Mitsubishi Remains Profitable Despite Setbacks, Top Exec Says

TOKYO – Japan’s auto makers still are struggling to put their supply chains back together after sending an army of engineers into damaged parts plants during the nation’s recent Golden Week annual spring break.

The good news is recovery from the nation’s worst natural disaster in nearly 90 years has been faster than expected. A case in point is Mitsubishi.

Since April 18, barely five weeks after a deadly 9.0-magnitude earthquake and tsunami struck the coast of northeastern Japan and shut down some 500 damaged suppliers, the auto maker’s three domestic vehicle plants have been operating at nearly 80% of capacity.

Management plans to continue at those operating levels through September, although it still is not certain when full operations can be resumed. Mitsubishi’s factories, all located in central and western Japan, suffered little or no damage. Not so for all of its suppliers.

Mitsubishi President Osamu Masuko kept his interview appointment with Ward’s on the afternoon of the March 11 earthquake, even though railroad trains had stopped and intermittent tremors shook the auto maker’s headquarters here throughout the 90-minute meeting.

The initial interview was to focus on how Mitsubishi has managed to remain profitable in spite of other (pre-quake) structural problems that have beset Japan’s automotive industry in recent years; namely, a record strong yen, rising fuel prices and a soft recovery from the worst recession in more than half a century.

Masuko, now 62, assumed the presidency in June 2005 after DaimlerChrysler withdrew its equity holdings and management team from a failed alliance. He inherited a company that had run up losses of nearly ¥225.4 billion ($2.8 billion) in fiscal 2003 and 2004.

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

“The earthquake in northern and northeastern Japan will slow our progress,” Osamu Masuko says.

Then the unthinkable happened: Lehman Brothers declared bankruptcy in September 2008, triggering a global recession, which for the Japanese auto industry was exacerbated by a spike in the yen that wiped out profits for medium- and small-car exports.

Yet, Mitsubishi surprisingly eked out a tiny profit in fiscal 2008 and followed with more profits in fiscal 2009 and 2010. Then, just as the auto maker was primed to restructure its operations to be profitable at $1:¥85, Japan’s devastating earthquake and tsunami struck.

“To be honest, the earthquake in northern and northeastern Japan will slow our progress,” Masuko says.

“So, too, will political instability in Northern Africa and the Middle East, both big markets for our products. Still, we’re confident that we can overcome these developments and achieve the targets of our new mid-term business plan on schedule.”

Mitsubishi launched its “Jump 2013” strategy in April. The plan, the auto maker’s third since Masuko became president, aims at boosting profits to ¥90 billion ($1.1 billion) in fiscal 2013 on sales of ¥2.5 trillion ($31 billion).

“Even now, we can manage at $1:¥82 or $1:¥80 if we factor in offsetting rates from our Thai operation (where the baht has fallen to $1:TB30),” he says. “But it’s not comfortable.

“And in some ways, a bigger problem has been the sharp rise in petroleum prices, which has resulted in a similar sharp rise in material costs such as steel. This is having a big negative impact on the entire industry.”

Mitsubishi shifting Outlander Sport production to U.S. in 2012 to minimize exchange rate exposure.

In the last fiscal year ended March 31, with currency rates at $1:¥88 and E1:¥114, Mitsubishi reported sales and earnings of ¥1.8 trillion ($22.8 billion) and ¥40.3 billion ($500 million).

To achieve its new targets, the auto maker needs to produce 1.6 million vehicles, with 55% in overseas plants, up from 45% today.

A third assembly facility will be added in Thailand to begin producing Mitsubishi’s Global Small car in March 2012. Initial production of the 1.0L-1.2L model is projected at 150,000 units annually.

In 2013, the auto maker plans to introduce a Chinese version of the car, presumably with new joint-venture partner Guangzhou Automobile Group. Details of the production plan could not be confirmed.

Masuko, as with other industry executives, is bullish on China.

“There is no doubt that the people of China are going to enjoy a rising standard of living and that the auto market will continue to grow more and more, (with) sales this year possibly exceeding 20 million units,” he said at the recent Shanghai Auto Show, where he unveiled Mitsubishi’s new lineup of compact SUVs,

And there also is no doubt Masuko wants Mitsubishi to be a vital part of the world’s largest auto market.

Elsewhere, the auto maker will expand capacity at its Catalao plant in Brazil and begin production of a new SUV in Kaluga, Russia, at a JV facility with PSA Peugeot Citroen.

The million E470 million ($675 million) Russian factory, located 112 miles (180 km) southwest of Moscow, currently builds the Outlander along with several Peugeot and Citroen models.

In the U.S., Mitsubishi will launch the Outlander Sport at its Normal, Il, plant in summer 2012. Sold as the RVR in Japan and ASX in other markets, the compact SUV currently is exported from the auto maker’s Okazaki plant in Aichi.

“We simply don’t have enough capacity in Okazaki,” says Masuko, who signed off on an ¥8.2 billion ($100 million) investment to produce the Sport at Normal. “More importantly, we hope that by shifting production to the U.S. we can minimize our exchange rate exposure.”

Masuko’s decision was made easier by the state of Illinois’ offer of $29 million in tax breaks to keep the underperforming plant open. Coinciding with the Outlander Sport launch, the facility’s existing lineup, including the Eclipse, Galant and Outlander, will be phased out. In 2010, Normal built fewer than 30,000 units, well below annual capacity of 240,000.

In Europe, Mitsubishi will discontinue Colt production at its NedCar NV plant in 2013. However, Masuko says the auto maker will continue building the Outlander at the facility in Born, despite Colt and Outlander output falling to below 27,000 units in 2010.

The combined effect of these moves, if Mitsubishi succeeds in meeting its targets, will be growth in overseas production to 850,000 units, up from 523,000 in 2010, of which most will be in B and C segment vehicles that no longer can be profitably exported from Japan.

Coinciding with this buildup, Mitsubishi platforms will be trimmed from 12 to six as underperforming models such as the Galant and Eclipse are phased out. Management aims to double unit production per platform.

In the Japanese market, where Mitsubishi holds a tiny 3.5% share, the auto maker will shift focus and concentrate on 0.66L minicars. To this end, it tied up with Nissan in February to jointly build this Kei segment car at Mitsubishi’s Mizushima plant in western Japan. Analysts believe the venture is “win-win” for both car companies.

Says Masuko: “We currently supply Kei cars to Nissan on an OEM basis (Clipper Rio, Kix and Otti). Joining forces will give us added volume and reduce purchasing costs.”

The Mizushima venture is one of several with Nissan. Others also involve OEM supply of vehicles, in both directions.

Mitsubishi, for instance, will supply Nissan with a pickup truck in Thailand and midsize SUV in the Middle East, while Nissan is scheduled to deliver a small commercial vehicle and upscale passenger car to Mitsubishi in Japan.

For Mitsubishi, these limited arrangements fit a pattern of working together on projects, rather than entering into broad-based strategic alliances that involve some form of capital commitment.

“Capital alliances are difficult, even if both parties have substantial resources,” Masuko says. “Financial might doesn’t guarantee synergies.”

He knows that from bitter experience. After 30 years at Mitsubishi Corp., Japan’s largest trading house, Masuko was appointed president of Mitsubishi Motors to pick up the pieces after the DaimlerChrysler relationship collapsed.

While many analysts believed his first priority should have been to seek a new partner, Masuko decided to go back to basics and capitalize on his company’s internal capabilities.

“DaimlerChrysler always did what was best for them,” he revealed in an earlier Ward’s interview. “Ultimately, this caused the breakup. Ironically, it also served as the impetus for our turnaround as we’ve been forced to focus on our needs, not theirs.”

In addition to supplying pickup trucks and minis to Nissan in Thailand and Japan and electric vehicles to PSA in Europe (Peugeot iOn and Citroen C-Zero), while jointly producing select models with PSA in Russia and Nissan in Japan, Mitsubishi also has teamed with lithium-ion battery maker GS Yuasa.

The JV, Lithium Energy Japan, produces the battery used in Mitsubishi’s i-MiEV electric car (which stands for Mitsubishi Innovative Electric Vehicle).

Based in the historic city of Kyoto, Lithium Energy Japan is building a third plant that, when operational next year, will boost capacity to nearly 70,000 battery packs annually. Cumulative investment is ¥51.7 billion ($640 million).

Masuko beams when discussing the auto maker’s EV strategy. He and Nissan CEO Carlos Ghosn are the industry’s two most-influential spokesmen. This week, for instance, the Mitsubishi chief was the keynote speaker at EVTeC11, the first International Electric Vehicle Technology Conference, held in Yokohama.

Mitsubishi took the early lead in the global EV race by introducing the i-MiEV in July 2009. In fiscal 2015, the auto maker plans to launch eight new models, both EVs and plug-in hybrids. Additionally, an electric version of the 0.66L Minicab will launch this November and a plug-in hybrid SUV, the PX-MiEV, will go on sale in fiscal 2012.

Masuko estimates EVs and plug-in hybrids will account for 5% of Mitsubishi sales in 2015 and 20% in 2020. That comes to an estimated 300,000 units. In fiscal 2010, the auto maker delivered 9,000 i-MiEVs, including an unspecified number to PSA. It plans to boost sales this year to 25,000, in part due to the model’s U.S. launch in October.

Mitsubishi began taking orders for the slightly longer and wider version car, to be sold as the “i,” during the New York auto show in April.

Masuko is bullish because he believes battery costs will drop more quickly than many analysts predict. Already, he confirms the price, not the cost, of the i-MiEV’s 16-kWh battery pack has fallen to ¥1 million ($12,400). When Mitsubishi launched the car two years ago in June, the battery’s price was more than double that amount. And he expects price to continue to fall.

Masuko, who becomes animated when discussing the auto maker’s EV strategy, believes the push into electrification has potential to change the company’s stodgy image inherited from its largest shareholder, Mitsubishi Heavy Industries, which is known for making big, heavy and powerful products.

“In the past, we focused on big, heavy vehicles like the Pajero (SUV) or on sport and rally cars (such as the Lancer Evolution),” he admits. “We’re now concentrating on small, fuel-efficient and eco-friendly vehicles, including EVs and plug-in hybrids. Clearly, our brand image and culture are changing.”

Although Masuko would never say it, part of this change can be credited to his management style and personality. Genial and unpretentious, the former trading-company executive is comfortable discussing everything from the intricacies of foreign-exchange trading to his favorite baseball team, the Hiroshima Carp.

Fluent in four languages, English one of them, Masuko defies the caricature of the old-style Japanese business executive. He seems to enjoy his freewheeling meetings with journalists and is neither afraid to answer tough questions nor say what’s on his mind.

Asked whether he fears Mitsubishi might be the target of a foreign takeover, perhaps by a Chinese venture-capital firm, as is periodically reported in the Japanese media, he immediately responds there’s no need.

“Our new mid-term business plan will allow us to operate independently and, more importantly, has the support of our main shareholders (Mitsubishi Heavy Industries, Mitsubishi Corp. and Bank of Tokyo-Mitsubishi).”

Asked why he roots for the Hiroshima Carp, in recent years mired in the cellar of one of Japan’s professional baseball leagues and whose new stadium was named after a competitor, the Mazda Zoom-Zoom Stadium, Masuko, a Tokyo native, responds: “Because they work hard and don’t have much money. We also don’t have enough money.”

As to whether Mitsubishi, having entered into a series of OEM supply arrangements with Nissan, might tie up with the Yokohama-based auto maker in joint development and production of electric cars: “We’re basically competitors, good competitors,” he says.

“Our batteries are different, so are our controllers. We use GS Yuasa; Nissan uses NEC. Cooperation would be difficult at this time. On the other hand, we certainly can collaborate in infrastructure-related areas such as quick-charge technology and charging facilities. That sort of cooperation is needed, and there will be many opportunities.”

To the question of why Mitsubishi focused on EVs, bypassing hybrids, Masuko is blunt. “We didn’t have the resources. But more importantly, we could never have become No.1 in hybrids, so we focused on EVs. And in fact, we were the first to launch a mass-produced electric car in July 2009.” Regarding the emergence of Hyundai as a global automotive force,” Masuko says that in the past the Korean auto maker’s products “were considered cheap and of poor quality. Not anymore.” “Their quality is excellent, on top of which they have an exchange-rate advantage with the won against the yen. If we compare to four or five years ago, the won is almost 80% cheaper than it was before. The yen is 20% stronger.”

Will there be competition in the coming five years besides Hyundai? “We might have to deal with new competition from China, because people there and in other emerging markets want cheaper cars,” he says.

“One thing for sure, competition will be more complicated as we move beyond Japan, North America and Europe.”