Renault is no longer the weak link in its alliance with Nissan

The role of the squeaky wheel in Renault and Nissan’s alliance looks to be changing in a remarkable example of what a difference a year makes.

One year ago today, Renault shares hit rock bottom in a rout triggered by the invasion of Ukraine.

Fitch Ratings was sounding alarm bells about the automaker’s exposure to Russia, then its No. 2 market after France. Within a matter of weeks, Renault made a costly exit.

Now Nissan is the one making credit raters nervous.

S&P Global Ratings cut the automaker to junk on Tuesday, calling its sales and profitability weak for the last several years and unlikely to improve anytime soon.

Renault, by contrast, notched a rating upgrade and outlook boost last month from Fitch and S&P, respectively.

What happened?

Renault changed things by taking the hit and quickly changing the subject. The company transferred its majority ownership of AvtoVAZ, Russia’s biggest automaker, to the state for one ruble and then began generating excitement about bold plans to carve itself up and list its electric-vehicle assets.

The radical effort to shake up a company that will turn 125 years old this year has paid big dividends for CEO Luca de Meo. It helped Renault and its biggest shareholder — the French state — get comfortable with paring its Nissan stake, addressing a power imbalance and source of simmering tension that boiled over with Carlos Ghosn’s shock arrest in November 2018.

In January, the two companies settled on a framework deal: Renault would give up a substantial chunk of its Nissan stake through coordinated and orderly sales that are likely to reap billions of euros in proceeds.

It also convinced its Japanese counterpart to become a strategic shareholder in the EV and software business it’s hoping to take public as soon as the second half this year.

Nissan is getting what many insiders long sought: to be on equal footing with Renault and restore its voting rights. But analysts suspect the Japanese company will end up having to pay up for this détente — it’s seen as a likely buyer for some of its own shares that Renault will sell off.

S&P is comfortable with the amount of cash Nissan has on hand. The credit rater’s concerns have more to do with its expectation that supply-chain disruptions, high costs, rising interest rates and a global economic slowdown will stifle automakers for the next year or two.

It’s also unsure whether Nissan has what it takes to compete in the industry’s new paradigm.

“We remain uncertain if Nissan will be able to secure a foothold in the rapidly growing global electric-vehicle market,” S&P said.

Renault, on the other hand, is “ready to face the challenge of establishing itself as a cost competitive leader of electric vehicles in Europe,” S&P said last month.

Over the last year, Renault shares have roughly doubled. At around 12.5 billion euros ($13.2 billion), its market value is closing in on Nissan’s, which has slumped to 2.3 trillion yen ($16.8 billion).

Marc Festa, a co-fund manager at Alken Asset Management, which owns Renault shares, expects the stock to continue outperforming Nissan, citing the former’s order book and new product launches.

De Meo has promised two dozen new models by 2025, including the battery-powered Renault 5, Dacia Bigster SUV and an electric Alpine performance car.

“Renault was long considered the weak member of the alliance,” says Stifel analyst Pierre-Yves Quéméner. “The table may be turning now.”