Mitsubishi Motors scandal adds to auto industry’s reputational woes

The Mitsubishi Motors Corporation (MMC) fuel economy issue of April 2016 is the latest scandal to hit the auto industry, at a time when consumers worldwide are already suspicious of the fuel economy and emissions performance claims of the world’s automakers. Although nowhere near as significant as the VW emissions scandal, the Mitsubishi issue comes at a difficult time for the auto industry.

The facts of the case are still emerging, but the picture so far seems to be as follows.

First, MMC staff appear to have misrepresented data from tests related to fuel economy, by presenting the ‘best’ figures from multiple tests, rather than the average values across these tests, as they should have done.

Second, MMC violated certain Japanese laws by using “an unapproved testing method”, specifically with respect to rolling resistance and air resistance (aerodynamic drag). There are no details of this yet, but it is widely known that around the world cars have been tested in configurations not likely to be found under normal driving conditions, specifically to improve their official fuel economy figures. Such configurations include the over-inflation of tyres to reduce rolling resistance and door openings being taped over (or body components removed) in order to reduce drag.

In Europe, regulators have been criticized for turning a blind eye to such practices. The US has been rather stricter – in 2014, for example, Hyundai Motor and its affiliate Kia were penalized for understating the fuel consumption of models sold in the US.

The latest issue will hurt MMC, which is already one of the world’s smaller and weaker auto makers. The fuel scandal knocked about 15% off the value of the MMC’s stock in the days that followed the announcement. The episode also serves as an unwelcome reminder of the reputational damage that MMC faced in the early 2000s when the company suppressed safety-related data.

MMC is a relatively fragile company in a very competitive industry. Its parent, the Mitsubishi Corporation Group is a huge enterprise, employing over 70,000 people, but is under pressure in a number of its business areas at the moment, for reasons unconnected to car-making.

Two important questions are: ‘How long the Mitsubishi Corporation Group is willing and able continue to support MMC?’, and even assuming it wanted to, ‘What are its exit options in a society in which merger and acquisitions are still relatively rare?’ By international standards, the Japanese auto industry is notoriously unconsolidated, with eight domestically-owned automakers. In many other business environments, one would expect the an enterprise like the Mitsubishi Corporation to try and sell MMC, possibly to another car maker, if one could be found that was willing to buy. This is not so easy in Japan…

Disruption from Kumamoto Earthquake Hits Toyota Production

George Olcott, in Tokyo and Nick Oliver, in Edinburgh

Toyota announced yesterday that following its total closure of assembly plants in Japan from 20 April due to the Kumamoto earthquake, production would resume in stages from 25th April.

By 28th April, it is forecast that 18 of the 26 lines currently shut down will resume operations with production initially reverting to 80% of pre-earthquake levels.

A major bottleneck has been the complete closure of supplier Aisin Seiki’s Kumamoto plant, which produces key door components for Toyota. Aisin is making arrangements for overseas plants to supply these parts.

In other areas, particular in the recovery of local infrastructure, we are seeing many examples of the kinds of highly cooperative inter-firm behaviour that contributed so significantly to the rapid recovery of the supply chain in the wake of the Tohoku earthquake in March 2011, as described here.Examples include:

Electricity: regional electric power utilities located in Chubu (the Nagoya area), Kansai (Osaka) and the island of Shikoku have dispatched 500 employees to help Kyushu’s local electric power utility to help restore supply.

Gas: Tokyo Gas and Osaka Gas have sent around 1800 employees to help the local Kyushu gas utility to restore gas supply and detect and repair gas leaks. 500 vehicles are being sent to Kyushu by these gas utilities as part of this effort.

Such efforts to restore the badly damaged local infrastructure will be critical in the overall efforts to get the supply chain back to normal.

The resilience of Japan’s supply chains is tested again

By George Olcott in Tokyo, Japan, and Nick Oliver in Edinburgh, UK

Only five years after the devastation of the Tohoku Earthquake which caused a massive tsunami, the meltdown of the Fukushima nuclear plant and disrupted supply chains around the world, Japan has experienced another major earthquake. This time the quake was centred on the city of Kumamoto on Japan’s southern island of Kyushu. The force of the latest earthquake is equivalent to that of the 1995 Hanshin earthquake, which caused nearly 6000 deaths and devastated the city of Kobe.

Mercifully, the casualties from the latest earthquake are far fewer than the Hanshin or Tohoku earthquakes. However, questions are already being asked about the security and resilience of global supply chains.

Kyushu, like Tohoku, has a high concentration of industrial facilities, many of them vital links in the supply chain of key industries such as automotive and electronics. Many companies have already had to halt production at sites affected by the earthquake. Examples include:

  • Toyota, who have stopped production at some sites from at least 18-23 April.
  • Honda, who have suspended motorcycle production at their Kumamoto factory from 18-22 April.
  • Daihatsu have stopped production at their Oita and Kurume factories until 22 April.
  • Mitsubishi Motors have suspended production at their Okayama light vehicle plant until 20 April due to lack of parts.
  • Renesas, who have stopped production of semiconductors at their Kumamoto plant and are considering temporarily moving production to another location.
  • Sony have stopped production at their Kumamoto semiconductor factory. This will impact on the production of Sony digital cameras and smartphones

If previous disasters are anything to go by, we can expect a flurry of reports that dwell on the risks that just-in-time logistics pose for supply chain resilience, and how day-to-day efficiency comes at a price when disaster strikes.

Our research into how Japanese companies recovered from the Tohoku Earthquake, which so badly ruptured many supply chains, suggests a much more optimistic picture. We found that in 2011 an abundance of social capital (goodwill, essentially), both within and between firms led the much faster-than-expected recovery of the supply chain in 2011. The existence of strong ties between firms, not just between suppliers and clients but in some cases even between competitors, permitted a rapid, coordinated and focused deployment of resources that aided recovery. (See our California Management Review article on the 2011 earthquake here). Ironically, the very existence of tight, JIT logistics both fosters and requires the development of these close, cooperative relations.

Car industry says goodbye to the Saab brand

The Saab name will not appear on any vehicles produced by National Electric Vehicle Sweden (NEVS), the Chinese-led consortium that has owned the remaining assets of Saab Automobile since 2012, according to a report by Automotive News.

The rights to the Saab name are held by Saab AB, a Swedish Aerospace company. Saab AB sold 50% of its stake in Saab Auto to General Motors in 1989 and exited completely in 2000. General Motors sold Saab to Spyker in 2010, but within two years the company went bust and NEVS stepped in. However, Saab AB controls the use of the Saab brandname.

Since then there have been periodic reports that NEVS will produce electric vehicles based on the Saab 9-3, the most recent in December 2015 – see our post of 21 December 2015 on this.

There are precedents for Saab AB’s action. In 2000 BMW broke up the Rover Group, selling the now-defunct Rover Car Company to the Phoenix consortium and Landrover to Ford. However, BMW retained the rights to the Rover name. Rover went bust in 2005, and its assets were acquired by China’s Nanjing Auto, later absorbed by Shanghai Automotive.

Concerned that use of the Rover name in China might adversely affect its Landrover brand, Ford bought the Rover brand from BMW in 2006, forcing SAIC to develop an alternative brand, which emerged as “Roewe”.

 

roewe Rover logo

Rover…                                                                    …. and Roewe

95% of diesels exceed NOx limits

Which?, the journal of the UK Consumers’ Association (CA), reports that 95% of diesel cars it has tested recently, and 10% of petrol cars, emit more NOx than limits allow. The majority of petrol cars tested by the Consumers Association also failed to meet EU standards for emissions of carbon monoxide (CO).

The Association tests cars and other products in order to help its members with their purchasing decisions.

In the light of the VW emissions scandal, the CA revisited test data from over 300 cars they tested between 2012 and 2015. Under official test conditions, all the vehicles tested were certified as meeting the latest EU emissions standards. However, very few met these standards under the CA’s test conditions, which, the Association claims, are much closer to real-world driving conditions than are the official tests.

Key findings included:

  • 95% of diesel cars tested emitted more n (NOx) than official limits permit;
  • 10% of petrol cars emitted more NOx than limits allow and 65% emitted more CO2 than prescribed
  • Around 10% of vehicles tested were not even able to meet 1993 emissions standards.

The report lists nine diesel vehicles that were the worst offenders – these included Kyundai-Kia, Jeep, Land Rover, Nissan, Subaru and Volvo vehicles.

Petrol-engined vehicles that did not meet standards for NOx or CO included models from Alfa Romeo, BMW, Hyundai, Mercedes, Mini, Nissan, Porsche and Toyota/Lexus.

The CA has removed best-buy status from 23 Volkswagen Group cars as a consequence of the emissions scandal.

There is no suggestion that the latest findings stem from the use of defeat devices of the sort employed by VW. However, they demonstrate the widespread ‘gaming’ of emissions testing that occurs in the industry.

That car makers feel the need to engage in such activity provides further evidence of the competitive stress and strain in the auto industry – stress that is only likely to get worse if there is a slowdown in the global economy.

A full report can be found on the Which? website: www.which.co.uk

Job rotation for VW executives

VW is reported to be considering regular job rotation for its some of its senior staff.

The move, originally reported in the German publication Welt am Sonntag and picked up by Just-auto (an auto industry intelligence service) is intended to address the organisational issues that may have led to the use of so-called ‘defeat devices’ which enable vehicles to meet emissions standards under test conditions.

VW claim that only a small number of its staff were involved in the deployment of defeat devices. The intention of time-limited assignments, if indeed they are actually introduced, will presumably be to prevent collusion amongst close colleagues, of the sort that may have contributed to the emissions scandal.

A practice such as regular rotation has both costs and benefits. On the benefits side, rotation spreads knowledge across functions, fosters cross-departmental networks and cooperation and as such can help organisations achieve coordination, control, and innovation. However, complex, technologically advanced environments require a depth of expertise, specialist knowledge and mutual understanding that is difficult to create and maintain via short, transient assignments.

There is clearly a risk that in fixing one problem, VW may create another.

Saab and NEVS rise from the ashes – again…

Watchers of Saab Automobile, the Swedish car maker which collapsed in December 2011, will be getting used to stories of Saab defying the odds and once more producing cars.

The remaining assets of the defunct auto maker were acquired by a Chinese-led consortium in 2012 who created National Electric Vehicle Sweden (NEVS), with the espoused aim of developing and producing electric vehicles. NEVS only produced a handful of gasoline vehicles before running into financial difficulties.

So it was surprising to see reports in December 2015 that NEVS had received a major order for 250,000 electric vehicles, most of them based on the dated Saab 9-3 saloon. The order, from a vehicle leasing agency, is allegedly worth $12 billion. This was reported by Reuters and by “The Local”, a Swedish (English-language) newspaper, amongst others.
http://uk.reuters.com/article/uk-nevs-panda-electric-vehicles-idUKKBN0U02OF20151217
http://www.thelocal.se/20151217/swedish-job-boost-after-chinese-green-car-order

These pieces carry the remarkable – some would say unbelievable – news that painted car bodies will be produced in Sweden for assembly in China. It is difficult to see any circumstances under which it would make sense to produce vehicles in this way, even assuming that a cash-strapped consortium that has never developed an electric car could do so and produce a mass-market product that is competitive with the electric vehicles of the giant auto firms (such as Nissan, with the Leaf) who have been in the game for some time – and are still struggling to achieve the sales volumes that they seek.

Saab followers may also recall that back in June 2015 Forbes ran a piece reporting that NEVS were to build a $400 million electric car factory in China:
http://www.forbes.com/sites/jnylander/2015/06/29/saab-owner-to-build-400-million-electric-car-factory-in-china/

What is so interesting about the Saab/NEVS story is how it illustrates the gulf that can exist between rhetoric and reality in the auto industry, of which the Saab/ NEVS story is just a particularly extreme example.

Understanding the VW scandal

The Volkswagen emissions scandal has sent shock waves around the world. Why would one of the largest car companies in the world, so successful on many measures, resort to cheating in emissions tests?

VW is certainly not the first, and will not be the last, car company to go off the rails in its efforts to survive in this fiercely competitive industry.

The auto industry has existed for around 120 years and different companies have enjoyed success at particular times. In recent years General Motors, Toyota and VW have vied to be the largest car maker in the world, yet all have experienced major crises. Why?

Recurrent crises in the industry stem from a ‘perfect storm’ of conditions that include long term overcapacity (resulting in lean margins); susceptibility to economic cycles; the need to realise economies of scale; and increasingly diverse and sophisticated markets.

The necessity of economy of scale is toxic when combined with complex and diverse markets. For car companies, too varied a range of models and too much decentralisation to different divisions means duplication and excessive cost; too little and HQ becomes increasingly disconnected from the operations they are controlling, as shown by Toyota’s recall disaster in the US 2010, when its centralised structure proved unable to respond quickly and appropriately to the unfolding crisis.

Such forces fuelled VW’s emissions’ scandal. As with Toyota before it, VW’s corporate objective of becoming the largest car maker in the world would have created huge pressures within the company. In VW’s case meeting this goal demanded a dramatic increase in its sales in North America. VW’s strategy to achieve this was clean diesel, but this had to be executed within a tight performance envelope of engine power, emissions standards, and fuel economy. Something had to give, and in VWs case what gave was any pretence of integrity between emission tests and on-the-road performance.