DBRS Comments on Nissan Motor Co., Ltd.’s Q1 F2019 Results and Announced Restructuring

DBRS Limited (DBRS) notes that, on July 25, 2019, Nissan Motor Co., Ltd. (Nissan or the Company) announced its Q1 results for fiscal 2019 (F2019, ending March 31, 2020), which were considerably below DBRS’s expectations. Nissan’s consolidated operating profit for the quarter fell substantially to JPY 1.6 billion (approximately USD 15 million equivalent) from JPY 109.1 billion (approximately USD 1 billion equivalent) in the similar prior-year period, with the Company’s automotive business incurring an operating loss in the quarter. Concurrent with the earnings announcement, the Company also announced a series of restructuring initiatives (the Restructuring), the highlights of which include targeted reductions of both its product line and global production capacity of 10% by the end of F2022, with a total headcount reduction of approximately 12,500 planned over the same time period.

The Company’s lower earnings are a function of softer volumes amid rising costs (exacerbated by trade tensions and associated tariffs) and investment requirements that are confronting all automotive original equipment manufacturers (OEMs) given tightening emissions regulations, the ongoing development of emerging automotive technologies as well as new mobility business initiatives. However, Nissan’s weaker results also reflect significant challenges in North America, primarily in the United States, where the Company’s prior growth was largely a function of higher fleet volumes and sales incentives. While Nissan is attempting to refocus its efforts in the United States on firmer retail sales, reduced incentives and associated increases in brand value and margins, a successful turnaround in this market now appears considerably more challenging than previously anticipated by DBRS.

Nissan’s current weaker operating performance, in isolation, would typically be deemed manageable by DBRS. However, DBRS notes that several other negative developments have affected the Company since DBRS’s last rating action of September 13, 2018, when the long-term ratings of Nissan were upgraded to “A” from A (low) with a Stable trend, including increasing uncertainty regarding the Renault-Nissan-Mitsubishi Alliance (the Alliance). DBRS notes that the Alliance has been a source of sizable cost savings and efficiencies for Nissan, with the increased scale and market position of the Alliance serving to positively influence DBRS’s business risk assessment (BRA) of the Company. As such, any meaningful unwinding or reduced effectiveness of the Alliance could materially affect Nissan’s BRA and, amid a weakening performance outlook, possibly result in negative rating implications, particularly since OEMs are increasingly looking to joint ventures and partnerships to alleviate cost headwinds facing the industry. Additionally, the Company is seeking to progressively strengthen its corporate governance structures (with Nissan having recently appointed a new board of directors) and ensure that accompanying policies are systematically implemented.

DBRS’s subsequent credit review of Nissan is due in autumn 2019. DBRS plans to attain additional details from the Company regarding its future performance outlook given its Restructuring amid softening, albeit still reasonable industry conditions, and it will also seek some clarity regarding future prospects of the Alliance. DBRS notes that the forthcoming credit review could result in negative rating actions if it reveals the likelihood of sustained deteriorating operating performance of the Company.

Notes:
All figures are in Japanese yen unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018), DBRS Criteria: Guarantees and Other Forms of Support (January 2019), and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019), which can be found on dbrs.com under Methodologies & Criteria.

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