Mitsubishi, an Unlikely Electric-Vehicle Pioneer

Compared with Japanese rivals Toyota (TM) and Honda (HMC), Mitsubishi Motors (7211.T) isn't renowned for its environmentally friendly lineup. Indeed, while Toyota was creating a market for hybrid cars with the Prius, Mitsubishi struggled to survive following an ill-fated tieup with Daimler (DAI) and Chrysler. The company has only made an annual profit four times this decade, and in the year ended March 2009 it lost $590 million on sales of $21.1 billion.

Yet when it comes to electric vehicles, Mitsubishi has emerged as an unlikely pioneer. At a time when global sales are plunging, this month the Tokyo automaker will begin the first deliveries of its i-MiEV to customers in Japan, making Mitsubishi the first major player to begin mass production of EVs.

While initial production this year will be limited to 2,000 and on a lease-only basis, Mitsubishi is taking orders from retail customers who are willing to pay around $33,000. As the company ramps up production, exports to Europe will follow in late 2010 and to the U.S. in 2011 or 2012. In Europe, Mitsubishi will also build EVs for PSA Peugeot Citroën (PEUP.PA), which already sells two SUVs based on Mitsubishi's Outlander and shares a factory with the Japanese carmaker in Russia.

Green Is a Necessity

For Mitsubishi President Osamu Masuko, the automaker's plans for green cars are a necessity. "We have to understand that the automotive industry is facing a big change; the business model that worked for the last century will not be sustainable in the future," he said in a recent interview at the company's Tokyo headquarters. And with reserves of oil diminishing and growing customer interest in alternative energies, Masuko, who has been using a chauffeur-driven red-and-white i-MiEV for a year and a half, reckons developing environmentally sound products is key to the company's survival. "We need to show concrete actions on how Mitsubishi Motors will meet these [challenges]," he says. "It's important to take the first step."Mitsubishi could certainly do with a boost. The automaker is pushing ahead with its electric plans at a time when the wider auto industry is in crisis. With sales depressed in most markets, Mitsubishi expects worldwide sales to plunge 17%, to 836,000 vehicles, during the current financial year, down from 1 million last year. In the U.S., June sales slipped 42%, to just 4,362. And even if sales recover, analysts aren't confident of a quick return to profit. Andrew Phillips, an auto analyst at KBC Securities in Tokyo, projects that Mitsubishi will make a net loss of $211 million during the current year and make only a small $105 million net profit by March 2011. "Their foremost priority is survival," he says.

The i-MiEV, based on the popular Mitsubishi 660cc i minicar, is just the beginning. Masuko says the company will follow up with a slightly larger electric vehicle of a similar size to the Honda Fit or Toyota Yaris compacts, and a commercial vehicle based on the i-MiEV. Mitsubishi will aim to increase the distances its EVs can be driven on a single charge to 200km, compared with the i-MiEV's range of 160km (100 miles). Another idea under consideration is to offer customers a choice of ranges when they buy the car, including cheaper models that travel shorter distances on a single charge.

Masuko also dismisses concerns about the reliability of lithium ion batteries—a relatively new technology for autos. In the Mitsubishi i-MiEV, the batteries are protected by both the car's rigid skeleton and a second anti-impact cage. Computers will control charging and continuously monitor the performance of each cell. With so many protections built into the electrics, gasoline is "far more dangerous," he says.

Way Out in Front on Electrics

At the Tokyo Motor Show this fall, Mitsubishi will show the second tenet of its electric strategy: a plug-in hybrid vehicle that, like its EVs, will use lithium ion batteries supplied by GS Yuasa, a Kyoto battery maker. Masuko is tight-lipped on what kind of performance customers can expect from the plug-in except that the system will be used in larger vehicles.

If all goes to plan, 20% of Mitsubishi sales by 2020 will come from either electric cars or hybrids. While it is difficult to make comparisons with other carmakers, that makes Mitsubishi's green plans ambitious by rivals' standards. Toyota and Honda, which account for more than 90% of global hybrid sales, are aiming for roughly 10% of sales to come from hybrids by the early 2010s.

Still, while the i-MiEV has been getting plenty of attention, particularly in Japan, industry watchers aren't convinced that the company's strategy will pay off. Analysts agree that long-suffering employees—currently stomaching pay cuts and smaller bonuses as part of cost-cutting measures—may be encouraged by the company's leadership in electric vehicles. And as Toyota has shown with its hybrids, a "green" image is hugely valuable to an automaker. Indeed, shares in Mitsubishi, which is popular with retail investors, have risen a healthy 36% this year even though analysts, wary of falling sales and Mitsubishi's also-ran status in the U.S., tend to shy away from recommending the company's stock.

Analysts' concerns are understandable. They worry that Mitsubishi's EV and plug-in hybrid plans will do little for the bottom line. Mitsubishi says it expects the business to break even once annual production reaches 30,000 in around 2013. Yet that relies on each sale receiving a substantial government subsidy, In Japan, customers buying an emissions-free i-MiEV receive about $15,000, which brings the price down from around $48,000. While increased production will cut costs, Masuko accepts that the company can't rely on subsidies indefinitely. "We must quickly find ways to reduce costs," he says.

Will Customers Bite?

Then there's the question of creating demand. For all the talk about electric cars, many customers will be put off by high prices and short driving ranges. Mitsubishi points out that the i-MiEV's 100-mile range is ample for many drivers. In Japan, for instance, 90% of weekday journeys are less than 25 miles. And, in time, the automaker hopes to bring the retail price down to around $20,000.

But that's still way more expensive than gasoline-powered cars of a similar size. For instance, the 660cc Mitsubishi i minicar—the gasoline version of the i-MiEV—has a starting price of $11,500. Other minicars, such as the $9,300 Nissan (NSANY) Pino, are even cheaper. "[An electric vehicle] may attract some customers to the company, but I don't think it makes good business sense," says Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo.

KBC's Phillips is also concerned that, while Mitsubishi's red ink looks relatively light—Toyota expects to lose $5.5 billion this year—some of the savings being made today could hurt future sales. For instance, reduced spending on marketing could weaken the company's brand image and make it harder to win sales once business begins to pick up. "If you lose your visibility, people start to lose confidence in the brand," he says. "I'm not sure it is the smart thing to do."

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