Mitsubishi: Conquest Or Quicksand For Daimler?

A culture clash could give the German company big headaches

Jurgen E. Schrempp, the uber-boss of car giant DaimlerChrysler, is a guy who likes to be in charge. He's the one, after all, who turned an equal partnership with Chrysler into an outright acquisition. So many investors figured it was just a matter of time before Schrempp tightened his hold on Mitsubishi Motors Corp., the cash-strapped Japanese carmaker that sold a third of its shares to DaimlerChrysler last spring.

Sure enough, when Mitsubishi was assailed for covering up decades of customer complaints, Schrempp pounced. Under the new terms of the partnership announced on Sept. 8, DaimlerChrysler is in the driver's seat--where it likes to be. Mitsubishi Motors President Katsuhiko Kawasoe is stepping down, and the new chief operating officer will be a Daimler veteran, Rolf Eckrodt, 58, chief of the Adtranz rail subsidiary. "This is developing quite positively for us," says one DaimlerChrysler executive. It's widely assumed that Eckrodt will be calling the shots: Germans 1, Japanese 0.

Well, maybe not. Look closely at Daimler's new commitment to Mitsubishi, and it's easy to see plenty of problems that could yet plague the relationship. It may turn out that this is one conquest Daimler could do without.

For starters, the revised alliance turns the rationale for the deal on its head. When DaimlerChrysler first announced the alliance in March, it said it expected to reap the benefits of Mitsubishi's knowhow in manufacturing small cars at low cost. The idea was to use Mitsubishi as a convenient manufacturing partner for a new line of small cars, which would be sold under Daimler's Smart brand around the world. Daimler's purpose was not to overhaul Mitsubishi the way Renault's Carlos Ghosn has dramatically reshaped Nissan.

But now, Eckrodt will be leading what looks like a rescue mission. Eckrodt, whose latest achievement has been closing down Adtranz facilities to prepare the unprofitable unit for a sale to Bombardier Inc., will take along dozens of experts in finance, quality control, and manufacturing. And the Germans will have to get their hands dirty deciding Mitsubishi's car strategy, including the future of its small cars.

To some investors, this looks like a case of the blind leading the lame, given Daimler's limited success with its own line of small cars. "By their own admission, DaimlerChrysler has been unable to make money out of the A-Class and the Smart," says auto analyst Christopher Will at Lehman Brothers. "And now they're supposed to know how to run a small-car business?"

And Mitsubishi is still a big fix-it job: The company is forecasting a $660 million net loss for this fiscal year. Mitsubishi Motors is laboring under almost $14 billion in debt. Interest expense is helping keep the company in the red, while operating margins are less than 1%.

The cash squeeze has limited Mitsubishi's launches to one car this year. This hasn't held it back in the U.S., where vehicle sales are up 34% through August, thanks to gains by its Montero sport utility. But in Japan, the going is far rougher. Toyota Motor and Nissan Motor are launching multiple models in the next 12 months, and Honda Motor is releasing a new version of the Step Wagon, which competes directly with Mitsubishi's lineup. Mitsubishi's Dion minivan is falling well below its sales target of 8,000 a month because of competition from the Honda Odyssey and Nissan Serena.

Eckrodt, who has no experience in Japan, will be navigating some turbulent waters. But Schrempp is intent on making the deal work. The biggest sales growth in coming years is expected to occur in Asia and in the small-car segments, and DaimlerChrysler wants a share of that. Investors, however, remain cool. DaimlerChrysler's stock slid this week to new lows for 2000 in U.S. trading, amid forecasts that Chrysler is set to report a $350 million operating loss for the third quarter. Schrempp has taken charge. But that doesn't mean things are under control.

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