Meet the Pivo 2: The car won't reverse

(Fortune Magazine) -- A hush falls over the vast white design studio outside Tokyo. Nissan CEO Carlos Ghosn is examining the concept cars that the company plans to unveil in late October at the Tokyo Motor Show, where every automaker's reputation will be on the line.

In the studio the designers wait anxiously to see where Ghosn's famous attention to detail will grab hold of something. Fittingly, it's a door handle; Ghosn doesn't like the way it feels, and he complains to designer Shiro Nakamura.

Carlos Ghosn inside the Pivo 2 at Nissan's tech center

At Nissan's tech center in Japan, the shape of the future is a closely held company secret.

At the Oppama plant in Japan, workers learn to assemble a door using a minimum of equipment.

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Nissan's radical chic

He's known for quick fixes, but Carlos Ghosn is staking the future on wild designs and hot technology. Photographs by Gregg Segal

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"When you close the door, you don't want to have this kind of vibration," he says in his best schoolteacher voice. "You still have more work to do."

Yet Ghosn shifts into another mode when he encounters an electric-powered, spaceship-like car known as Pivo 2. Instead of picking at details, he sees the future. The wheels on this car rotate 90 degrees to make parking easier in space-challenged Japan, and the passenger compartment revolves in a full circle, so the driver never has to back up.

When Ghosn sits in the vehicle, his attention is caught by a robotic bubble on the instrument panel that blinks and nods and answers questions in English or Japanese. He's also impressed by the advanced lithium-ion batteries that propel the car. Verdict: The boss is pleased.

As Ghosn notes later, "It is modern, full of technology, very innovative. Electric cars are going to be very important for urban transportation. And I think this one is going to be a big hit and attract a lot of attention. We'll see."

The scene perfectly captures the two sides of Carlos Ghosn (rhymes with phone). Mostly he's viewed as the tough-minded bean counter who, beginning in 1999, rescued Nissan (Charts) from near bankruptcy quarter by quarter, and was rewarded by gaining the additional post of CEO of parent company Renault in 2005.

But the less recognized Ghosn is the long-term strategic thinker who is trying to position Nissan for a tumultuous automotive future. Having taken a public flogging when Nissan missed its financial targets for the first time in his tenure earlier this year, Ghosn has made management and operational changes in the hope that it doesn't happen again.

But he is also steering Nissan for the long haul, focusing on what he believes are going to be the key pressure points: low emissions and passenger safety on the technology side, developing nations and low-cost transportation on the growth side. Traditionally Nissan has been a leader in none of those areas.

Ghosn starts from a position of surprising strength. While Nissan's operating profit margin for the fiscal first quarter ended June 30 ran a bit below Ghosn's target for the year, at about 6.1%, it was still better than any other mass-market carmaker in the world except Toyota (Charts), and leagues ahead of Renault, whose operating margin is around 3%.

Says Ghosn: "Yes, Nissan's profit went down, but it is still hugely profitable. Nissan is a very happy company."

Happy but hardly ecstatic. Shrinking numbers of new-car buyers and a market shift to small cars has caused big problems in Nissan's home market of Japan. Sales fell for 23 months straight before turning up in August. Long a strong No. 2, Nissan now ranks third in the market behind Toyota and Honda (Charts), and it is trimming its ranks of dealerships to eliminate marginal outlets. Akira Sato, who runs Nissan's domestic network, says he doesn't expect Nissan to regain the No. 2 ranking until 2011.

In the U.S. as well, Nissan looks like an also-ran. Its market share is two-thirds of Honda's and less than half of Toyota's. A large share of the blame rests with corporate reputation: Nissan is a weaker brand. Toyota and Honda buyers shop the manufacturer. They are looking for the "Honda minivan" or the "Toyota hybrid."

When buyers come to Nissan, they're seeking a specific model, like the Altima or the Murano, so the company doesn't get any spillover from casual customer traffic. Says a dealer who carries several brands: "At Toyota people are coming in to buy a Toyota. Not at Nissan - it is a second-tier brand. We make only $600 per car profit on a Nissan, while we make $2,000 a car on the stronger brands."

Fixing the brand is a long-term proposition, but Ghosn can be impatient at times. In June he replaced Brad Bradshaw, head of sales and marketing for Nissan North America, after just 11 months on the job, even though Nissan's sales were up 4.6% for the year in a relatively weak market. In September the head of advertising quit.

Bradshaw's successor, senior vice president Mark McNabb, says he knows precisely how to satisfy the man they call the Boss. "There is no ambiguity to it. My mission is to hit my numbers." The sudden personnel change surprised some of Nissan's biggest customers. Says the dealer: "Ghosn has no loyalty. He goes through people like Kleenex. He's ruthless. Bradshaw did nothing wrong."

Ghosn himself has taken a public hammering in recent months. His overtures to General Motors (Charts, Fortune 500) about an alliance, urged by investor Kirk Kerkorian, were spurned. When Nissan missed that earnings target for its fiscal year ended March 31, finishing a seven-year run, the critics took advantage of the dramatic story line.

SUPERMAN STUMBLES was the headline in the Toronto Star. "Some of his glamour has gone," opined the Financial Times. "The world automobile industry is teaching upstart Carlos Ghosn a few hard lessons," wrote a Bloomberg columnist.

Ghosn was overstretched, many argued, trying to run two companies based on opposite sides of the world. Since becoming chief at Renault, he has made only slow progress toward his goals of boosting sales 32% and cutting costs 10% by 2009, though the company has a hot product in the new, low-priced Logan model.

For a man of Ghosn's considerable self-esteem, the criticism has stung. "When your results are good, you are obviously going to have a lot of press," he told Fortune during an interview in Tokyo. "And when you start to falter a little bit, you are going to have some criticism, and there is nothing abnormal in that. 'You are spread too thin, you should concentrate on one company' - it is fair. I am not questioning this. But at the end of the day it is a question of trust: Can you do the job or not for your company?" Ghosn leaves no doubt what he thinks the answer is.

When Ghosn was forced to issue his profit warning in February, the media called it "Ghosn shock." His company, he admitted, was suffering a "performance crisis." He announced that Nissan's operating profit for the fiscal year would be 11.1% lower than he had promised, or $3.9 billion instead of $4.4 billion.

At the annual shareholders' meeting in April, he offered an apology and spent little time blaming the usual suspects: rising material prices, a slowdown in domestic and foreign markets, a slackening in the pace of Nissan's new model introductions. Instead he looked ahead, making specific and generally optimistic projections for fiscal 2007: higher sales, higher profits, massive investments in R&D, and a rush of new products, 11 in all.

"Last year we hit a bump," he told shareholders. "We haven't gone in the ditch. We will get past this bump with a sharper competitive edge."

Looking back, it is clear that the missed forecast hit Ghosn hard. "This is something that I do not take easily," he told Fortune. "You have to be careful to react when you start to deviate from your course. We made a big deal out of it, and I think it should be the case because when for the first time in seven years you miss a forecast, you try to understand why did you miss it - and make sure this doesn't happen again."

Ghosn wasted no time making changes. After determining that the executive committee running Nissan was overstretched, he expanded it from seven to nine members, adding a global head of sales and marketing as well as an executive to look after smaller overseas markets. At the same time he delegated responsibility for running the North American unit so that he could concentrate on his duties as CEO. And after nearly four years of serving as his own CFO, Ghosn finally hired a replacement in September.

Simultaneously Ghosn moved to return some consistency to Nissan's new-product program. From March 2005 to September 2006, Nissan launched just one new model in the U.S., eroding dealer traffic and dampening sales. Ghosn smoothed out the cadence of new-model introductions so that it will be "very regular" for the next five years. He intends to launch an average of 11 new vehicles per year between 2007 and 2012.

The attention to his short-term performance has tended to obscure the strategic makeover Ghosn has underway. Undaunted by the upheaval that followed when he relocated Nissan's North American headquarters from Los Angeles to Nashville, he is uprooting Nissan's corporate offices in 2009.

They are relocating from Tokyo's glittery but high-rent Ginza district to Yokohama, Japan's second-largest and distinctly less glamorous city, 18 miles away. Aside from freeing up some valuable real estate, the move will bring Ghosn closer to two of the company's operations vital to its long-term health: design and advanced technology research.

Ghosn invested heavily in two state-of-the-art facilities that now serve as the twin hubs of the company's creative efforts. Nestled into a heavily wooded hillside hidden from the highway, the starkly white design center looks like one of those rural redoubts inhabited by the villains in a James Bond movie. Nissan's Japanese rivals haven't distinguished themselves with design, so Ghosn has made it a keystone of Nissan's brand identity. (Distinctive new vehicles like the Murano crossover have sold strongly and contributed big profits.)

The hypermodern facility is enormous. Some 600 designers and other workers occupy five hangar-size studios connected by a corridor nearly 1,000 feet long and wide enough for two cars to pass. Visitors gain admittance by passing through a cordon of locked doors.

A couple of miles down the road is Nissan's new Advanced Technology Center, which opened in May. The interior features an atrium seven floors high that provides an unobstructed view of the ground floor, where future vehicles are analyzed by suppliers. The tech center is organized to focus on two main areas of research: technology aimed at environmental sustainability (primarily electric powertrains) and a safer mobile society - cars that will drive themselves in order to protect passengers, pedestrians, and other drivers.

In a nod to employee morale, all of the facility's 2,000 workers are asked to leave the building each day no later than 8 P.M.

Early on, Ghosn was caricatured as a Luddite because he refused to follow the rest of the industry in developing hybrid gas-electric powertrains. His argument: The technology might be promising, but the business case was dismal, and he had no interest in making cars that he couldn't sell at a profit.

His views haven't changed, but competitors have forced his hand. This year Nissan launched an Altima fitted out with a Toyota hybrid system, and in 2010 it will introduce its own hybrid system.

At the same time, Nissan is pushing ahead with research on all-electric cars, the ultimate "powertrain of the future," according to Mitsuhiko Yamashita, executive vice president of R&D. Yamashita thinks Nissan has a big lead in the development of next-generation lithium-ion batteries - prized for their superior energy to weight ratio - because of its partnership with NEC Corp.

"Internal testing has told us it is the best among competitors," says Yamashita. Nissan expects to sell an all-electric lithium-ion car in Japan by 2010-11 that will have a 100-mile range and be capable of being recharged in two hours. By contrast, Toyota has delayed installing lithium-ion batteries in its next-generation Prius hybrid, while General Motors is still thrashing out details for production of its much-hyped Chevrolet Volt plug-in hybrid.

Ghosn isn't waiting around for the next big breakthrough. He has created a method of tracking new technologies so that they can go into production in a timely manner. When Ghosn took over in 1999, Nissan's R&D cupboard was virtually bare. Nissan introduced just two new technologies in 2001 and another two in 2003. He's promised more than 15 each year beginning in 2009.

Coming this year are three particularly novel developments. One is a 360-degree-view monitor that provides images of the area all around the vehicle taken by four high-resolution cameras and then synthesized into one. Another is a distance-control assist system that uses a combination of throttle control and braking to keep a safe distance from the car ahead. The third is a lane-departure-prevention system that brakes the car when it drifts out of its lane.

Nissan got a slow start in fast-growing overseas markets, but it is gathering speed. It has almost no presence in India but plans to participate in a new plant jointly built with Renault and India's Mahindra & Mahindra (see "India's Global Reach") that will have a capacity of 400,000 vehicles.

Nissan started late in China too, but expects to sell 300,000 cars there this year, making it the sixth most popular brand. Likewise, it is coming on strong in Russia. Three years ago it sold 28,000 cars there; this year it will move 110,000. Infiniti, Nissan's luxury-car brand, has been a huge success. In Moscow and St. Petersburg, just three dealers are expected to sell 7,000 Infiniti cars this year. Finally, Renault and Nissan are building a plant in Tangiers, Morocco. With a capacity of 400,000 vehicles, it will be the largest auto plant in Africa.

Selling in developing markets means hitting price points that are unknown in Western nations, and Nissan is exploring whether it can build a $3,000 car. (By comparison, the cheapest car sold in America, the tiny Chevy Aveo, costs $9,995 before rebates.)

Indian manufacturer Tata has announced plans to introduce a $3,000 car next year, and Ghosn wants to see whether Nissan can too. "We're checking the feasibility right now," he says. "This has to be a breakthrough from the beginning." For assistance, Nissan is partnering with Indian manufacturer Bajaj. Ghosn figures that the manufacturer's cost has to be around $2,500 for the car to be practical.

New technology and overseas adventures grab headlines, but Nissan is also making gains on less glamorous fronts. Five years ago Nissan's light-commercial-vehicle division was moribund. Its vehicles hadn't been redesigned in eight years on average. It sold 163,000 trucks, vans, and buses and produced an operating profit of 2%.

"Nobody had the balls to tell the dealers we were getting out of the business," recalls Andy Palmer, who heads the unit. In September 2002, Ghosn told Palmer to "fix it or close it." Using tried-and-true turnaround techniques - platform rationalization, cost reduction, speeded-up introduction of models, new markets - Palmer rebuilt the business. By the time the fiscal year ends in March 2008, he expects to have sold 500,000 vehicles and generated an operating profit in excess of 8%.

Yet Ghosn pays special attention to Nissan's sexiest hardware. He deemed the relaunch of the 350Z sports car in 2002 essential to Nissan's comeback, and now he's touting the debut of the all-new GT-R supercar. The GT-R is designed to outperform a Porsche 911 Turbo (zero to 60 mph in under four seconds) at a sticker price under $80,000 (vs. $123,000 for the Porsche).

In late September, Ghosn spent two days driving the car at the Nürburgring, the famed German racetrack. The 17-mile circuit contains 170 corners and is considered the most demanding racecourse in the world. Though he'd never be confused with a hot-shoe driver, Ghosn was eager to try the car for himself as well as show the Nissan flag. "It is very good for our engineers that they see they are getting the attention of the CEO," he says.

At a likely annual volume of 12,000 cars a year worldwide, the GT-R is not a huge business proposition for Nissan, but Ghosn values it as a profile raiser. "There are GT-R fans all over the world, not only in Japan. So it is not so much about how many people are interested in the car, it is the intensity and the complete involvement, engagement, and passion of people." When the car is unveiled at the Tokyo Motor Show, Ghosn plans to drive it onstage himself.

When he does, he'll be breaking new ground in another area. Always careful about his appearance, he is being dressed for the introduction by France's Louis Vuitton. The fashion house will provide a suit, shirt, and tie coordinated with the color of the car.

Clothes may not make the man, but they might make the company, in Ghosn's view. "Look at Steve Jobs," says a Ghosn aide, citing another CEO who personifies his company. "By always appearing in a turtleneck and blue jeans, he creates an identifiable image for the company."

Not to mention sharing a hands-on approach to the job. In a world of uncertainty, Ghosn's confidence is infectious. Which is a good thing, since by his own prediction, his next eight years as CEO may make the first eight years look like a joy ride by comparison.