Nissan Makes Move on Mitsubishi Amid Mileage Debacle

TOKYO – It shouldn’t have come as a surprise, but it did nonetheless: Thursday’s announcement that Nissan will acquire a 34% equity stake in Mitsubishi.

For years, industry analysts have contended Mitsubishi couldn’t go it alone and needed a new capital partner, usually mentioning foreign automakers after DaimlerChrysler withdrew its equity stake in the Japanese company in 2005.

For years, Mitsubishi kept proving them wrong. In fiscal 2015, the automaker reported record profits and was on track to meet its midterm earnings targets this year.

But Mitsubishi, which largely had restored its reputation following a series of costly recalls dating back to 1999, including criminal convictions for falsifying records related to traffic deaths, ultimately decided it was time to start a new chapter, this time with a Japanese partner.

The seeds for the merger were sown in 2011 when Mitsubishi and Nissan formed a joint venture to produce 0.66L minicars at Mitsubishi’s Mizushima plant in western Japan. The Nissan-badged Dayz and Dayz Roox, along with Mitsubishi’s eK Wagon and eK Space, are at the center of the scandal involving Mitsubishi’s admission that overstated the fuel economy of those models.

But even before working together on minis, the automakers joined forces in 2002 when they merged part of their transmission operations to form JATCO, now the world’s No.1 manufacturer of CVTs. Nissan holds a 75% equity stake in JATCO with Mitsubishi and Suzuki, Japan’s largest manufacturer of minicars, owning the rest.

For Nissan, Thursday’s announcement means the automaker gets a new partner that is largely restructured and will join its alliance with French automaker Renault, a 43.4% shareholder in Nissan.

Mitsubishi Well-Positioned to Absorb Penalties  

In the fiscal year ending March 31, Mitsubishi reported record profits of ¥138.4 billion ($1.3 billion) with ¥462.4 billion ($4.3 billion) in cash on hand, likely more than enough to cover any financial losses from the fuel-economy-cheating scandal. When DaimlerChrysler announced plans to withdraw its equity holdings in spring 2004, Mitsubishi carried a debt load of ¥1.5 trillion ($13 billion).

Nissan is paying only ¥237 billion ($2.2 billion) for its 34% stake in Mitsubishi. Three weeks ago, the asking price would have been nearly ¥413.8 billion ($4 billion). On April 19, the day before the mileage scandal broke, Mitsubishi was trading at ¥864 ($7.94) per share. On Tuesday, its share price had fallen to ¥495 ($4.55).

The deal bolsters Nissan’s presence in Southeast Asia, where Mitsubishi is strong and profitable. More than 50% of the automaker’s fiscal 2015 earnings were generated in Asia, with the majority coming out of Southeast Asia. Nissan is less profitable there.

Mitsubishi, one of the first automakers to set up shop in the region half a century ago, opened a new plant in Laem Chabang, Thailand, in 2012. In addition to the Mirage, which it exports to the U.S., the automaker produces Triton pickup trucks in Laem Chabang.

Elsewhere, it is expanding capacity in the Philippines, Indonesia and China. It will add a second plant in Indonesia in 2017. Located east of Jakarta, the facility will have annual capacity of 160,000 units and initially will produce the Pajero Sport CUV.

Nissan also gains easier access to Mitsubishi’s suppliers including Mitsubishi Electric, Mitsubishi Chemical and Mitsubishi Heavy Industries, Japan’s largest heavy-machinery manufacturer and Mitsubishi Motors shareholder.

Nissan Offers Tech Expertise, Plant Capacity

Mitsubishi, meanwhile, gets a development partner in battery-electric and autonomous cars. It also gains access to the North American and European markets where Nissan operates a total of six vehicle plants – in the U.S. (2), Mexico (2), the U.K. (1) and Spain (1). Mitsubishi operates none, having suspended production at its Normal, IL, plant last November and NedCar in the Netherlands three years before.

Mitsubishi holds a minority equity stake in PSA Peugeot Citroen in Russia (PCMA Rus) which builds Outlander SUVs.

The automakers will collaborate on joint platform development and procurement. Mitsubishi also will be able to turn to Nissan’s extensive financing operations.

Significantly, the automaker will be able to turn to Nissan for a successor to Chairman and CEO Osamu Masuko, who turned 67 in February. It is not clear what future role Tetsuro Aikawa, Mitsubishi’s president and chief operating officer, might have in the organization. But unconfirmed media reports in Japan say Aikawa, the 61-year-old son of former Mitsubishi Heavy Industries President Kentaro Aikawa, wishes to step down to accept responsibility for the scandal.

At Thursday’s news conference, Nissan CEO Carlos Ghosn calls the agreement a “potential win-win” for both companies. Initially, it would appear to be more of a win for Nissan. Mitsubishi lacks the resources – even though it is debt-free – to move aggressively by itself into future electrification of cars, autonomous driving and other advanced technologies where Nissan is among the industry leaders.

Until the scandal broke, Masuko had not been considering a capital tie-up with another automaker. It is not clear when Nissan and Mitsubishi, Japan’s No.3 and No.5 automakers, respectively, decided to negotiate an agreement, but Ghosn says the deal was sealed after Masuko assured him Mitsubishi could determine the “size and limit” of the mileage-cheating scandal.

Mitsubishi Dodges Global Damage

Mitsubishi announced April 28 that its U.S. models were not involved. It then confirmed fuel-economy testing was conducted properly and legally on cars sold in Europe, Asia and Australia, regions that combined account for 80% of annual sales and nearly half of production.

The day before the automakers announced the alliance, Masuko reported Mitsubishi could cover any financial penalties out of its cash reserves.

Masuko also reported cheating involving domestic vehicles, both cars and trucks, dated back to 1991. Thus, the worst-case scenario based on sales data published by the Japan Automobile Manufacturers’ Assn. is that 8 million vehicles might be affected.

It still has no exact tally, but using the Hyundai-Kia settlement for a similar scandal as a benchmark, the Korean automakers paid about $300 million in fines, rebates and loss of greenhouse-gas credits when they were caught overstating fuel-economy numbers on an estimated 900,000 cars in 2011 and 2013.

Based on the Hyundai-Kia payout in the U.S. market, the scandal could cost Mitsubishi about $2 billion if all 8 million vehicles’ fuel economy was found to have been misrepresented.

The automaker has set up an independent panel to investigate and provide recommendations on how to proceed in resolving claims and other matters including its relationship with Nissan, which purchased most of the initial 650,000 affected vehicles.

Mitsubishi has not yet disclosed its fiscal 2016 earnings and sales forecasts.

Ghosn and Masuko plan to sign the alliance agreement May 25. Besides Nissan’s taking of the 34% equity stake in Mitsubishi, the deal calls for one-third of the partnership’s directors to come from Nissan, and for Nissan to nominate Mitsubishi’s next chairman.

Nissan plans to complete its due diligence by the end of August and complete the stock purchase in October. The companies hope to pass regulatory requirements before year’s end.

It is not clear how and when the management changes will be made. But Masuko joined Mitsubishi as managing and representative director in June 2004, two months after Rolf Eckrodt, DaimlerChrysler’s hand-picked president, resigned. In April 2005 Masuko was promoted to president.