Mitsubishi: Fall Of A Keiretsu
On the ground floor of a Mitsubishi building in central Tokyo, there's a historical display. Opening with a photo of founder Yataro Iwasaki, an industrialist of samurai stock, a time line traces Mitsubishi Group's 129-year history from a zaibatsu, or family-run holding company, to the present. It's supposed to impress clients and foreign visitors with Mitsubishi's noble traditions and clout. Yet in a forlorn way, the place has the feel of a museum. That's fitting, because Mitsubishi itself is starting to look like a business relic.
The curators of this display certainly won't be hurrying to update the saga. Just in the past few weeks, the news has told a tale of distress and turmoil at Mitsubishi, long the mightiest of Japan's keiretsu, those huge corporate alliances welded together by shared values, business ties, and webs of cross-shareholdings.
In mid-February, the head of auto maker Mitsubishi Motors Corp. admitted his company was in such bad shape that he would welcome a foreign partner. Then, Mitsubishi Electric Corp. said it expected a huge loss of $330 million. Now, Mitsubishi Chemical Corp. and Mitsubishi Materials Corp. are both forecasting losses of more than $200 million each. Meanwhile, Bank of Tokyo-Mitsubishi Ltd. (BTM), the money machine that once fueled the whole group, has scrambled to collect $2 billion in new capital from other group members rather than suffer the humiliation of going cap in hand to the government for aid.
STRUCTURAL CHANGES. The humbling of Mitsubishi is a devastating blow to Japan. The $400 billion revenues of its top 30 group companies alone represent about 8% of the country's total output. They make everything from Nikon digital cameras to Mitsubishi cars, ships, and processed nuclear fuel. Their collective international assets range from natural-gas reserves off Brunei to Union Bank of California. But now, 13 of its core members have a combined debt of $132 billion and just $58 billion in shareholders' equity, according to Warburg Dillon Read.
It's hard to believe this is the same Mitsubishi that terrified Corporate America a decade ago. In 1989, Mitsubishi flexed its considerable muscle and stunned the world by buying 51% of an American icon, New York's Rockefeller Center. At the same time, Mitsubishi Motors, backed by affiliates and suppliers, was racking up 27% annual sales gains in the U.S. auto market, while Mitsubishi Electric's big-screen TVs flew off the shelves. Japanese academics talked of the "Mitsubishification" of global markets. U.S. lawmakers and executives demonized the keiretsu as dangerous economic Godzillas stomping all over America.
So what went wrong? Basically, the very strengths of the keiretsu system that struck terror in American boardrooms and enabled Mitsubishi to forge its amazing ascendancy in the 1980s are now huge liabilities. Plentiful cheap capital from the group's own banks financed a wild dash for global market share in boom times. So Mitsubishi and the other keiretsu plowed on, until Japan was weighed down with huge overcapacity in a zero-growth economy. The country is now saddled with 11 vehicle manufacturers, 5 integrated steelmakers, 10 semiconductor companies, and 17 money-center banks. "Now electric companies, public works, overseas markets, everything is going badly," says one Mitsubishi salaryman.
Rival keiretsu--Fuyo, Mitsui, Sumitomo, Dai-Ichi Kangin, and Sanwa--are struggling, too (table). Their ability to develop businesses patiently over decades was once much envied. But what these groups' boosters failed to tell is that these practices shot the system through with a deeply ingrained conservatism. In the fast-moving global markets of the 1990s, that is a major handicap. Even in the Japanese market, it is hurting the keiretsu: Kirin Brewery, the Mitsubishi group beermaker, is in danger of losing its No. 1 spot in the domestic market to a nimble Asahi Breweries Ltd. And the corporate collegiality that kept business in-house has sent Mitsubishi and others up blind alleys. One example: sticking with proprietary computer technology when the world moved on to Microsoft Corp. software and Intel Corp. chips. These blunders are costing the keiretsu plenty. "This is not a temporary change due to the recession," says Hiroshi Okumura, a Chuo University professor who studies the keiretsu. "These groups have become weak because of a structural change in the economy."
The way the Mitsubishi keiretsu extricates itself from its difficulties will indicate how Japan itself will emerge from crisis. The prognosis is not good. Mitsubishi's insistence, intended to deflect antitrust enforcers in Japan and abroad, that group companies are legally independent is now taking on an air of reality: Mitsubishi managers are searching for solutions to their companies' problems far beyond the confines of the keiretsu. If that trend continues, the group will eventually break down. Otherwise, it can probably only preserve its integrity by forcing itself through a dramatic reconfiguration.
During Japan's bubble years, Mitsubishi managers felt like lords of the universe. But huge capital gains from real estate and shares robbed them of all sense of the value of money. So keiretsu elders kept on diversifying, feeding the Japanese preference for higher sales rather than profits. This disdain for return on equity is now punishing Mitsubishi. The main Mitsubishi companies average an ROE of just 4%, while some major members of the group have steep negative returns because of huge losses. Contrast that with the U.S., where anything less than 15% is considered poor, or Europe, where big Continental companies are setting goals of 10% or better.
Poor returns and the collective drag of Mitsubishi's obligations have prompted global ratings agencies to downgrade the credit of 13 group members such as Mitsubishi Heavy and BTM in the past year. Mitsubishi Rayon, Japan's largest acrylic-fiber maker, has even been downgraded to junk status. The keiretsu's bank once lent freely to group companies. Now, its hefty Asian exposure--tops among Japan's banks--and low capital ratios are crimping its ability to lend.
Little wonder that an air of gloom has descended over Mitsubishi Village, a cluster of headquarters buildings in Tokyo's Marunouchi district, near the Imperial Palace. Superbright graduates of Japan's elite schools once had it made when Mitsubishi hired them. "There was a sense of security," says Yoko Fujii, an analyst with Jardine Fleming Securities Ltd. who quit Mitsubishi affiliate Tokio Marine & Fire Insurance Co. in 1992. "All employees felt they were part of the elite." No longer. Corporate loyalty is eroding as recent hires quit more often. "We're not doing well. No one understands why," says one twentysomething manager. "Though our economy has changed, our organization hasn't."
Few CEOs would find it easy to manage their way out of this mess. And adding to Mitsubishi's woes, it has never had a group CEO. The closest equivalent to that is Minoru Makihara, 69. He chairs the flagship trading company, Mitsubishi Corp., and so by tradition is leader of the keiretsu.
NOT TALKING. Makihara acknowledges that inefficiencies, ill-considered investments, and glacial decision-making riddle the system. So why can't Mitsubishi's kinyokai, or Friday Club meetings of the presidents and chairmen of 28 Group companies, come up with some ideas? "I'm sorry to say that there has been no meaningful discussion," says Makihara. Instead, the group's bosses seem self-absorbed. "Twenty years ago, there were powerful leaders in the group," he adds. "People are now more concerned with their own problems." Besides, the Friday Club crowd hates to embarrass underperforming colleagues in public. "We never raise topics related to the management of individual companies," says Yasuhiro Satoh, president of Kirin.
Without a consensus among top management, there's little the blue-blooded Makihara, born in London and educated at Harvard University, can do. In past crises, bosses at the four most powerful Group companies--Mitsubishi Corp., Mitsubishi Heavy Industries, Mitsubishi Electric, and BTM--would meet to map out a broad strategic plan. In 1984, for example, the group bought Mitsubishi Oil Co. stock to defend it from a raid by Getty Oil. But today, the pressures are too intense for group members to stick together. "The reality is that Mitsubishi presidents aren't really talking to each other," says Koichi Hori, head of Boston Consulting in Tokyo. "The companies just happen to have the same name."
And they are becoming mutinous, seeking alliances outside the family. Last summer, Nikko Securities Co. broke a taboo by seeking an outside alliance without prior discussion. Although it is Mitsubishi Group's primary investment banker and 20% owned by BTM, it sold a 25% equity stake to what's now Citigroup Inc. for $1.8 billion. With losses mounting, Nikko needed the capital and marketing savvy that the tie-up offered. Yet inside the keiretsu, says Hori, himself a former Mitsubishi Man, the $2 billion deal was viewed as "an act of betrayal."
The mutiny is spreading. In April, money-losing Mitsubishi Oil will merge with outsider Nippon Oil. "Shocking," says an insider. Mitsubishi Motors is ready to talk deals with Ford Motor Co., preferably about technology tie-ups but possibly about an equity stake. "I'm not hesitant to accept foreign capital if I think it's necessary or helps," says President Katsuhiko Kawasoe, 62. Now, there's market talk that both Mitsubishi Chemical and Mitsubishi Trust & Banking Corp. may form alliances with companies in other keiretsu. "That's something we could never have dreamed of several months ago," says Warburg Dillon Read analyst Akiro Kanegura.
At the Mitsubishi Village, top executives in elegant corner offices must confront a terrifying question: Is their fabled keiretsu drifting into irrelevance? To some bold Mitsubishi Men, the answer is yes. Mitsubishi Electric Managing Director and board member Takashi Kiuchi says the keiretsu system is now largely a fiction. He argues that individual members decided a while ago to look outside the group for alliances and new opportunities if it suited them. But he wonders openly whether most executives have yet grasped that unless Mitsubishi companies raise their efficiency, profitability, and business practices to global levels, even new, outside alliances cannot save them. "A lot of people don't want to see it," says Kiuchi. They certainly didn't want to hear it. At the end of February, he was told he'd be off the board by the end of June.
UPHILL BATTLE. What remains of the keiretsu way of doing business is hurting Mitsubishi. Old ties prove costly when partners keep hitting on each other for subsidies and bailouts. Weaker players are preying on the group's dwindling capital resources. Electronics-wire maker Optec Dai-Ichi Denko Co. hit Mitsubishi Electric, which owns a 20% stake in it, for $150 million. Mitsubishi Trust and BTM each agreed to forgive $46 million worth of loans.
The question now is what to do about the most troubled companies before they drain even more capital from the system. Mitsubishi Motors is a case in point. Although the carmaker wants an outside alliance, there's no guarantee it will get one. And in that case, it will need the keiretsu to help save it. It's still Japan's No. 4 carmaker, with $31 billion in revenues. But truck sales, once a big profits earner, are collapsing at home as Japan's economy misfires: The company has lost $1 billion in two years. Its credit rating has plummeted to near junk-bond status, thanks to $17 billion of debt. And neither BTM nor Mitsubishi Trust is in the mood to lend anymore.
Mitsubishi Motors President Kawasoe has fought an uphill battle ever since he took over in early 1997. Lackluster models and a scandal arising from a sexual harassment class action filed the year before at its sole U.S. assembly plant in Normal, Ill., slammed U.S. sales. Then came the collapse of the Thai and Malaysian auto markets, where Mitsubishi companies had invested more than $2.5 billion. Kawasoe has fought back with a $3 billion cost-cutting campaign, asset sales, and job cuts of 1,400 through attrition from its 27,000-person workforce.
Even so, the company relies heavily on a little help from its keiretsu friends. Mitsubishi affiliates buy a third of its trucks and buses. A third of the keiretsu's employees own Mitsubishi cars, such as the Dingo sport-utility wagon and Galant sedan. Group companies also buy 30% of their own fleets from Mitsubishi Motors. Yet "we have only 10% of the domestic market," says Shoichi Yamamoto, a managing director. Some wonder if Mitsubishi really needs a full range of products. "They should get out of cars and focus on trucks," says Stephen Usher, a Jardine Fleming analyst. There's no sign that's in the cards.
A similar insularity has afflicted Mitsubishi Electric. The company relied so much on other Mitsubishi companies for sales of its computers that it was unprepared when Compaq Computer Corp. and other U.S. PC makers hit Japan. Its access to easy capital led to other huge blunders. From 1994 to 1997, it spent $3.5 billion mostly to expand production into high-end 64-megabit memory chips. But a global chip glut and falling prices contributed to an $870 million loss last year--with a $330 million loss expected this year. Now, Mitsubishi desperately needs to focus on a few businesses, such as satellites and defense systems. "It's hard for a big company like Mitsubishi Electric to switch gears," says HSBC Securities Inc. analyst Naoki Sato, "but that is precisely what it needs to do."
In the U.S., a company's board of directors would certainly step in if such disasters were occurring. It's hard to imagine Mitsubishi's myriad boards acting this way. Boardrooms brimming with insiders--as are all of BTM's approximately 50 directors--are often too timid to kill a bad idea or nudge a promising one forward.
Still, things are so dire that, finally, everybody is trying. At the Mitsubishi Corp. trading company, President Mikio Sasaki, 62, is trying to move the company away from the price-sensitive steel and iron business. He sees more of a future turning the company into a global financial merchant bank that will bring companies together for energy development and infrastructure deals. Makihara, his boss, wants to boost return on equity for the trading company to 8%. BTM and Mitsubishi Trust are negotiating a broad tie-up with Sumitomo financial institutions in the pension and asset management business. Mitsubishi Estate is disclosing much more information on the quality of its leasing contracts and now raises 60% of its capital from the global bond market.
There's no denying that many Mitsubishi companies have the managerial talent to carve a profitable future. But the Mitsubishi Group will never be the same again. The elite graduates that Mitsubishi still recruits are increasingly unlikely to become the corporate royalty they assumed they would be. Indeed, they will have to unlearn the first article of faith drilled into new Mitsubishi Men, that the immediate gain of any one member matters less than the broad strategic aims of the whole empire. Otherwise, they may well end up as history--instead of making history as their forebears did.