Nissan boss foolhardy in bailing out struggling Mitsubishi Motors

Updated : 28.06.2016 / Category Corporate Investigations

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In May, Nissan Motor Corp. moved with lightning speed to bail out the embattled Mitsubishi Motors Corp., which was plunged into yet another battle for survival—its third to date—after admitting three weeks earlier it had falsified fuel efficiency test data.

Nissan will take de facto control of Mitsubishi with a 34 percent stake in the company after it completes its acquisition of 506.6 million shares at a cost of ¥237 billion by the year's end. Nissan will become Mitsubishi's largest shareholder—boasting a larger stake than any other top Mitsubishi Group company—thus effectively obtaining management rights. Four of Mitsubishi's 11 board members are expected to hail from Nissan.

According to a Bank of Tokyo-Mitsubishi UFJ executive, Nissan is getting the Mitsubishi shares at a bargain price of ¥468.52 per share; before the scandal came to light, each share cost about ¥850.

Nissan embracing sizeable legal risks
Mitsubishi's falsification of fuel efficiency tests came to light after Nissan noticed discrepancies last November in data submitted for Mitsubishi's eK miniwagons and data Nissan measured in its Dayz vehicles, which are provided by Mitsubishi under an original equipment manufacturer (OEM) agreement and thus essentially the same as eK minicars. From February, the two automakers conducted a joint investigation into the matter, eventually finding that the data had been fabricated by Mitsubishi.

"At that stage, Nissan probably started conducting due diligence on the company, secretly analyzing Mitsubishi's business standing and its assets, believing Mitsubishi Motors wouldn't be able to survive after its admission of wrongdoings," said a Toyota Motor Corp. official. "Otherwise, it would have been impossible for the company to make its huge investment decision in such a short time—a little over 20 days. Immediately after it saw Mitsubishi stock prices plummeting, Nissan moved with rapier speed."

During interviews with newspapers and magazines, Carlos Ghosn, Nissan President and Chief Executive Officer, admitted the plunge of Mitsubishi Motors stock prices was a factor in prodding him to make his decision.

But many industry sources question whether the deal is worthwhile for Nissan. For example, there are huge legal risks associated with Mitsubishi compensation payouts over the bogus fuel efficiency claims. Furthermore, Mitsubishi's brand is "tarnished almost beyond hope," as one Honda Motor Co. official put it, making the company's revival difficult, if not impossible.

"We'll propose the compensation amount—fuel costs incurred due to the difference in [bogus and] actual gas mileages, and a certain amount of additional money," Osamu Masuko, Mitsubishi Chairman of the Board and CEO, said last month regarding compensation payouts to 625,000 buyers of four models of miniwagon for which gas mileage claims were falsified.

The Ministry of Land, Infrastructure, Transport and Tourism is currently examining the gas mileages of the four eK models. Based on a study of a different scandal that involved South Korean carmakers, Mitsubishi hopes to decide on appropriate compensation sums after receiving the ministry's report. In 2012, Hyundai Motor and Kia Motors were found to have overstated fuel-economy claims in the United States, leading them to pay buyers of affected vehicles between $200 and $500 apiece, or $395 million in total.

Besides covering additional gasoline costs shouldered by buyers, Mitsubishi is expected to cough up money for extra tax that purchasers will have to pay due to a fuel economy downgrade for their vehicles. Furthermore, Nissan, affiliated car dealers, and parts makers will likely demand that the carmaker pay compensation for lost opportunities and other reasons.

But Mitsubishi officials are undaunted. "If we compare our case with the scale of Hyundai's misdemeanors, we believe compensation in the range between ¥100 billion to ¥200 billion is perhaps enough," one official said. "That won't immediately jolt our company's foundations."

As of March, Mitsubishi had liquidity in hand worth ¥462.4 billion. Combined with the ¥237 billion stake to be bought by Nissan before year's end, Mitsubishi will have about ¥700 billion in hand, which it believes is more than sufficient to cover compensation payouts.

But can Mitsubishi, which has repeatedly betrayed public trust, soothe customer anger with just a small amount of money (referred to by one Toyota Motor official as a "a drop in the bucket")? The prices of affected vehicles have already been slashed by 20 to 30 percent in the used car market, and an official of Gulliver International Co., a used car sales company, said the resale value of the trade-in vehicles is "close to zero."

If an investigation finds that Mitsubishi management was involved in the wrongdoings—systematically and intentionally selling vehicles with bogus fuel economy claims—it will "be an outright case of fraud" according to a legal expert. As sales contracts based on fraud are deemed invalid, purchasers are likely to request that Mitsubishi buy back their vehicles at the original selling price.

Indeed, Land, Infrastructure, Transport and Tourism Minister Keiichi Ishii has indicated that Mitsubishi should consider buy-back, among other measures, to deal with the fallout from the company's malpractices. Earlier this year, Volkswagen, which admitted deceit in relation to emissions of its diesel models, agreed to buy back up to 500,000 vehicles at the insistence of U.S. regulatory authorities.

What would happen if Mitsubishi were to buy back all affected vehicles, including those provided to Nissan under the OEM arrangement? Models of the eK miniwagon series sell for a basic price of between ¥1.08 million and ¥1.58 million. If Mitsubishi were to buy back these vehicles for an average of ¥1.2 million, it would cost ¥750 billion, which means the automaker would fall short in terms of liquidity. If it was forced to put aside a reserve fund to cover expected losses, most of its capital (¥687.6 billion as of March and ¥237 billion from Nissan) would vanish.

Struggle looms to retain dealership network
It is also feared that legal risks could extend to other models, as Mitsubishi has admitted it neglected to conduct test runs on its RVR sports utility vehicles, among other models, to collect fuel economy data, choosing instead to calculate such figures at the desk. This means Mitsubishi may have to make additional solatium payments.

Ghosn maintains these problems should be dealt with by Mitsubishi alone. But what would happen if Mitsubishi was unable to shoulder such a burden single-handedly? Would Nissan cut Mitsubishi adrift after having invested ¥237 billion, or would it pump additional funds into the carmaker?

Even if Mitsubishi overcomes its legal problems, it still faces a thorny path just to maintain its dealership network, not to mention bouncing back in terms of new car sales, car industry sources say. Although Ghosn says the Mitsubishi brand will be retained, the brand itself now lies in tatters and is almost beyond repair.

"Mitsubishi dealers are already exhausted after having dealt with the revelations in 2000 and 2004 in which the company concealed defects that required car recalls," said a high-ranking official of a midsize Mitsubishi car dealer. "If the latest scandal alienates the already diminished Mitsubishi user-base, many dealers will be left in dire financial straits."

In the business year that ended March 2016, Mitsubishi domestically sold 102,000 vehicles at the retail level, which accounts for less than 10 percent of its global sales of 1.48 million units. Even so, abandoning its home market will have a serious impact on worker morale at factories across the nation, as well as on the company's ability to secure young human resources. "Consumers in advanced countries will turn away from vehicles that have no brand value in their home market," a Honda official said.

Doubts cast over synergetic effects in Southeast Asia
As for overseas sales, Mitsubishi has a strong presence in the Southeast Asian market, and the tie-up with Mitsubishi will eliminate Nissan's disadvantages in relation to the Big Three companies (Toyota, Volkswagen and General Motors) in the production and procurement domains in Southeast Asian countries, according to Ghosn.

Nissan is expecting synergetic effects from its deepened alliance with Mitsubishi in cultivating the Southeast Asian and other emerging markets, thereby helping revive the embattled carmaker. "It's true that Mitsubishi has more presence in Southeast Asia than Nissan, but it's not an overwhelming presence," a Toyota executive said, expressing doubts over the synergetic effects Nissan expects.

The biggest car market in Southeast Asia is Indonesia, which registered sales of about 1.13 million new cars in 2015. Mitsubishi sold 112,527 units, winning an 11.1 percent share of the market and putting it in fifth place behind top seller Toyota (which boasts a 31.8 percent market share), Daihatsu Motor Co., Honda and Suzuki Motor Corp.

The second biggest car market in the region is Thailand, with 799,000 units sold last year. Mitsubishi was the fourth-largest new car seller with 59,800 vehicles (constituting a 7.5 percent market share), trailing after Toyota, Isuzu Motors Ltd. and Honda. Mitsubishi's market presence in other ASEAN nations, such as Malaysia, is at a similar level. Market players say synergetic effects from a tie-up between Mitsubishi and Nissan—which have much smaller market shares in the region than their rivals—will be too small to resuscitate Mitsubishi.

"Setting aside business merits and demerits, if Nissan believes it can or will change the corporate disposition of Mitsubishi Motors through its stake acquisition, it's mistaken," another industry source said.

The seeds of delinquency were sown at Mitsubishi Motors during its long years of "colonial rule" by Mitsubishi Heavy Industries, DaimlerChrysler and the Mitsubishi Group. "Every time the 'ruler' changed, the firm's original employees hid things that were inconvenient to their company, or indulged in wrongdoings," a former Mitsubishi Motors employee said. "Some disgruntled original employees exposed scandals in such a way as to retaliate against their rulers."

Danger of rebels committing wrongdoings that are later exposed
In fact, the 2000 scandal was exposed after the then Transport Ministry received an anonymous report saying that papers showing the company had concealed car defects were kept in a changing-room locker at the company's product quality control section—the kind of information that only an employee could obtain. Similarly, Nissan reportedly learned about the latest scandal after receiving insider information from Mitsubishi.

Many say the same kind of thing could happen after Nissan becomes "ruler." As the colonial rule structure will remain in place, "dissatisfaction among employees will eventually be directed toward the new corporate overlord, Nissan," an informed source said.

The aforementioned former Mitsubishi Motors employee said employees harbor strong feelings of resentment toward foreign rulers, after being traumatized by events following the carmaker's acceptance of capital from DaimlerChrysler in the wake of a financial crisis triggered by the 2000 scandal. DaimlerChrysler span off Mitsubishi's money-making commercial vehicle department to establish the Mitsubishi Fuso Truck and Bus Corp—now an integral part of Daimler AG—before deserting Mitsubishi.

In this regard, Nissan represents foreign capital, as it operates under the umbrella of French carmaker Renault. If Nissan decides to exploit Mitsubishi in the coming years "it's possible that dissatisfied elements [of the latter company] will commit misdemeanors and expose them to the regulatory authorities and mass media to retaliate against the colonial rule," the former employee said.

Nissan reported ¥793.3 billion in operating profits for the business year ending March 2016, up 34.6 percent from the previous year on the strength of robust sales of sports utility vehicles in China and North America, as well as its high-end "Infiniti" vehicles in Europe. Its net profits were ¥523.8 billion, besting the previous record of ¥518.1 billion registered in the business year that ended in March 2006.

For the next business year, Nissan projects net profits of ¥525 billion, slightly surpassing the previous year's gains. Although the yen is stronger than it was last year, Nissan no longer has to deal with the ¥907 billion extraordinary loss it entered in its account books the previous business year to deal with the massive recall over Takata airbags.

Nissan's financial standing is strong, with capital of over ¥4.7 trillion and ¥992 billion liquidity in hand. Even if its investment in Mitsubishi comes to nothing, Nissan will remain on a very firm financial footing. However, if it becomes entangled in its management of Mitsubishi and ends up damaging its own brand, it could prove a fatal mistake.

Nissan's latest investment may bring about the expansion in scale it desires, but the automaker may end up paying a high price for inking a poisonous deal, according to a Toyota executive.

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This is a translation of an article from the June 2016 issue of Sentaku. The original article can be found here.