Mitsubishi Back on Track to Reach Near-Record Earnings for 2012

TOKYO – Analysts often overlook Mitsubishi among the major Japanese auto makers, but they invariably have positive things to say about President Osamu Masuko and his management skills and leadership.

Masuko, soon to turn 64, assumed the presidency in June 2005 after DaimlerChrysler withdrew its equity holdings and management team. He inherited a company that had run up losses of nearly ¥225.4 billion ($3 billion) in the two previous fiscal years.

Under Masuko’s direction, Mitsubishi turned around its business fortunes and three years later, in fiscal 2007, reported record earnings of ¥108.6 billion ($1.3 billion).

But then came the global recession in 2008, following the Lehman Brothers bankruptcy; the massive earthquake and tsunami in Japan that downed operations for nearly two months; historic flooding in Thailand, where Mitsubishi has its largest overseas production base; and, most recently, the anti-Japanese demonstrations in China.

Against this backdrop, the yen soared to record levels against the dollar and euro, cutting sharply into export margins.

Despite these negative factors, Mitsubishi reported a ¥30.8 billion ($362 million) operating profit for first-half fiscal 2012 and, although sales fell 10%, is projecting full-year earnings of nearly ¥80 billion ($1 billion), second highest in its history and up 25% from fiscal-2011 levels. And that was before the recent mini-surge of the euro and dollar.

Masuko recently met with WardsAuto here to discuss Mitsubishi’s current market situation and future plans. Following are excerpts from the interview:

WardsAuto: When Mitsubishi closes its books at the end of March, you will have produced an estimated 60% of vehicles outside Japan in fiscal 2012, up from 37% five years ago. What overseas production levels do you envision for fiscal 2013 and beyond?

Masuko: We don’t have a clear idea for beyond fiscal 2013. But in fiscal 2013, we estimate that overseas production will be slightly below 60%, perhaps 57% or 58%, factoring in our new Russia and China operations.

(Mitsubishi began manufacturing ASX SUVs in October at GAC Mitsubishi Motors in Changsha, China. In December, the auto maker launched the Outlander SUVs at PCMA Rus, a joint venture with PSA Peugeot Citroen. The plant is located in Kaluga, 112 miles [180 km] southwest of Moscow).

Longer term, we expect overseas production to comprise more than half of our global total. It’s hard to give a precise estimate, because from summer we will collaborate with Nissan in 0.66L minivehicle production at our Mizushima plant in Japan.

WardsAuto: Like other Japanese auto makers, Mitsubishi has impressed analysts by substantially lowering its exchange rate breakeven point. According to your midterm earnings forecast, you are projecting profits for the current fiscal year at ¥79:$1 and ¥100:€1. In fiscal 2009, these levels stood at ¥92:$1 and ¥130:€1. How did you lower these thresholds?

Masuko: We’ve done two things. First, we’ve reduced costs substantially, both components and logistics. Second, we’ve shifted focus to emerging markets where we’ve established a production presence in Thailand, China, Russia and Indonesia. These markets will be the growth engine for our future business.

In advanced countries, we plan to maintain our presence by way of our environmental technologies. In July 2009, we launched the i-MiEV electric car. We will introduce the Outlander plug-in hybrid on Jan. 24 in Japan. The Outlander plug-in is the first car to package EV, hybrid and 4-wheel-drive technologies into an SUV.

In 2010, we introduced clean diesels in Europe and Japan – in Europe, the 1.8L 4N1 engine as an option for the ASX; in Japan, an improved improved 3.2L 4M4 unit for the Pajero. Our Thai-built Mirage employs a state-of-the-art gasoline engine.

We now have the products and technologies for whatever market we wish to compete. Simply stated, we’ve restructured our operations.

WardsAuto: Since the beginning of November, the yen has fallen to below ¥80:$1 and ¥110:€1 levels and remained there for eight consecutive weeks through December. Despite this short-term easing, can you produce B- and C-segment cars profitably in Japan?

Masuko: Several years ago, we decided to concentrate B-segment production in Thailand, our new Mirage is our first global compact model, and have split C-segment production between Japan and our overseas plants. For instance, we currently build the RVR series including the ASX and Outlander Sport in Japan, Indonesia and the U.S. and the Outlander in Japan, China and Russia.

As for mini or kei car production, since kei cars are dedicated to the Japanese market, production will remain in Japan. We will also keep advanced technology vehicles in Japan, including both EVs and plug-in hybrids.

WardsAuto: In the 0.66L mini segment, what will be the split between Nissan and Mitsubishi?

Masuko: We haven’t made a formal announcement, but initially the project will be limited to the eK Wagon (which Nissan sells as the Otti). From a total sales standpoint, we expect minivehicles to account for half of our domestic sales in fiscal 2013, thus around 100,000 units according to our Jump 2013 business plan in which we projected total domestic sales of 200,000.

WardsAuto: When does production get under way?

Masuko: This coming summer, but we haven’t set a launch date yet.

WardsAuto: Mitsubishi also is working jointly with Nissan in Thailand, isn’t it?

Masuko :  We’re building Navaro pickup trucks on consignment for Nissan at our Laem Chabang plant, about 40,000-50,000 (units) per year.

WardsAuto: Do you see the relationship expanding into other model lines including even electric cars?

Masuko: It’s possible, but we have no specific plans.

WardsAuto: Mitsubishi is projecting global sales this fiscal year of slightly more than 1 million units. Have you made any changes in your production plan for fiscal 2015? Previously, you had hoped to achieve this target by the middle of the decade.

Masuko: Our goal now is to sell 1.5 million units as soon as possible. Can we do it by fiscal 2015? It will be difficult and depends on such factors as political stability in the Middle East, economic recovery in Europe and, more generally, a more robust global business environment. In our case, sales will also depend on the success or failure of our Chinese and Russian operations.

But one thing is certain. We need to reach 1.5 million to bring down costs and make the transition more easily into environmental vehicles.

WardsAuto: Both near term and long term, how do you envision the global auto markets evolving?

Masuko: First, we’re placing considerable emphasis on emerging markets. Excluding the United States, we believe that advanced-country markets have peaked and won’t see substantial sales growth moving forward. Japan is a good example (where sales have leveled off at 4.7 million units over the past four years, down from peak levels of 6.7 million the early 1990s).

WardsAuto: And the most promising markets?

Masuko: Those with the largest populations. Indonesia, for instance, has a population of 240 million; also the Philippines, with more than 100 million people and annual car sales of 200,000. Longer term, we are looking at markets like Cambodia, Laos and Myanmar in Asia and to Central and South America.

WardsAuto: What about China?

Masuko: Our joint venture, GAC Mitsubishi, began operations in October. Capacity is 50,000 units including the ASX, launched in late October, and the V73 Pajero, previously produced by GAC Changfeng, now an equity partner in GAC Mitsubishi.

As for the overall market, we don’t know if the Chinese economy will continue to grow at the same pace as the past few years. That said, we expect demand, at least for fiscal 2013, to reach 18.5 million-19 million units, dampened by the debt crisis in Europe.

WardsAuto: And the effect of last autumn’s anti-Japanese demonstrations?

Masuko: We expect demand to recover by the end of March.

WardsAuto: The U.S. market?

Masuko: We expect sales in the current fiscal year to total 55,000 units and next year 70,000 due to a full market year for the Outlander Sport and Mirage, introduced, respectively, last July and September.

Regarding the total market, it is difficult to speculate because of the so-called fiscal cliff and its potential impact on the economy at large. But looking forward to fiscal 2015, we believe that 15 million (units) is a reasonable number. Sixteen million might be difficult.

WardsAuto: Is Mitsubishi, like Mazda, considering a plant in Mexico?

Masuko: No. We’re committed to boosting utilization at our Bloomington (Normal, IL) plant first by launching the Outlander Sport and then exporting the model to Russia, the Middle East and Central America.

WardsAuto: What is the plant’s current production target?

Masuko: We’re aiming for 49,000 (units) this year and hope to boost that to 70,000 in fiscal 2013. Remember that we phased out the Eclipse, Eclipse Spyder and Endeavor in August 2011, contributing substantially to this year’s production shortfall.

WardsAuto: If not Mexico, are you considering building cars anywhere in Central or South America?

Masuko: We’ve had a partner in Brazil since 1998, MMC Automotores do Brasil.  We’ve been producing and selling there at an annual rate of 60,000-70,000 units including the L200, Pajero TR4 and Pajero Sport models.

Because of new tax rules scheduled to go into effect in 2015 (designed to protect domestic auto makers), we must raise both local content levels and equity. We are currently negotiating with our partners.

WardsAuto: What is the outlook for Europe?

Masuko: Recovery will be difficult.

WardsAuto: Switching to Asia?

Masuko: Southeast Asia will be relatively stable next year, and in India we find ourselves in a similar situation to Brazil. We must consider raising our equity stake in our local partner, Hindustan Motors.

(Due in part to the May 2012 launches of the Mirage in Thailand and Outlander Sport in Indonesia, Mitsubishi reported 5% growth in sales in the region during the first six months of the current fiscal year, April-September).

In Japan, our home market, much will depend on the stimulus package the new (Prime Minister Abe) government will introduce. But long term, we don’t expect the market to grow appreciably. If we can reach this year’s sales level in fiscal 2013, which was aided by eco-car tax incentives, that would be a good result.

(Through November, new registrations in Japan, all manufacturers, totaled 3.3 million units.)

WardsAuto: Speaking of which: i-MiEV and Minicab-MiEV sales, despite subsidies in Japan, Europe and the U.S., totaled only 3,700 through October, well below your fiscal-2012 target of 50,000 units. What is the main reason for this shortfall?

Masuko: The strong yen, both against the dollar and euro. The yen (which has fallen back to ¥85:$1 levels) has made it difficult to export. Of course, the European economy has affected all manufacturers and all segments including environmental cars.

WardsAuto: Do you think it was a mistake for Mitsubishi to have placed so much emphasis on electric vehicles?

Masuko: Absolutely not. Our EV activities enabled us to develop a plug-in hybrid, the Outlander Plug-In, which we’ll introduce on Jan. 26 in Japan. The vehicle has a range of 34 miles (55 km) in pure electric mode and gets 143 mpg (1.6 L/100 km)) in Japan’s new JC08 test mode.

WardsAuto: In light of the changing market situation, what is your revised fiscal-2012 EV sales target, including OEM models shipped to Citroen and Peugeot? What is your fiscal-2013 target for both EVs and plug-in hybrids?

Masuko: We still expect to sell 12,000 EVs in the current fiscal year (including) 5,000 plug-in hybrids. As for fiscal 2013, we haven’t finalized our business plan but surely will sell more than 5,000 plug-ins in part because we will begin exports. Perhaps sales will double or even triple, but again we haven’t finalized our target.

Concerning EVs, it’s difficult to forecast sales because of the economic problems in Europe. At the very least, we hope to maintain this year’s sales level.

WardsAuto: Has Mitsubishi changed its medium- and long-term internal sales targets for EVs and plug-in hybrids – 5% of sales in fiscal 2015 and 20% in fiscal 2020?

Masuko: We still think we can achieve those levels.

WardsAuto: Would you please provide an update on battery costs? When do you envision lithium batteries falling to $250/kWh levels and $50/kWh levels?

Masuko: There are two aspects of battery costs: mass production, or how much volume you produce, and technological innovation. We continue to see advances in technology, but the number of batteries produced and sold is far below expectation. As a result, price hasn’t fallen as we anticipated.