Debt-Ridden Mitsubishi Running on Fumes

Mitsubishi Motors Corp. appears to be living on borrowed time as a stand-alone auto maker.

This sober conclusion is not held unanimously. But the evidence is compelling, and many industry experts believe an alliance of some kind with a foreign auto maker is essential to survival.

“Mitsubishi Motors is a financially troubled company with too much debt in a difficult competitive position, with market share small and vanishing almost everywhere,” says Chris Richter, a senior analyst with CLSA Asia-Pacific Markets in Tokyo.

The auto maker has never fully recovered from a debilitating triple whammy – revelations in 2000 of recall cover-ups in Japan dating back to1983, a disastrous experiment with easy credit in North America in 2003 and an ill-fated, 5-year strategic alliance with the former DaimlerChrysler AG that ended with Mitsubishi being dumped in 2005.

Revitalization plans, restructuring and management reshuffles have worked no miracles. Once Japan’s fourth-largest auto maker, MMC has sunk to seventh place.

Global sales dropped from 1,615,000 units in fiscal-year 2000 to 1,065,000 in fiscal 2008 and are expected to sink below 1 million in fiscal 2009, which ended March 31. And the ¥30 billion ($333 million) operating profit forecast for this fiscal year is overshadowed by massive losses in the past.

(“MMC’s) balance sheet is extremely weak,” says Koji Endo, managing director at Advanced Research Japan. “And even if the company continues to make annual operating profits of ¥30 billion ($322 million) or ¥40 billion ($429 million), it will take more than 20 years to wipe out accumulated losses of ¥700 billion ($7.7 billion).”

MMC’s main profit centers now are Southeast Asia, especially Thailand, the Middle East, Australia and China, while losses primarily are in the U.S. and Europe, particularly Russia, as well as Japan, he says.

This is a shift of tectonic proportions. In past years, the U.S. provided nearly all of MMC’s profits. In fiscal 2001, for example, the U.S. was the source of 220% of MMC operating profits, more than enough to offset losses elsewhere, leading industry analysts in Tokyo say.

Debt of more than ¥1 trillion ($10.7 billion) is a heavy burden, as well.

Mitsubishi to provide PSA with version of iMiEV electric car starting this year.

For the last decade, the auto maker has been on life support provided mainly by the Mitsubishi Group, leaving the three biggest companies now holding 34% of common shares – Mitsubishi Heavy Industries with 15.16%, Mitsubishi Corp. (13.99%) and Bank of Tokyo-Mitsubishi (4.85%) – and most of the ¥440 billion ($4.7 billion) in unredeemed preferred shares.

MMC issued the preferred shares in 2004 or 2005, according to an MMC spokesman. Most went to the big-three companies, presumably for help rendered. Beginning in 2011, annual dividends of ¥22 billion ($235 million) are supposed to be paid. But, "We cannot pay the dividend,” the spokesman says.“We want to pay, but we cannot."

Endo calculates total support from the Mitsubishi Group companies may be as much as ¥1 trillion.

“Without the group continuously injecting money into the company, Mitsubishi Motors’ financial situation would never improve,” he says. “The group is desperate to find the company a new partner, but finding one has become increasingly difficult.”

Richter says supporting Mitsubishi is something the group companies don’t like to do, “and I’m not sure they will do it indefinitely in the future.

“It will be hard for the company to recover, because other auto makers are so much more powerful. Sales have been lost to stronger competitors, and it’s very difficult, in a sustainable way, to get those lost sales back.”

Osamu Masuko, a veteran executive with 31 years at Mitsubishi Corp. who became president of MMC in 2005, is understandably more upbeat about the auto maker’s future.

In a recent interview with Reuters, he challenges suggestions a strategic partnership is needed for survival, claiming MMC excels in areas such as all-wheel drive and electric-vehicle technologies and draws strength from its partnership with PSA Peugeot Citroen.

That tie-up began in 2005 with an agreement to supply the French auto maker with MMC’s Outlander SUVs. It was followed by a joint venture in an assembly plant with annual capacity of 160,000 units in Kaluga, Russia, owned 70% by PSA, 30% by MMC, and due to begin production later this year.

On March 8, a final agreement was reached to supply PSA with a version of the Mitsubishi iMiEV small electric car, launched in Japan last July well ahead of larger competitors. PSA’s sales are to begin by the end of 2010, and a total of 100,000 units are expected to be supplied in the years ahead.

Earlier in March, Masuko and PSA CEO Philippe Varin confirmed their intent to broaden cooperation between the two auto makers, but concluded “a capitalistic alliance was not appropriate in the current circumstances.”

The two companies were unable to agree on terms for a capital alliance during negotiations last December, which reportedly would have involved an investment by PSA of $2.3 billion to $3.5 billion for a 30%-50% stake in MMC.

“There could have simply been disagreement over what PSA and MMC thought an investment was worth,” Richter surmises. “Another sticking point could have been the unwillingness of the Mitsubishi Group to relinquish control. Although the two companies are cooperating in several ventures, I don’t see any of them as transformational for MMC.”

PSA also is in trouble, losing sales and money, Endo points out. “To acquire over 50% of MMC, the company probably would have needed ¥300 billion to ¥400 billion ($3.33 billion to $4.44 billion) in cash and didn’t have the money. And if they tried to borrow from banks, their credit rating would have gone down double digits.”

PSA’s vehicle sales in 2009 fell 7.2% to 3.2 million units. Operating losses were E1.82 billion ($2.45 billion), more than twice that of the previous year.

“PSA is well-developed, with the critical mass in sales required to survive in the global industry,” says Ian Fletcher, an industry analyst with IHS Global Insight in London. “But the company has a new CEO and is restructuring and did not want to put more cash than it could afford into another company.”

However, Fletcher expects talks of a capital alliance to resume in the near future, emphasizing “the two companies have very little overlap. They complement each other. Mitsubishi is relatively strong in Asia and has outlets in North America. PSA is strong in Europe and has a presence in Brazil and Latin America.

Maybe in two or three years, when the economic gloom is gone, a capital alliance might make sense to them.”

Mitsubishi Group has been interested in decreasing its responsibility for MMC for a long time and “would be open to a deal if the circumstances were right,” Fletcher adds.

He doesn’t consider control an insoluble issue, citing Nissan Motor Co. Ltd.’s alliance with Renault SA, in which the French auto maker holds 44%, as evidence it is not necessarily bad for a company to relinquish control.

“It has taken 10 years for Renault and Nissan to get the cost savings and other synergies worked out, and even now the alliance is not perfect,” Fletcher says. “They’re still working on it, but it has been successful.

“Neither company, alone, could have created the electric vehicle they’re planning to launch. They have the scale and finances now to be key players in the global auto industry.”

Still, there is no consensus about the best course for MMC to take.

“A strategic partner would probably help Mitsubishi Motors, because I don’t know if the company has a viable stand-alone strategy,” says Richter, who does not consider PSA the best fit. “(MMC) may need to be owned by a large auto maker, which would have to have complete control without any restrictions, such as purchasing parts from Mitsubishi Group companies.”

Endo, too, sees a buyout by another auto maker as a likely recipe for survival. “The most important requirement is how much money a partner is willing and able to spend, because the most important and urgent thing the company needs is cash. A Chinese, Indian or Russian partner could be possibilities.”

An alternative, in his opinion, would be for MMC to become a smaller, boutique auto maker.

There are rumors of another possible solution: the auto maker could become a division of Mitsubishi Corp. or Mitsubishi Heavy Industries Ltd.

Conversely, Fletcher expects the present PSA partnership to blossom. “MMC and PSA have too much going on together, and I can see them expanding their relationship,” he says. “It could be a perfect marriage.”