Why is the CEO of the world’s largest automaker in jail?

I have been surprised at the paltry attention paid by the US mainstream media to the arrest and incarceration Monday last week of Carlos Ghosn, who is the head of the world’s largest automobile manufacturing group: the alliance of Renault, Nissan, and Mitsubishi, with 450,000 employees and 10.6 million vehicles annually produced. As Joe Biden would say without resort to initials, this is a BFD.

[Mitsubishi was added to the group two years ago, as its failure to reach sufficient size has left it with a serious cost disadvantage. The cooperative purchasing and technology advantages of the combination presumably have kept it alive, but as a distinctly junior partner. This story is mostly about Renault and Nissan.]

Of course, the Wall Street Journal and other business publications have devoted considerable coverage to the drama unfolding, but the average American news consumer has seen very little, if any, information on the affair that is roiling Japan, France, the EU, and the auto industry.

Ghosn reportedly is denying the charge that he illegally failed to report substantial income to Japanese regulators for his role as President of Nissan.  He was fired by Nissan at the time of his arrest, but remains CEO of Renault, which purchased a controlling 43% stake in Nissan when that company was in a financial crisis.  The BBC reports:

Public broadcaster NHK, which first disclosed Mr Ghosn's arrest, reported he had told investigators there was no intention to under-report his earnings.

He has not spoken publicly.

Greg Kelly, a former Nissan executive arrested along with Mr Ghosn, was quoted by NHK as defending his boss's compensation, saying it was discussed with other officials and paid out appropriately.

Japanese prosecutors claim the two men conspired to understate Mr Ghosn's remuneration by about half the 10 billion yen ($68m) he earned at Nissan over five years from 2010. The company has also made other allegations about use of company money.

The Wall Street Journal provides additional information on the allegation and a possible line of defense:

Altogether, Mr. Ghosn earned about ¥8 billion in what Nissan calls unreported deferred compensation in the eight years ended March 2018, these people said. The exact terms and payout period of that money couldn’t be learned.

The structure was formulated in consultation with Nissan executive Greg Kelly, whom Nissan has publicly called the “mastermind” of the plan, one of the people said. Mr. Ghosn told colleagues that if he was set to receive the deferred money after retirement, it wouldn’t have to be reported in Japanese regulatory filings, but Nissan says it should have been reported, this person said. (snip)

In addition to the allegations made by prosecutors, Nissan’s investigation alleged that Mr. Ghosn used corporate money to buy and renovate residences he used in Beirut and Rio de Janeiro, a person familiar with Nissan’s investigation has said. Prosecutors have so far not said publicly whether they are investigating that issue.

The Ghosn family believed the residences in Rio de Janeiro, Beirut and other locations were corporate housing, whose purchase went through the normal channels for Nissan approval, a person familiar with the family has said.

Mr Ghosn is a Brazilian of Lebanese heritage, which explains his residences in those two countries. He is also the very definition of a jet-setter, commuting between Paris and Tokyo on Boeing Business Jet (an upgraded version of the Boeing 737) outfitted with a complete office for him to conduct business – until his incarceration.

The BBC mentions a suspicion that many close observers of the global auto industry have harbored:

…there are suspicions about the timing of Mr Ghosn's downfall, which came amid concerns about the future of the Renault-Nissan partnership

He is thought to have planned a full merger of the carmakers, something that some Nissan executives feared could see their company reduced to a junior partner.

That is highly plausible to me because Nissan rebounded from the crisis that made it possible for Renault to gain control and now Nissan is substantially (about 30%) bigger than Renault in car production. Nissan got into trouble because in the face of a downturn, it kept too many factories open and too many models in production. This unresponsiveness was itself the product of a notorious aspect of Nissan’s corporate culture. The company was formed by a merger of two almost equally-sized manufacturers in the 1960s: Nissan Motors and Prince Motors. For decades, the company was split between former Prince factories/models/personnel and former Nissan factories/models/personnel. I heard stories that the company even had two separate personnel operations to tend to the two sub-organizations.  It was factionalism on steroids.

Ghosn and Renault were able to come into Nissan and streamline the operation without regard to the old organizational split, and as a result, along with a rebound in global auto sales, Nissan returned to its former glory and overshadowed Renault. With its corporate history of internal strife following a merger, I can imagine that extreme dread followed the suspicion that another merger was ahead – into a smaller non-Japanese organization.

The prosecution ahead probably will be the “trial of the century” in Japan. Ghosn has already hired a top lawyer with relevant experience:

NHK reported that former prosecutor Motonari Otsuru, now in private practice, is representing Mr. Ghosn. Mr. Otsuru’s office previously declined to comment and a call to his office on Sunday wasn’t returned.

Mr. Kelly’s family has retained Nashville-based attorney Aubrey Harwell [Nissan USA is headquartered in Nashville - TL] to represent him. Mr. Harwell said in a phone interview that he hasn’t had contact with Mr. Kelly yet, but that Mr. Kelly’s family believes he did nothing wrong. Mr. Kelly’s family plans to hire a Japan-based lawyer for him, Mr. Harwell said.

I will be following this case as closely as my schedule and location allow. This will be historic in many senses of the word.

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