Ghosn scandal could trigger a series of crises for Nissan, Renault, Mitsubishi

There aren't many automotive executives who can claim to have saved a company, let alone three. But now, Carlos Ghosn might also prove to be the man responsible for shattering the global alliance that transformed Renault (RNO-FR), Nissan (7201.T-JP) and Mitsubishi (8058.T-JP) into an industry powerhouse.

A day after prosecutors arrested Ghosn and another senior Nissan executive, accusing them of serious financial irregularities, the fallout was escalating. Some auto analysts questioned whether the alliance between the three carmakers could survive the affair, leading nervous investors to pare back their holdings. U.S. traded shares of Renault have slid by about 11 percent since news of Ghosn's arrest in Tokyo broke Monday while Nissan's shares in the U.S. fell by about 6 percent.

Self-destruction

"You're witnessing the single greatest act of self-destruction in modern automotive history," said Eric Schiffer, chairman of Los Angeles-based Reputation Management Consultants. "Not only has [Ghosn] destroyed his life, but he puts those companies in uncharted and dangerous waters."

His swift fall from grace places the carefully constructed alliance he built between the three automakers at risk and will have far-reaching repercussions across the industry, auto executives and analysts say.

Perhaps only Tesla (TSLA) CEO Elon Musk and former Fiat Chrysler (FCA-IT) CEO Sergio Marchionne, who died last July, came close to matching the high-profile persona of the 64-year-old Ghosn. Born in Brazil of Lebanese parents, he began his career in France with the tire-making giant Michelin.

In 1996, Ghosn was recruited by Paris-based Renault and tasked with pulling together a turnaround plan for the struggling automaker. His strategy worked so well that Renault was back in the black in barely a year.

Ghosn got the chance to prove he wasn't a one-shot wonder when Renault assigned him to lead its efforts to revive debt-laden Japanese automaker Nissan in 1996. With only three of its product lines making money, many observers expected that country's second-largest manufacturer to go broke. There was widespread skepticism when Renault announced plans to purchase a 38.6 percent stake – which has since grown to 43.4 percent.

Skeptics

At the time, former General Motors (GM) Vice Chairman Bob Lutz said Renault would be better off "taking $5 billion, putting it on a barge and sinking it in the middle of the ocean." But within three years, Ghosn's Nissan Revival Plan had taken hold. The automaker halved its debt and was delivering profit margins of around 4.5 percent.

"I said it would never work" Lutz said on CNBC's " Squawk on the Street " on Monday "and to my amazement it has worked fabulously well for both companies."

Originally working as Nissan's chief operating officer, Ghosn was soon its CEO and, a few years later, added the title of chief executive of Renault, as well as head of their Renault-Nissan Alliance.

Ghosn had long left open the possibility of adding a third leg to the stool and, in 2016, he made his move, directing Nissan to purchase a controlling stake in Mitsubishi, the small Japanese automaker teetering on the brink of bankruptcy after a series of financial and regulatory scandals.

While still too soon to tell whether Mitsubishi is completely out of the woods, it added enough volume to the alliance total that, in 2017, it nudged past both Volkswagen (VOW3-DE) and Toyota (7203.T-JP) to claim the crown as largest automotive group in the world by unit sales.

Forcibly removed

But that celebration could be short-lived. Ghosn, who has repeatedly sidestepped questions about his potential retirement, is now being forcibly removed from all his posts in the wake of this week's breaking scandal.

On Monday, Yokohama-based Nissan issued an initially terse release stating that, "Based on a whistleblower report, Nissan Motor Co., Ltd. (Nissan) has been conducting an internal investigation over the past several months regarding misconduct involving the company's Representative Director and Chairman Carlos Ghosn and Representative Director Greg Kelly."

Within hours, reports began circulating that Ghosn and his hand-picked lieutenant had been arrested by authorities in Tokyo where they faced a number of potentially serious allegations. Ghosn — who was now serving as Nissan chairman — was accused of concealing as much as 5 billion yen, or about $45 million, in income, as well as misusing corporate funds. Precise details have yet to be released, however.

For the past two decades, Carlos Ghosn was seen as one of the biggest rock stars in a Japanese business world normally skeptical of "gaijin," or foreigners. He even became a star of his own comic book series. Since the accusations were made public, however, his image has been washed away by a tsunami of bad news. Reputation expert Schiffer told CNBC, "There will be blood because it is about preserving honor and trust with the public."

Anger and disappointment

That became apparent within hours. "I feel strong anger and disappointment," Ghosn's handpicked successor as Nissan CEO, Hiroto Saikawa told reporters at Nissan headquarters in Yokohama. "I am very sorry."

The Japanese automaker quickly moved to fire Ghosn, even as pressure mounted on Renault to do the same thing a half a planet away. The French government, the automaker's biggest shareholder, called for a shake-up in management. Renault plans to name its chief operating officer Thierry Bollore as an interim replacement for Ghosn, the Wall Street Journal reported Tuesday, citing unnamed sources.

"Carlos Ghosn is no longer in a position where he is capable of leading Renault," Finance Minister Bruno Le Maire told France Info radio. But he added that the government "(has) not demanded the formal departure of Ghosn from the management board for a simple reason, which is that we do not have any proof and we follow due legal procedure."

The fallout could, and likely will, continue according to several observers. During a meeting with reporters in Tokyo on Tuesday, Mitsubishi CEO Osamu Masuko said the very alliance that Ghosn strung together is in jeopardy. "I don't think there is anyone else on Earth like Ghosn who could run Renault, Nissan and Mitsubishi," he said.

Dire warnings

Whether such dire warnings prove true is uncertain. Though they legally operate as independent manufacturers, after nearly two decades working together it can be difficult to distinguish between Nissan and Renault in many areas. They share most of their product platforms, as well as an extensive array of components. They work closely together on advanced research programs, including electric, hybrid and autonomous driving. And they are intertwined in global manufacturing and distribution. Since being pulled into the group, Mitsubishi has also begun mingling its operations.

Many of those activities were carefully crafted by Ghosn, especially the alliance's focus on the technology needed for future mobility, such as battery-electric vehicles like the Nissan Leaf.

"He was an asset in navigating globalized markets," said Jeremy Acevedo, manager of data strategy for automotive service Edmunds. "So really this is coming at a terrible time."

Daimler

It's not just the Renault-Nissan-Mitsubishi Alliance at risk. For the past nine-years, Ghosn has carefully sculpted a separate partnership with Daimler AG, the parent of the Smart and Mercedes-Benz brands.

Though there are none of the financial cross-holdings found in the alliance, the partners are today working together on a variety of projects. Engines made by Nissan in Smyrna, TN, for example, are being used in Mercedes vehicles assembled in Alabama. Mercedes and Nissan's Infiniti brand share a Mexican assembly plant. And a platform developed by Daimler underpins the Smart fortwo and Renault Twizzy.

At least initially, the partnership with Daimler was nurtured by Ghosn and his German counterpart, Daimler CEO Dieter Zetsche, who said at a news conference during the Paris Motor Show last month, "Without the chemistry between us, maybe this wouldn't have happened."

There have been questions about whether it would survive Zetsche's scheduled move to relinquish the CEO post next year, moving into the post of Daimler chairman. Last month, he told reporters at a joint news conference with Ghosn, "I don't see from my perspective why the momentum in this relationship should change." But with the Nissan boss enveloped in scandal and the future of the Renault-Nissan-Mitsubishi Alliance itself uncertain, all bets are now off.

It is, of course, possible that Ghosn could survive the scandal, the allegations against him proving false. But whether he could rebuild his reputation is another matter entirely. He seemed to anticipate the risk, early in the new millennium, when he discussed the Japanese comic book he starred in.

"If you have not been a villain at a certain point in time, you will never be a hero. And the day you are a hero, you may become a villain the next day," he said.

Few in the auto industry have fallen as far, as hard and as fast as Ghosn. It may be impossible for him to find a way to become a hero again.