Our Last Chance

DaimlerChrysler AG has lost control of its major Asian alliance partner, and Mitsubishi Motors Corp. now will have a chance to live its cat-like ninth life thanks to a $4 billion cash infusion from Japanese companies interested in ensuring its revival.

MMC's newly installed Chairman Yoichiro Okazaki calls the company's new bailout plan, “our last chance at survival as an auto maker.”

But many analysts are not convinced the company will survive, while dealers question whether MMC will continue to sell in the U.S.

Burdened with more than ¥1 trillion ($9 billion) in debt, tumbling car sales and growing recalls, Mitsubishi was left flailing for emergency rescue after DaimlerChrysler's April 22 decision not to pump any more money into the ailing company.

The move was a complete reversal from what had been anticipated, sending shock waves through the auto industry and bringing disarray to CEO Juergen Schrempp's Asian initiative, which since has seen the dissolution of a strategic partnership with Hyundai Motor Co. Ltd., as well.

“The board of management and the supervisory board decided not to participate in the planned capital increase and not to give further financial support to MMC,” Manfred Gentz, DC's chief financial officer, said in a conference call with reporters at the time, noting the company had no immediate plans to sell off its equity stake in Mitsubishi.

However, DC saw its 37.3% controlling stake minimized May 21, when MMC announced its new business revitalization plan led by Tokyo-based investment firm Phoenix Capital. DC's share now is expected to fall to about 23%. “We don't know how big the new stake will be,” a DC spokesman tells Ward's. “We will have to wait. I don't think that would concern us.”

Phoenix reportedly will pay between ¥70 billion and ¥100 billion ($624 million-$892 million) for a controlling 40% stake in Mitsubishi Motors and a seat on its management board. In addition, J.P. Morgan Chase & Co. will underwrite a sale of ¥100 billion of preferred shares.

The rest of the cash injection comes from group companies Mitsubishi Corp., Mitsubishi Heavy Industries Ltd. and Bank of Tokyo-Mitsubishi, which together have pledged to contribute ¥270 billion ($2.3 billion).

Strategic partner China Motor Corp. is kicking in an additional ¥10 billion ($88.5 million). MMC, reportedly plans to shift more attention to China, where it hopes to nearly double sales in the next three years.

The auto maker also is stepping up production in the Philippines, where its $181 million Pajero SUV project calls for production beginning in 2006 of more than 200,000 units over seven years — two-thirds targeted for export — expected to earn $200 million to $240 million annually.

That said, the 3-year “MMC DNA” turnaround plan — which sees the company back in the black by next year — hinges on a 17% scale-back in global capacity including the closure of a car plant in Japan and an engine plant in Australia, massive cuts to both the white- and blue-collar workforces and the eventual reduction of platforms by more than half.

Failures within the U.S. operations sent Mitsubishi last year into a financial tailspin with $419 million in loan defaults, but Mitsubishi Motors North America Inc. Chairman and CEO Finbarr O'Neill, brought in to fix the U.S. arm, calls the new restructuring plan great news.

“The new financial support also underscores the Mitsubishi companies' belief and confidence in the future of the brand in the North American market,” he says in a prepared statement. “We now have the financial backing to ensure a successful turnaround in the North American market.”

MMC will use ¥130 billion ($1.2 billion) to cut debt, which it wants to trim 40% by the 2006 fiscal year, and ¥320 billion ($2.8 billion) towards the implementation of the revitalization plan.

If the turnaround — Mitsubishi's second major attempt since DC's 2000 involvement with MMC — works this time, it will see by the 2006 fiscal year net sales of ¥2.49 trillion ($22 billion), operating profit of ¥120 billion ($1.1 billion), ordinary income of ¥100 billion ($885.9 million), net profit of ¥70 billion ($620 million) and a 4.8% operating margin.

Whereas DC top brass, including former MMC CEO Rolf Eckrodt and turnaround architect Steve Torok, led the last failed attempt, this recovery plan will be undertaken by a new executive lineup headed by Okazaki and Hideyasu Tagaya, former executive overseeing international operations and newly named president and CEO.

MMC is slashing white-collar personnel 30%, from current levels of 26,400 to 18,800, by 2006-2007. The plan also calls for a 30% reduction in staff at its Japanese headquarters, which the auto maker is moving to Kyoto from Tokyo, and a cut in the number of top executives to 37 from 51 by March 2005. Additional paring of the workforce will take place in tandem with the plant closures.

The capacity cut — which sees the elimination of the Okazaki, Japan, plant; the cessation of the Lonsdale engine plant in South Australia's Adelaide; and the reduction of output elsewhere — is slated to be completed by 2006-2007. MMC says the move will bring its capacity utilization rate to 95% from current levels of 70%.

Australian state and federal officials, who traveled to Tokyo in May to prevent cuts to MMC's Australian operations, now say the government is establishing a A$50 million ($35 million) assistance package in the wake of engine and foundry plant closings in October 2005. About 700 jobs will be lost.

Prime Minister John Howard says that while MMC's intention to proceed with a A$600 million ($421 million) investment to produce a replacement for its Magna (Diamante) and Verada sedans at the Adelaide assembly plant beginning in 2005 is welcome news, the decision on the engine plant operations is a great blow.

Meantime, operations at Mitsubishi Motors Mfg. of North America Inc.'s plant at Normal, IL, are under review. MMC has not specified options for the plant, except to say its operations will be examined.

“We don't have any specifics about that,” a spokesman at the Normal plant tells Ward's. “We're not going to speculate on what the possibilities would be, but we constantly review our production to ensure it's in alignment with market demand.”

Such a review earlier this year resulted in the elimination of 52 non-union jobs, and about 200 union workers took a voluntary separation package.

Rumors target a production cutback to 160,000 units in a plant that produced 174,000 vehicles last year, when Mitsubishi sales fell 26%. Maximum capacity is 240,000 units.

MMC projects selling 74,000 fewer vehicles worldwide this year, 40,000 fewer in the U.S., and says it will look at “an adjustment to production capacity to balance supply with demand” at Normal.

The company also says it will “look into possible strategic alliances with other partners” for future production at the plant, suggesting a partner other than DaimlerChrysler, as it takes on new investors.

The pact to produce Chrysler cars at Normal expires in June 2005. Chrysler Group CEO Dieter Zetsche says any joint venture products with Mitsubishi carrying the Chrysler name would be built in Chrysler plants, which rules out Chrysler's presence at Normal.

Along with the capacity reduction, MMC also plans to trim material costs by 15%, in tandem with the promotion of global sourcing and greater parts commonality. The company is looking to tighten such variable costs to save ¥154 billion ($1.4 billion) by fiscal 2006.

A cutback in platforms by 2010 — to six from 15 — doesn't mean fewer products. The “MMC DNA” strategy calls for the launch of 44 new models — including a new strategic car for Asia.

And despite the fallout with DC, Mitsubishi says joint projects still are in the works — something a DC spokesman also confirms to Ward's.

These include: joint development of a B-segment platform supporting the Mitsubishi Colt and Smart Forfour; a combined C/D platform that supports the smaller Dodge Neon, PT Cruiser and Mitsubishi Lancer as well as midsize Chrysler Group vehicles and derivatives of the Mitsubishi Galant; and the sourcing of a Dodge Dakota-based pickup truck that will be badged as a Mitsubishi for the U.S. market.

MMC additionally says it is interested in going forward with the Global Engine Alliance, in which DC and Mitsubishi would build a 4-cyl. engine at several locations around the world, including a plant in Dundee, MI. DC says the Michigan plant will go forward with or without Mitsubishi's commitment.

Ramsay H. Gillman, president of Gillman Auto Companies of Houston, TX, who owns six Mitsubishi franchises, is counting on MMC's continuing presence in the U.S. market. The former National Automobile Dealers Assn. chairman says dealers selling 100 vehicles per month in 2003 now are selling less than 20.

“Mitsubishi does have manufacturing capabilities with the plant in Normal,” he says. “And I don't think the company will let go 600 North American dealers with almost 700 facilities.”

But industry observers warn not to expect too much too soon.

“How this (new business plan) is going to turn out could take months to find out, especially since Japanese banks are involved, which are slow and methodical and don't operate on knee-jerk reactions,” says Jim Hall, vice president-industry analysis for AutoPacific Inc., an automotive marketing and consulting firm.

Hall insists Normal is vital to Mitsubishi's recovery. “To put it in context, Toyota (Motor Corp.) is the most profitable company in the industry, and the bulk of its profit comes from the U.S. market,” he says. “Mitsubishi needs to have a presence in the U.S. to be profitable, and Chrysler needs it in the U.S. for economies of scale with those small cars and engines.”

But questions remain whether Mitsubishi will continue to exist in the U.S. for the long term.

DaimlerChrysler, in a statement, says, “We hope the revival plan works and Mitsubishi succeeds, because we don't intend to pull out of our alliance with Mitsubishi and intend to continue the projects we have going with them, as well as look at others in the future. We absolutely don't intend to sell our stake in Mitsubishi.”

Others aren't so sure. “Can Mitsubishi survive? That's the $64,000 question,” says Joe Phillippi, principal with AutoTrends, an automotive consulting firm. “It has so many problems on a worldwide basis that you have to wonder what is going to happen over the long term.”

One ugly development that has slipped by relatively unnoticed in the U.S. is the loss of credibility with consumers in Japan, where MMC is under criminal investigation for possible defect cover-ups. The auto maker previously admitted defect cover-ups in a massive recall of passenger cars in 2000.

Now a new scandal is boiling over as Mitsubishi Fuso Truck & Bus Corp., which was spun off from the auto maker and in which DC holds a sizable stake, recently acknowledged defects likely have been concealed and announced a recall of 180,000 trucks.

Defects are suspected in the death of a driver thrown out of his Mitsubishi truck in a crash and in the death of a pedestrian crushed by a wheel that rolled off a Mitsubishi truck.

And for the second time in four years, MMC executives are charged with avoiding expensive recalls by falsifying reports and concealing vehicular defects from Japanese authorities and the public. Seven former executives have been arrested for ignoring faulty hubs that permitted wheels to come off, causing more than 50 accidents since 1992.

While it is too soon to say how much Fuso truck sales, and DC's hopes, will be hurt by the recent arrests and revelations, it is certain they won't be helped. The Japan dealers' association says MMC saw new-vehicle sales for April drop 19% vs. year-ago.

Reaction has extended beyond recalls and arrests. Japan's Ministry of Transport reportedly has stopped certification of new Mitsubishi trucks. The Ministry of Land, Infrastructure and Transport is ceasing purchase of Mitsubishi trucks and cars for the next 18 months, and prefectural and municipal governments may follow suit.

More punishment may be coming: “I have heard that some Japanese oil companies have asked truckers not to use Fuso trucks to haul oil, gasoline and other flammable products,” says Koji Endo, head of Equity Research, Credit Suisse First Boston Securities (Japan).

The scandal apparently has yet to spread to other Asian markets vital to Mitsubishi and DC, but recalls in the region are possible and would be another stinging blow for both companies.

with Katherine Zachary, Kevin Kelly, Cliff Banks, Jim Mateja, Mack Chrysler and Alan Harman