Daimler: Now For The Next Repair Job

It's probably going to pump more money into Mitsubishi. That may not help

The pressure is on to deliver a radical fix at DaimlerChrysler Corp.'s (DCX ) 37%-owned Japanese unit, Mitsubishi Motors Corp. Mounting losses and an estimated $8.4 billion in debt have infuriated investors and provoked stinging attacks on the globe-spanning strategy of DaimlerChrysler Chief Executive Jürgen E. Schrempp. "Why did you not recognize the problems sooner?" demanded Klaus Kaldemorgen, head of DWS, Germany's top investment fund, at Daimler's annual shareholders meeting on Apr. 7. "How much more money will you pump in?"

Daimler's supervisory board is wrestling with these questions as it prepares to vote on a bailout plan later this month. To date, Schrempp's $3.2 billion investment in Japan's No.4 auto maker has delivered little but disappointment. Plagued by weak products, poor quality, and disastrous consumer credit policies, Mitsubishi expects to lose $685 million for the fiscal year ended Mar. 31, its first loss in three years, on a 10% drop in sales, to $23.5 billion. In March, Schrempp sent a SWAT team headed by Andreas Renschler, former head of Daimler's Smart division, to design the third turnaround plan in four years. Details of Renschler's bailout strategy are to be announced on Apr. 30, but it's likely to take Daimler's stake above 50% over several years. Estimates of the capital injection needed from Daimler and the Mitsubishi group vary from $5 billion to nearly $10 billion.

Daimler's board is almost sure to back the plan, insiders say, in part because ditching Mitsubishi would be an admission Schrempp's global strategy has failed. "The decision at Daimler is very, very political," says one German auto analyst.

Schrempp insists that Daimler will do the right thing strategically and is reviewing all its options. But taking eventual control of Mitsubishi is the only way to keep Daimler's Asian strategy in place and step up the pace of restructuring. Schrempp also says new products will help reverse Mitsubishi's sliding market share, and that the increased sharing of parts among Mercedes, Chrysler, and Mitsubishi is already paying off. "Synergies have already emerged on the scale of $4.8 billion," Schrempp said at the Daimler annual meeting in early April.

But the jury is still out on how long the cure will take. "You can bring Mitsubishi back to break-even in three to four years," says one Daimler exec. "But this investment will never pay a return. For shareholders, it's money down the drain." Schrempp insists the strategy will pay off long-term.

In the U.S., sales of Mitsubishi cars and trucks plunged 19% in the first quarter. "They've never had enough capital investment -- not for the last five to six years -- to put product on the road," says Wesley R. Brown, automotive analyst at Iceology Inc., a market researcher in Los Angeles. In J.D. Power & Associates' most recent study of initial vehicle quality, Mitsubishi ranked one rung from the bottom with 148 problems per 100 vehicles. In Japan, where Mitsubishi has faced repeated recalls, the brand is yet more tarnished.

Despite these problems, a divorce would jeopardize Chrysler, given the companies' wide sharing of parts. "Operationally, it would be a huge setback for everything they've developed so far," says Arndt Ellinghorst, an analyst at Dresdner Kleinwort Wasserstein in Frankfurt.

Analysts also worry that Mitsubishi's Japanese investors will resist a shakeup until Daimler bumps its stake to more than 50%, which is not expected until 2006. It will take that long to get Mitsubishi's debt under control. "There is no way to consolidate [Mitsubishi's financials] in the short term," says a Frankfurt-based analyst. "It would blow apart Daimler's credit rating."

The 45-year old Renschler resolved startup problems on Mercedes-Benz's M-Class production line in the U.S. and helped overhaul Smart's operations. But insiders say his direct personality may not play well in Japan. As Renschler and his team dig in, no one is counting on a quick fix.

By Gail Edmondson in Frankfurt, with Brian Bremner in Tokyo, Kathleen Kerwin in Detroit, and Christopher Palmeri in Los Angeles

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