In May 2001, just 12 months after reporting its biggest loss ever, the Nissan Motor Company reported the largest net profit in its history. This turnaround, announced by Nissan’s president and chief operating officer, Carlos Ghosn, made good one of the boldest promises ever pledged by a corporate executive. Mr. Ghosn had said he would resign if the automaker did not report an operating profit in the fiscal year ending March 31, 2001. Mr. Ghosn made this dramatic pledge shortly after Renault announced that it had chosen him to run the company, in June 1999. The French automaker had purchased a controlling 36.8 percent interest in Nissan that March.

Mr. Ghosn’s change-management challenge at Nissan—and the approach he took to the company’s 19-month turnaround—is of great interest to top managers and academics alike. The former Michelin and Renault executive, best known for his cost-cutting skills, was trying to do more than restructure a respected but money-losing industrial giant. He was doing so in Japan, where social convention limits one’s flexibility in making big, fast cost reductions. Moreover, he is a foreigner, one of the few to lead a Japanese company.

In these excerpts from an interview—conducted by Allan Gold, Masao Hirano, and Yoshinori Yokoyama, and published in early 2001—Mr. Ghosn offers his perspective on the turnaround effort he was in the process of leading at Nissan.

Interviewer: How do you describe the Nissan revival plan?

Carlos Ghosn: The plan is still, unfortunately, known for its immediately dramatic part. How do you make head count reductions in Japan? How do you reduce manufacturing overcapacity in Japan? How are you going to get rid of the seniority system in Japan? How do you establish performance-based management? So attention was focused on cost reduction, sales of assets, and how we are going to eliminate the keiretsu¹ and develop other kinds of suppliers.

In fact, the Nissan revival plan is more a growth plan. Not only the good part but the part of growth that is a little bit more painful: shifting resources from where they are not effective today to where they’re going to be much more effective.

Interviewer: How did you make the decision to cut back drastically on suppliers and to close factories, given the historical constraints on taking these kinds of harsh steps in Japan?

Carlos Ghosn: First thing, there is no doubt that we had a "burning platform"—declining market share, ¥2.4 trillion [$22.3 billion] in debt, a lack of profits. When you look at the last ten years, you have seven out of the last eight without profit.

I discovered very quickly that this sense of decline was widely known inside the company and shared. I can tell you that from the inside, the burning platform was even more visible. Managers knew how much they were restricted in their budgets, how many resources they needed that were not given to them, and how much they had to accept short-term-oriented decisions that hurt the company long term, in terms of delayed development of certain products. For example, the Micra, which will be replaced at the beginning of 2002, will have been on the market ten years. No car company today maintains its product in such a competitive segment for such a long time.

We said that we were going to build the revival plan together. So we started by establishing nine cross- functional teams one week after I took my job in July [1999]. Today there are ten. The object of each cross-functional team was to bring people from various seniority levels around the table to discuss all the problems and opportunities existing for one particular area of the company: business development, purchasing, manufacturing, research and development, general and administrative, marketing and sales, phasing out products and complexity, financial costs, management systems. I told the executive committee that we needed cross-functional teams because we wanted to make sure that this [revival plan] was the work of the company [as a whole], not only top management. So that’s why in the cross-functional teams we didn’t have only executive vice presidents and senior vice presidents.

We said to the teams, "Tell me what you think Nissan should do to get the maximum out of this area." There was continuous discussion, and we made all the decisions in one week, at the end of September, and ended up with the Nissan revival plan on October 18, 1999.

Interviewer: Did you know at the beginning that the people on the cross-functional teams would conclude that Nissan had to reduce its supplier network and close factories?

Carlos Ghosn: It was so obvious from the beginning. The only question was by how much and how fast. But I don’t want you to think that the cross-functional teams were created only to [help people] buy into the plan and that the plan was ready before then. It’s not true. We built it together.

The cross-functional teams were challenging a lot of traditions. But how do you challenge a keiretsu that you have been doing business with for many years and that you are heavily involved with? How do you do it from one day to the next? It’s very difficult.

So, in a certain way, an outsider could do it. I’m not saying a foreigner. I’m saying an outsider could do it because the outsider is free of all these ties. The outsider is not compromised by all the promises and the deals that took place [earlier]. An outsider can come in and say [to suppliers], "Performance is not enough. I’m sorry, guys. Nissan is not doing enough, but you are not doing enough, either. We’re going to fix our problem. But we’ll ask you to fix your product, and here is a guideline for the next few years."

Interviewer: How have you managed to reduce the number of jobs at Nissan, given the Japanese tradition of avoiding straight layoffs?

Carlos Ghosn: In Japan, head count reductions are taking place, and we’re not planning to change that. The reductions are [coming] through retirement and preretirement [offers].

There is also relocation. For example, we’re closing the Murayama plant. We said to every single blue-collar worker who would like to be relocated in another Nissan plant, we will offer him a job. It happened that 80 percent of the people accepted a new job in another plant. So there’s 20 percent that we’re helping to find a job [with another company]. We’re helping them to reintegrate because they want to stay in Murayama.

Outright sackings of [Nissan] employees in Japan are not taking place. It’s not taking place, because I don’t think I need to do this. We can revive Nissan without that.

Interviewer: You have noted that you received considerable outside advice. What kind?

Carlos Ghosn: I’ve had a lot of opinions from people who are ex–Nissan executives, ex–Nissan board members, dealers, suppliers. Even people from outside who one way or the other are opinion leaders who came to me and wanted to discuss or make a particular suggestion—what’s feasible in Japan, what’s not feasible. I must admit that a lot of people cautioned me about being prudent. "You’re not in the United States, you’re not in Europe. You’re in Japan. It’s a little bit difficult, so it’s going to take five years or ten years or whatever."

There was a disconnect between what I was hearing and doing inside the company and what I was hearing outside the company. But I had to make a decision, and a decision has to come from strong inner beliefs. And my strong inner belief was that it was time to totally break with the past ten years of Nissan.

At the end, I made a decision to commit my own job if any one of the objectives was not met. It was very important for the credibility of the plan, both internally and externally, to make this kind of commitment so people knew that you are going to be 100 percent behind the Nissan revival plan. The ultimate sacrifice for the top manager is to say, "I’m putting my job on the line if I don’t achieve these targets." You can’t ask a manager for more than this, especially in my position, because I had nothing to do with this [company’s problems]. I was not in any way responsible for the situation. On top of this, I was saying, "I bet my job on this." So it has a high level of credibility. In a certain way, this limited—not eliminated—the anxiety and the skepticism about the question, "Are they really going to do this?"

We had to act fast. And we had to mobilize and make strict, immediate targets so that there was no room for people to say, "Well, let’s wait and see."

Interviewer: What kind of targets did you set?

Carlos Ghosn: Let’s use purchasing as an example. Purchasing is very important for car manufacturers because it’s between one-half and two-thirds of their costs. If you don’t have an effective purchasing system, there is no way you can be a competitive car manufacturer.

When we started the discussion in purchasing, the first cross-functional-team proposals were more into the one-digit, three-year effort than into the two-digit effort. So we said, one digit is a more conservative objective and does not take into consideration a lot of areas [for change] that we were discovering, like rationalizing the way we purchase services or equipment. People usually think about purchasing as parts, but it is much more than this. Little by little, in the meetings we moved from a one-digit objective to a two-digit objective for three years. And we ended with a commitment of 20 percent [for purchasing cost reductions]. But the target is higher than 20 percent. For the year 2000, we called for an 8 percent purchasing cost reduction. Today we are envisioning more than 8 percent.

Interviewer: When you arrived, did the company have any targets?

Carlos Ghosn: There were some. What I can tell you is that there were no global ones. Japan had its own targets, the United States its own targets, and Europe had its own targets. They didn’t even know each other’s targets. Each one was left to its best efforts. Service was not considered at all. Equipment was not considered at all. They [the targets] were fragmented, partial, conservative, and did not add up to any long-term vision.

’So you are in a vicious circle where the supplier has every interest in giving you the minimum’

The suppliers complained a lot that Nissan people were coming many times during the same year and asking for more [reductions]. Say you’re a supplier of Nissan. You have the purchasing guy from Nissan coming to you and telling you for next year that we want a 4 percent price reduction. And the supplier challenges you a little bit and then you have to end up at 3.5 or 3.6 [percent]. So you start the year like this. But the supplier knew that the Nissan guy would be back in three months. Why? Because the situation of the company would be worse then, and he would come back and ask for half a percent more or 1 percent more. So you are in a very vicious circle where the supplier has every interest in giving you the minimum, knowing that you will be coming back. And then when you come back, he will give you another slice. This is the way you end up having costs in your supply chain that are 20, 25, or 30 percent higher than your competitors’.

One of the most important objectives for us was to make sure that the suppliers would believe us when I told them it [the objective] was 20 percent, [including] 8 percent the first year. We will not come back to change this objective, whatever the situation.

Interviewer: What attitude did you find at Nissan upon arriving?

Carlos Ghosn: This is something that is common; this is the biggest sign that a company is in trouble. Not just in Japan but everywhere. The biggest sign is when everybody tells you he is achieving his objective. Yet the company is in bad shape. Why? Because when you are in a situation where everybody feels good about what he is doing personally—or his section or his department or his country—all the problems are due to the neighbor or the colleague or somebody else who is blind about how much [trouble] he is creating. And the company suffers. This was exactly the situation of Nissan. Nobody felt really responsible for the situation of the company, and that’s why there was no sense of urgency.

Interviewer: This question of responsibility leads to the next question. Have you made any changes in Nissan’s performance evaluation procedures?

Carlos Ghosn: We have. But you cannot start with performance-based management at the base. You start at the top and cascade down.

’You can’t start with performance-based management at the base; you start at the top and cascade’

First, we established a team that we call the nomination advisory committee, over which I preside. No promotion in top management—in Japan or outside Japan—is approved without a review of the [candidate’s] specific contribution to the performance of the company. If, at the nomination advisory committee, somebody comes and says, "This is a great guy, we had a great time with him," I’ll say, "What is his specific contribution to growth, profits, or cost reduction?" I can tell you that we’ve eliminated a lot of people from promotions. For us, the main question about high potential is not only how brilliant the guy is but what are the breakthroughs or the specific contributions that he has concretely achieved in the last two to three years.

The second thing is compensation. There is a bonus system that is strictly linked to the operating profit of the company or of the subsidiary and to one or two critical objectives—critical objectives being growth and profits.

Third, stock options. Stock options are still very complicated in Japan. So we have to go for what we call warrant bonds. The board of directors voted for ¥15 million warrant bonds, allowing more than 500 executives—not only in Japan but in North America and Europe also—to benefit from them as an incentive, not a reward. The basic condition is the operating profit of the global company. If the operating-profit [target] of the global company is not reached, nobody gets anything. There is a lot of money on the table for upper management, especially when you are starting with a company in which shares are depressed.

Interviewer: To what extent do you think that your new system will help attract and retain top talent?

Carlos Ghosn: This is always a concern for any person who is in charge of a company or part of a company. Obviously, some talent prefers working for a peaceful, growing company with no problems. But a lot of talent likes challenges, to prove yourself in a not-so-easy situation.

For example, we said that on top of the reliability of o ur cars and the quality of our cars, we are going to improve design. Attractive design is one of the dimensions missing in Nissan today. To date, we have had no problem hiring designers. We have people coming from all parts of the world—Italian, French, Japanese, and American. They want to come to Nissan because they know that there is a challenge here. They know that here they can make a real difference.

Compensation obviously is an important element. The fact that we are one of the most aggressive Japanese companies in terms of bonuses and stock options—even if this is recent—is something of value for a lot of people. Especially when this system is more and more known and understood in Japan.

This is the attractive side. Now we have the negative side. Some people ask, "Do I have a future in this company? Is Nissan going to really make it?" Others ask, "Is it going to be a Renault-dominated company? That means no future for Japanese workers, because everything is going to be taken by French people or foreign people or American people, et cetera." We have spent a lot of time saying, "Look, it’s really performance that counts." This company will remain Japanese; the culture, the base, the engine are Japanese. We want to keep the strengths of Japanese culture but to modify everything that clearly presents us with an opportunity for progress by adopting best practices worldwide. But it’s still a risk because some people don’t believe it.

Interviewer: What kind of effort have you been making in order to recruit younger people to the company?

Carlos Ghosn: We are clearly saying that we are challenging the seniority system. Today the system in Japan is, if you don’t have a certain age, if you don’t have a certain experience, you can’t aspire to have certain jobs. And [at Nissan] we say, no [longer]. If younger people or less experienced people have a clearly bigger potential, they will get the job. This is not creating, obviously, enthusiasm everywhere in the company. But it is creating enthusiasm among the younger people.

Interviewer: You have begun to reorganize the management of Nissan. What are the changes that you might describe as innovative, at least for Nissan?

Carlos Ghosn: We have announced a Japan management committee. In the Japan region, nobody knew who was really in charge. Is it the executive committee of the company? Is it the sales organization? You ended up with a situation where, in fact, nobody was really responsible for the decline of Nissan in the Japanese market.

We will have less than 200 people at the world headquarters in Tokyo. Some headquarters people will not be based in Japan. Part of the headquarters will be in the United States or Europe. You won’t have people who will be here [at headquarters] for life. No. People will go in and out of headquarters based on what they do. We have some core people who are part of headquarters. Obviously, the CEO has to be part of it, and the head of human resources globally has to be part of it. But, for example, some people are in charge of a project, and as long as the project continues they are part of headquarters. The day the project is finished, they are out of headquarters.

Then we have experts. There are certain areas where we need to evaluate people and to identify them as experts in a particular technology or in a particular process that is important. They can be in the United States, they can be in England, they can be in Thailand—it’s not important.

We eliminated the position of president in North America and Europe. Instead, our executive vice president travels every month to head the management committee of North America. And I travel every three months to head the management committee of North America. Each time you have a regional president, you start to have problems of communication and retention of information, either from headquarters to the region or from the region to headquarters. We don’t want that. This is a killer for the global performance of the company.

Interviewer: What do you consider the biggest difficulty that you’ve faced in your job to date?

Carlos Ghosn: The biggest difficulty for me by far is not mastering Japanese. You are facing a very important period of change, so obviously communication is extremely important—communication at all levels of the company, from executive committees to the workforce. I can manage [to make myself understood] in low-level Japanese, ordering a meal in a restaurant or going to a store to buy something. But I cannot sustain a business discussion in Japanese. And whatever the quality of the interpreter you have, you will never know the subtleties that people would like to communicate to you. And you’ll never know how you are being translated.

Interviewer: What lessons have you learned on the job?

’Japanese people want and need to spend a lot of time on a concept at the beginning’

Carlos Ghosn: You have to make sure that you understand the cultural differences between Japan and all the cultures that I’ve been part of, whether it’s French or American or Brazilian or Eastern. Even though you know that, you can always fall into traps. At the beginning of the year in Japan, there are a lot of parties where people greet each other—suppliers and dealers, for example. It happened that we had the supplier New Year party at the beginning of January. And I was supposed to be in Brazil at the same time. I spoke to our people and asked if it was a problem if I didn’t go to the supplier party. They said, "Obviously, they would love to have you there, but if you have a fundamental reason, they will understand."

In an American environment or in a Brazilian or French environment, if you are absent and you have an excuse, it’s not a problem. But in Japan, you have to come. So this is something I learned: there are certain formal meetings or events that you cannot miss. You have to find the right balance, obviously. Even though you know the rules at the beginning, it’s not the same thing when you go through it [in real life].

For example, you know that the Japanese approach is very different from the French approach or the American approach. Japanese people want and need to spend a lot of time on a concept at the beginning. They need to understand the concept. What do you want to do? Why do you want to do it? How do you want to do it? It takes much, much more time. [But] when they [the Japanese] understand and they buy in, they execute. And you don’t have to spend a lot of time checking afterward—the results will be here. The Nissan revival plan is going to be an excellent example of this.

In a Latin American country or even an Anglo-Saxon country, it’s different to a certain degree. People are very quick at the beginning. "We understand. We understand. You don’t have to continue. We understand." So the concept part and the decision part are very fast. The problem is that when they [Westerners] execute, you’re going to have to intervene many times to make sure that everybody is moving in the direction that you want the company to move in.

In Japan, I also discovered, if people don’t act, it doesn’t mean that they don’t agree with you. It means they don’t understand, which is totally different. This is the kind of thing that you learn—not in the books, but in your day-to-day practice. In this case, it’s Japan, but it could be in another country.