Mitsubishi CEO Sees Upside in Mileage-Fixing Scandal

TOKYO – It was inevitable that Japanese automaker Mitsubishi would seek a new capital partner. The only issue was when and, more precisely, when Chairman and CEO Osamu Masuko  felt the time was right.

The time became right in the second week of April, days before Mitsubishi would announce record fiscal 2015 earnings.

When due diligence is completed, Nissan will take a controlling 34% stake for its ¥237 billion ($2.3 billion) investment in Japan’s No.5 automaker. Nissan also will insert one of its executives as chairman, effectively replacing Masuko, who spent the past decade restructuring Mitsubishi and largely succeeding.

Masuko’s role in the new organization “will be decided by the new organization,” he tells WardsAuto in his first interview since Mitsubishi's April 20 disclosure of mileage fixing. “For the moment, my job is to lay the foundation for the alliance so that we can move forward.”

Operations by the new organization are to begin in November or December.

Masuko, a longtime critic of capital tie-ups dating back to Mitsubishi’s divorce from DaimlerChrysler a decade before, abruptly reversed course in the face of evidence the automaker had falsified fuel-economy testing data on more than 625,000 minicars sold in Japan.

A 2-month investigation revealed mileage-test results were misrepresented for 725,000 vehicles covering a range of 29 Mitsubishi and Nissan models, both 0.66L minicars and non-minis alike, dating back to 2006, the earliest year for which the automaker has records.

Masuko expresses frustration that 11 years after assuming the presidency and restructuring the automaker, literally bringing it back from the brink, he again finds himself in the embarrassing situation of having to defend misconduct inside Mitsubishi’s research organization.

“It left me speechless,” he says. “We had just begun preparations for our next medium-term business plan, and then this.”

Ferreting Out Internal Wrongdoing

This time there were no fatalities as had been the case in summer 2000 when the automaker was caught concealing defects by its former truck-making subsidiary. Thus the likelihood of arrests, such as those that resulted from the earlier scandal, is negligible. However, one of the first moves Masuko made when the fuel-economy disclosures came to light was to hire three former prosecutors and a retired Toyota engineering executive to conduct an internal investigation.

And unlike the Volkswagen scandal that erupted in September in which the automaker was caught evading diesel-emissions standards by altering software, there has been no direct damage to the environment. Just plain old double-dealing to gain an advantage on the competition.

Masuko repeats the assertion he made at a May 20 news conference that Mitsubishi has no debt and can cover the financial damage from cash reserves. “But the loss of trust and confidence, the damage to our brand image, that is not something that can be handled just by money,” he says.

Mitsubishi announced June 22 it would report a net loss of ¥145 billion ($1.4 billion) in the current fiscal year of which an estimated ¥65.5 billion ($620 million) will comprise tax-credit refunds and compensation for extra gasoline costs associated with the fuel-economy discrepancies which, according to reports, were inflated by as much as 15%.

The amount is nearly double Hyundai and Kia’s settlement in a similar mileage-cheating scandal in which the Korean automakers paid $300 million in fines, rebates and loss of greenhouse credits when they were caught overstating fuel-economy numbers on about 900,000 cars sold in the U.S. between 2011 and 2013.

On an operating basis, Mitsubishi expects to report a ¥25 billion ($240 million) profit, 80% smaller than the previous year’s record high, and coming despite a projected 8% decline in unit sales. Masuko expects a full recovery in fiscal 2017.

Analysts are less optimistic. Nevertheless, Masako expects fiscal 2017 earnings “to exceed fiscal 2015 levels. We’ve streamlined our management. We’ve stopped production of cars in the U.S. (the automaker shuttered its Normal, IL, plant June 1). We’ve launched a new vehicle in the Philippines. And there are no problems overseas.”

This is significant in that 80% of Mitsubishi sales, nearly half of production and 100% of earnings are generated outside Japan including more than half in Asia, mostly Southeast Asia.

In the business year ending March 31, the automaker reported record earnings from operations of ¥138.4 billion ($1.3 billion) with ¥462.4 billion ($4.4 billion) in cash in hand, more than enough to cover financial losses from the cheating scandal.

Nissan Finds Mistakes

The origin of the scandal dates back to August 2015, when Mitsubishi and Nissan decided to develop the next generation of Dayz and eK-series minicars. The Nissan-badged Dayz and Dayz Roox, along with Mitsubishi’s eK Wagon and eK Space, were the first models produced by NMKW, a 5-year-old Nissan-Mitsubishi joint venture to develop and manufacture minicars.

Known locally as “kei” cars, minis occupy a unique Japanese segment. Powered by 0.66L gasoline engines, they account for nearly 40% of domestic demand. The segment is extremely competitive and the introduction at the beginning of the decade of a new, more rigorous test cycle put pressure on automakers to meet higher emissions standards.

(Suzuki, the segment’s largest manufacturer, reported last month it had used the wrong test procedure for more than 2 million of its cars, although it claims it had not inflated mileage.)

The first-generation Dayz and eK models were engineered by Mitsubishi at the automaker’s Car Research & Development Center in Okazaki, Aichi prefecture. This time, Nissan’s engineering group would take the lead.

Early in the development process, Nissan uncovered discrepancies between the publicly stated and actual fuel economy of the current-generation models.

When launched in June 2013, the four new cars were advertised as best-in-class with mileage of 82 mpg (2.9 L/100 km). All four models qualified for preferential tax breaks as environmentally friendly vehicles.

After several months of back-and-forth between the automakers’ engineering organizations, Mitsubishi concluded in mid-April that the discrepancies traced back to its Okazaki R&D center and the intentional falsification of test data. Masuko reported Mitsubishi’s findings to Nissan on April 18, then to Japan’s Ministry of Land, Transportation & Infrastructure on April 20, several hours before holding a news conference.

Plug-Ins to Play Bigger Role

If there is a remotely positive aspect of the scandal, it is that Mitsubishi likely will begin weaning itself off the gasoline internal-combustion engine. Additionally, analysts have felt for some time that the automaker would face difficulties trying to go it alone as the industry increasingly moves into electric powertrains and automated driving, both areas where Nissan is strong.

Mitsubishi, whose i-MiEV became one of the first volume-production all-electric cars when it went on sale in July 2009, has shifted focus to plug-in hybrids now that the Nissan Leaf has become the world’s best-selling all-electric car. The i-MiEV remains in production but Mitsubishi has three new plug-in hybrids in the pipeline.

Masuko contends he would not have supported the financial aspect of the alliance had it not been for the mileage-cheating disclosure, yet admits tying up with Nissan was inevitable. “We would have had to do it eventually…several years later,” he says.

Other factors in Mitsubishi’s acquiescence to Nissan also are in play. While it has been restructured with a product plan that will take it to 2020 and beyond, Mitsubishi lacks a sufficiently deep management corps to compete in today’s market, something Nissan has aplenty.

Tetsuro Aikawa, Mitsubishi’s president, chief operating officer and Masuko’s heir apparent, and Ryugo Nakao, executive vice president in charge of the automaker’s global research organization, both took responsibility for the scandal by resigning at Mitsubishi’s annual shareholders’ meeting Friday.

“We’ve been aware of the management problem since I became president in 2005,” Masuko notes, “as have our principle Mitsubishi group shareholders – Mitsubishi Heavy Industries, The Bank of Tokyo-Mitsubishi and Mitsubishi Corp. And over the years they’ve injected not only capital but (also) human resources to provide management support in accounting and sales, for instance.”

To ensure a smooth transition into becoming a strategic partner of Nissan and Renault (the French automaker holds a 43.4% equity stake in Nissan), Masuko initially reached out to Nissan for management support in its engineering division.

Formally joining Mitsubishi’s board of directors Friday was Nakao’s replacement, Mitsuhiko Yamashita, former executive vice president in charge of Nissan’s R&D organization. Highly respected within the Japanese industry, Yamashita joins the board as a representative director.

Mitsubishi also brought in Koji Ikeya, a senior managing officer of The Bank of Tokyo-Mitsubishi and Kozo Shiraji, who was an assistant to the president of Mitsubishi Corp.

Grabbing Nissan’s Lifelines

In the end, Masuko admits the alliance represents an opportunity for Mitsubishi.

“I can’t disagree,” he says. “In addition to synergies for us working with Nissan in EVs and automated driving, there are several markets (notably North America and Europe) where we might be able to use idle Nissan plant capacity.

“In reverse, we have a strong presence in Southeast Asia. In that sense, Nissan can gain some advantage.

“And of course, there are potential advantages of joint procurement with Mitsubishi now having direct access to Nissan-Renault Alliance suppliers and vice versa, including Nissan having more ready access to other Mitsubishi Group companies.”

Those include Masuko’s former employer, Mitsubishi Corp., Japan’s largest trading house, which provides a range of services globally, from financing to logistics and sales.

Beyond the numbers and talking points about the merits of the alliance, Masuko’s overriding concern is protecting Mitsubishi’s brand.

“We’ve had a history of capital alliances that haven’t succeeded, first with Chrysler and then with Daimler. And there are other similar examples in the industry. The Nissan-Renault Alliance is one of the rare examples where a capital alliance has worked.

“And when (Nissan CEO Carlos) Ghosn told me that Nissan would provide whatever support we needed, I decided now was the time to make a move.”

Although they maintain financial ties, Nissan and Renault have distinct brands. The two companies also are working jointly with Daimler and Russian automaker AvtoVAZ with clear divisions of labor.

According to Masuko, Mitsubishi and Nissan will have separate management and separate marketing organizations. “We’ve worked together since 2011 in our minicar venture. The three Mitsubishi group companies – Mitsubishi Heavy, Mitsubishi Corp. and Tokyo Mitsubishi Bank  – will retain 22% equity stakes in the new organization.

“We see it as ‘win-win.’”