To ally or not to ally: That is GM's question

The ailing auto giant said Friday it will explore a deal with France's Renault and Japan's Nissan.

The world's largest automaker stands at the brink of a make-or-break choice: whether its extreme corporate makeover is best managed from within or with foreign help.

The question is strategic but also personal: A proposed alliance between General Motors, Nissan, and Renault could end up making Carlos Ghosn – widely credited with engineering Nissan's turnaround since 1999 – a candidate to replace GM's chief executive Rick Wagoner.

For now, Mr. Wagoner has the inside track on determining GM's future, and his own. The company's board on Friday opted to have him take the lead in discussions with Nissan and Renault, both of which are led by Mr. Ghosn.

The consideration of this global linkup – designed to save costs and thus help GM return to profitability – comes at the urging of GM's largest shareholder, who is disappointed at the pace of change under Wagoner.

For all the companies involved, the risk is that an alliance could distract them at a difficult time for the automotive industry. But if done right, an alliance could benefit all three companies and perhaps nurse one of America's most storied corporations back to health.

Indeed, the imperative of cost control may push more carmakers around the world into such link-ups.

"It's continuing this internationalization of the car business," says Jeremy Anwyl, president of Edmunds.com, a provider of automotive information in Santa Monica, Calif. "The opportunity with an alliance would be to spread those costs across a broader base."

From GM's perspective, the alliance wouldn't be about "going global" in terms of dealership presence. GM already has major brands on the market from Beijing and Berlin to Mexico City. Rather, it would be about reaping global efficiencies in production and product development.

It would also be about the pace of restructuring.

GM posted stunning losses of $10.6 billion last year. The company remains the world's largest automaker, but Toyota could soon claim that title.

Wagoner has already orchestrated a difficult downsizing of US operations, recently luring 35,000 union workers into buyouts to pave the way for plant closings.

But some investors say Wagoner has too little to show for his six years as CEO.

By contrast, Ghosn has a reputation as "le cost cutter" for his radical overhaul of Nissan starting in 1999. The Brazilian-born, French-educated son of Lebanese parents, he was able to shake up the Japanese carmaker's supply chain in a way that, arguably, no insider could have done.

In its letter to GM's board on June 30, major shareholder Tracinda Corp., owned by billionaire Kirk Kerkorian, made no reference to Wagoner or Ghosn (the "s" is silent, so it's pronounced like "cone"). The letter said simply: "We believe that participating in a global partnership-alliance with Renault and Nissan could enable GM to realize substantial synergies and cost savings...."

But Ghosn is the one who slashed costs for Nissan, steering it from the brink of bankruptcy. In a recently published Forbes magazine interview, he had this to say about Detroit: "There is nothing that cannot be fixed."

Presumably, if given a say, he would seek deeper and faster changes on GM. There is no telling whether he would succeed, or even whether he will get the chance to try.

"GM is really hard to fix," says John Paul MacDuffie, an industry expert at the University of Pennsylvania's Wharton School. "I don't have so much faith in the Carlos Ghosn magic."

But in an alliance where GM would agree to take on Nissan and Renault as part owners, discussion of a managerial role for Ghosn could easily arise. Already, GM has granted a board seat to Mr. Kerkorian's ally Jerome York.

Kerkorian hopes for rapid changes that will boost the value of Tracinda's 10 percent GM stake. If Ghosn takes a seat on the board, he could at the very least become a powerful advocate for his own brand of change.

It is not clear if GM, Japan's Nissan, and France's Renault will agree to an alliance, but all three have begun actively exploring the possibility.

Still, Nissan and Renault may decide that they have little to gain from a move that might shift Ghosn's focus to a company that dwarfs both of them in size and in current woes. And according to some news reports, GM managers don't see big benefits from a link up.

Whoever runs GM, the corporation faces challenges that outside partners cannot directly resolve: high labor costs, low reliability ratings compared with Japanese rivals, and a sprawling array of brands to manage.

Alliances, moreover, have hardly been surefire winners in the past. GM bailed out of a partnership with Italy's Fiat last year. Outright mergers or buyouts have also been challenging, as GM, Ford, and DaimlerChrysler have all found.

But over time, alliances promise greater sharing and pooling of development costs for new technologies. Such deals could expand the practice of building varied car models atop a common platform, which would allow different vehicles to use similar architecture.

The seven-year-old Renault-Nissan alliance already employs two common platforms and intends to share 10 such systems by 2010. The cooperation has already helped Renault and Nissan cut costs, helping them rely more on common components that can streamline both product development and factory assembly.

"That creates huge efficiencies," Mr. Anwyl says.

It doesn't necessarily make the proposed GM alliance a wise move, he says. But "it could be an interesting opportunity."

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