Mitsubishi Fuel Economy Measurement Scandal

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1 4 May 2016 Client Alert Mitsubishi Fuel Economy Measurement Scandal Introduction On 20 th April, Mitsubishi Motors disclosed that it has manipulated reported fuel efficiency data of four Kei car* models produced at their Mizushima plant: the Mitsubishi ek wagon and its sister model Nissan DAYZ, and Mitsubishi ek Space and its sister model Nissan DAYZ Roox. Although they are the products of MNKV, the Kei car joint venture between Mitsubishi and Nissan, Mitsubishi took a leading role in developing and producing those four models. [*Note: Kei cars represent a mini vehicle category aimed primarily at the Japanese market.] Nissan plans to take more control in developing the successors to its affected models, expected in the timeframe. It is understood that Nissan, while examining the present models performance ahead of the coming redesign, discovered the fuel economy data manipulation by their partner. This is not, of course, the first time Mitsubishi finds itself in a position where it has been found to be misrepresenting key vehicle information. The carmaker deliberately avoided reporting vehicles for recall on safety grounds in 2000 and 2004 alongside major reputational and financial damage, this resulted in a loss of market share, especially in the Japanese market. After the recall problem in 2000 and 2004, the carmaker had tried to rebuild to its former sales level. But this has not proven possible (see chart below). The emergence of another scandal, in the context of the earlier events, implies that the impact will be high. Mitsubishi sales drop after recall concealments in 2000 and 2004 (Light Vehicles in Japan, Units) 450, , , , , , , ,000 50,

2 Sequence of events Immediately after the announcement, Mitsubishi stopped sales and production of the four affected models. As they are all Kei cars, which are sold only in Japan, the impact in non Japanese markets is relatively small in comparison with Japan (so far). In Japan, Mitsubishi sales have halved following the announcement. In Europe and the US, Mitsubishi s local sales companies have stated that manipulated models are not on sale there. However, the authorities in Japan suspect that there are other models whose fuel efficiency data was distorted. Mitsubishi itself admits that misreporting of fuel economy data has been taking place for over two decades, and has set up an independent enquiry to establish the facts. Consequently, more models, in addition to the Kei cars, are being inspected by the government. If the company manipulated data for other models, and those models are sold outside of Japan, sales in non Japanese markets will be damaged further. As such, a scandal focused heavily within Japan could potentially take on a global dimension, causing serious difficulties for the company (see chart below, showing the share of vehicle sales in Japan and major regions outside of Japan), and reputational damage is already spreading beyond Japan. Finally, Mitsubishi will have to compensate Nissan for damages arising from this issue, and will likely have to offer compensation to customers buying Mitsubishi vehicles also. Mitsubishi Light Vehicle sales in Japan and other markets 2015 Mitsubishi Light Vehicle sales: 1.05 mn units Japan 12% Europe 18% North America 13% Asia Pacific minus Japan 39% South America 6% Other 12% 2

3 Estimated impact on Mitsubishi In response to these events, we have removed Mitsubishi Kei cars from our forecast (ek Wagon and ek Space), with volume redistributed among similar offerings from Daihatsu, Suzuki and Honda. We have also reduced Mitsubishi s sales in Japan, assuming that damage to demand from this revelation will spread well beyond Mitsubishi s Kei cars, and using the impact of the 2000 and 2004 events as a guide to the size of negative market share impact. Other brands should, of course, benefit from Mitsubishi s losses. Mitsubishi has stated that it wishes to look to continue to sell other Kei cars not affected in the initial reports, though their fuel economy data will also be evaluated by the government. However, if the authorities find any other distortions in the data, it will severely impact Mitsubishi s ability to sell such models. Moreover, even if all of its Kei cars receive a clean certification, it will prove difficult to recover some of the lost market share. For the time being, we assume that future sales of the ek Wagon and ek Space will be lost. Changes to Mitsubishi Light Vehicle sales forecast in Japan (units) 160, , ,000 Previous Forecast 100,000 80,000 60,000 New Forcast 40,000 20, Estimated impact on Nissan Nissan has been less forthcoming on its intentions in the Kei car segment, though there are a number of possibilities. Among these, we would rule out the option that Nissan withdraws from the Kei car business altogether since, although Nissan expanded into the Kei car business only to supplement sales in Japan, they have increased in importance and their sales amounted to 35.7% of total Nissan sales in Japan in

4 The carmaker will seek to protect such a large volume. In addition, as public opinion in Japan has been sympathetic towards Nissan s predicament, the reputational damage is low, so recovery will be easier. Nonetheless, it is not clear how Nissan will re start its Kei car provision. There are three more obvious alternatives: 1. Nissan develops and produces its own Kei car. This is not unrealistic, as Nissan has mentioned an intention to develop its own Kei car models and produce them at its Japanese plants in order to improve capacity utilization. Moreover, it was decided that Nissan will take a leading role to develop next generations of MNKV Kei cars, which are expected around However, the carmaker will need to shorten development time by at least a year, otherwise its Kei car sales will fall to very low levels until , making it very challenging to recover. 2. Nissan expands use of Suzuki s Kei car models to replace the DAYZ and DAYZ Roox. This is not unrealistic either. Nissan still rebadges some of Suzuki s Kei cars in this vehicle segment. As the Kei car market has been shrinking gradually, it would also be good for Suzuki to maintain production volume at its plants in Japan. Longer term, one concern here is that Nissan has an intention to develop/produce its own Kei cars. 3. Nissan to continue MNKV, and start producing the DAYZ and DAYZ Roox, and their next generation models. Mitsubishi intends to re start MNKV Kei cars production as soon as possible, and Nissan has not openly discussed leaving the MNKV venture at this stage. However, even if the production is to be re started, it may be difficult for Nissan to maintain previous sales volumes, given the tarnished reputation of these vehicles. Summary and future actions These developments are serious for Mitsubishi and potentially put the group s future in jeopardy. A collapse in sales in the home market of Japan could, perhaps, be withstood, if there is little or no damage in non Japanese markets. However, if the scandal broadens, then not only will Mitsubishi s relatively low World sales volume (by comparison with other global automakers) make it relatively exposed, but the costs of reparation could be difficult to manage. The lasting negative impact on the brand is also a key issue, especially in the context of the earlier scandals. More information is likely to come to light in the coming weeks and months as Mitsubishi conducts its own investigations and reports on the findings, and as independent regulatory testing actions lead to clarification in Japan and possibly other markets. Such changes will be adopted into our forecasts as soon as relevant intelligence becomes available. The above assumptions on Mitsubishi s activity have already been made in the April 2016 Global Automotive Production Forecast. 4

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