Chrysler Corp. and longtime partner Mitsubishi Motor Corp. were on different tracks in the late '90s. Chrysler was racking up huge profits on its minivans, Jeep SUVs, and Dodge trucks. Mitsubishi was launching a U.S. rebound of its own: The Japanese carmaker, a proud part of the giant Mitsubishi keiretsu, was determined to succeed on its own with models engineered and designed by its Japanese staff. So when executives from both companies met in 1997 to discuss future collaboration, the partners agreed only to keep building two low-volume coupes together. "We weren't focused on sharing anything. We were going our separate ways," says Richard O. Schaum, Chrysler Group engineering executive vice-president.
Now, Schaum sees only one way for Chrysler and Mitsubishi to proceed--by forging a recovery plan together. Both Chrysler and Mitsubishi are struggling to stanch a flood of red ink. The task of fixing both companies belongs to Germany's DaimlerChrysler, which bought Chrysler in 1998 and a 34% controlling stake in Mitsubishi last year. Now, both Mitsubishi and Chrysler will be unveiling their turnaround strategies at the end of February in meetings in Stuttgart and Tokyo. These plans include ambitious schemes to combine the companies' engineering and design talents and jointly produce big parts of their lineup on shared platforms. The total savings could run in the billions.
The plans represent a degree of co-operation neither side ever contemplated, and they form a part of Chrysler's strategy that investors transfixed by the German-American drama have largely overlooked. Since DaimlerChrysler boss Jurgen E. Schrempp engineered the 1998 merger, few of the promised synergies between Mercedes and its mass-market cousin, Chrysler, have materialized. But Mitsubishi is a mass-marketer, too, so maybe it can make music with Chrysler. "The real, significant savings in DaimlerChrysler are going to come from synergies between Chrysler and Mitsubishi, not Chrysler and Mercedes," Schaum says.
First, though, come the fixes. Chrysler lost $1.8 billion in the second half. This year, the DaimlerChrysler unit could lose an additional $2 billion. Mitsubishi was already struggling last year when DaimlerChrysler agreed to pay nearly $2 billion for the 34% share. Then, in July, the company admitted covering up vehicle defects for 20 years. Losses for the fiscal year ending Mar. 21 are expected at $1.2 billion, on sales of $30 billion. President Takashi Sonobe is now crafting a turnaround with a new chief operating officer, Daimler executive Rolf Eckrodt. Although in Japan only since Jan. 4, Eckrodt already has a team of 20 Germans, Japanese, and Americans working with Mitsubishi staff.
TOGETHERNESS. The Mitsubishi plan may well mirror the Chrysler plan in its toughness. Chrysler is squeezing suppliers for 15% price cuts, laying off 20% of its workforce, closing six plants, and trimming $500 million from dealer-support programs. Eckrodt, meanwhile, is expected to speed up a plan to cut 10% of Mitsubishi's Japanese workforce by 2004. One plant in Australia may be shuttered, as well as one of three underperforming plants in Japan. The plan may call for suppliers to reduce costs by as much as 20%. Eckrodt wants management, workers, and suppliers to get the message. "If we don't all start at the same reference point, then we could have a real problem," he says.
But such cuts will only stop the hemorrhaging. Fixing the underlying problems will require extensive cooperation. Both Schaum and Eckrodt are contemplating ways to profit from Mitsubishi's excellence in engines and Chrysler's flair with design. Scenarios include Mitsubishi engineering the next Dodge Neon and Mitsubishi Mirage small cars, with Chrysler reciprocating on the larger Dodge Stratus, Chrysler Sebring, and Mitsubishi Galant and Eclipse models.
If this teamwork plays out, then Mitsubishi and Chrysler will essentially be merging their small- and midsize-car operations. Schaum says every joint project can prune $100 million or more from costs by eliminating duplicate engineering, saving on tooling, and combining resources to design components. "It starts to add up," says an understated Schaum.
Chrysler and Mitsubishi might also tap Hyundai Motors' small-car expertise. DaimlerChrysler paid $428 million last year for a 10% stake in the Korean auto maker, mostly for its heavy-truck business. But Hyundai also builds 35,000 sedans annually for Chrysler in Mexico. Hyundai's desire for a U.S. manufacturing base will likely figure into DaimlerChrysler's plans, too. "If we play this right, there are lots of opportunities for us throughout Asia," says Rainer Jahn, president of DaimlerChrysler's sales unit in Japan.
Plenty of broader issues could yet complicate a closer alliance between Mitsubishi and Chrysler. Even though Eckrodt is coordinating his moves with Chrysler, his putative boss, Sonobe, has made it clear he intends to run Mitsubishi as independently as possible. The German has paid court to the top officials of Mitsubishi's keiretsu. But Mitsubishi may yet resist the kind of pain that Frenchman Carlos Ghosn has inflicted at Nissan Motor Co.
The trump card in the Daimler hand may end up being Mercedes-Benz technology. If Chrysler and Mitsubishi can craft a mass-market strategy that creates the promised volume savings, Mercedes can offer technology in transmissions and other areas to help beef up their offerings. And Daimler has already proved with its heavy-truck business that it can meld a global operation from different cultures. On Feb. 26, investors will get a much better idea of Daimler's ability to build another global business and what painful steps it must take to get there.
By Jeff Green in Detroit and Chester Dawson in Tokyo, with Christine N. Tierney in Frankfurt and Ihlwan Moon in Seoul
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Copyright 2001, Bloomberg L.P.
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