Auto Alliances In Japan: Carload Of Trouble?

Mergers with Japan's auto makers don't always pan out for foreigners

Snap up distressed Japanese auto makers and get a foothold in the vast Asian market. That's been the strategy of foreign companies drastically rewriting the rules of the road in Japan over the past four years. When Ford Motor Co. took control of Mazda Motor Corp. in 1996 by boosting its stake to 33.4% from 25%, the move sent shock waves through the country. Now, half of Japan's total vehicle market is partly owned by gaijin, or foreigners: Renault owns a third of Nissan Motor Co., while General Motors Corp. has acquired or will acquire sizable stakes in Isuzu Motors Ltd., Suzuki Motor Corp., and Fuji Heavy Industries, the maker of Subaru.

So it seems natural that the Asian automotive world's latest mating dance, between Mitsubishi Motors Corp. and foreign suitors DaimlerChrysler and Ford, should end in a trip to the altar. With eight times more debt than equity and analysts anticipating a loss of $190 million for this fiscal year, Japan's No. 5 auto maker is in dire straits and President Katsuhiko Kawasoe should be desperate for a deal. Yet its network of Asian plants remains a tempting prize. Ford is not as ardent for a partnership as DaimlerChrysler, and it will not comment on any deal. But it is also eyeing Mitsubishi--possibly to check DaimlerChrysler's Asian ambitions.

But any suitor of Mitsubishi should take a hard look at the track records of these mixed marriages. Most of the cross-border experiments suffer from product problems, culture clashes, and a distinct absence of the hoped-for rich profits. "These rescue plans haven't really rescued any of these companies yet," says Koji Endo, automotive analyst at Schroders Securities Japan Ltd.

The greatest challenge has been to tackle Japanese auto makers' shortcomings while navigating an obstacle course of social constraints. Take the case of Renault, which controls 36.8% of Nissan Motor. Nissan's hands-on chief operating officer is a Renault executive, Carlos Ghosn. Nine months into his job at Nissan, Ghosn is still having trouble balancing the interests of Western investors, Japanese employees, and Japanese customers.

Ghosn's tough talk has convinced investors and employees that he wants to fix the ailing icon. His efforts may yet end in success. But for now, his brutal honesty has also scared away customers: After Ghosn publicly declared that Nissan's cars were blandly styled, the Japanese apparently agreed. Nissan is now selling as many vehicles every month as it did roughly 30 years ago. Many former Nissan drivers have defected to Toyota, whose models this season have more kick. Now Schroders Securities sees Nissan's operating profit falling as low as $380 million, less than half its targeted $857 million for the year ending Mar. 31.

DOUBLE BIND. The deadly combination of a strong yen and a local recession also puts strains on these partnerships. Roughly half of Japanese auto makers' domestic production is sold overseas. So any foreign partners must either help the Japanese build up plants abroad or remain vulnerable to currency swings.

Just look at what's happening to Mazda. Since taking control in 1996, Ford has slashed Mazda's payroll by 7%, reduced the number of its platforms by 30%, and taken an ax to its subsidiaries. Yet the company remains on slippery ground. Mazda recently revised down its forecast of net profits for this year to $238 million, from $381 million. Mazda depends on exports for 60% of its revenues, and a stronger yen is squeezing profits.

Melding operations with foreigners and standardizing parts should help Japan's auto makers become more competitive. But such arrangements take time. Mazda and Ford will launch their first jointly developed sport-ute based on a common platform this year, four years after the merger.

And Ford execs at Mazda still have trouble convincing workers to accept drastic restructuring. James E. Miller surprised investors and employees when he abruptly quit as Mazda's president in December--officially for health reasons. Analysts suspect problems with Mazda's union were behind his exit.

DaimlerChrysler may not find a warm reception at Mitsubishi either. They are far from strangers: Chrysler held a 15% stake in Mitsubishi until 1993. And until 1996, Daimler worked with Mitsubishi to sell cars and create commercial vehicles in Japan. Neither alliance ended well. This time, Mitsubishi may be be more cooperative. "If Daimler walks away from this one, Mitsubishi looks very vulnerable," observes Steve Usher, auto analyst at Jardine Fleming Securities Ltd. in Tokyo. But if Daimler clashes with Mitsubishi over cost-cutting, things could get nasty.

Working with Japan's societal constraints is important. So is survival. Mitsubishi may yet merge happily with a foreign white knight. But the formula for success in Japan remains elusive.

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