thumbnail

Over the past several years, Mazda Motors has been on a roller coaster ride that has seen it go from a financial state of perennial losses to one of record profits, with many factors playing a part in the company’s turnaround. Being the small automaker that it is, Mazda lacks deep pockets to reach into during difficult times and doesn’t enjoy the same level of financial stability as its larger Japanese counterparts, which has made for an uncertain future at times. With its solid track record as a technological innovator and a little bit of good fortune, however, the automaker is now headed in a positive direction and has others looking to it for its engineering and manufacturing prowess.

In the 1960’s, Mazda, known as Toyo Kogyo Co. at the time, made great strides in automotive engineering when it developed its Wankel rotary engine, a technology that would help define the company as a pioneer in the industry and distinguish it from its automotive peers. The rotary powerplant would go on to symbolize the automaker’s sporty, fun-to-drive character, beginning with its use in the limited-production Cosmo Sport in 1967 and later in the RX-7 sports car in 1978. However, its shortcomings as a relatively inefficient gasoline engine limited its application versus piston engines, which contributed to the brand’s near bankruptcy amidst rising oil prices and need to partner with outside investors to prevent this from occurring.

Thirty five years ago, Ford Motor Company first took a stake in Mazda, giving birth to a new partnership between the major American corporation from Detroit and the small Japanese automaker from Hiroshima. In the years that followed, their relationship led to collaborative efforts on a variety of joint projects as Ford progressively increased its stake in its Japanese partner. Things would take a turn for the worse during the 1990’s, however, as Mazda and many of its Asian peers faced financial troubles in the lead-up to the Asian Financial Crisis of 1997-1998. The sequence of events spurred Ford to acquire a 33.4% controlling interest of Mazda in May 1996, which calmed the headwinds the Japanese brand was facing, but resulted in Mazda handing over the reins of its operations.

It was not all smooth sailing for the two automakers for long, however, as the Great Recession would hit the global economy following the U.S. subprime mortgage and financial crises that arrived in 2007-2008. Consequently, Ford, along with the rest of Detroit’s “Big Three,” found itself in a downward spiral with slumping sales and a free-falling stock price that would eventually hit $1.01 in late 2008, just eight years after reaching a high of over $57. In its fight for survival, Ford dumped roughly two-thirds of its stake in Mazda for about $538 million in an effort to quickly raise capital, relinquishing its control of the Japanese company in the process. Thus, Mazda was once again left to fend for itself in a tumultuous financial climate while struggling with declining sales of its own.

By 2012, nearing the end of its fiscal year in March, Mazda was forced to make extremely difficult financial decisions after having already struggled through four years of net losses. With an expected loss of 100 billion yen, or $1.2 billion, for the year and the future of the company potentially at risk, Mazda elected to offer buyout packages to its U.S. workers hoping this would allow it to operate leaner and more efficiently.

Coinciding with this move was the company’s plan to sell new stock and raise $1.9 billion, which would fund the future construction of manufacturing facilities overseas. Mazda made it its objective to limit its exports and build half of its vehicles abroad by the fiscal year ending in March 2016, but question remarks remained over how the brand would fare until then.

The move to shift production was necessary because by 2012 Mazda was exporting 100% of its vehicles from Japan to the United States. Following years of declining sales, Mazda ceased the last model it produced in North American, the Mazda6. This ended a 25 year run at the AutoAlliance assembly plant it shared with Ford in Flat Rock, Michigan and meant the brand’s bottom line fully subjected to swings in currency exchange rates.

thumbnail

The appreciation of the Japanese yen relative to the dollar, which began in 2007, challenged Mazda’s ability to be profitable in the United States, but economic conditions were also poor in the company’s domestic market. Data from The World Bank shows that GDP in Japan was actually negative in three out of five years, starting in 2008, and the economy contracted overall. However, while major corporations such as Toyota and Honda were able to shift production over to North America to eliminate currency risk and optimize their balance sheets, Mazda struggled without any partners to assist it financially. Thus, a stagnant Japanese economy along with a strong domestic currency that ate into profit margins on exports left the smaller automaker in a dour position, with a growing number of doubters.

thumbnail

In the months after ceasing its manufacturing operations in Michigan, the exchange rate for one U.S. dollar hovered at just over 78 Japanese yen. The weaker dollar made it difficult for Mazda to maintain price competitiveness against other companies who were building a majority of their vehicles for U.S. consumption in North America. However, a stroke of good fortune transpired in late 2012, which benefitted many companies throughout Japan, but was especially helpful to export-reliant Mazda.

thumbnail

Upon winning a second term as Prime Minister of Japan during the December 2012 general election, Shinzo Abe set forth with an aggressive rollout of policies to lift the island nation out of its economic slump, which began in the early 1990’s after the Japanese asset price bubble popped. “Abenomics,” as it is popularly referred, was introduced within weeks and implemented strategies to grow the country’s economy through monetary and fiscal policies. Among the plan’s initiatives was a 2% annual rate of inflation target to induce a depreciation of the yen by means of quantitative easing, this would increase the money supply and thus lower the yield on interest rates to encourage private investment.

A correction of the yen’s relative price began to occur shortly thereafter and it could not have come at a better time for Mazda as the company would increasingly reap higher gains from export sales. In the fiscal year ending in March 2013, Mazda Motor Corp. realized an annual net profit for the first time since Ford sold its controlling interest in the Japanese company. Naysayers are quick to point out that the North American unit actually lost $519.1 million, up from a $427.8 million loss the previous year, despite reducing headcount by over 100 as part of its payroll cost cutting plan from earlier in the fiscal year. However, it wasn’t until May 2013 when the Japanese currency depreciation broke 100 yen per U.S. dollar for the first time since 2008, and only starting in late November 2013 had the exchange rate remained above that level.

To protect itself from adverse currency fluctuations, cut shipping costs and expand vehicle profit margins, Mazda invested $770 million to build its first wholly-owned manufacturing facility in North America, located in Salamanca, Mexico. The plant began production of the Mazda3 in January this year, with output increasing to 140,000 units a year by April, and the Mazda2 will be added once its second-generation model arrives next year. With small cars having the slimmest profit margins, production in Mexico is expected to help greatly, especially since the Mazda3 is the highest-selling model in the company’s product lineup. Also, the plant has the flexibility to make adjustments to its mix of Mazda3 and Mazda2 production in order to optimize capacity and satiate ever-changing global demand as the company envisages building cars at its new plant for markets in North, Central and South America, as well as Europe.

Perhaps most importantly, Mazda leveraged the construction of its new factory, as well as its well-regarded SkyActiv technologies whose platform designs can be scaled up or down, to strike a deal with Toyota to build 50,000 units of the large automaker’s next-generation Yaris model alongside the Mazda2. Although the Yaris will be a Toyota in terms of style and design, its powerplant will be Mazda’s high-compression, direct-injection SkyActiv gasoline engine, which speaks to how esteemed Mazda’s engineering has come to be in recent years. The partnership led to the expansion of the Mexican plant’s output to 230,000 units, a capacity that is 21% greater than initially planned, and should prove advantageous in the spreading of costs, which is among the greatest concerns of any small manufacturer.

With “Abenomics” acting as a catalyst behind the yen’s decline, Mazda expects its global net profit to reach an all-time high of $1.05 billion upon the conclusion of the current fiscal year in March 2014. The unexpected windfall of profits affords Mazda with the ability to invest in more R&D to better compete with the likes of its larger Japanese peers in the years to come. As a result, the company is said to have plans to hire 185 new engineers in the fiscal year ending March 2016, nearly four times the number it plans to hire in the next year, to work on the development of the next generation of SkyActiv technologies.

Mazda has become a well-recognized nameplate in the United States over the past few decades, but its separation from Ford has put it in an unfamiliar position of having to forge its own future. Through the first few years of the brand’s independence, its financial outlook was bleak and its ability to survive on its own merits was put into question. However, with a focus on efficiency as well as sound investments in engineering and manufacturing, other automakers are now looking to tap into Mazda’s technical know-how, which it’s leveraging into new opportunities. Aided by the Japanese government’s new economic policies and the resulting depreciation of the domestic currency that has helped it reach record profits, the carmaker is investing in its future and paving its own way. By continuing to innovate and raise its brand image, Mazda can best take advantage of its smaller status to reach even greater success and if it can consistently maintain profitability in America, the “zoom-zoom” automaker will be hard to slow down.