Autos

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

(Updated )

When facing trouble, you can either close your eyes and hope it will go away or confront it head-on. Nissan appears to be following the latter strategy in dealing with Mitsubishi Motors' falsified fuel-economy tests.

Japan's second-biggest carmaker will take a 34 percent stake in Mitsubishi, Chief Executive Officer Carlos Ghosn said Thursday. In return for the 237.4 billion yen ($2.2 billion) purchase of new shares in the smaller company, it will get a proportionate number of board seats and the right to appoint Mitsubishi's chairman, Ghosn said.

The move is a bold way of inoculating Nissan against the fallout from 25 years of false testing data at Mitsubishi. Sales of Nissan cars fell 22 percent in Japan last month, steeper than the 15 percent slump suffered by Mitsubishi (which manufactures minicars for its bigger partner). Based on Mitsubishi's most recent statements, more mis-tested vehicles were sold under the Nissan brand than its own marque.

Bringing It All Back Home
Number of Mitsubishi-made vehicles sold with improper testing data through March 2016
Source: Company statement: http://www.mitsubishi-motors.com/publish/pressrelease_en/corporate/2016/news/detailg420.html

The approach in many ways resembles the 1999 deal that enabled Renault under Ghosn to buy control of Nissan. Like Nissan in the late 1990s, Mitsubishi has pockets of strength but has experienced a dramatic plunge in value. Nissan can understand Mitsubishi's predicament because ``we have been in trouble not a very long time ago," Ghosn said at a briefing Thursday.

Little Brother
Operating cash flows at Mitsubishi are about a quarter to a third of those from Nissan
Source: Bloomberg data
Note: Nissan quarterly data has been consolidated into half-years to match Mitsubishi.

While Mitsubishi's operating cash flows have tended to run at about a third to a quarter of those at Nissan, its market capitalization has been a fifth the size in recent years. That's dropped further in the wake of the testing scandal, with Mitsubishi valued at about 11 percent of Nissan as of Wednesday's close.

Discount on the Showroom Price
Mitsubishi's market capitalization has trailed Nissan's for years. The difference has only widened over the past month
Source: Bloomberg data

Nissan's main asset in this deal is its 1.4 trillion-yen cash pile, which would be sufficient to buy Mitsubishi's shares almost three times over at current prices. Cash isn't a great asset to hold at current Japanese interest rates, and a partial or complete takeover would help plug a few of the remaining gaps in Renault-Nissan's global empire. Ghosn called out Mitsubishi's strong performance in Southeast Asia and SUVs. In Thailand, a combined Nissan-Mitsubishi would stand a good chance of overtaking Honda and Isuzu for second place, behind Toyota.

Thais That Bind
On their own, Mitsubishi's and Nissan's unit sales are too small to take on Thailand's biggest car marques. Together, they look stronger
Source: Bloomberg Intelligence

There's another, more challenging resemblance to the original Renault-Nissan deal. It's only worth Nissan's while dumping cash on Mitsubishi because it's buying some degree of operational control. But that will bring Ghosn up against one of Japan's most formidable keiretsu -- the interwoven networks of enterprises that still wield power in the country's business world.

While the proportionate allocation of board seats in the deal would at least be an improvement on the current setup, which is dominated by veterans of the Mitsubishi keiretsu, Mitsubishi group companies will still hold more than 30 percent of the shares after the deal is complete, the carmaker's CEO Osamu Masuko said Thursday. That should leave them more or less even with Nissan.

Ghosn has dined out for almost two decades on how he took on the now all-but-forgotten Nissan keiretsu and won, but in that instance he was dealing with an industrial group that was already fatally wounded by Japan's 1990s property crash and the 1997 collapse of its life-insurance business.

The Mitsubishi keiretsu will be a tougher nut. The carmaker's largest shareholder, Mitsubishi Heavy, is forecasting its highest operating profit in at least a quarter of a century next year. Mitsubishi Corp., the largest of Japan's trading companies by market value, and Mitsubishi UFJ, the country's biggest bank, also have key shareholdings.

The 34 percent stake will give Nissan veto power over management decisions, ``but I don't want you to think in this that we are getting into a power struggle,'' Ghosn said. ``We don't believe in power struggle.''

It's a laudable sentiment, and Ghosn's considerable diplomatic skills have enabled him to hold together the Renault-Nissan alliance for 17 years while adding a manufacturing tie-up with Daimler and control of Avtovaz, owner of Russia's Lada brand.

As empires grow bigger, though, they get harder and harder to manage. His biggest test still lies ahead.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates with details from announcement and Ghosn statement in second and seventh paragraphs, Ghosn comment in third-last.)

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net