PARIS/TOKYO -- At the Paris Air Show in June 2007, Mitsubishi Heavy Industries unveiled a sleek, gleaming silver mock-up of an aircraft it hoped would conquer the world's regional jet market. Twelve years and billions of dollars in overruns later, the Japanese conglomerate was back in Le Bourget this week, rebooting a program that was billed as the fulfillment of a national and corporate dream but instead became an investor nightmare.
The pavilion of subsidiary Mitsubishi Aircraft attracted crowds of journalists and aviation enthusiasts, eager to check out the interior of the redesigned and renamed Mitsubishi Regional Jet -- now the SpaceJet -- and hear how executives plan to rise above the design flaws and other setbacks that delayed deliveries five times.
The buzz was also fueled by the news earlier this month that Mitsubishi Heavy is negotiating to buy the regional jet program of one of its archrivals, Canada's Bombardier.
The acquisition of Bombardier's CRJ jet program could be the watershed that transforms the very identity of Japan's largest defense contractor.
Already, the SpaceJet revamp, which includes a variant tailored to the needs of U.S. airlines, suggests the company has recognized the need to change. The Bombardier deal, if it goes through, would end a damaging insistence on indigenous development at the bluest of Japan Inc.'s blue-blooded companies, potentially paving the way for Mitsubishi Heavy to harness global talent and opportunities.
The question is whether aircraft buyers -- and stock investors -- will go along for the ride.
The course correction reflects a quiet sense of crisis at a 130-year-old conglomerate that has made everything from World War II fighters to stealth submarines, nuclear power plants and an International Space Station module. The company is so close to the Japanese government that it is widely considered a "proxy" for Tokyo, and revenue is stable for now. But, internally, concern is mounting in the face of the Japanese economy's hazy future, given the aging and shrinking population, and Mitsubishi's own struggles to leverage its expertise into globally leading positions.
Edward Bourlet, an analyst at CLSA, suggests Mitsubishi seems content with being an also-ran in too many sectors, rather than sharpening its competitive edge.
"They are not No. 1 in planes. They are not No. 1 in gas turbines. They are not No. 1 in nuclear plants. They are not No. 1 in anything," he said. "If they are not globally competitive in any single product and it is a conglomerate of businesses that aren't No. 1 in anything, that's a risk."
When Mitsubishi Heavy set out to produce the MRJ, it believed the jet could be that elusive globally competitive product. It also wanted to avoid a price war over aircraft components and maintain manufacturing in Japan. While Mitsubishi Heavy supplies wing flaps for the Boeing 737 Max, for example, they are made in Vietnam to keep costs down.
Japan had not produced a passenger plane of its own since the YS-11 turboprop was scrapped in 1973. Still, the company envisioned raking in orders from North American airlines that would be replacing aging fleets and from upcoming players in emerging Asian markets.
China's foray into the passenger jet market in 2008 with the establishment of COMAC added motivation. Mitsubishi officials were eager to grab market share before the Chinese competitor had a chance to build momentum.
But Mitsubishi appears to have overestimated its own capabilities.
The group manufactures the wings of Boeing's 787 Dreamliner and the fuselage of the larger 777. It assembles F-15 and F-35 fighter jets. It builds rockets to deliver supplies to the ISS. Yet, while Mitsubishi saw the passenger jet challenge as one of technology, other big hurdles lay elsewhere: safety, accountability, smooth communication, and the hiring and retention of international expertise.
All are essential for persuading U.S. regulators to allow Americans to board a new aircraft.
Mitsubishi Aircraft intended to make the first delivery in 2013. Now, the goal is to have the roughly 90-seat SpaceJet M90, a rebranding of the MRJ, enter service with Japanese carrier All Nippon Airways next year. The SpaceJet M100, which will seat 65 to 88 -- accommodating U.S. pilot union rules that set a maximum of 76 seats in a regional jet -- is due to be ready by 2023.
After several delays on type certification in the U.S., and three years after the plane was originally due to fly, Mitsubishi finally recruited an experienced outsider. Alex Bellamy came from Bombardier in 2016 to lead the MRJ project. He called the SpaceJet a "product born in Japan" that will be "certified around the world, to meet the global demand."
His mission is to convince airlines and the stock market that the project is indeed at "the turning point." Mitsubishi Aircraft originally expected to spend 150 billion yen ($1.4 billion) to develop its regional jet, but as of last year it had poured in 600 billion yen. The cost is projected to reach 800 billion yen by the 2020 debut of the M90.
Investors are in wait-and-see mode. Mitsubishi Heavy shares are trading at around 4,700 yen, roughly half the peak in 2007.
"So they needed outside specialist help in the first place," CLSA's Bourlet said of the Bellamy hiring. "They should have done that before."
He thinks the MRJ is a big reason investors are avoiding Mitsubishi Heavy. The jet, he said, is seen as "a long-term, capital-intensive, risky project that doesn't necessarily immediately make economic sense."
Mitsubishi Heavy's history of high-profile international missteps may be fueling skepticism as well.
The company booked special losses totaling 240 billion yen by the year ended March 2016, after a move into cruise ship construction went awry. The group was founded as a shipbuilder in 1884 and supplies submarines and Aegis warships for Japan, but it had no experience with luxury ocean liners when it won an order from top cruise company Carnival in 2011. Much like the MRJ, the project was plagued by delays and overruns. The conglomerate ultimately gave up.
Also in 2016, Mitsubishi Heavy lost a bid to supply next-generation submarines to the Australian navy, despite an all-out sales pitch by Prime Minister Shinzo Abe's government. The contract went to a French company that promised to create more local jobs.
Last December, Mitsubishi Heavy's project to build a nuclear power plant in Turkey fell through after the cost estimate ballooned -- again after an all-out sales pitch by Abe.
Mitsubishi Heavy has tried to become more open, competitive, and less bureaucratic. For example, Previous President Shunichi Miyanaga initiated a merger of its energy business with Hitachi's. He also introduced a more transparent CEO selection process and began briefing analysts about quarterly earnings himself. In a rare move for a storied Japanese conglomerate, the company brought in a foreign woman -- management professor Christina Ahmadjian -- to serve as an independent director.
But the pace of change is slow from a Western perspective. "Everyone is waiting for a big move and there is no big move," Bourlet said. Japanese contractors are "trying to be progressive, but struggle to be aggressive."
The Bombardier deal could help to change that perception -- but only if it goes ahead, and integration is well managed.
Buying the Canadian company's jet program, known as the CRJ, would give Mitsubishi Heavy access to a wealth of expertise along with a network of maintenance hubs -- necessary to win new MRJ orders. Bombardier's know-how would also give the SpaceJet program more credibility at a time when aviation safety is in the spotlight, after two Boeing 737 Max crashes.
The purchase would also remove a major competitor from the U.S. regional jet market. Mitsubishi Aircraft would still have to confront a formidable foe in Brazil's Embraer, which has agreed to sell its commercial aircraft division to U.S. giant Boeing. But the rival is focused on jets seating 100 or more, while Mitsubishi is aiming at the smaller end of the market.
In an interview, Mitsubishi Aircraft President Hisakazu Mizutani suggested the talks with Bombardier were progressing, saying the Canadian company is "looking at the idea in a very positive manner." The CRJ program is loss-making for Bombardier. Nevertheless, Mizutani described it as "a solid business," adding, "We are looking into how the combined operations could produce maximum results."
Rob Morris and Thomas Kaplan, analysts at aviation consultancy Cirium, said the replacement of the mature CRJs with SpaceJets "could be a natural move for many of the existing operators." Another benefit of the deal would be having a production foothold in Canada, right next to the world's largest regional jet market in the U.S.
Mitsubishi executives cautioned that the companies could still fail to reach agreement. But without the CRJ, the Japanese jet would be "the weaker second player in a regional jet duopoly dominated by Embraer/Boeing," said Morris and Kaplan, assuming Bombardier ultimately withdraws from regional aircraft.
Either way, Mitsubishi still has high hopes for the plane business. "We want to grow commercial aviation into a main revenue source in 10-20 years," Masanori Koguchi, Mitsubishi Heavy's CFO said in an interview in November. Demand for regional jets is currently concentrated in North America and Europe, but Koguchi expects it to grow in Asia as well, especially in island countries like the Philippines and Indonesia where land transport is relatively limited.
Mitsubishi Aircraft is currently sitting on about 400 aircraft orders, including options. On Wednesday it signed a memorandum of understanding with an undisclosed North American airline for 15 SpaceJet M100s.
Over the next two decades, the company expects demand for more than 5,000 regional jets, mostly replacement demand, and aims to capture "a significant proportion" of it.
"Aerospace is actually a good business," Bourlet said, noting industry players should be able to take advantage of increasing air travel, especially in Asia. The trouble is that Mitsubishi has not shown the MRJ can capitalize on that opportunity so far, and it will still face obstacles even with Bombardier, he added.
"They haven't completed the first delivery of the MRJ yet," said Sho Fukuhara, an analyst at Jefferies. "I'm not so sure how they can manage these two business entities."
Investors may harbor similar concerns. The day after the news of the Bombardier talks broke, Mitsubishi Heavy shares fell more than 2% on the Tokyo Stock Exchange.
A lot may depend on the cost of the deal, according to Bourlet.
"If they get a good price [for] the expertise of Bombardier, the maintenance hubs, the know-how, experience, and [if] they can efficiently integrate Bombardier, I think they could turn sentiment and opinion around."