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…