Can Mitsubishi Pull out of its Skid?

It has been a year of self-inflicted wounds for Mitsubishi Motors Corp. -- and one of sheer agony for President Rolf Eckrodt. An intense ex-DaimlerChrysler car guy who was dispatched from Stuttgart in early 2001 to fix Mitsubishi, Eckrodt has been working furiously to breathe life back into the brand. He has slashed supplier costs by 15%, eliminated 16% of the workforce, doubled spending on research and development from 2000 levels, and hired top-flight designers. Just months ago, Heart Beat Motors looked like a comeback story.

Not anymore. Mitsubishi's sales in the U.S., its most important market, are tanking. North American sales dropped by 20% in the first eight months of this year, to 189,118 vehicles, compared with the same period in 2002. And a company that likes to boast about its cool, Gen Y consumer base has discovered that young car buyers don't always pay their bills. A wave of bad loans tied to an ultra-generous 0-0-0 financing program -- no money down and no interest or principal payments for a year -- has been a complete disaster.

The debacle already is hitting Mitsubishi's bottom line. In late July, the company announced a projected half-year loss of $683 million and lowered its overall net income forecast for the fiscal year ending in March by 75%, to $85 million, on lowered estimated sales of $23.2 billion. Its stock price has been hit, down 5.1% since early July. "That was a big skeleton that fell out of the closet," says HSBC Securities Inc. analyst Christopher Richter.

No one is more likely to be rattled by the numbers than Jürgen E. Schrempp. The DaimlerChrysler boss spent over $2 billion for a 37.1% stake in Mitsubishi to get a bigger footprint in Asia. Ironically, the bad news comes just as Mitsubishi is overcoming its reputation for uninspired car design. The Endeavor, a stylish crossover sport-utility vehicle with a 3.8-liter V-6 engine launched in March, continues to attract buyers.

Trouble is, Mitsubishi hasn't quite figured out its marketing. The carmaker boasts the most youthful consumer base in the industry. But a lot of young folks browsing Mitsubishi's showrooms simply can't afford the cars in such an iffy U.S. economy. Notes Sam Li, owner of a Mitsubishi dealership in Alhambra, Calif.: "We need to get the message to people who can buy it."

On Aug. 31, Mitsubishi changed its main messenger: It replaced North American Chief Executive Pierre Gagnon with Finbarr O'Neill, CEO of Hyundai Motor America. "You'll see new marketing, new products," says O'Neill. A change in the Endeavor campaign is already having an effect. The new ads feature families, and highlight extras such as rear-seat DVD players, to attract more affluent buyers. Endeavor sales in August in North America rose 30% from July.

Back in Japan, the challenge is quality. Mitsubishi is losing money in its home country, where its market share has been cut nearly in half since 1995, to 5.8%. Last year, nine models were recalled for faulty parts and, in 2000, the company caused a firestorm by admitting it hadn't passed along consumer safety complaints to regulators. Has the trust come back? "I don't know if I can say that," admits Junichi Nishikido, sales manager at a Mitsubishi dealership in suburban Tokyo.

Eckrodt hopes to change that by pumping out great cars, like its well-received 1.5-liter Colt subcompact and Grandis minivan. He also plans to shell out $300 million to overhaul and revamp Mitsubishi's 186-strong dealership network. The former DaimlerChrysler troubleshooter is fanatical about integrating more parts and platforms within the alliance. In Europe, the new 2004 Smart ForFour compact and a yet-to-be-named Mitsubishi will be built at a jointly owned plant in the Netherlands. They will share platforms and 60% of their parts. Chrysler's next-generation Neon, due in 2005, will be built on a Mitsubishi chassis. By 2005, Eckrodt wants 50% of Mitsubishi's models to share platforms with DaimlerChrysler vehicles.

Platform-sharing is key to Mitsubishi's survival. A middle-size player in a capital-intensive industry, it spends just 2.8% of sales on R&D, vs. the 7% of colossus Toyota Motor Corp. For now, Mitsubishi needs to stay focused on basics such as smart marketing and quality control. Oh, one more thing: Watch out for those Gen Y deadbeats.

By Brian Bremner in Tokyo and Christopher Palmeri in Los Angeles

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