Path to profit

MITSUBISHI Motors Australia has moved to take the emphasis off the locally-made 380 large car as part of a year-long restructuring designed to return to profitability on the back of a strong portfolio of imported products and an end to the discount mentality in dealerships.

By resisting the temptation to create volume by building cars and supporting them with incentives and discounts, MMAL believes it can sit out the current downturn in large-car sales "almost indefinitely".

Instead of seeking volume, the company has adopted a policy of building the 380 to meet the current rate of demand. Excluding 380s being built for a specific order from Avis, MMAL is currently holding just eight days supply of 380s.

MMAL chief executive Rob McEniry told GoAuto that locking the plant down to 50 cars a day was far less costly than it would be to attempt to drive sales by pushing cars into dealerships and trying to drive demand with massive advertising costs and discounts.

Although not giving a figure, he said that losses on production of the 380 were manageable at current levels and that avoiding the cost of force-feeding the market with 380s was "monumentally in favour of everyone” (both Mitsubishi Motors and the dealers).

Mr McEniry was commenting on MMAL’s latest results which showed a loss of $226 million in the year to March 31 – an improvement from a loss of $400 million in the previous year.

The figure reflected cost savings of some $100 million over the previous year and included one-off costs associated with the end of Magna production, the closing of the Lonsdale engine plant, writing off a number of one-off costs associated with the development of the 380 and asset impairment costs because of the 380 volume drop.

"That is another reason why we are able to keeping doing it (running the car plant) because we have written off a lot of the investment in 380 so we are effectively carrying it for nothing," Mr McEniry said.

Mr McEniry said that, allowing for the one-off costs, MMAL would still not have traded profitably in the latest year to March 2006.

"With the plant in the mix, we are progressively moving to a point where we are continuously cash flow positive (EBITDA) and then we aim to move into positive EBIT and then move into positive net profit," he said. The timeframe was two to three years.

Mr McEniry said his priorities in his first year at MMAL were to "restructure the business to get the foundation right, introduce new products and position 380 within that product mix".

"We have spent the year trying to balance the product mix so that the locally-manufactured car is not in the spotlight and having to be the dominant player.

"To do that we have locked the manufacturing process down so that 380 is an important car but it is only one of a number of important cars in our range.

"So we have introduced new products this year like the Triton, the Pajero and Outlander, broadening the Colt range, introducing things like the Ralliart Colt and the convertible. This is all part of broadening the appeal of the total range and then having a flagship car line like the 380 properly positioned within that group of cars and within the large-car segment.

From top: Outlander, 380 and Triton.

"To support the manufacturing business unit you really need a balanced portfolio contributing to allow you to balance your total business. That is what we have been doing this year.

"One critical part of the restructuring was realigning MMAL pricing, not only the 380, but across the range," he said. "The brand has been carrying bad baggage of being a heavy discounter and that is sometimes caused by getting the price point wrong.

"So we really wanted to make sure that as part of our brand repositioning that Mitsubishi would represent exceptional value. Part of doing that is making sure our retail price is right so you can support your residual values on the way through and some of our products were out of whack.

"So we adjusted the prices of the cars already on sale and with all the new products we have introduced we are market-driven in our price positioning."He said the aim was to bring the prices closer to the actual transaction prices rather than encourage a discount mentality in showrooms.

"That has a flow-through effect to residuals where people can feel secure on what the residual values will be rather than taking a bet on the future. It has worked and we have seen an improvement in 380 residuals and in every other of our car lines."He also said one of his priorities was to wipe the discount mentality out of the dealer network and rebuild the brand around good value rather than low prices.

"One of the factors that influence a trading mentality is a heavy dependence on a locally-produced car. (The thinking is that) you have to keep the volume going to keep the plant going and so on.

"But MMAL had a significant advantage in that it was already a low-volume producer. So the quantum of investment is a hell of a lot different from some of the other players. So we can juggle a bit more with the volume expectations.""Part of pulling back (production) was to stop forcing volumes through the pipeline. If you are forcing cars on dealers they expect more financial support to help them (to move unwanted stock) and then you just get into this negative cycle. They get on the drip you end up with stock you don’t want.

"The plan was to pull back by getting the pricing right first and then getting inventory levels right and then move from a push to a pull system as much as we could."Mr McEniry said the dealers helped with that process because it was "in their interests" as they were not paying to hold stock they could not sell. He also said that the strong success of new imported models meant that in many cases demand was now ahead of supply and that this was also helping to change the old "deal mentality" throughout the network.

"We have managed the stock very carefully so the dealers are not carrying excess inventory which helps their cash flow and their costs." According to Mr McEniry, MMAL was holding "negative plant stock" on current Pajero and Outlander and that dealer orders for the run-out vehicles had exceeded stock levels.

"So we have been very successful in cleaning out our inventory," he said.

On the future of the 380 he said: "On the assumption we can build up the other side of the business (imports), we can keep going virtually forever".

"The key to the future is what will be the replacement product and how we manage that. It will be clearly difficult at that (current) rate to justify massive investments.

"But as we build up new products in the CBU and LCV ranges and balance the total portfolio so that you look at the profit from the total business and not model-by-model you can balance it all out.

"The current level is not ideal. We would like to be double or treble that but we are subject to the foibles of the market."