Pinocchio Motors - Imagine if the sell-side had to recall every over-optimistic forecast

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It is clear that a 40% fall looks like the industry standard knee jerk reaction. Ford (F US) and Bridgestone (5108) shares reacted negatively to the Ford Explorer/Firestone rollover/tyre burst cases of 2000. 260 odd people died in the US. At the time many analysts tried to downplay the litigation aspect and consequent impact to Bridgestone. It was so under baked as to be unreal. The US loves a good class action and the shares took a while to take a beating. Ford also marked time in the initial phases until the matter became clearer. Takata (7312) has remained under pressure for its wilful misguidance of its customers. In Ford, Bridgestone & Takata’s case, lives were put at risk. For VW & MMC, this is not the case. However punishments seem to be over-inflated.

Here we go again. The story starved media gets its hooks into a has-been car maker with a mediocre presence and spinning it into the potential for multi-billion dollar fines. Mitsubishi Motors Corporation (MMC) admitted the falsification of fuel economy records. It is never good that a corporate admits to telling porky pies. To April 25, MMC has shed nearly ¥370bn from its market cap since the scandal broke.

In MMC’s defence, quoted fuel economy stats in any automakers brochures are always overly optimistic. The officially sanctioned tests are run on smooth tarmac in ideal conditions. So inflating already inflated numbers in the real world effectively makes no difference. However is this form of advertising any different to the Flab-blaster 1000 helping you lose belly fat or a shampoo that will make your hair silky smooth? Should research analysts be held accountable for every single earnings mistake found to be made through a lack of rigour and due process? One might even argue that in the dating game, interested parties inflate their qualities to such a degree that should the other party fall for it they could be sold goods that might not live up to expectations.

Class actions in Japan will be promulgated in December 2016. There are no cases now. The Consumer Court Special Procedure Act (“The Act”) will only allow qualified consumer organisations (not consumers) to sue against businesses. In many cases such consumer bodies have limited financial resources. Under the current Act certified (by the Prime Minister no less) consumer organisations can file for injunctive relief not damages. From the end of that year it might change but since 2007, 15 lawsuits for injunctive relief have been filed. Interestingly, the 2007 law says that consumer associations must notify any offender corporations to provide a window to fix the problem before engaging in any legal action. 

As it is the Japanese domestic market that is under fire we can only suspect the MMC fine will be paltry compared to the 500,000 car buyback that VW is embarking upon. Let us not forget that one can be an insider trader in Japan and pay a fine of only $700. Pretty light on.

Nissan will expect to be compensated somehow but if the production arrangements via MMC are viewed as long term beneficial to Nissan then perhaps MMC will be forced to accept even tougher terms on outsourced production in place of a fine. The juxtaposition of MMC is simple. Accept slimmer margins on future outsourced production or risk having to close plants and face the prospect of further restructuring. It is unlikely the government wants to see another round of layoffs. MMC employs around 30,000.  Nissan can choose to bury MMC if it so chooses and indeed if it has the will to go to Osamu Suzuki and ask for similar terms which are probably unlikely it could but I suspect it won’t.

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