TOKYO - Mitsubishi President Katsuhiko Kawasoe's flight to Malaysia late last week was an unsubtle reminder of why DaimlerChrysler wants a stake in his company.
In Kuala Lumpur, Kawasoe joined officials of Malaysia's Proton to announce plans for two new models. Mitsubishi and its partner Proton are strong in Asia's growing markets, making Japan's No. 4 automaker an enticing target.
Mitsubishi holds a 9 percent share of the four largest markets in Southeast Asia: Malaysia, Thailand, Indonesia and the Philippines.
Add the share of Proton, and Mitsubishi has a commanding 23 percent share in those four countries.
Acquiring a stake in Mitsubishi would give DaimlerChrysler entry into the world's fastest growing markets and provide an Asian base for the company.
DaimlerChrysler Chairman Juer-gen Schrempp and Kawasoe are in intense discussions about a possible equity tie-up, according to sources at Mitsubishi.
FOOTHOLD IN ASIA
Hilmar Kopper, chairman of the DaimlerChrysler supervisory board, declined to talk directly about a potential acquisition of Mitsubishi. But he said acquiring a strong Japanese partner for Asian markets 'would be an important move. Without a foothold in Asia - and that means Japan - we will never make it in Asia.'
The German carmaker wants to raise its revenues from Asia, expected to be one of the world's fastest-growing car markets, to 25 percent from about 3 percent last year.
Another part of Mitsubishi's appeal is its lineup of small cars and minivehicles, which are cars and trucks with engines smaller than 660cc, plus its small-car plant in the Netherlands it jointly owns with Ford Motor Co.'s Volvo Cars unit. That would plug the glaring small-car gap in DaimlerChrysler's lineup. DaimlerChrysler recently killed its Java small-car project, but has not come up with an alternative small-car strategy. (See Java story on Page 4.)
For its part, Mitsubishi needs cash. It is struggling under debts of ¥1.75 trillion - about $16.4 billion at current exchange rates - as of Sept. 30. It probably will lose money in the fiscal year to March 31 for the second time in the past three years. In the fiscal first half, when even struggling Nissan Motor Co. Ltd. showed an operating profit, Mitsubishi failed to do so. Since then, currency exchange rates have moved against Japanese carmakers, worsening Mitsubishi's outlook.
By some measures, Mitsubishi is in worse shape than Nissan. At the end of March 1999, the most recent period for which group results are available, Mitsubishi's debt-to-equity ratio stood at 250 percent, well above Nissan's 143 percent. Speaking a year after DaimlerChrysler looked at buying a stake in Nissan and decided not to, Kopper said, 'I'm still happy we didn't do that.' DaimlerChrysler is not interested in 'rescue operations,' he said.
The key to whether DaimlerChrysler buys a stake in Mitsubishi Motors may not lie with either carmaker, however, but with Mitsubishi Heavy Industries Ltd. and the rest of the Mitsubishi Group.
Mitsubishi Heavy owns 23.8 percent of Mitsubishi Motors, making it the carmaker's largest shareholder by far. Altogether, the 28 companies in the Mitsubishi Group own 48.3 percent of Mitsubishi Motors, enough to make or break a deal.
Schrempp is unlikely to accept anything less than a controlling stake of 33.4 percent in Mitsubishi Motors. It remains to be seen whether Mitsubishi Heavy and the rest of the Mitsubishi Group would accept ceding control.
A Schrempp-led drastic restructuring of Mitsubishi may be just what the Japanese carmaker needs. But it is also what the Mitsubishi Group fears. As suppliers to Mitsubishi Motors of everything from chemicals to electronics, the group would not be happy to see DaimlerChrysler apply some of the same medicine that former Renault executive Carlos Ghosn prescribed for Nissan, such as price cuts to suppliers and a halving of Nissan's supply base.
Those fears are 'not relevant,' countered Noriyuki Matsushima, director of equity research at Nikko Salomon Smith Barney Ltd. 'Mitsubishi Motors is going to have to pursue cost reduction regardless' of whether DaimlerChrysler buys a stake, he said.
Still, consider technology. Mitsubishi Heavy is Mitsubishi Motors' partner in fuel-cell development. That research has remained under wraps. If Schrempp discovered Mitsubishi Heavy's fuel-cell work was ahead of the rest of the world, he would be delighted. If he found it was on a par with work elsewhere, he might keep it going. But if he found that Mitsubishi's work was behind DaimlerChrysler's own research, he likely would ax the Mitsubishi fuel-cell project.
Another sticking point could be Mitsubishi's truck business. DaimlerChrysler would like to expand its truck business in Asia, but last year agreed to spin off its truck and bus operations into a new company to be owned 19.9 percent by AB Volvo. In addition, Volvo was to buy a 5 percent stake in Mitsubishi Motors itself. If DaimlerChrysler seeks to reverse either of those steps, doing so would drag out negotiations.
TOP PRIORITY: CASH
Mitsubishi Heavy has its own problems. It recently revised its projected group loss for the fiscal year ending March 31 to $1.3 billion, more than double the $616 million loss it earlier predicted, and is selling some of the securities in its portfolio to cover those losses.
Analysts doubt, however, DaimlerChrysler would end up buying Mitsubishi Motors shares from other Mitsubishi Group companies eager to raise cash.
'What Mitsubishi Motors needs more is the cash, rather than a symbolic unwinding of the keiretsu situation. Most people expect some sort of third-party placement for that reason,' with Mitsubishi Motors issuing new shares to be sold directly to DaimlerChrysler, said Christopher Richter, Tokyo-based auto analyst at HSBC Securities Japan Ltd.