Nissan (TYO:7201), always behind Nissan, also lags behind in sales as it tries to capture emerging Asia. Deciding that it was time to shift gears and try non-traditional methods, Carlos Ghosn, CEO of Nissan, has given the green light to buy a 34% controlling share in the scandal-hit Mitsubishi Motors. Its goal is to revive sales, jumpstart business in Asia, and turn around a negative margin.

Nissan has produced discouraging results in Asia’s emerging economies. It hasn’t made a dent in countries such as Vietnam and Indonesia despite aggressive investment in production and marketing.

 

Doing Business in Asia Difficult for Nissan

One example of poor results can be seen in Indonesia, ASEAN’s most populous country with over 200 million people. Even though Nissan revived its low-cost brand Datsun to capture the more cost conscious customers, its market share is only a dismal 2.5%.

Another country where Nissan is falling behind is India. The company tried to use a low cost model to capture the market, but car sales in India grew at the fastest pace in five years. Consumers in India are increasingly demanding higher quality vehicles. So the result was that Nissan’s choice to use poor quality materials in the manufacturing of low-cost models backfired on them.

Losing out to its competitors in key markets such as Indonesia and India, Nissan has developed an even more critical need to boost its presence in these emerging markets.

 

Mitsubishi Having Better Luck in ASEAN

Mitsubishi has had better results than Nissan despite its recent scandal. In 2015, the company boasted an impressive 7% operating margin in the ASEAN region – something Nissan tried to achieve and failed. Mitsubishi also has a longer standing reputation in Southeast Asia.

There are many reasons why a strategic alliance between Nissan and Mitsubishi makes sense. First, with the addition of Mitsubishi, the existing Renault-Nissan partnership will be the world’s fourth-largest automobile alliance. This will lead to cost savings by combining procurement activities, sharing of power-trains, and jointly developing new car models. Analysts at BMI research believe this is the right call to make.

A lot of cost savings can be had, but the possible sales increase is also notable. These would result from combining distribution networks and the synergy from doing so.

The two companies also have complimentary products. Mitsubishi’s portfolio, which is dominated by SUVs, would help Nissan capture Asia’s growing middle income customers.

This merger comes at a perfect time for Nissan. Mitsubishi has recently gone through a scandal which left its share prices crippled. Even though it creates a lot of work in terms of regaining customer trust, the benefits of having a controlling interest far outweigh the cost.

About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's experienced with trading stocks and buying property in Thailand, Cambodia, and elsewhere. He's been featured in publications such as Forbes, Nomad Capitalist, Property Report, and Seeking Alpha. Download his free investment guide by clicking here.

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