Cross-shareholdings make state intervention in French group a problem for Japanese, too
On Friday, Renault’s board is expected to change its cross-shareholdings with Nissan so they might better reflect the power balance in the two carmakers’ 16-year-old alliance. And not too soon.
When the French state raised its stake in Renault in April, it stoked Japanese concern about the partnership agreement. The alliance is a good model of how to reach scale in an industry where consolidation is difficult. The current incident shows why such alliances should not be cemented with cross-shareholdings.
The share structure is a legacy of the French carmaker’s bailout of its larger Japanese peer. In 1999, Renault invested $5bn in return for 37 per cent of its highly indebted rival. Carlos Ghosn arrived in Tokyo and turned the company round; he is now in charge of both companies. The alliance grew one project at a time. The cross-shareholding were increased as a symbolic gesture. Renault now owns 43 per cent of Nissan, which owns 15 per cent of Renault (the two companies also have an alliance with Daimler, involving smaller cross-holdings).
Alignment of interests (“skin in the game”) is the reason given for holding partner’s shares. It is a bad one. It adds legal complexity because of the web of national regulations on shareholdings, voting rights and operational control. Management needs to focus on the successes of shared projects. It is not clear how swapping shares adds to the commercial incentives already provided by investment in those projects. Cross-holdings can magnify issues associated with state control. France’s meddling in Renault has become a distraction for the alliance: the state forced Renault to adopt the Florange law (more voting rights to long-term shareholders) which has pushed Nissan to seek voting rights.
Alliances offer the benefits of scale to an industry where consolidation is blocked by family and state shareholdings. Partners swapping shares increase the risk of distracting power struggles.
The Renault-Nissan alliance offers a good model, but for the tangle of shareholdings. Renault’s board should agree to sell down its share in Nissan to protect the alliance.