Anatomy of Restructuring: Did Nissan Pick a Winner in Mitsubishi?

TOKYO – It was one of those “deja vu all over again” moments for Osamu Masuko, Mitsubishi chairman, president and CEO.

When Masuko, now 67, took over as president and CEO in June 2004, his CEO title stood for chief ethics officer, one reason why the April disclosure the automaker had falsified fuel-economy test results was a bitter pill.

He had spent the past decade trying to undo the damage to Mitsubishi’s brand from three recalls between 2000 and 2004, one of which involved concealing records by the automaker’s former truck-making subsidiary, Mitsubishi Fuso Truck and Bus.

In a somewhat unorthodox move in Japan, Masuko volunteered for the job when one-time equity partner Daimler appointee Rolf Eckrodt resigned as president in April 2004. Masuko had risen to the executive ranks at Mitsubishi Corp., Japan’s largest trading house, before joining the automaker first as representative director in June 2004, then as president the following April.

Among his early decisions was not to rush out and seek a new automotive partner but to try to restructure from within.

“Daimler tended to do what was best for them,” Masuko revealed in an earlier interview with WardsAuto. “And ultimately this was the cause of the breakup. But ironically, this also served as the impetus for our turnaround, as we’ve been forced to focus on our needs, not theirs.”

This did not preclude working with other automakers on a project basis – building cars jointly with Group PSA in Russia, badging and selling electric cars through Peugeot and Citroen in Europe and tying up with Nissan to produce 0.66L minicars in Japan.

The next step was for Mitsubishi to focus on its strengths and live within its means, ultimately leading to its further involvement with Nissan, which is taking a 34% equity stake in Mitsubishi.

“Focus is absolutely critical, especially when you’re our size,” declared Masuko several months before forming an alliance with Nissan, announced May 12, just weeks after the fuel-economy scandal hit.

Early on, Masuko concluded Mitsubishi was too small to build cars in all of the markets its larger competitors operate. In addition to Southeast Asia – particularly Thailand, where the automaker was one of the first to establish a manufacturing presence half a century ago, Mitsubishi had ventured into the U.S., Europe and Australia. It entered the U.S. and Australia through its one-time connection with Chrysler.

“We were one of only five automakers in the world to operate plants in Europe, North America and Australia, the others being Toyota, (General Motors), Ford and Nissan. Were we big enough to do that? Of course not,” he says.

“We simply had too many models and were building cars in too many markets. We had gone past our ability to do business, which is why we had so many management crises.”

The automaker entered Australia in 1979, acquiring the Adelaide plant of Chrysler Australia. In 1985, it formed a U.S. manufacturing joint venture with Chrysler in Normal, IL. Receiving a $274 million incentive from the state of Illinois, Diamond-Star Motors (a word play on Mitsubishi’s three diamonds and Chrysler’s pentastar logos) opened a greenfield plant three years later with capacity to produce 240,000 cars.

With Chrysler in need of cash in 1991, the U.S. automaker sold its 50% stake to its Japanese partner, which four years later changed the name to Mitsubishi Motors Mfg. North America.

Also in 1991, Mitsubishi entered into a joint venture with Volvo to build cars at a 24-year-old plant in Born, the Netherlands, a quaint town known for its auto plant and zoo.

Too Much Capacity

It is hard to grade these operations, but in the case of Mitsubishi Australia, only twice in 17 years did the automaker produce more than 50,000 cars. In the final five years before shuttering the plant in March 2008, output averaged fewer than 18,000 annually.

Mitsubishi Australia President Robert McEniry cited structural changes in the industry that made it impossible to keep the plant open. The bottom line: insufficient volume.

In North America, combined production exceeded 200,000 units only three times in 27 years as the central Illinois plant operated at below 60% of capacity in 15 of those years. During the last decade, production averaged only 57,176 units.

Like Mitsubishi Australia, the operation simply wasn’t big enough, plus Mitsubishi never fully recovered from a series of marketing missteps, including a disastrous zero down, zero interest and zero monthly payment scheme in 2003 that boosted sales short term but left the automaker saddled with massive debt when thousands of buyers defaulted on their purchases.

Earlier, in 1996, the plant became the target of a federal sexual harassment suit that made national news and, although there is no way to measure the effect, damaged the brand.

Management’s decision in 2012 to shift production of bread-and-butter models such as the Mirage to Thailand rather than build the car in the U.S., its main market, played into the narrative and reduced potential volumes further. By 2015, the plant’s last year of operation, nearly 40% of sales in the U.S. market were Thailand-built Mirages.

An attempt to salvage the Normal plant by building the Outlander Sport fell short when the Russian market, where one of five Sports were headed, crashed in early 2015, making it impossible to meet production targets.

Mitsubishi finally suspended production last November and shuttered the plant June 1. The automaker now builds the Outlander Sport in Japan.

In Born, the story was much the same. Mitsubishi acquired Volvo's share of the venture in 2001 to become the 100% owner. Eckrodt, dispatched to Japan by DaimlerChrysler to head Mitsubishi’s restructuring effort, reportedly told a German business newspaper the Netherland’s subsidiary would have to boost capacity to 280,000 if it hoped to be viable.

In the last five years through 2012, when the Japanese automaker unloaded the operation, production averaged just 53,356 units annually.

Each one of these separations played out like a kabuki dance, with Mitsubishi going through the motions of trying to keep the plants open, but in the end they had no realistic chance. And while decisions to close the three plants widely were seen as failures, they proved key to the automaker's restructuring.

Next was to focus on markets where the Mitsubishi name is strong, chiefly Southeast Asia. Mitsubishi was one of the first to set up shop in Thailand in 1966, building pickups from components exported from Japan. It now makes cars and trucks there, having opened a new 10 billion baht ($284 million) plant in Laem Chabang in 2012.

In addition to the Mirage, Mitsubishi produces Triton pickups in Laem Chabang. Previously, it built a version of the truck, the Navara, for Nissan. Most components, including engines, transmissions and seats, are sourced locally.

Elsewhere in the region, the automaker is expanding capacity in the Philippines, Indonesia and China. It will add a new plant in Indonesia, its second, in 2017. Located east of Jakarta, the plant will have capacity to produce 160,000 units. Initially, it will build the Pajero Sport SUV.

“Mitsubishi Motors has become a primarily Southeast Asian automaker,” says Chris Richter, managing director at market analyst CLSA. “They dabble in Russia. They dabble in Japan. But mostly their story is in Southeast Asia.”

And not by accident.

Masuko, his sights set on the big picture, has linked Mitsubishi’s market strategy to population trends in the Asia region. It is not by accident the automaker is investing in new capacity in Indonesia, the world’s fourth most heavily populated country; or in the Philippines, at 12th; or in Thailand, 20th. Or in China, at No.1.

Moreover, vehicle ownership throughout the region remains low, standing at 7% in Indonesia, 4% in the Philippines, 19% in Thailand and 8% in China.

With most economists projecting significant income growth in Asia over the next 10-15 years, vehicle ownership is expected to grow accordingly.

By 2030, the Institute of Energy Economics Japan, a Tokyo-based think tank, expects vehicle ownership in Indonesia and China to double to 13% and 20% of population. Thailand and the Philippines will grow incrementally to 27% and 6%.

In 2015, the automaker sold 1.1 million vehicles globally. One of three was sold in Asia, excluding Japan. More importantly, the Asia market accounted for half of global earnings in fiscal 2015:  ¥66.0 billion ($655 million) of a ¥125.0 billion ($1.2 billion) total.

Focus on CUVs, Plug-Ins

Last on Masuko’s list of priorities – a work still in progress and possibly to be tweaked by the new organization – is to overhaul the automaker’s model lineup and focus on segments that offer greatest growth potential for the brand: CUVs and SUVs.

And in the wake of the green movement: plug-in hybrids and EVs.

Although not widely reported, Mitsubishi was the global leader in plug-in hybrids in 2015. Outlander hybrid sales totaled 40,990 units, including 29,990 outside Japan, outpacing the Chevrolet Volt, the plug-in version of the Toyota Prius and other competitors.

Mitsubishi has three new plug-in hybrids in the pipeline.

Globally, the automaker expects the fullsize SUV market to grow nearly 20% over the next five years and the compact CUV/SUV market to expand 60%. Meanwhile, management forecasts fivefold growth in EV and plug-in hybrid sales over the same period.

Mitsubishi plans to introduce 14 new and refreshed models during fiscal 2017-2020, including three SUVs, two multipurpose vehicles, two cars, two 0.66L minicars and four plug-in hybrids and EVs.

It also will consolidate its model lineup into four main platforms ranging from 0.66L minis for the Japanese market to rear-drive trucks sold in Asia, Australia and Europe (marketed by Fiat Chrysler Automobiles).

Included in the revamped lineup are a new Delica D:5 multipurpose van, an all-new small multipurpose van and SUV, a fully remodeled Outlander and a new-generation RVR.

Mitsubishi completed full model changes of the Triton pickup in November 2014 and Pajero Sport last August.

When former Mitsubishi President Katsuhiko Kawasoe unveiled the automaker’s first midterm restructuring plan in 1998, shortly after the Asian financial crisis caused the automaker’s debt to balloon to ¥2.0 trillion ($19.9 billion at today’s exchange rate), he set forth modest earnings and sales targets but not-so-modest market-share goals of 15% in Japan and 5% globally.

Its domestic market share was slightly more than 10% and its global share had fallen below 2%.

Today, nearly 20 years later, Mitsubishi’s global share is less than 1.5%, although through March the company was operating profitably.

It is too soon to tell whether the automaker has turned the corner on the product front.

Veteran Tokyo analyst Koji Endo, managing director of Advanced Research Japan, declares Mitsubishi hasn’t had “a truly successful model and that most of (its) restructuring is due to cutting costs and closing three money-losing plants outside Japan.”

Endo’s conclusion regarding product is supported by sales results in North America, Europe and several other markets, less so in the Middle East and Asia where the brand is considered strong.

Nevertheless, the fact remains the automaker has a history of struggling with product, in particular with marketing its cars. Some of the early stories are amusing. Most relate to the business realities of having to work as an OEM supplier of cars for a larger global partner.

Several months before the Pajero launch in North America, Mitsubishi had to change the model’s name. Someone had pointed out that “pajero” meant something other than “Pampas cat” in Spanish slang. Thus was born the Montero.

The Colt became the Dodge and Plymouth Colt because Mitsubishi did not have the means to introduce the model to the North American market on its own. And of course, over time it lacked the right product as market demand shifted to front-drive CUVs and SUVs.

Akira Kijima, who headed Mitsubishi’s car development group shortly before DaimlerChrysler took control, attributed part of the problem to corporate culture in a long-ago interview with WardsAuto.

“We have always had excellent technology from our powertrains and engine electronics to our all-wheel-drive and traction control systems,” Kijima explained. “Unfortunately, we lacked a marketing and sales tradition having come from the heavy industrial sector.” Namely, Mitsubishi Heavy Industries, Japan’s largest manufacturer of ships, military aircraft, turbines and other energy equipment.

The automaker also had the wrong models – or at least the wrong models for the times. While the industry was moving full-speed ahead into CUVs and other multipurpose vehicles, marked by the mid-1990s introduction of the Toyota RAV4 and Honda CR-V, Mitsubishi was a johnny-come-lately to the segment, despite having been an early leader in the SUV segment with the Pajero.

“In the past,” Masuko recalls, “we focused on big, heavy vehicles like the Pajero or sport and rally cars (such as the one-time brand-defining Lancer Evolution that went out of production in March). We are now concentrating on small, fuel-efficient and eco-friendly vehicles, including EVs and plug-in hybrids.

“Clearly, our brand image and culture are changing.”

Masuko, having rolled the dice with Nissan, can only hope that the synergies he and Nissan CEO Carlos Ghosn spoke about at their May 12 news conference will materialize. Then, as they suggested, this tie-up could be win-win for both automakers.