<<BACK TO HYUNDAI

DC bites the bullet

It has been a tough year for the world's fifth carmaker. The partnership with Chrysler has proved to be more difficult than anticipated and the relationship with Japanese arm Mitsubishi has ended abruptly. Smart seems to be the only smart decision the carmaker has made in recent years, but even the small carmaker may face problems now that Mitsubishi is out of the way.

It looks like the Mitsubishi rescue mission is over. In an extraordinary meeting held on the 22nd April the board of management and the supervisory board of DaimlerChrysler decided not to participate in a capital increase planned by Mitsubishi Motors Corporation (MMC) and to cease all further financial support. It had simply proved to be too much of a costly affair for DC and it could no longer justify the increasing expenses vital to MMC’s survival.

It all began back in 2003, following the earnings collapse of MMC. DC stepped in, offering the substantial financial resources required to guarantee a sustainable financial recovery. Together with the major shareholders of the Mitsubishi Group, DC tried hard to establish a solid financial structure, but the plan failed.

Things headed for the worse a few days after the April announcement when Rolf Eckrodt stepped down as MMC president. The carmaker said it would soon appoint a new president, but in the meantime Keiichiro Hashimoto, board member and chief financial officer, would oversee ongoing business. Commenting on the timing for his resignation, Eckrodt pointed to the decision of the DCsupervisory board neither to participate in a capital increase nor to grant further financial support to his company.

With staggering reported debts of around €8.4bn ($10bn), plus a market capitalisation of only €2.8bn ($3.3bn), MMC’s case is not looking too good. Additionally, in the year to the end of March 2004, the carmaker expects to record a €553mn ($660mn) net loss. Having already sunk nearly €2.5bn ($3bn) into the company, even the architect, DC boss Jürgen Schrempp, could no longer justify any further investment.

Graeme Maxton, partner at automotive consultancy Autopolis in Singapore, is two-sided about the decision. On the one hand he thinks it was right for DC to pull the plug when it did, but on the other he foresees it as a real disaster for both companies. “Schrempp or someone should be held responsible for it as it is damaging for both firms,” he says.

Mitsubishi Corporation has stated that it only needs €2.6bn ($3.2bn) to save MMC and that the €5.4bn ($6.4bn) rescue money quoted before by DC was exaggerated, though the company refused to comment.

Former owner Mitsubishi Group, led by Mitsubishi Corporation, Mitsubishi Heavy Industries and The Bank of Tokyo-Mitsubishi have temporarily stepped in with a reported initial investment of around €1.1bn ($1.4bn). The Group has said it will draw up a new mid-term business plan aimed at revitalising MMC’s operations. Yoichiro Okazaki, managing director at Mitsubishi Heavy Industries, will head up a business revitalisation team and has promised to finalise the plan within a month. Eckrodt said he strongly welcomes this decision. „Based on my sense of responsibility, I decided to make way for the new team around future chairman Okazaki.“

Failing global strategy

DC Finance director, Manfred Gentz, said at a press conference held following the announcement that the Asian region is one of the fastest growing and that the company is designing a new strategy for there. This has admittedly been DC’s weakest link even before the MMC disaster, though he announced: “It is too early to give further specification now.”

However, it is not just the Asian strategy that needs rethinking, but also DC’s general global strategy, especially if it wants to become a global player much in the way of General Motors. “Mitsubishi wasn’t just an Asian strategy,” says Professor Garel Rhys, industry analyst and director of the Centre for Automotive Industry Research at Cardiff Business School in the UK, “it is part of DC’s world strategy to become a truly global player.”

Right now, though, DC lacks market share in certain key areas. For instance, Chrysler cars sell well, but predominantly in the US and Canada, Mercedes-Benz cars are also a popular choice, but within a higher income bracket and Smart is just a niche carmaker. Therefore what the company desperately needs in order to compete on a global scale are world cars, ones that could have been built by Mitsubishi and ones that are built by Hyundai/Kia.

“Daimler is a very strange global player,” notes Rhys. When it merged with Chrysler, it failed to produce the global car company that people assumed it would. Interestingly enough DC is a very successful global commercial vehicle company, but has failed on the passenger car front. Perhaps it should apply its CV strategy to this area.

To gain the 80 per cent market share that it was excluded from, DC needed a third arm and this is where MMC had come in. Rhys points out that the carmaker did not see this as its Asian strategy, but as a way of getting into other areas of the world market, including mass markets in Europe, in the Americas as well as Asia. It is perhaps crucial to turn DC into the same sort of company in terms of marketing reach as GM or Toyota.

“Daimler’s strategy in Asia is almost back to where it started,” says Maxton, “which is healthy sales for Mercedes cars in the wealthy markets in Asia,” meaning Hong Kong, Singapore, Taiwan, Japan and, to a lesser extent, Thailand. DC has a very good position there where the moneyed elite is prepared to pay a lot of money for the Mercedes-Benz badge.

“I suspect the focus will now be on China, which they see as a great hope for the future,” says Maxton, though he believes that China is a risky market to go into with your technology. “It’s not entirely clear to me that Mercedes should actually avoid claiming on the bandwagon.”

German rivals BMW and Audi are selling better and faster in the vast land, mainly due to local production and distribution. DC did sign a deal back in September with Beijing Automotive to make, from next year, Mercedes cars and trucks in China, but this is having a negative effect on its relationship with South Korea’s Hyundai which also has a long-term contract with the Chinese company.

The Hyundai story

DC has a 10 per cent share in Hyundai, acquired back in 2000. It also has the option of raising this to 15 per cent. Reports following the MMC announcement speculated that the two are in crises talks, but the two companies have not made any comments on the subject. Maxton, though, thinks the DC/Hyundai relationship is on the rocks. “The Hyundai split is mostly over China,” he admits, “Hyundai sees that it’s big enough itself and doesn’t need Mercedes any longer.”

Rhys is less final about the DC’s future with the Korean, if, he adds, the relationship with Hyundai can be maintained with the right spirit. But does Hyundai need DC? Hyundai is a big player in its own right. It has impressively improved its market share in areas like India, where it is currently at number three, China, the US and even in Europe, with the recent Slovakia operation. However, it can still benefit from having DC looking after its interest.

Despite its size, Hyundai is well behind the six global giants. “If one was looking ahead with a degree of foresight and statesmanship, then to be within the DC empire would probably give you a safer future than going it alone,” says Rhys. “I think Hyundai does see the merits of being part of DC. Even if the shareholding is 20 per cent you still have a great deal of autonomy.”

On a more negative note, the progress with DC in joint efforts has been slower than both sides would have liked, though the MMC split may actually bring Hyundai and DC closer together. “DC is in a much weaker place than it was before and so the Korean carmaker is asking itself if it really needs Mercedes anyway. Hyundai is one of the biggest car companies in the world now,” Maxton reminds us.

Despite both arguments, Hyundai could be an alternative to Mitsubishi, though the ideal would be to have both companies. It is an alternative card and Hyundai is in a much better financial and economic position than MMC.

Hyundai could be a vehicle for DC to take a big stake in the Asian heavy industry market. However, Mercedes-Benz is a already a world leader when it comes to commercial vehicles and now that it owns 65 per cent of Fuso, MMC’s heavy truck division, it does not really need another CV presence in the region. “Mercedes can grab some of the truck market through Fuso, but what it desperately needs there is to have a middle market brand,” says Maxton, which is what it was trying to do with Mitsubishi.

Sharing technology

Right now, both the Forfour and Colt are in full production at the MMC NedCar plant in Born in the Netherlands. Although the plant has a lower capacity, DC is planning to make around 280,000 units a year, though this was announced before the MMC split and the carmaker has not comented since. Currently the plant makes the Forfour and the five-door Colt, with a three-door following in January 2005. NedCar is also home to the Space Star minivan. The site is capable of annual productions of as much as 300,000 units. On top of this, much technology is shared across the DC group, that includes MMC. The crucial question is what will happen to the joint ventures now that the relationship isn't as chummy as before?

Some people are assuming that these ventures could continue. “If divorce turns into something very acrimonous, then the position of co-operation can be more difficult,” says Rhys. “The history of joint ventures, especially in the motoring industry, is one in which most fail, because the companies start to diverge in their intent. If the break is sour then it will not be easy to maintain the current climate or indeed to keep the objectives the same.”

Can DC become a global player?

Daimler perhaps saw Mitsubishi as a manageable problem. Five years ago it had turned down the opportunity to help Nissan, which it saw as an overwhelming challenge and one that would not respond to treatment. How wrong where they in retrospect.

MMC is a much smaller player in terms of its market reach. “If you could get the Nissan turnaround, you were able to unlock into the economies of scale immediately because they were there,” says Rhys. MMC, on the other hand, is a much smaller player than other Japanese companies Toyota, Nissan and even Honda. It is down there with the likes of Subaru and Isuzu.

Additionally, Renault succeeded with its Asian strategy not only because the French carmaker invested thoughtfully in its bankrupt partner Nissan, but because it, too, admitted to its shortcomings and dealth with them.

Perhaps blame cannot be placed solely on DC. MMC like Nissan could have changed its ways and not relied completely on the German saviour. Rhys points out that the DC did take very serious action and placed some of its own people in charge of the company over two years ago, though some say they were not its best stock.

“They were addressing the issue, the number of platforms, the joint ventures with MMC were on the up, but what is clear is that you are dealing with a very conservative company,” says Rhys referring to DC. Even the Japanese claim it to be one of the most conservative companies in Japan, which is saying something.

Additionally, there were some serious issues to do with quality control at MMC that the parent company chose to ignore. In 2000, for example, the carmaker was fined for withholding customer complaint reports from the Japanese government; it had been affected by more than two million vehicles under recall in the years since; and the company is still recovering from a €420mn ($500mn) loss from the “triple-zero” sales scheme that provided new-car loans to US customers with bad credit. Only in April, MMC announced another recall of 81,531 cars in its home market of Japan, for design issues that could cause the wheels to come off. Perhaps DC did not do enough in time to save the brand image.

Many things went wrong, including a lack of insight from the German/American company, but can anything be salvaged from the ruins? “By losing this strategy their entire global strategy is ruined,” claims Rhys. Though he adds that in theory they can keep the joint ventures going.

He argues that what has happened shows that all three – DC, Chrysler and Mitsubishi – need each other. Gains in terms of economies of scale, production and marketing are so large that something could be rescued from the wreckage. DC is perhaps rightfully saying that it is not prepared to bankroll a company that clearly has not yet confronted its demons. If it does, then it would look at things differently.

Looking at the wider implications of what has happened at DC as a whole, Maxton comments: “We need to work this out before thinking of what it will do in Asia,” including the costs of the fallout and what it could do to the company’s reputation. “Chrysler in the US is facing problems, the Mercedes-Benz brand is suffering from poor quality, and so there is an awful lot to fix. The temptation is to push into Asia as there may be rapid growth, instead they need to concentrate on more critical issues at home.”

So is the global strategy over? DC insists that it will continue its strategy of having a presence in every major market and segment, but perhaps Schrempp’s vision of a global carmaker forged from three different companies needs to be re-thought. By investing in MMC, Schrempp had sought to add an Asian dimension to his strategy Perhaps Hyundai can complete this mission.