Auto Alliances In Japan: Foreign Buyers Beware

Mergers with Japanese carmakers don't always work out

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 Mitsubishi's network of Asian plants remains a tempting prize. DaimlerChrysler has lost ground in Asia as rivals have picked up new capacity and dealership networks by rapidly striking deals with local partners. DaimlerChrysler chief Jurgen E. Schrempp doesn't want to be cut out. Ford is not as ardent as DaimlerChrysler, and it will not comment on any deal. But it is also eyeing Mitsubishi as a partner--possibly to check DaimlerChrysler's Asian ambitions.

But any suitor of Mitsubishi should take a hard look at the track records of these cross-border mergers with the Japanese before potentially handing over more than $1 billion for a 34% stake. Despite the much-publicized synergies these alliances claim, the reality is hardly that. Most of these alliances suffer from product problems, culture clashes, and a distinct absence of the rich profits that were hoped for. "These rescue plans haven't really rescued any of these companies yet," says Koji Endo, automotive analyst at Schroders Securities Japan Ltd.

DEADLY COMBINATION. The greatest challenge has been to tackle Japanese auto makers' failings 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 diverse 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 and not simply milk it for Renault's benefit. And 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. Nissan's share of the Japanese market fell to 13.7% in February, from 14.3% a year earlier.

Many former Nissan drivers have defected to Toyota, whose models this season have more kick. Nissan can ill afford to run on empty until a jointly designed and built Renault-Nissan car is ready. 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. Nissan is not alone. On an operating level, Isuzu, which is 49% owned by General Motors, is looking at a $200 million loss for 1999.

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 overseas or remain vulnerable to volatile currency fluctuations.

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. The problem: Mazda depends on exports for 60% of its revenues, and a stronger yen is squeezing company profits.

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

UNTIMELY EXIT. And Ford executives at Mazda still have trouble convincing employees to accept drastic restructuring. Mazda's former president, James E. Miller, 55, surprised investors and Mazda employees alike when he abruptly resigned in December--officially for health reasons--after only two years at Mazda. He announced that Mazda board members had appointed Mark Fields, a 39-year-old vice-president drafted from Ford, to replace him. Analysts suspect problems with Mazda's union were the real reason for his speedy 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 passenger cars and create commercial vehicles in Japan. Neither alliance ended well. Mitsubishi may be more cooperative this time. "If Daimler walks away from this one, Mitsubishi looks very vulnerable," observes Steve Usher, automotive analyst at Jardine Fleming Securities Ltd. in Tokyo. Then again, Mitsubishi employees hope that even if Daimler takes over, the company payroll will stay untouched. There's no guarantee of that.

Working within Japan's societal constraints may be important, but so is survival. If Mitsubishi and its foreign white knight agree to cut costs, their merger could succeed beyond anyone's dreams. But the formula for success in Japan is an elusive one.

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