Mitsubishi Motors Corp. faces a rocky road after DaimlerChrysler AG’s announcement today that the company has decided not to pump any more money into its beleaguered Asian alliance partner, in which it holds a 37.5% stake.

The decision, a complete reversal from what had been anticipated, stunned industry observers and marks the first public display of major shareholders dissatisfaction with the German auto maker’s global strategy.

It also brings disarray to CEO Juergen Schrempp’s Asian initiative.

Just a day earlier, DC reportedly said it was considering selling its 11% stake in South Korea’s Hyundai Motor Co. Ltd. Mitsubishi and Hyundai are collaborating with Chrysler Group in a global engine-making venture that will provide engines to all three companies. (See related story: DC May Sell Hyundai Stake)

The move also draws into question Chrysler and Mitsubishi’s plans to cut costs by jointly developing cars and pickup trucks, although a DC official says contractual operational cooperation will proceed.

After careful review of a proposed Mitsubishi revitalization plan, which was devised with the help of a team of DC executives headed by Smart GmbH CEO Andreas Renschler, it was determined the financial commitment vs. potential return would be prohibitive.

Mitsubishi reported a ¥37.4 billion ($675.2 million) loss for the fiscal year that ended March 31 and is not forecasting profits for the current fiscal year. The auto maker wrote off $419 million last year due to loan defaults in the U.S., alone.

“The board of management and the supervisory board decided not to participate in the planned capital increase and not to give further financial support to MMC,” Manfred Gentz, DC’s chief financial officer, tells reporters and analysts during a conference call.

He says DC has no immediate plans to sell off its equity stake in Mitsubishi, although the level of equity likely will be diluted should a future revitalization plan call for the issuance of additional shares.

Gentz says DC will wait to make that decision based on details of a restructuring plan led by three other Mitsubishi group firms, which together hold a 23% stake in the auto-making arm. Mitsubishi reportedly is looking for an overall financial aid package of some $6.4 billion.

“Unfortunately, we could not find a solution which fulfills DaimlerChrysler’s minimum requirements, which we owe to our shareholders,” Gentz says. “Now, we have to think about how MMC can continue to operate. We are confident the projects we had agreed with MMC can be executed.”

Renschler is expected to return to Smart and will not be part of the Mitsubishi team, as was widely speculated. DC’s other recent ambassador to Mitsubishi, board member Eckhard Cordes, still could be appointed to Mitsubishi’s board of directors, but DC officials say this decision now rests in Mitsubishi’s hands. (See related story: Mitsubishi Names Cordes to Board; Awaits More Changes)

The task now falls to Mitsubishi’s leadership in Japan to devise a plan to revitalize the company that excludes any contribution from DC. That could be difficult. DC was expected to contribute up to $2.1 billion as part of the proposed plan. The German auto maker already has lost as much as E2.5 billion ($3 billion) on its Mitsubishi investment, analysts say.

Struggling under a pile of debt, weak sales and a U.S. financing scandal, Mitsubishi had planned to unveil the second wave of its revitalization plan April 30. The Japanese auto maker now says it will need a month to regroup. (See related story: Ailing Mitsubishi Announces Another Restructuring)

Only weeks ago, Schrempp, who championed the alliance with Mitsubishi for $1.9 billion in 2000, told shareholders at the auto maker’s annual meeting that he would “keep all options open” when it came to Mitsubishi. He said the Asian auto maker was better-positioned than either Mercedes-Benz or Chrysler to expand DC’s presence in Asia. (See related story: DC Plans To Stay Course)

“Mitsubishi Motors has well-established access to Asian markets, an extensive dealership network and many years of know-how when it comes to compact cars,” he said at the time.

It now appears shareholders have told Schrempp just how far he can go with his global aspirations. Gentz says it was DC’s major shareholders – including Deutsche Bank AG, Brandes Investment Partners LP and JP Morgan Chase and Co. – that put the kibosh on the Mitsubishi plan.

“From the DaimlerChrysler side…the return we could expect (for our shareholders) on our side was not sufficient,” Gentz says, noting major shareholders set a level they expected as a return from the Mitsubishi investment and that level could not be reached.

Gentz says the move will not hamper Chrysler plans to continue joint development of engines and vehicle platforms with Mitsubishi. However, future sharing plans are up in the air.

The two auto makers have joined forces to develop platforms encompassing the C- and D-segments of the global market. The platforms are to be shared between Mitsubishi and Chrysler, with the first vehicles slated to hit the market in 2005.

“We’re sure we can execute (these products),” Gentz says. “Chrysler can continue its product plans and its production facilities as before. We are confident that we will continue to cooperate with common platforms and the relationship between MMC and Chrysler. The intellectual rights on the cars we want to build are completely with us.”

Chrysler also has agreed to build a pickup truck for Mitsubishi based off the Dodge Dakota platform, with production set to begin next year.

Another key program the two auto makers have been working on is the development of a new 4-cyl. engine to be produced via the newly formed Global Engine Alliance LLC, which recently broke ground on a new plant in Dundee, MI, and encompasses facilities in Japan and South Korea.

“We do not see any reason (why the Global Engine Alliance partnership) will change,” Gentz says. “We will continue to build the world engine.”

DC is relying on Mitsubishi, as well, for its Smart division, which recently debuted a new joint platform developed with Mitsubishi for use on the Smart Fourfour and the Mitsubishi Colt.

Gentz says Smart and Mitsubishi will continue to work together through the life of the joint production contract. “I suppose Mitsubishi will continue to build the Colt (on the jointly developed platform with Smart),” he says. There is no reason why they shouldn’t.”

Nevertheless, DC will now have to return to the drawing board to develop an Asian strategy, Gentz says, adding it is uncertain whether the company will look to hook up with another Asian auto maker or grow its presence via its current brands.

“We have to reconsider our Asian strategy and we have to reevaluate (it),” he says. “It’s (too) early to look for new partners in Asia.” However, some industry observers would argue it is too late.

DC may develop further joint ventures and platform-sharing relationships with Mitsubishi, if the auto maker survives. But Gentz admits DC may have burned some bridges with its decision, which could make it complicated to build future relationships between the two auto makers.

“Nobody can exclude that the climate will be negatively impacted for some time (between DC and Mitsubishi),” Gentz says.

“As long as MMC is an incorporated company, the rationale of our contracts will (allow) them and us to further cooperate on those projects which are already under way. We are all rational business people, and we should come together again.”

– with Katherine Zachary