Mitsubishi's Mr. Fix-It?

DaimlerChrysler's Eckrodt has only a short time to save Mitsubishi Motors

One of Rolf Eckrodt's first acts after arriving in Japan in January was to hand out fist-size chunks of the Berlin Wall. The recipients were the 25 highest officials at Mitsubishi Motors. Eckrodt, DaimlerChrysler's top troubleshooter, had labeled each piece "Leave no stone unturned." It was a not-so-subtle message that Eckrodt expected complete dedication to the job at hand: overhauling the ailing Tokyo carmaker--and vindicating DaimlerChrysler's $2 billion investment. The Wall relics had a deeper meaning, too. "It's a symbol of how Daimler and Mitsubishi must come together, like East and West [Germany]," says Eckrodt, now Mitsubishi Motors' chief operating officer. "Japan has to change, like the East." And change hurts. Weeks later, a dozen Mitsubishi Motors execs were sent packing, taking their rocks with them.

DaimlerChrysler's Mr. Fix-It is moving fast. He needs to, because turning Mitsubishi Motors around is going to be far more complicated than DaimlerChrysler anticipated. On May 18, the Japanese auto maker will report its worst earnings ever: pretax losses of $750 million on sales of $31 billion. More telling, it is also likely to post an operating loss--a sign of implosion at the core business level that not even Renault had to contend with when it bought a controlling stake in Nissan Motors Co. in 1999. This year, Mitsubishi Motors will be lucky to break even--and that's only if Eckrodt's hard decisions pay off.

CRUNCH. If Toyota and Honda embody the essence of Japanese excellence, then Mitsubishi Motors represents how much damage the Japanese can do to their own top brands. The company, part of the huge Mitsubishi keiretsu, has traditionally counted on handouts such as money from property sales and credit lines from sister companies to avoid a cash crunch: But the corporate coddling probably delayed restructuring too long. Meanwhile, Mitsubishi has stretched itself thin by competing in too many niches--while fielding few memorable models. This overreaching is partly responsible for the recent recall of 2 million cars plagued with glitches, from defective brake hoses to faulty suspensions. Coordination with suppliers is inefficient, and cost controls are loose. Then there are the spectacular flops, among them the Dignity limousine and the luxury Proudia sedan. No wonder Mitsubishi's sales in Japan have dropped 17% in the past six months (chart).

When DaimlerChrysler bought 34% of Mitsubishi Motors last year, Stuttgart knew about the problems. Yet the Germans figured a standard restructuring job would make the deal worth it all. Mitsubishi would plug a hole in DaimlerChrysler's global portfolio. The idea was that Japan's No. 4 auto maker, a proven force in Asia and, despite its problems, an accomplished builder of small and mini cars, would complement DaimlerChrysler's solid footing in Europe and the U.S. As the automotive world's first global partnership, the DaimlerChrysler-Mitsubishi alliance was to be a test case in squeezing synergies from plants worldwide. DaimlerChrysler and Mitsubishi expected to cut costs by co-developing such models as the next-generation smart minicar.

BLOWOUT. Yet the Mitsubishi mess is worse than expected, and it puts this global strategy at risk. Mitsubishi's problems also up the pressure on DaimlerChrysler boss Jurgen E. Schrempp. Already under fire for the deterioration of the Chrysler division, Schrempp and his team must cope with a blowout in Asia too. Still, DaimlerChrysler is too far along to turn back--and its executives insist Mitsubishi is essential to the plan.

First, they will have to fix the Japanese carmaker. To that end, Eckrodt and his team vow to cut purchasing costs by 15% over three years, slash 9,500 jobs--or 14% of the global workforce--halve the number of platforms from 12 to 6, and shrink domestic production capacity 20%, by closing Mitsubishi's smallest plant by September. BusinessWeek has learned Eckrodt will go even further--dumping inefficient suppliers, cutting costs more aggressively, selling assets, and recasting the brand with a major ad campaign and new slogan. Eckrodt is also likely to play a more dominant role than he wants to admit. So far, the German has taken pains not to upstage his Japanese boss, Mitsubishi Motors President and CEO Takashi Sonobe. However, the recent elevation of five of Eckrodt's aides to top posts indicates that Eckrodt will bypass Sonobe if restructuring falters.

There is no time to waste. Angry shareholders are calling for heads to roll at DaimlerChrysler as U.S. losses keep mounting. And shareholders in Japan are antsy. Mitsubishi Heavy Industries Ltd., which owns 22.6% of Mitsubishi Motors, a stake second only to DaimlerChrysler's, more than doubled its initial estimate of losses last month: It must include the carmaker's poor results in its own profit statement. Some keiretsu officials even hint that they're ready to cut their losses by turning the money-losing auto maker loose, as long as the brand name remains intact. Indeed, DaimlerChrysler has the right to an unlimited increase of its current 37.3% stake in 2003. But it's unlikely to do so until it stanches the red ink at Mitsubishi; the German giant doesn't want the losses to stain its consolidated balance sheet.

LOW PROFILE. If the heavy pressure is daunting to Rolf Eckrodt, he doesn't show it. Unlike former Renault executive Carlos Ghosn--who is quick to trumpet the success of his turnaround strategy for Nissan Motors--Eckrodt, 58, doesn't want to make too much of a spectacle of his work at Mitsubishi. Shortly after arriving in Tokyo, he told a Mitsubishi Motors official: "We don't need any more Frank Sinatras." Indeed, Eckrodt has turned down most interview requests, and agreed to speak with BusinessWeek only on condition that Sonobe be included.

Yet Eckrodt resembles Ghosn more closely than he's letting on. Like the Nissan chief, he went to Japan after earning his spurs restructuring other companies--Daimler's Brazilian subsidiary and rail affiliate Adtranz. That's where Eckrodt earned a reputation for ruthless job-cutting and relentlessly squeezing suppliers, two skills that will come in handy at Mitsubishi. That's if Eckrodt's Japanese colleagues will let him. While Nissan's management was "ready to lay down their swords," says Christopher Richter, an analyst at HSBC Securities Inc. in Tokyo, "I don't think Mitsubishi management is at that stage." It is also worth noting that the Mitsubishi keiretsu collectively still own 37.5% of the carmaker, a shade more than DaimlerChrysler's 37.3% stake.

Still, meet Eckrodt and Sonobe together, and it's clear which is the alpha male: Eckrodt positively fidgets when it's not his turn to talk. Not that Sonobe is a pushover. After all, the 37-year Mitsubishi veteran won his job by rehabilitating the U.S. operations, one of the company's few bright spots. Sales there surged 65%, to 314,417 vehicles, between 1998 and 2000. "Sonobe led the turnaround in the U.S.," says Pierre Gagnon, chief operating officer of Mitsubishi Motors Sales of America Inc. "We think he can do the same in Japan."

But the company's latest setback--a recall involving 1.36 million cars--has apparently given Eckrodt room for some boardroom bloodletting. His Mar. 28 move to replace five top Japanese execs with Germans--four of them under 40--shocked company veterans. "I can't deny there were some misgivings among the rank and file," says a company source. "In Japan, it's pretty unusual to appoint thirtysomethings to senior posts." Even more unsettling, the promotions coincided with the forced retirement of 11 of 38 senior Japanese executives. To cap it off, a new "turnaround promotion" office was established. Its team reports directly to Eckrodt. As Nissan's Ghosn says: "It's not the job title that matters. People inside a company know who's in control."

So much for the notion, suggested earlier by Sonobe, that the restructuring would be largely an extension of plans developed before Eckrodt set foot in Japan. And let no one doubt the German's zeal for his mission. "We will fulfill it," he says, pounding the table for emphasis. Even if it means further job cuts--a notion that doesn't sit easily with Katsuji Hayakawa, president of Mitsubishi Motors Workers' Union. "There are limits to how far we'll go," he says. "We draw the line at chopping off heads. That we cannot accept."

With his team in place, Eckrodt's first task is consolidating or getting rid of a third of Mitsubishi's 600-plus parts suppliers. The goal is to boost purchases from global suppliers--those who can provide parts to plants around the world--from the current 1% of all parts purchased to 20%. That's part of a drive to meet an internal target above the official goal of lopping 15% off overall expenses, says 36-year-old finance specialist Joachim Coers, one of the five new German execs. "The focus is on getting quick wins," he says. "Clearly, procurement is a quick win."

The moves plainly put Mitsubishi's traditional suppliers at risk. Many next-generation models will share platforms with Chrysler, so suppliers must have the scale and financial muscle to meet demand for worldwide orders. Nor does being a longtime Mitsubishi supplier help. "There are no guarantees," says Sonobe, "only because it's a Mitsubishi company." That kind of talk unsettles Akikuni Itoh, who runs money-losing Mitsubishi Automotive Techno-Metal Co. About 90% of its parts go to Mitsubishi Motors. "Eckrodt is right about one thing," says Itoh. "If Japanese manufacturers don't change, we'll all be eaten alive."

Besides sorting out the suppliers, Eckrodt is betting on aggressive brand-building and a more stylish lineup. A domestic ad campaign starting this month will set the tone of a revitalized player. Ulrich Walker, an ex-DaimlerChrysler exec who oversees branding, research, and development, says the company will unify advertising under a global umbrella. Right now, each market does its own advertising. "We've no idea how much we're spending," Walker says. By October, the company hopes to unveil at least one concept car under the direction of new design chief Olivier Boulay, a Daimler veteran who previously worked for Subaru in Japan. The new models will probably adhere to Mitsubishi's traditional strengths: small, fuel-efficient cars and sports-utility vehicles targeted at entry-level buyers.

"WAR ROOM." Can Eckrodt turn Mitsubishi Motors around? He worked wonders in the 1980s at Mercedes-Benz, where he pushed aggressive salesmanship instead of relying solely on great engineering to sell cars. At loss-making Benz do Brasil, he strengthened supplier partnerships, introduced global sourcing, and trimmed the payroll by 3,000, or 15%, his first year. At DaimlerChrysler's struggling Adtranz railroad unit, Eckrodt tracked individual and project performance on a monthly basis. He's bringing that "war room" concept to Mitsubishi as well--and even impressing some senior execs in the Mitsubishi group. Among them is Minoru Makihara, chairman of trading house Mitsubishi Corp. and de facto head of the keiretsu. Of Eckrodt, Makihara says: "He's able to come up with ideas that I had difficulty getting out of Japanese management in the past."

Still, squeezing out a profit over the next 12 months is a tall order for a company with a big lineup but few new models, strong engineering but serious quality problems, and worldwide ambitions but no familiarity with hitting global benchmarks of performance. DaimlerChrysler can't afford to wait too long. "It's the job of Takashi Sonobe and Rolf Eckrodt and his team to get the company turned around," says Manfred Bischoff, a member of both the DaimlerChrysler and Mitsubishi boards.

If the plan doesn't show big savings and rejuvenated sales pretty quickly, the relationship between Eckrodt and Sonobe likely will be the first thing to collapse. The two have made a joint pledge to quit if the company does not break even in 12 months. Given the obstacles and potential for acrimony, one or the other could be out the door--a chunk of the Berlin Wall in hand--well before then.

By Chester Dawson in Tokyo, with Jeff Green in Detroit, Larry Armstrong in Los Angeles, Christine Tierney in Frankfurt, and Jonathan Wheatley in Sao Paulo

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