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Mitsubishi Heavy, reform in peril, seeks Hitachi arbitration

South African power plant losses spark dispute with partner

Mitsubishi Heavy Industries President and CEO Shunichi Miyanaga has steered the company toward reform.

TOKYO -- Mitsubishi Heavy Industries has filed for arbitration in a cost dispute with partner Hitachi, the company said Monday, seeking to break out of a slump as its CEO and his reform efforts face a make-or-break year.

The Japanese industrial machinery maker went to the Japan Commercial Arbitration Association seeking around 90.77 billion South African rand ($6.9 billion) from Hitachi, up about 1 billion rand from an earlier figure, involving losses stemming from power plant construction in South Africa.

The two companies merged fossil-fuel power operations in 2014 to form Mitsubishi Hitachi Power Systems. The dispute surrounds the cost burden for supplying large boilers in projects Hitachi undertook prior to that, in 2007.

Mitsubishi Heavy, which holds a 65% stake in the joint venture, says Hitachi should bear the full weight of losses from business it undertook on its own. Hitachi, which holds the other 35%, argues for splitting the burden based on each partner's ownership share in the venture.

A public relations official said Mitsubishi Heavy "was forced to seek arbitration because intercompany talks had not led to a solution." Hitachi said Monday that it would "continue to respond sincerely to MHI ... toward a resolution based on discussion."

Down in the dumps

Mitsubishi Heavy faces a slump at a critical juncture in long-haul reform efforts by President and CEO Shunichi Miyanaga. The power systems segment, once an income wellspring, brought the manufacturer just 600 million yen ($5.43 million) in operating income for the first quarter, less than one-tenth the year-ago figure. Company shares have plunged to just over 400 yen from heights of 800 yen seen in 2015.

The standoff with Hitachi bespeaks impatience to resolve the dispute. The arbitration announcement came just two hours after Mitsubishi Heavy's earnings conference here. At that conference, officials alluded only to the possibility of "seeking some form of third-party judgment," as Masanori Koguchi, an executive vice president, put it.

Hitachi sees MHI as an "important business partner" in a range of operations, primarily fossil-fuel power. The conglomerate's leadership had been seeking common ground with that partner, and the announcement caused one Hitachi-affiliated source to wonder "what in the world those at Mitsubishi Heavy are thinking."

The Mitsubishi Hitachi Power Systems venture, a consolidated Mitsubishi Heavy subsidiary, heavily supports earnings in the power segment. It was an alliance of the type long sought by Miyanaga, who has said he focuses on beating competitors such as America's General Electric and Germany's Siemens. But the fusion has produced less synergy than hoped.

Reshuffling to survive

Mitsubishi Heavy has repeatedly lost big projects overseas owing to a GE price offensive that one company-affiliated source said was "never expected to go this far." The Japanese company's orders received in the power segment stand about one-tenth of the 1.95 trillion yen it targets for the full year.

Still, the company maintained its full-year earnings guidance, pinning final hopes on its focus on core businesses. Mitsubishi Heavy said Monday it would spin off operations in four areas including shipbuilding, hydraulic machinery and chemical plant engineering. Those businesses combined total around 500 billion yen, and the manufacturer said it was eyeing tie-ups with other companies as well. Turning those operations into separate companies also would ease any effort to restructure or sell them, for instance.

Mitsubishi Heavy will consolidate construction and other operations at its Shimonoseki shipyard into a new company in January. The manufacturer also will expand the functions of subsidiaries that build and sell certain ship parts, as well as merge construction operations at its Nagasaki shipyard.

Miyanaga is rumored to be up for replacement when he finishes his fifth year next spring. He has little time left to steer Mitsubishi Heavy out of the rut that has cast a pall over forceful reform efforts, which include measures such as giving production centers less of a voice.

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