Apr 25 2016

TOKYO— Mitsubishi Motors Corp.’s admission to cheating on fuel-economy tests highlights the intense competition for fuel efficiency both globally and in a market segment unique to Japan called “kei” or minicars.

The fallout from Mitsubishi’s admission spread Thursday, with the company’s stock falling more than 20% after a 15% fall Wednesday. Japanese authorities raided a Mitsubishi office in central Japan for a second day in a row, seeking evidence.

All four models for which Mitsubishi admitted manipulating data are minicars: functional, boxy and inexpensive cars with 660-cc or smaller engines. The segment last year accounted for 38% of the Japan’s overall auto sales of around five million vehicles, up from a third a decade ago.

Tighter regulations and global warming have made consumers in many parts of the world more conscious of gas mileage. Governments in Europe and the U.S. have called on auto makers to set ambitious fleetwide targets, while developing nations including China and India have introduced fuel-economy standards.

Meanwhile in Japan, where the population is graying, aging buyers are shifting to smaller cars after their children leave home.

The minicar market for years was dominated by Suzuki Motor Corp. and Daihatsu Motor Co., which still hold a combined share of more than 60%. But the segment’s rise has prompted others, including Mitsubishi and Nissan Motor Co., to develop fresh models, triggering fierce competition.

One way to grab customers’ attention is with record-setting fuel-economy numbers. In September 2011, Daihatsu introduced the first gasoline-powered car to achieve more than 30 kilometers per liter (70.6 miles per gallon) as measured by Japanese standards. Three months later, Suzuki released a car that hit 30.2 kilometers per liter, and the two were off to the races, constantly one-upping each other with new models.

Smaller players Mitsubishi and Nissan decided they wanted a share of the pie. In 2011, the two companies set up a joint venture to develop and manufacture minicars. The deal called for Mitsubishi to use some of its excess production capacity in Japan to supply minicars to Nissan, which would sell the cars under the Nissan brand at its own dealers.

About three-quarters of the 625,000 cars affected by the manipulated data were Nissan-branded.

The Mitsubishi-Nissan relationship developed in 2013 into a broader alliance of sharing products, technology and manufacturing capacity, including Nissan’s alliance partner Renault.

Mitsubishi set fuel-economy targets internally and tried to keep up with rivals. At Mitsubishi, the chief product developer would state the target at a top management meeting, which would then be approved by those managers, Executive Vice President Ryugo Nakao said at a news conference Wednesday.

“We’re talking about a world of competition. The development team should aim high and set challenging targets, but that doesn’t mean the management is pushing for targets that are not backed by technological evidence,” he said.

For one of the affected models, the model year 2014 eK Wagon, the internal target approved by management was 29.2 kilometers per liter, which was met when the car went on sale. The latest eK Wagon’s mileage was announced as 30.4 kilometers per liter. Mitsubishi said its manipulation resulted in the gas mileage being overstated by 5% to 10%.

Employees who manipulated the data likely did so to meet the company’s internal mileage target, Mr. Nakao said. He said the company was investigating whether the targets were impossible to meet otherwise.

In August 2015, Nissan and Mitsubishi decided that Nissan would take over development of the next-generation minicar. In November, Nissan engineers found discrepancies in data when they tested the fuel efficiency of existing models, Mitsubishi executives said.

In December, Nissan asked Mitsubishi to conduct a joint probe, which took place in February. Mitsubishi analyzed the results in March and confirmed the discrepancies.

In the wake of the scandal, Mitsubishi said it would discuss compensating Nissan, and Nissan said that as of now it has no plans to change the partnership.

The biggest shareholders of Mitsubishi Motors are members of the Mitsubishi group of companies, which share a common history and informal ties as well as cross-shareholding relationships. Collectively, Mitsubishi group members own 34% of Mitsubishi Motors following a bailout of the auto maker in 2004 after it acknowledged covering up quality problems.

Share prices of the Mitsubishi group companies, the main shareholders of Mitsubishi Motors, rose on Thursday. That suggests investors didn’t fear an immediate need for another bailout.