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Mitsubishi Motors' scandal was an accident waiting to happen

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It's a familiar Japanese corporate ritual: a deep bow before the cameras to atone for wrongdoing. And when it comes to the art of public mea culpas, few companies can top scandal-prone Mitsubishi Motors Corp.

[TOKYO] It's a familiar Japanese corporate ritual: a deep bow before the cameras to atone for wrongdoing. And when it comes to the art of public mea culpas, few companies can top scandal-prone Mitsubishi Motors Corp.

On Wednesday, president Tetsuro Aikawa announced his resignation effective June 24, to take responsibility for the automaker overstating the fuel economy of its minicars and improperly testing other models as far back as 1991.

The revelations have cost the company about 35 per cent, or 303 billion yen (S$3.8 billion), of its market value. In another blow to the reputation of Japanese automakers, Suzuki Motor Corp said it used measurement methods not compliant with local regulations, after the transport ministry directed other carmakers to investigate their practices.

The scandal has damaged the Mitsubishi Motors brand and opened the way for Nissan Motor Co to buy more than one third of the company at a deep discount, giving it veto power over major strategic decisions.

Chairman Osamu Masuko said Nissan would send in its own engineers to straighten out the Mitsubishi unit responsible for fudging the mileage data.

Surrendering effective control to a rival is the latest in a decades-long line of embarrassments at Mitsubishi Motors, a troubled also-ran among Japanese carmakers with just one-tenth the sales of Toyota Motor Corp.

It's also a stunning fall for a company at the heart of one of Japan's most powerful corporate constellations, the almost 150-year-old Mitsubishi group, maker of the famed World War II Zero bomber and the nation's first jetliner.

Mitsubishi Motors' propensity for trouble, current and former employees say, is partly the result of an insular corporate culture that never fully absorbed the lessons of its last major scandal back in the early 2000s.

The company covered up safety problems and ignored customer complaints that resulted in unsafe vehicles being left on the road to avoid the embarrassment and costs of recalls.

"We thought we had sufficient investigation after the previous cheating case in 2003, but it was not enough," Mr Masuko said in Tokyo last week, where he spent three hours fielding questions from reporters on how such widespread fraud on fuel efficiency could have occurred. "The problem has deep roots," he said.

Nissan's injection of capital will give Mitsubishi Motors time and resources to investigate a scandal Mr Aikawa, 62, said last month could threaten its very existence. Japan's transport ministry has twice rejected the company's explanations for the misconduct as insufficient.

Avoiding yet another mishap, however, will require deep changes in corporate practices and governance, said the current and former staff, all of whom asked not to be named discussing internal matters. It'll also take much closer outside oversight, they said, which has been lacking.

Of the four outside directors on the automaker's 13-member board, three are affiliated with other Mitsubishi firms.

The employees described an environment where, until recently, staffers tended to stay within the same team for a decade or more and were forbidden from speaking with executives in other departments.

More harmfully, they said, engineers fearful of angering superiors routinely avoided admitting they'd failed to meet targets until the last possible moment.

One such instance occurred in the last 12 months, one of the employees said, when Mitsubishi Motors was working on a refresh of its RVR line of small sport utility vehicles. Engineers misled superiors about the accuracy of data related to fuel efficiency, the employee said, which the company has confirmed.

In particular, two managers in the vehicle development department were fired last autumn after they failed to report an accurate weight of the proposed new RVR design until late in the process, meaning efficiency goals had to be completely re-calculated, another employee said. The new RVR model was supposed to be introduced this year, and has now been delayed indefinitely.

The scale of the current scandal was also kept from high-level executives until late in the game. Mr Aikawa said late last month he was only informed of the discovery of faked emissions data on April 13, a week before the company's public disclosure and five months after Nissan engineers first raised questions and began an investigation with their counterparts at Mitsubishi Motors. The two companies formed a minicar joint venture in 2010.

The delay "shows MMC not having any risk management at all," said Zuhair Khan, an analyst at Jefferies Group LLC in Tokyo. "The worse the information was, the sooner it should have been raised to their bosses."

Mitsubishi Motors' efforts to reach ambitious efficiency targets were also undercut by the fallout of its last major crisis, two of the employees said. In 2000, it admitted defects in cars had been systematically covered up for more than 20 years, including faulty brakes and fuel tanks. Four years later, after a well-publicised accident that killed a young mother and hurt her children, it said many more flaws had also been hidden, part of a chain of events that ultimately led to a divorce from DaimlerChrysler AG, which owned 37 per cent of its shares at the time.

Those events cemented Mitsubishi Motors' reputation as the problem child of the broader Mitsubishi group, made up of 29 major companies including manufacturer Mitsubishi Heavy Industries Ltd and lender Mitsubishi UFJ Financial Group Inc and under the auspices of 86-year-old Minoru Makihara, a senior corporate adviser and one of Mitsubishi's so-called "emperors".

The scandals led to three straight years of losses and hundreds of thousands of recalled cars, demoralising the company and driving many skilled engineers to leave, the employees said.

Mr Masuko said this left the firm short of development talent, with those left behind struggling to keep up with demands for new models to win back customers. That skills gap created circumstances that encouraged cheating, one of the employees said.

"Where does it get its engineering talent, and how does it retain that talent? Who's going to get the best and the brightest? It's not necessarily going to be Mitsubishi," said Maryann Keller, an independent automotive analyst in Stamford, Connecticut.

In the years since its cover-up trauma, Mitsubishi Motors tried to take modest steps to prevent similar mishaps. The company created whistle-blower protections in 2006 and implemented mandatory compliance seminars for all departments in 2011. A panel of outside advisers was created to consult on safety and legal issues.

Mr Masuko's own efforts to encourage more open discussion, meanwhile, led to unintended consequences, the employees said. A veteran of other Mitsubishi companies, he became chief operating officer in 2005 and then chairman and chief executive officer in 2014, priding himself all along on a hands-on leadership approach, quizzing underlings in great detail about even minor issues.

That habit, two staff members said, could make employees feel interrogated and even blamed for issues they brought to his attention, discouraging them from speaking up about problems in the future.

Reforming Mitsubishi's culture now falls in large part to Nissan and Carlos Ghosn, its Brazilian-born CEO, who already led a turnaround of a deeply troubled Nissan beginning in 1999.

Under the proposed deal, Nissan will have the right to name four directors to Mitsubishi Motors' board, and to look deeply into its operations.

Having Nissan engineers embedded in Mitsubishi Motors' development teams means "we can have outside eyes who know how to develop and assemble cars," Mr Masuko said in an interview.

It'll also help Mitsubishi Motors compete in the increasingly technology- and capital-intensive global auto industry. A successful alliance would have combined global sales of almost 10 million vehicles, in striking distance of the total volumes sold by Toyota and Volkswagen AG, the global leaders.

Still, a root-and-branch overhaul in operations and mindset will be required to break Mitsubishi Motors' chain of debilitating scandals, said Kazuhiko Toyama, a Tokyo-based management consultant who's advised companies including Japan Airlines Co.

"The key issue is that life-time employees live in a small society that has all the same types of people," Mr Toyama said. "They care more about what is happening within a five-metre radius than common sense outside of it."

BLOOMBERG