A Cash-Guzzler Called Mitsubishi

It just got $490 million from Daimler-Chrysler, and its troubles aren't over yet

Collapsing U.S. sales, a rash of recalls, and a dearth of breakthrough models. That about sums up the outlook for Mitsubishi Motors Corp. and its embattled president and chief executive, Rolf Eckrodt. In a move to raise $490 million, Japan's fourth-largest carmaker on Jan. 15 sold a 22% stake in affiliate Mitsubishi Fuso Truck & Bus Corp. to DaimlerChrysler (DCX ), which already owns just over a third of the Japanese carmaker and a chunk of Fuso as well. Eckrodt says proceeds from the sale will afford "extra traction" to "invest in new model development."

Buying control of Fuso gives DaimlerChrysler a good operation that fits well with its commercial truck business. Whether Mitsubishi will ever prove a good partner is still an open question. When Daimler shelled out $2 billion for its Mitsubishi stake in 2000, the Japanese carmaker was supposed to be a valuable ally in firming up DaimlerChrysler's Asian footprint and developing its small-car expertise. Eckrodt was dispatched from Stuttgart to turn the car company around. Results looked encouraging, but a by-any-means-necessary drive to hike U.S. sales resulted in a rash of finance problems, as scads of young Mitsubishi owners proved unable to keep up payments on their cars.

TROUBLES WITH RECALLS. Now the $32 billion Mitsubishi is a fix-it job again. After making money in 2002, it's on track to lose $94 million in the year ending in March: U.S. sales fell a walloping 25% last year. To avert a full-blown crisis, Eckrodt refinanced a portion of the company's short-term debt last fall. It has about $1.6 billion in cash, but Eckrodt probably needs to raise closer to $2 billion to service a $10.5 billion debt and cover new product development. "This deal helps short-term cash needs, but Mitsubishi really needs a lot more money," says Credit Suisse First Boston (CSR ) analyst Koji Endo.

So don't expect the cash-raising to stop here. Eckrodt is expected to sell the remaining 20% in Fuso to other partners in the Mitsubishi keiretsu, or conglomerate, such as trading company Mitsubishi Corp. (MSBHY ) and Mitsubishi Heavy Industries Ltd., whose Chairman Takashi Nishioka has pledged his "utmost support." That should bring $450 million or so at current valuations. Next, a possible $940 million new share offering may be absorbed by Daimler and other key shareholders. Eckrodt hasn't commented publicly, but Daimler Chief Financial Officer Manfred Gentz confirmed talks were under way at the Detroit motor show. Daimler will be careful not to extend its stake to 51% -- when it would have to show Mitsubishi debt on its balance sheet.

If Mitsubishi could raise the $2 billion it needs, it would still have one of the smallest product development budgets around. It spends just 3% of sales on research and development, compared with 7% at Toyota (NSANY ). And though Mitsubishi's styling has improved under chief car designer Olivier Boulay, borrowed from Mercedes-Benz (DCX ) in 2001, quality issues remain. Last year, the Galant and Diamante sedans were recalled with faulty fuel tanks, and the new Colt compact did not race out of showrooms. "We have a real image problem because of our troubles with recalls," laments Nobuyuki Matsuzawa, a 25-year-old salesman at one Tokyo Mitsubishi dealership.

Perhaps more threatening is the ugly slide in the U.S., which makes up 36% of net sales. Last year, Eckrodt recruited Finbarr O'Neill, who masterminded Hyundai Motor Co.'s resurgence in the U.S. O'Neill ended loose financing policies and cut low-margin sales to rental outfits and corporate clients. Mitsubishi's new national ad campaign kicked off on Jan. 19 with a warranty for 10 years or 100,000 miles, whichever comes first, on the powertrain of the Galant. In Detroit, Mitsubishi unveiled a muscular Sports Truck concept car to be made at a Chrysler plant in Warren, Mich. The high-powered Lancer Evolution sports sedan is winning raves from the buff books.

By 2005, Eckrodt wants half of Mitsubishi's new models to share parts and platforms with DaimlerChrylser. Maybe that will save Mitsubishi the cash it needs to put into new designs. Otherwise, the Daimler-Mitsubishi pact will prove one more way to burn money.

By Brian Bremner in Tokyo, with Gail Edmondson in Frankfurt

Before it's here, it's on the Bloomberg Terminal.