens.

Critics say he moved too quickly and too dramatically at the expense of revenue flow.

In the first nine months of its current fiscal year, efforts to reel in U.S. incentives added ¥56.7 billion ($514.3 million) to the company's operating profit. But that couldn't offset the hit to volume. Sliding sales lopped off $628.6 million.

Saikawa said things will worsen before they improve. He predicted deteriorating U.S. market conditions will further complicate the turnaround.

"The U.S. market has been expanding for a long time," Saikawa said. "But because of changes in the environment, it peaked out. For the next fiscal year, we see it coming down slightly and competition intensifying," he said.

Executives have said Nissan's drive to improve profitability is taking more time and money than expected. To shore up profits in North America, Nissan last month said it would cut 700 workers from its Canton, Miss., assembly plant amid slowing sales of trucks and commercial vans.

"We don't want to push sales. We want sales based on value," Saikawa said.

"Eliminating overstretch and letting the volume come down, that is what we have done. But we need to enhance our sales capability. That's where we are struggling and taking time," he said. "The U.S. team has not had enough time to develop this kind of capability yet."

Nissan's progress toward lower incentives and inventories has been mixed.

At the Nissan brand's make meeting last month during the National Automobile Dealers Association Show, Valls promised consistent and fair objectives to the controversial stair-step incentive program, while pledging to reduce bloated inventories of older models on dealer lots.

He also said Nissan would give dealers longer-term, 90-day sales objectives, so retailers have more time to better plan their business strategies.

Incentive spending at Nissan brand and Infiniti increased 1.5 percent to an average of $4,389 per vehicle in October-December, according to Autodata Corp.

That bucked the industry trend, which experienced a 3.4 percent decrease in per-vehicle spending, and Nissan's outlays were still higher than the industry average of $3,714 per unit.

By contrast, U.S. incentives at Japanese rivals Toyota, Honda, Mazda, Subaru and even Mitsubishi were below Nissan's in October-December. Each of those makers, except Honda, also cut incentive spending in the quarter.

At the same time, Nissan North America has been trying to reduce U.S. inventories.

But Nissan Group vehicle stocks rose to a 79-day supply on Feb. 1, from 51 days on Jan. 1 and 65 on Feb. 1, 2018, according to the Automotive News Data Center. On Feb. 1, Nissan brand and Infiniti had 317,200 vehicles in inventory, up from 290,200 on Jan. 1.

Nissan's supply was lower than the industry average of 88 days on Feb. 1, and, notably, the company's inventories were lower than American Honda's, at 90 days.

They were lower than Mitsubishi's, at 120, while still being in the range of Mazda's 75-day supply and Toyota's 71-day backlog.