#10 “Free Cash-Flow Management” Jan, 2010

Part 3: Nissan's Actions in FY 2008 and FY 2009

Despite the three challenges mentioned, it is possible to achieve a positive free cash flow position. This section provides detail on Nissan's actions in FY 2008 and FY 2009.

(1)Expense reductions

When cash is not expected from sales and profit, it is necessary to reduce cash expenditures, particularly expenses and capital expenditures, in order to achieve positive free cash flow.

To curtail spending, Nissan reduced its labor cost. Executive compensation and annual salaries for managers were cut. Overtime was eliminated and work sharing was introduced for regular employees. Concurrently, the total number of employees decreased through retirement, the introduction of a voluntary transition program and natural attrition. In high-cost countries like Japan, North America and Europe, labor cost has been controlled by curbing new hires to the minimum.

At the beginning of FY 2009, Nissan stated that it will reduce labor costs by twenty percent in high-cost countries and fixed costs, including labor costs globally, by over 200 billion yen compared to the previous year.

In FY 2008, capital expenditures decreased to 383.6 billion yen from 516.4 billion yen in FY 2007. This was achieved by the company's decision to reduce the number of new models slated under its previous plan. The new model launch plan is now based on a streamlined product lineup. Furthermore, each project is analyzed to determine their necessity and relevance. With these continued efforts, the company will control capital expenditures below 2008 levels in FY2009.

(2)Inventory reduction

Generally, a company maintains a certain level of inventory, so that it does not lose out on sales opportunities and can quickly deliver products to customers. However, if a company misreads future demand and produces more vehicles than the market needs, the company is saddled with unsold products and excess inventory. As a result, a company risks product obsolescence and deterioration in quality, as it takes longer for these products to be sold. Moreover, excess costs are incurred, as discounts and incentives are needed to move these unwanted products. As such, excessive inventory is disadvantageous for a company.

Regardless of when products are sold, cash expenditures are inevitable, as a company pays money to suppliers for necessary parts or services and to employees for salaries and wages. Therefore, cash goes out, even when unsold products are in inventory and cash is not coming in.

Cash is necessary for maintaining inventory and when inventory increases, more cash is needed to reduce them. This falls into a vicious cycle. In contrast, if inventory is reduced, money owed to suppliers is decreased and discounts or incentives is restrained. This can contribute in the generation of positive free cash flow.

In response to the decline in global TIV in FY 2008, Nissan reviewed its production levels and sharply reduced production at its vehicle and powertrain plants all over the world. By implementing non-production days and shorter work hours, the company was able to ensure an appropriate level of inventory. Consequently, the company's global production was reduced by 20% or 772,000 units compared to the initial plan. Inventory was considerably reduced. Specifically, inventory had reached its peak of 720,000 units in November 2008 and then dropped to 470,000 units in March 2009, which was a 26% decrease compared to the end of FY 2007. This reduction in inventory improved free cash flow by 354.5 billion yen for the three month period from the end of December 2008 to the end of March 2009.

To achieve positive free cash flow, the company will continue to place strict controls on its inventory levels and optimize production and sales. However, the company also remains focused on its core business, selling vehicles. Certain markets have exhibited strong demand, such as China and those countries with government purchase subsidies. For those markets, production will be maximized, so as to not lose out on sales opportunities.

Part:4 Conclusion

Based on the above mentioned efforts, Nissan is focused on achieving a high-level of positive free cash flow, while continuing its investment and development of new core technologies for the future, such as the electric vehicle (EV) and global compact car. The company also aims to reduce its automotive net debt (387.9 billion at the end of FY 2008) and move to a net cash position as soon as possible. The company's business is proceeding well, as a result of the prompt, increased focus on free cash flow management in response to the downturn.

The company believes that positive free cash flow is an important driver for an increase in its credit rating and resumption of the dividend. Company-wide efforts to improve free cash flow are underway, as exhibited by a monthly free cash flow committee. This meeting is attended by those parties in the budget control division, responsible for free cash flow, for their respective regions around the world.

Please look forward to the future of Nissan.

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