Carlos Ghosn, Chairman of Nissan (TYO 72010), Renault (Euronext RNO) and Mitsubishi (TYO 7211), has been arrested in Japan for alleged tax evasion. Ghosn and Nissan’s Representative Director Greg Kelly were charged for under-reporting Ghosn’s earnings to the Tokyo Stock Exchange (TSE/TYO) as well as other financial misconducts.

The arrest followed a months-long internal investigation carried out by Nissan that uncovered financial misconduct including compensation under-reporting, misrepresenting company investments and personal use of company assets by Ghosn and Kelly.

Alleged Misconduct and Charges Faced

In a press conference on Monday, Hiroto Saikawa, CEO of Nissan, revealed that Ghosn had used corporate money for personal use and under-reported his income for years in official filings to the TYO in conspiracy with Kelly. Saikawa added that Nissan paid millions of dollars to buy and renovate homes for Ghosn in Rio de Janeiro, Beirut, Paris and Amsterdam that had no business purpose and were not listed as benefits in TYO filings.

Japan’s public broadcaster NHK reported that Ghosn’s executive compensation totaled JP¥1.1 billion (US$9.7 million) in 2016 while for FY17, Ghosn reported compensation of JP¥730 million (US6.5 million). NHK added that Ghosn used thousands of dollars of Nissan’s funds to pay for family trips and dining and that Ghosn could have pocketed up to one-third of the money destined for Nissan executives since 2010. Ghosn and Kelly could face 10 years in prison. They also a ¥10 million (US$88,640) fine for falsifying corporate financial reports as laid out by Japan’s Financial Instruments and Exchange Act.

International Resonance

The announcement that Ghosn, who turned Nissan around after a bad slump that had the company nearly in bankruptcy, was arrested hit financial markets, spurred a corporate crisis in several continents and put the future of the Renault – Nissan – Mitsubishi alliance to test. Nissan’s stock price fell 5.45 percent and Mitsubishi slid 6.8 percent on TYO. Renault took the largest hit with an 11 percent decline on the PSE.

Nissan, Renault and Mitsubishi have called for emergency directive board meetings with the objective to oust Ghosn. After expressing his disappointment, outrage and despondency for their financial misconduct, Saikawa vowed to propose the removal of Ghosn and Kelly from Nissan’s board. Similarly, Groupe Renault issued statements that highlighted that the Board of Directors would meet tonight to in lieu of this situation and that Thierry Bolloré will temporarily substitute Ghosn as CEO of the company and ensure the continuity of Groupe Renault’s regular activities. The French government (a stakeholder of Groupe Renault) has distanced itself from Ghosn. “Carlos Ghosn is no longer in a position where he is capable of leading Renault,” said Finance Minister Bruno Le Maire.

Mitsubishi Motors also proposed to its Board of Directors that Ghosn be separated from the positions of Chairman and Representative Director and announced it will carry out a similar investigation to Nissan’s to find out whether Ghosn engaged in a similar misconduct within Mitsubishi.

Ghosn crafted the alliance between the three automakers. In 1999, he became the President of Nissan after the company received investments from Groupe Renault, from which he became the Chairman in 2005. In 2016, after Nissan acquired a 34 percent stake in Mitsubishi Motors (then facing a mileage scandal) he also became that company’s chairman. This alliance sold over 10.6 million vehicles in 2017 to become the second-largest auto seller worldwide.

The arrest of Ghosn has raised questions about the continuity of the Renault – Nissan – Mitsubishi Alliance, but Le Maire underlined that he would communicate with his Japanese counterpart on this matter. A few hours later, the Japanese and French government jointly expressed their support for the alliance and showcased it as one of the greatest symbols of Franco-Japanese industrial cooperation.

But the impact of Ghosn’s arrest goes beyond the companies he presides over. The collaboration projects between Daimler and the Renault – Nissan – Mitsubishi Alliance could be hanging on a thread following his arrest. Engines made by Nissan power Mercedes-Benz cars built in Alabama and Nissan’s luxury brand INFINITI shares an assembly plant in Aguascalientes with Daimler’s Mercedes-Benz. As Ghosn and Daimler’s CEO Dieter Zetsche were the main orchestrators of these projects, all bets are off now that Ghosn had been detained.

The Mexican Affair

Nissan Mexicana, the local subsidiary of Nissan Motor in Mexico, published the Spanish version of the statement issued by its headquarters in Yokohama. The company apologized for causing worries to its shareholders and promised to continue working toward identifying its governance concerns and face them.

The Mexican light vehicle market is experiencing a sales downturn and the automaker with the largest share of Mexico’s vehicle sales, exports and production has seen its share slip as a result. The company went from a market share of 25.7 percent in 2014 (previous to the boom in sales of 2015 and 2016) to 23.8 percent in 2017, according to AMIA data.

With 16 consecutive months of sales declines, Nissan Mexicana has sold 229,396 units as of 3Q18, which entails a 14.7 percent reduction compared to the 268,999 vehicles sold in the same period in 2017. The trend in production is similar. Nissan Mexicana produced 11.7 percent fewer cars in this period but exported 1.6 percent more units, according to AMIA. Still, Versa, NP300 and March remain the first, third and fourth best-selling vehicles in the Mexican market, respectively.

During the Paris Motor Show, Ghosn announced a series of changes to the structure of the company’s Mexico subsidiary that were aimed at optimizing operations. USMCA played a key role in this. Ghosn underlined that there would definitely be more investments by Nissan in the US, but the company would also continue investing in Mexico. Following Ghosn’s arrest, the future of these investments projects remains unclear until the next chairman outlines Nissan’s strategy for Mexico and dissipates uncertainty.

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