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Monday, February 3, 2014

Mitsubishi Motors: Going, going ... gone?

Mitsubishi Motors Corporation (MMC) is trumpeting record profits. I'm not convinced things are so rosy: they've also just restructured debt, with its four main creditors – and largest shareholders – taking an average 25% haircut on their preferred shares, to the tune of ¥95 billion (US$950 million), something made clear only in its Japanese-language filings. Perhaps they want a tax writeoff and figure their last bailout won't be recouped. But it also provides MMC with a clean ownership structure that would make a sale easier. Whether anyone would want to buy them is less clear: the company has a stormy history that includes 2 failed sales and an unenviable strategic position. They aren't unique in this; many other small firms have failed or changed hands in the past half dozen years. But they're more likely to be a Saab story than any of the other Japanese bit players.

...they're more likely to be a Saab story than other Japanese bit players...

Mitsubishi Motors' origins saddled it with an inefficient structure. During World War II Mitsubishi Heavy Industries (MHI) made munitions ranging from warships to the Zero fighter. After 1945 the US Occupation split up the firm into 3 pieces, each of which made different sorts of motor vehicles – three-wheeled cars, scooters, commercial trucks – as they struggled to find things to sell in the grim 1940s and early 1950s. After the Occupation ended MHI's former pieces merged. The end result was the Mizushima plant in western Japan producing minicars ("kei" cars), Okazaki in central Japan making passenger cars, and Maruko in Tokyo (eastern Japan) making trucks, all within the larger MHI with its industrial machinery, shipbuilding and heavy equipment operations.

Then along came Chrysler, wanting to source small cars in Japan to provide dealers with something to compete against the VW Beetle, which in 1968 sold 600,000 units. (Ford and GM did the same thing, eventually ending up with controlling stakes in Toyo Kogyo – renamed Mazda to echo its brand – and Isuzu.) So in 1970 MHI bundled together the three automotive pieces into MMC and set it up as an independent company, with Chrysler to take a 35% stakeholding (which under Japanese corporate law would give them veto rights and hence potentially de facto control). But Chrysler entered one of its periodic crises and couldn't raise the cash, leaving it with a 15% stake in an unwieldy company. MHI and its bankers remained as the dominant shareholders. While MMC and Chrysler set up Diamond-Star, a joint venture assembly plant in Illinois that opened in 1988, by 1991 Chrysler had sold its share in MMC and various joint ventures.

[An aside: Chrysler purchased its stake in direct contravention to MITI's industrial policy of preventing foreign ownership in the industry – when push came to shove they lacked the clout to make such policies stick, cf. IBM's operations in Japan.]

Then in 2000 DaimlerChrysler bought into MMC, eventually holding 37.5% of the company. But MMC performed poorly, not helped by Daimler's management, and by 2004 that stake was sold off, with Daimler keeping MMC's truck division, Fuso, the one piece that made strategic sense for its Asian production base and array of drivetrains.

In the background is a rollercoaster history of a piece with Chrysler. The initial spinoff from MHI coincided with the success of the Galant passenger car in Japan. MMC then entered the US market, as did the partners in the other Detroit Three alliances. Unlike Isuzu and Mazda, both of which ceased production in the US, MMC never shuttered its plant in Illinois, despite low capacity utilization and poor North American sales. Inside Japan sales did well during Japan's bubble, with MMC introducing new brands, including the luxury Diamante. Again, given the bubble context, that didn't go well. Next MMC rode the sport utility boom with the Pajero, its Jeep-like product. It was the first firm to do so in Japan, and until rivals entered it earned a lot of money. Meanwhile it expanded overseas, with assembly plants not just in the US but also NedCar in Europe, Chrysler's old operation in Australia, a tie-up with Proton in Malaysia, and stand-alone operations in Thailand.

Most fared poorly. Its bubble-era brands are gone, as are its European and Australian operations. Domestically it turned out a bit over 500,000 vehicles in 2013, but 60% of those were exported. With the yen weak (today at ¥101 per US$) exports are far now profitable. Exports are also the focus of their US operations, which currently turn out 70,000 SUVs a year. Butexports are an expedient, not a strategy, only grasping at a short-term profit source. Meanwhile, 60% of domestic sales are of minicars. That's good news, because sales of that segment are rising (up 10% over the last year) but it's also bad news, because low-priced cars cannot possibly generate the profits needed to keep the company going.

...exports are an expedient, not a strategy...

International operations, centered in Thailand and with joint ventures in China and Russia, look better. In terms of production they are the same order of magnitude as MMC's domestic operations. But because most of domestic production is exported, the international-to-domestic sales mix is closer to 90:10 than 50:50. What has tided the company over were one-off OEM deals with Nissan, Honda and others, and its pickups in Thailand and SUVs in other developing markets such as Russia and China.

In Japan, Europe and North American its dealership networks remain weak. For example, in Japan it was late to expand into urban areas, and so had poor locations and poor franchisees. In order to finance its urban presence MMC resorted equity stakes, and then dispatched managers from the manufacturing side who seldom proved adept at running dealerships. In North America and Europe it is hampered by years of poor sales and an uncertain product strategy. Inside Japan contract production arrangements with several manufacturers have been cancelled; it has exited the "kei" (minicar) segment. Only repeated infusions of equity from the Mitsubishi family of companies kept it afloat.

Thus MMC is a firm with a strong presence in Southeast Asia. It has modest operations in China, though as typical of late entrants its factories are scattered from Manchuria to Guangzhou. Then there's a production base in Japan. Its product lineup is good for the developing world, but in 3 of the 4 largest markets – North America, Europe and Japan – its product mix is weak. The company is thus claiming it will ride emerging market dynamism to success. Elsewhere its focus is electric vehicles, to me a dim idea. But where will it be able to generate profits sufficient to sustain its engineering operations and factories in Japan? And without a steady stream of new products, all facing the expensive engineering challenges of increasing demands for fuel efficiency, low emissions, safety and connectivity, it can't survive.

So selling the firm strikes me as their last straw. For whom would a purchase make sense? Its current alliances with Nissan-Renault make that a possible option, as they can potentially use MMC's plants (though not its dealers in the US, Japan and Europe). Perhaps a Chinese company can be tempted, as with PSA and Volvo. But as I see it, Chrysler is the one global player with a footprint in North America and Europe that lacks a strong presence in China and developing Asia, the regions where MMC is least weak. If so, this would be the third attempt involving some iteration of Chrysler. But remember, three strikes and they're out. And that will be MMC's fate, if it can't sell itself before the yen again strengthens.

...three strikes and they're out...