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Another bailout of Mitsubishi adds to auto glut
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TOKYO - For auto makers worried about the world-wide glut of cars, there's some bad news: Some of Japan's biggest companies are preparing a lifeline of at least $3 billion for unprofitable Mitsubishi Motors Corp.
The big bailout from its corporate cousins, Mitsubishi's second in seven months, will allow it to keep competing in the U.S., where Detroit's car makers face a growing onslaught from Japanese and Korean rivals and consumer demand is showing signs of slowing. Mitsubishi produces roughly 1.4 million cars annually.
he global car industry already has annual excess production capacity of roughly 24 million vehicles, according to CSM Worldwide, a Farmington Hills research firm.
Mitsubishi Motors declined to comment on the proposed deal, but people familiar with the matter said talks are in the final stage.
The planned rescue illustrates why the overpopulated car industry has trouble consolidating and reducing capacity. Japan and other nations see their car makers as national champions. Letting them fail is particularly difficult since so many jobs would be lost at once. Mitsubishi employed 43,801 people as of last March 31, with many thousands more working at suppliers.
Japan has moved in recent years to let weak companies fail so that there's more opportunity for new or healthier companies. Still, many executives and politicians adhere to the notion that employment and tradition should play a role in deciding which companies live.
"The automobile sector is so broad-based," said Yoichiro Okazaki, Mitsubishi Motors' chairman, in an interview last year. He asked rhetorically what other manufactured product spreads around benefits to so many companies. "Tractors? No. It is only cars that can benefit so many. Ultimately, that's the thinking of the Mitsubishi group," Mr. Okazaki said.
Mitsubishi's recent history gives little hint that a cash infusion will do much good. DaimlerChrysler AG paid $1.9 billion in 2000 for a 37 percent stake in Mitsubishi and sent German executives to try to fix the company. Last year, Daimler gave up and refused to put in more money.
Other Mitsubishi-group companies then injected $5 billion into Mitsubishi Motors, reducing Daimler's stake to 22 percent. Most of that money is gone, having been spent paying down debt and covering operating losses, according to people familiar with the company's finances.
Mitsubishi Motors had a loss of about $2.1 billion for the year ended March 31, 2004, and is on pace to lose as much as $2.4 billion in the current fiscal year.
The only thing standing between the car maker and bankruptcy court is the Mitsubishi group. The group's companies are linked by cross-shareholding and historical ties dating back to prewar Japan, when they were part of a giant conglomerate or zaibatsu. Today the chief group members include Mitsubishi Tokyo Financial Group Inc., Japan's healthiest banking group; trading company Mitsubishi Corp.; and Mitsubishi Heavy Industries Ltd., a ship and machinery builder and onetime parent of Mitsubishi Motors. In World War II, Mitsubishi Heavy built Japan's feared Zero fighter planes.
People familiar with the group companies' plans say they are prepared to continue pouring money into Mitsubishi Motors until it recovers, although at best that is likely to take at least several years. The roughly $3 billion capital infusion for Mitsubishi Motors will be announced later this month when the company discloses its latest restructuring plan, these people said.
After the Mitsubishi group carried out its first bailout of the car maker last year, President Nobuo Kuroyanagi of the Mitsubishi Tokyo Financial Group's core bank explained in an interview: "We have to help because we have a responsibility to society." He added: "This is different from how things are done in the U.S."
Mitsubishi Tokyo and other group companies declined to comment on the new capital infusion, referring all queries to Mitsubishi Motors. A spokesman for the car maker said nothing has been decided. Though the government hasn't taken a leading role in the talks, people familiar with the matter say the government-run Development Bank of Japan might participate in a new bailout of Mitsubishi Motors, which has said in public filings that it is eligible for help from the bank.
Rescuing the car maker will be an uphill struggle. Sales have been crippled in its home market of Japan, falling around 30 percent in 2004 after a scandal involving a coverup of vehicle defects. In one instance a pedestrian was killed when a tire flew off a Mitsubishi-brand truck. The company blamed poor maintenance by the truck's owner although it allegedly knew of other similar incidents. Japanese authorities arrested several former Mitsubishi Motors executives last year, including a former president who has pleaded innocent.
U.S. sales, meanwhile, fell by 37 percent in 2004. That partly reflected a decision to cut sales to rental operators sharply as a way of propping up the resale value of Mitsubishi cars and making them more attractive to regular consumers.
The U.S. operations are also struggling to recover from piles of bad consumer loans caused by a "zero-zero-zero" financing offer that gave young people with spotty credit records the chance to buy a car with no money down and no payments for a year. Mitsubishi has pared back shifts at its Normal, Ill., plant. Finbarr O'Neill, the head of U.S. sales, quit earlier this month for a job at another company.
Since last year, Mitsubishi Motors' U.S. unit says it has lost 64 dealers and now has 582. Some of the defectors became dealers of cars made by South Korea's Hyundai Motor Co. and Kia Motors Corp.
Mitsubishi Motors was spun off from Mitsubishi Heavy Industries in 1970. The car maker's initial success meant business for other Mitsubishi group members, who supplied steel, rubber, glass and electronic parts. But Mitsubishi Motors never squeezed its suppliers for cost savings in the manner of Toyota Motor Co.p., whose ruthless efficiency and reputation for quality have made it the world's most profitable auto maker. Toyota posted net income of more than $11 billion in the year ended March 31, 2004.
People familiar with the matter say Toyota was approached last year about taking a significant role in rebuilding Mitsubishi Motors. Toyota passed on the invitation, although it did agree to hire a few hundred Mitsubishi employees.
Since last year the Mitsubishi group companies have sent senior executives to Mitsubishi Motors to oversee a broad restructuring. But some employees at the car maker say the attempt to cook up a new strategy suffers from too many chefs. People familiar with the planning say representatives of Mitsubishi Corp., the trading company, want the car maker to focus more on Asia, where the trading company has extensive operations. Mitsubishi Heavy is said to believe that Mitsubishi Motors must rebuild its U.S. operations first.
Many in the Mitsubishi group are eager to remove a taint from the Mitsubishi name. After endless hours of television coverage in Japan about Mitsubishi Motors' scandals, the car maker's executives have spent much of the past few months bowing in apology to consumer advocates and customers. As a show of contrition, senior executives spent weeks over the summer at dealerships offering to help with tuneups and wash customers' cars.
One success story that lends a glimmer of hope to Mitsubishi Motors is Nissan Motor Co., which was itself on the verge of bankruptcy in 1999 before it received a capital infusion from Renault SA of France. Chief Executive Carlos Ghosn has returned Nissan to profitability with a combination of cost-cutting and more attractive new models.
Mitsubishi Motors has sold its headquarters building in Tokyo to raise cash _ a step also adopted by Nissan during its crisis _ and has plans to reduce staff by 30 percent, largely through attrition. Mitsubishi Motors also plans to shutter a factory in central Japan. To boost sales, it recently agreed to boost the number of minivehicles it produces for sale under Nissan's brand to 59,000 from 20,000 currently. It is also negotiating with SGA Peugeot Citroen about a similar arrangement.
Analysts are unimpressed. "Until they take more drastic action to lower fixed costs, it won't recover," says Noriyuki Matsushima, an auto industry analyst with Nikko Citigroup.
In the U.S., Mr. O'Neill, the sales chief who recently departed, had started shifting course away from younger buyers, whose bad credit caused problems. The company's advertising has stressed the long warranty on its cars. Among Mitsubishi's coming models are a revised version of the Eclipse coupe, which is targeted both at single people and "empty nesters" in their 50s, and an upscale pickup truck called Raider. Both models were unveiled at the Detroit auto show this month and are set to go on sale in the U.S. later this year.
As recently as 2002, Mitsubishi sold 345,000 vehicles in the U.S. In an interview before his departure, Mr. O'Neill said Mitsubishi could be profitable in the U.S. if it sold 200,000 cars without heavy discounting, but he predicted that wouldn't happen until the year ending March 31, 2007.
DaimlerChrysler still has a considerable stake in Mitsubishi Motors' recovery even though it owns less of the company now. Chrysler engineers, among other joint projects, have collaborated with Mitsubishi Motors to develop a small car "architecture" for the next generation of Chrysler small cars, including the Neon and PT Cruiser and a Jeep crossover. Chrysler may now have to finish developing the cars on its own. However, Michael Aberlich, a Chrysler spokesman, says both companies have already begun to work on their individual models based on the architecture. "At this point, if there were less collaboration, it would not affect us that much," Mr. Aberlich says.
Mitsubishi Motors declined to comment on the status of the collaboration. But President Hideyasu Tagaya, in an interview last fall, said all projects with DaimlerChrysler are under review and Daimler no longer has the power to decide what Mitsubishi Motors does. "Our cultures never really mixed well," he said.
Martin Fackler contributed to this article.
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The Detroit News.
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