May 22, 2004
Mitsubishi Unveils Another Bailout as It Tries to Save Itself
By TODD ZAUN

OKYO, May 21 - After securing $4 billion in emergency financing, the ailing Japanese carmaker Mitsubishi Motors is embarking on its second sweeping restructuring in recent years, but analysts say its road to recovery is as long as ever.

On Friday, Mitsubishi unveiled a blueprint to rebuild itself with new investment from the Mitsubishi Group companies and a Japanese buyout firm, plus an issue of stock to be underwritten by J. P. Morgan Chase.

"This plan is our last chance for survival," Yoichiro Okazaki, chief executive of Mitsubishi Motors, said on Friday.

The announcement of the bailout came as the automaker also reported a loss of nearly $2 billion for the fiscal year that ended March 31. The company said that it expected to lose a similar amount this year as it closed plants, trimmed its work force and tried to repair its badly damaged brand.

Mitsubishi Motors has been scrambling for cash since the stunning decision last month by DaimlerChrysler, Mitsubishi's biggest stockholder, to stop supporting the company. Daimler determined that any more investment in Mitusbishi was unlikely to pay off, Daimler executives said at the time.

Mr. Okazaki on Friday outlined sweeping steps to cut costs with the goal of turning a profit within three years. Those steps include closing a vehicle assembly plant in Japan, cutting nearly a third of its nonfactory employees and scaling back production overseas, including at a plant in Illinois. Mitsubishi Motors will cut thousands of jobs to trim its global work force to 38,200 by April 2007 from more than 43,000 employees now.

The losses and bailout package were widely expected after a costly failure in Mitsubishi's marketing strategy in the United States, which drew buyers with very easy credit terms. When many of those customers did not pay their loans, the United States finance unit of Mitsubishi was left with huge losses. And vehicle sales plunged after the company stopped lending to customers with weak credit, dropping by a quarter in the United States for the year that ended March 31.

After being cut off by DaimlerChrysler, Mitsubishi Motors turned to the Mitsubishi Group, a loosely affiliated collection of companies in businesses from aerospace to finance and shipbuilding. The largest share of the 450 billion yen ($4 billion) in new investment announced Friday will come from Mitsubishi companies. J. P. Morgan Chase will underwrite a sale of 100 billion yen of preferred shares, which do not carry voting rights.

With more than 1 trillion yen ($8.9 billion) in debt, Mitsubishi Motors badly needs money to finance the development of new vehicles. But even with the bailout, analysts say Mitsubishi's condition has, at best, gone from critical to stable.

"This is urgent surgery to stop the bleeding," Koji Endo, an auto analyst at Credit Suisse First Boston Securities Japan, said of the bailout. The restructuring steps probably will not be a complete solution to Mitsubishi's troubles, he added.

With annual production of about 1.5 million vehicles, Mitsubishi Motors is too small to compete against larger rivals, like Toyota and Nissan, unless it finds a unusual way to appeal to car buyers, the way Porsche has done with its sports cars or Subaru with its all-wheel-drive wagons and sedans.

"Such a small-volume manufacturer cannot survive in the long-term unless they find a really strong niche," said Mr. Endo, who expects Mitsubishi to again look for a larger partner in a few years.

Currently, analysts say, there is little to distinguish Mitsubishi models, like the Galant sedan, from competing Toyotas, Hondas and Nissans.

Mr. Okazaki, Mitsubishi's chief, said that the company would try to create a unique identity by drawing inspiration for new vehicles from two popular, but aging models - the Pajero sport utility vehicle and the Lancer Evolution sedan.

But developing new models takes years and Mitsubishi faces the challenge of returning to the black in the meantime.

The earnings results announced Friday showed the depth of the company's troubles. Mitsubishi Motors said that it lost 215.4 billion yen ($1.9 billion) in the year ended March 31, far worse than its forecast for a 72 billion yen loss and a sharp reversal from a 37.4 billion yen profit the year earlier. Mitsubishi's sales sank 35 percent to 2.52 trillion yen ($22.4 billion) from 3.89 trillion yen a year earlier.

Mitsubishi Motors has now lost money in three of the last six years, including its biggest net loss ever, 278.14 billion yen ($2.47 billion), for the year that ended March 2001.

The company forecast another dismal performance for the year that ends March 2005 with an expected loss of 230 billion yen. Mr. Okazaki said that Mitsubishi was aiming for a small net profit in the fiscal year ending in March 2007.

Mitsubishi's troubles have been a setback for DaimlerChrysler and its ambitions to become a global carmaker. Mitsubishi Motors was supposed to be Daimler's door to the growing Asian market. The German automaker sent a turnaround team, led by former chief executive, Rolf Eckrodt, to Mitsubishi Motors four years ago to put the ailing company back on track. But the effort was troubled from the start.

Just a few months after Daimler announced that it would buy a stake in Mitsubishi Motors, it admitted to systematically covering up defects in its cars over two decades to avoid recalls. Mitsubishi's sales in Japan plunged after the revelation and the company has yet to put the scandal behind it.

Just this week, Mitsubishi's truck-making affiliate, Mitsubishi Fuso Bus and Truck, admitted that it had concealed knowledge of defective parts that may have played a part in a fatal accident. Mitsubishi sold fewer cars last year than in 1999, the year before DaimlerChrysler took control.

DaimlerChrysler has invested about $3 billion in Mitsubishi since 2000, but will now see its 37 percent stake in the carmaker diluted by the new investors. DaimlerChrysler is likely to end up with a stake in Mitsubishi of 22 percent to 23 percent.

Three Mitsubishi companies - the industrial equipment maker Mitsubishi Heavy Industries, the trading company Mitsubishi Corporation and the Mitsubishi Tokyo Financial Group - will invest a total of 120 billion yen. In addition, Mitsubishi Tokyo Financial will exchange 130 billion yen in loans to the company for preferred shares.

The carmaker will also issue 70 billion yen to 100 billion yen ($889 million) in specially priced common stock to Phoenix Capital, a Tokyo-based turnaround fund. Phoenix will be able to buy the stock at a price of 100 yen a share, a discount from Mitsubishi Motors market price of 240 yen at the close of trade on Friday. The discount means that, although it plans to invest less than others, Phoenix will become Mitsubishi Motors's largest shareholder with a 40 percent stake.

Phoenix was given the special price because it was expected to play a major role in managing the turnaround, Mr. Okazaki said. On Friday, Mitsubishi Motors nominated the chief executive of Phoenix, Yasushi Ando, to its board.

Mitsubishi said that it planned to close a car plant in the city of Okazaki in central Japan and an engine factory in Australia. Production levels at Mitsubishi's factory in Normal, Ill., will probably be reduced, Mitsubishi executives said, though they declined to say if there would be layoffs.