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The paradox of alliances– strong economics but fragile politics

It’s not just in international relations that identity politics can sabotage opportunities to cooperate for mutual economic benefit. Much the same can happen to cooperation between firms. Organizations form alliances because they make strategic and economic sense. Yet often the potential for collaboration is undermined by the distrust and fears of the partners.

The long-standing alliance between Renault and Nissan Motors has been in the news for just this reason. Their collaboration began in 1999 when Renault sought a partner to help it achieve economies of scale and to sell cars in more countries. It agreed to a complex cooperative relationship with struggling Nissan, then facing a shrinking market share and a debt load that was leading the company toward bankruptcy. Under the leadership of Carlos Ghosn, the new alliance management turned Nissan around through a combination of investment and streamlining production and purchasing, while Renault gained first-rate engineering and access to new markets. In only three years Nissan had been rescued, and the combined companies were among the top five world automakers. By 2016, another struggling Japanese manufacturer, Mitsubishi, joined the alliance which in 2017 sold more cars than any other manufacturer.

The Renault-Nissan alliance seemed to have worked. A variety of joint activities, shared production, and technology development projects led to improved efficiency for all parties involved. At the same time, the partners retained their separate identities with customers and employees, building confidence and loyalty.

Yet things have gone badly wrong. Ghosn, by then chief executive of all three entities, was arrested by the Japanese authorities in November 2018 on charges of financial misconduct at Nissan including understating his pay and perks. This exposed a simmering rivalry between the French and Japanese nationalists in each camp of the alliance. While speculation continues as to the underlying reasons for this hostile move by the Japanese, it seems that a major factor was a growing sense of grievance that Renault dominated the alliance through its 43.4% ownership. Although Nissan accounted for the largest share of the alliance’s sales and profits, it owned only 15% of Renault in the form of non-voting shares. Tension increased when the French government decided in 2015 to boost its stake in Renault to preserve its double-voting rights as a shareholder. The French also began to push for a complete merger of the two firms. Nissan’s reservations stopped an announced merger between Renault and Fiat Chrysler, while Renault threatened to derail the recent overhaul of Nissan’s corporate governance structure. Despite the agreement reached on granting Nissan board committee seats to Renault’s representatives, whether their lucrative collaboration can be repaired remains to be seen. Some of the alliance’s joint business functions set up during the Ghosn era to oversee cooperation are reportedly being axed amid the increasingly strained relationship between the companies.

It is not so unusual for an economically successful alliance to fall prey to mistrust between the partners. The Renault-Nissan alliance started well with a strong personal chemistry between senior partner executives and engineers fostered by joint activities undertaken even before the companies signed a formal agreement.  This foundation was built on cooperation in many joint project teams which particularly contributed to Nissan’s turnaround.

Over time, though, the alliance’s unbalanced ownership structure failed to reflect Nissan’s success. Joint activities such as the launch of a low-cost car in India in 2014 were hampered by failing cooperation. Ghosn’s centralized leadership eroded the separate identities of the firms and supplanted the need for actual cooperation between firms. The prospect of a full merger driven by French voting interests threatened the carefully maintained cultural identity of Nissan as a leading Japanese industrial firm. By the summer of 2019, it is clear that little trust remains among the partners, even as all sides proclaim their commitment to continuing cooperation.

What can we take away from this story? Alliances can be very successful – if led by the right people, designed around a sound cooperative strategy, and supported for the long run by  employees. Yet conflicts often arise between partners, and studies suggest that around 50 per cent of alliances are terminated by the time they reach their fifth anniversary. Even with a good economic and strategic fit, personal and political tensions can develop between partners, reflecting differences in cultural identity and expectations. An understanding of human perception and behavior is essential to enable the economic payoffs from alliances to be achieved and maintained. Two insights are particularly important. First, while cooperation provides mutual gains that partner firms cannot generate on their own, it is important for the partners to develop and maintain a perception of mutual benefit among their staff. Second, trustbetween firms is essential and requires a lot of psychological investment to overcome cultural and other sources of misunderstanding

Cooperative strategies are ever more common; firms often use alliances in order to pool technologies and development costs in search of innovation. Cooperation between auto and artificial intelligence companies to develop autonomous vehicles is one example of such agreements. However, firms must recognize that the strategic and economic benefits of cooperation cannot be sustained without a lot of effort to overcome human and organizational divisions.

Image by Gerd Altmann from Pixabay

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