Magical Mystery Tour

At last October's Tokyo Motor Show, Rolf Eckrodt new Mitsubishi Motors Corp. chief operating officer, just shy of a year on the job, took the stage to the strains of the Beatles “Magical Mystery Tour.”

The musical selection is one indication that the beleaguered automaker may possess a touch of self-awareness, not to mention a working sense of humor.

Indeed, Mitsubishi has been on a bit of a magical mystery tour. The song, however, raises the question of whether the odyssey is coming to its logical end or if the new German management has just hopped on for the ride.

Mitsubishi — mired in financial turmoil and pushed downward even further by Japan's pitiful economy — found its white knight in June 2000, when DaimlerChrysler AG struck a deal to purchase a controlling share of Mitsubishi, now at 37.3%.

DC, which paid $2.1 billion for its stake, may have gotten more than it bargained for. Before the ink dried, MMC became embroiled in a scandal rivaling that of the Ford Motor Co./Firestone tire debacle in its scope and implications.

The scandal — MMC covered up more than two decades worth of consumer complaints that undoubtedly would have resulted in a slew of expensive recalls — damaged the auto maker's reputation in its homeland even more than its pocket book.

The sum forked over by DC for its stake was shy of the net loss — $2.31 billion — that MMC racked up in fiscal year 2000-2001, in the wake of the scandal.

Though the era of cover-ups most likely has come to an end, the recalls so far have not. The latest involved Town Box and Town Box Wide models built between 1998 and 2001, distributed in several Asian countries. Earlier last year, the auto maker had its Pajero SUV banned from China due to quality problems. Six new Mercedes-based quality gates adopted at Japan plants are expected to help.

Despite myriad problems, Mitsubishi officials are insulted by the suggestion that DC “rescued” the auto maker. The stake in Mitsubishi provides DC access to Asia/Pacific, the world's fastest-growing market, in addition to well-placed manufacturing facilities across the continent. DC had the smallest and most tenuous grip in the market previous to the tie-up. And Mitsubishi's strengths in platforms and technologies often supplement areas where DaimlerChrysler is weak.

MMC Chief Executive Takashi Sonobe, who stepped in to replace Katsuhiko Kawasoe after the recall scandal (who himself replaced a CEO also forced to step down), has taken a back seat to restructuring leader Eckrodt, a DaimlerChrysler appointee and native German.

The new relationship prompts many to hearken back to the early days of the Daimler-Benz/Chrysler Corp. merger, characterized by culture clashes and accusations that German methods were sapping the life out of the old Chrysler ethos.

Such fears were not allayed at the Tokyo Motor Show, when top MMC designer Olivier Boulay — who hails from France but cut his teeth on Mercedes concept cars — professed his commitment to re-instill Japanese values in the Japanese auto maker.

There are signs, however, that DC indeed values Mitsubishi's strengths — including small cars, direct-injection gasoline engines and continuously variable transmissions. Mitsubishi, which is partnered with Nissan Motor Co. Ltd. in a joint transmission venture, Jatco TransTechnologies, is working on next-generation CVT technology, with possible application in future small and midsize cars being developed in partnership with the Chrysler Group, Eckrodt tells Ward's.

By no means is Eckrodt a Carlos Ghosn, the current CEO of Nissan imported by majority-owner Renault SA, and a man whose business acumen now has vaulted him to near-mythological heights in normally insular Japan. But Eckrodt also has been given less to work with — in terms of the company's global foothold, products and reputation. And this turnaround chief, whose job may be easier because leaders like Ghosn have tread before him, says he's well on the way to getting the job done.

Eckrodt, who has been trumpeting the auto maker's progress, claims Mitsubishi will break even in the current fiscal year ending March 31, a remarkable feat especially in light of last year's staggering losses.

The auto maker, well ahead of its restructuring targets on all fronts, also will achieve breakeven in its toughest markets — Japan and Europe — in the 2003 fiscal year, when it expects to see a 4.5% global operating profit margin.

Other financial targets include a cut in material costs, which represents 60% of the company's total costs of ¥338 billion ($2.7 billion) by the end of the 2003 fiscal year. The number of suppliers will be reduced by 30% and global sourcing, or using suppliers from outside Japan, will rise to 25%, from its current 6% level.

Also by the end of the 2003 fiscal year, fixed-cost saving will be cut by ¥140 billion ($1.1 billion), with the biggest savings of ¥55 billion ($446.8 million) occurring in the final year of the program, Eckrodt says.

Although it's still early in the plan, Mitsubishi is beating other downsizing targets as well. Head-count reductions, with a targeted trimming of 14% by the end of fiscal year 2003, boasts a 50% overachievement.

Moreover, 24% of executive offices have been removed and 60% of top management are as new to their positions as Eckrodt is. As part of the restructuring, Eckrodt, who wanted younger, less-entrenched workers, cancelled the traditional Japanese seniority system and introduced performance evaluations, virtually unheard of in Japan, where lifetime employment is an institution.

The auto maker's lofty goals will be achieved, Eckrodt says, through continued cost-cutting efforts, process optimization and key investments. Mitsubishi is in the process of investing ¥8 billion ($64.9 million) in information technology for infrastructure modernization and business process re-engineering.

But new products, destined for key markets, are the strategy's lynchpin, with three introduced last year, eight to come this year and five in 2003.

The only two all-new products destined for the U.S. are SUVs — a small, Lancer-based crossover dubbed the ASX, slated to bow this summer; and a larger, Galant-based SUV that falls between the Montero Sport and Montero in size, due for '04.

The new entries will help “swing balance more toward the truck and crossover direction,” says Pierre Gagnon, president and chief operating officer of Mitsubishi Motor Sales of America Inc.

Several new global products, Mitusbishi promises, will be geared toward global emerging youth markets.

Even as total products increase, there will be a 28% reduction in production capacity. Total platforms will continue to shrink, from Mitsubishi's current 11 to seven by 2006 and eventually to five, when the auto maker is sharing most platforms with DaimlerChrysler and its affiliates.

Mitsubishi will lend the platform for its Lancer small car to the Chrysler Group's Neon, while Chrysler likely will provide the midsize Sebring/Stratus platform for a future-generation Galant. The next Galant, due out in 2005, still will have many Mitsubishi-based components due to development lead times.

The two auto makers have experience in the platform-sharing department, as the Sebring/Stratus coupe traditionally has been built on the Galant/Eclipse platform. All are built at a shared plant in Normal, IL — a partnership stretching back to the days of the Eagle brand.

MMC will work closely with DC on the development of the Z car — a subcompact destined for Japan and Europe. Built on a Mitsubishi platform and powered by a Mitsubishi direct-injection gasoline engine, the vehicle is slated for launch in Japan in 2003, where it will be built at MMC's Mizushima plant. It debuts in Europe the following year, where, it will be built at Netherlands Car BV and sold through DC's Smart channel.

All shared-platform vehicles promise to have completely different looks in order to avoid cannibalization and keep distinctive brand characters, officials say.

Mitsubishi is banking on these moves to spur sales of cars — especially in its home market. The most recent year-to-date data (Jan.-Oct. 2001) shows Mitsubishi's sales in Japan to be down 11.7% on 171,749 units, and market share to have fallen to 4.5% from 5.2%. Of the global Japanese makers, only Fuji Heavy Industries Ltd. is weaker.

Eckrodt touts the U.S. market as one of the company's bright spots, boasting a sales growth of 69% over three years. But even here, growth is relative; Mitsubishi expects its added product, the ASX, will help the auto maker break the 2% market share barrier in 2002, Gagnon says. And last year's big debut, the Lancer, is garnering strong sales but little respect in the ever-crowded small-car segment.

Mitusbishi in the U.S. last year was surpassed by Hyundai Motor Co. Ltd. — the South Korean car maker now 10%-owned by DaimlerChrysler. Insiders criticize DC for not capitalizing on its relationships with both Hyundai and MMC involving three-way partnerships. Although the Hyundai partnership is in the earliest of development stages, the Korean maker reportedly was upset to be cut out of the Z-car collaboration.

Despite small share and products criticized for missing the mark, DC and MMC do dovetail nicely in the U.S., because of their longstanding manufacturing relationship.

With a 1.1% market share, MMC is weak in Europe, where sales in 2001 fell to 188,451 units, down from 230,708 the previous year. The DC relationship likely will not help, as the German maker works to strengthen its dominance on its own turf.

Australia also has proven to be a thorn in the auto maker's side for many years. One of only four auto makers that builds cars in Australia, Mitsubishi's operation has been plagued with problems and had difficulty retaining profitability. Before the DC tie-up and since, MMC has been threatening to pull out down under.

Meanwhile, MMC is not ignoring new markets. The car maker is preparing for next year, when it plans to re-enter Canada and make its first foray into Mexico.

Whether the restructuring steps add up to a turnaround soon will become clear, as the magical mystery tour continues.