International -- Asia Cover Story
CAN FORD FIX MAZDA? (int'l edition)
Revving up the ailing Japanese carmaker is proving to be a much knottier problem than Ford expected
Nestled in a bay on the Sea of Japan lies Mazda Motor Corp.'s Hofu assembly plant, a feat of automated manufacturing and worker-friendly industrial design. In the "human zone," workers in spanking-white coats operate under gleaming fluorescent lights. Hot, heavy, noisy work is fully automated in a separate area. The decor is soothing greens, grays, and blues. Modular mini-lines churn out subassembled sections.
Unfortunately, this ergonomic high-tech marvel is running at only 35% of capacity these days. Mazda sank $550 million into the plant, which it opened in 1992 to ramp up production of upscale passenger cars. Then, Japan entered an economic slump, and consumers turned to sport utilities, wagons, and vans. But the Hofu plant can't make those kinds of vehicles. "Hofu is our most modern plant and our most efficient, but it's also our least flexible," concedes Mazda President Henry D.G. Wallace, who was dispatched by major shareholder Ford Motor Co. more than two years ago. "We tend to run into restrictions with what we want to do at Hofu."
WRONG CALLS. Ford is running into a lot of restrictions with Mazda. The U.S. auto maker shelled out $481 million to raise its stake to 33.4% in June and effectively take control of the ailing $12 billion Japanese carmaker. Ford portrayed the buy as a bold move to find massive savings in development costs while extending its reach in Japan and Southeast Asia. Ford would reduce Mazda's bloated cost structure by shaking up suppliers and reducing personnel. At the same time, it would integrate the Japanese partner into a global "Ford 2000" strategy to benefit from Mazda's technical and engineering abilities.
Six months after word of the deal broke in April, it's clear the task is more difficult than Ford wants to admit. Long admired by car buffs for engineering marvels such as the Miata sports convertible, Mazda has made some very bad business decisions. The largely idle, unadaptable Hofu factory is only one symbol. Mazda's faithful engineers also cling to sentimental loss-leaders such as the sexy but gas-guzzling rotary engine. A surprisingly rigid corporate culture keeps a brake on the pace of cost-cutting in the aging Mazda workforce.
Mazda's entire cost structure is bloated--even by Japan's pricey standards. A parochial mind-set has left the company with only one major overseas plant, in Flat Rock, Mich., which puts it way behind its rivals in establishing a global strategy. Mazda's passenger-car market share in Japan has fallen to a mere 4.1%, from 7.8% in 1990, and its U.S. sales have dropped sharply because of poor image and marketing. This year, the company will churn out a total of just 800,000 vehicles, vs. 1.4 million in 1990. Mazda had cumulative net losses of more than $700 million from 1993 to 1996, though it eked out a net profit for the fiscal year that ended in March. It also carries a staggering $4 billion debt load.
No one is arguing that the Mazda dilemma will break Ford, which earned $2.5 billion in the first half of this year. But it will take a long time to make Mazda a smooth-running gear in the Ford machine. Mazda will require more management--and possibly more money--than initially expected. And the takeover could have a global impact on Ford's operations. The integration of Mazda with the rest of Ford, for example, could slow the pace of Ford's sweeping global reorganization, Ford 2000. Indeed, Ford 2000 was some two years along when the Mazda deal became public. The risk now is that Ford could end up with redundant small-car development operations in Europe and Japan, limiting the economies it hoped to achieve.
Officially, Ford does not acknowledge that the problems at Mazda are deeper than it understood. But it's clear Ford didn't have a complete picture of what was going on inside Mazda before it took control. With less than a one-third ownership stake in the Japanese carmaker, legal restrictions kept Ford in the dark on vital business decisions. It took a year of encouragement from Wallace and Sumitomo Bank Ltd., Mazda's second-largest shareholder, before top Ford executives in Dearborn, Mich., signed off on the deal--without having complete access to Mazda's inner workings. Before that, "We never had the ability to share at the strategic level," says Edward E. Hagenlocker, president of Ford's auto operations.
Finding a way to make it work is Job One for Wallace, a lanky Scottish troubleshooter, and W. Wayne Booker, Ford's executive vice-president in charge of emerging markets. In countless brainstorming sessions, Ford execs are trying to come to grips with tough issues such as how to leverage Mazda's core strengths--small-car design knowhow and engineering excellence--and team up to find cost savings. At the same time, top Ford and Mazda executives are groping for ways to rebuild Mazda's market share in Japan, jump into the race to fashion a low-cost "Asian car," and possibly shift some of Ford Europe's small-car design work back to Mazda, according to Booker. The two also hope to marry Mazda components and auto "platforms" to cut development costs by as much as one third, analysts estimate.
With a U.S.-style restructuring out of the question, competitors are openly skeptical that Ford can move fast enough to stanch the red ink and convince Japanese consumers that Mazda isn't being Americanized. "The question is whether they can take the drastic action they need and still be accepted by Japanese society," says a top Toyota Motor Corp. executive.
Drastic action is needed because Mazda has a huge capacity crisis. Even if it did regain its peak domestic sales--600,000 vehicles in 1990--it would still fall far short of its 1.4 million annual capacity. Mazda always relied on exports, but overseas sales have been hit hard by the high yen. Although the yen has retreated from its profit-busting high of 80 to the dollar, at 110, it's still hard, and the downward momentum is tough to halt. If Ford picks up market share in Japan, Mazda might get a boost by building Ford cars. Mazda made 30,000 of the 48,000 Ford Escorts and Lasers sold in Japan last year. But that's not much of a lift against overcapacity of more than half a million cars.
DEVILISH DILEMMA. That means Mazda needs to quickly step up sales in foreign markets with hot new affordable products. Otherwise the U.S. company at some point would have to face up to the necessity of closing a Mazda factory. "These guys have to get sales back up to what they were in the good old days or close a plant," says Christopher Redl, an analyst at ING Barings Ltd. in Tokyo. "Otherwise, they're operating under conditions that just aren't sustainable."
Mazda has two huge passenger-car plants in Japan, and choosing which to shut down is a devilish dilemma. Hofu is new and efficient, but inflexible. The other choice is the 30-year-old Ujina plant near headquarters in Hiroshima. Like many auto plants, it's aging--along with its workforce. The average worker in a Mazda plant is in his early 40s, and several years of hiring freezes haven't eased the problem. "Aging workers are losing their eyesight, and in some cases, their judgment ability," says Toshihide Deguchi, executive vice-president for operations. But closing the plant is hardly an option. Mazda is the economic heart of Hiroshima, and closing the plant would trigger an intense backlash from political leaders and consumers.
So for now, the goal is to build up sales, beginning with Japan. Mazda had a lot riding on the success of the Demio, launched on Aug. 26. A station wagon so compact as to almost be a minicar, Demio is the first new domestic model designed under Ford's aegis. It was priced very aggressively, starting at about $7,400 with five-speed manual transmission. The most popular model goes for about $10,500. The advertising shows Chicago Bulls basketball star Scotty Pippen, a giant as he dribbles around the tiny vehicle. Then, he gets inside, suggesting that it only appears to be small. Wallace also has appeared in ads, praising Mazda's rebirth under Ford and attempting to ease buyers' concerns that a gaijin, or foreigner, is running Mazda.
The strategy has been a success so far. In its first two weeks on the market, Demio pulled in 11,200 orders, against a monthly target of 4,000. But it's a distinctly small success, and it remains to be seen whether the Demio phenomenon will last. In other, bigger market segments, Mazda has few new models in the pipeline. Meanwhile, Toyota has begun an aggressive sales push. Other rivals aren't resting, either.
That's why Ford executive Ronald J. Leicht is pressing ahead with a marketing division, which is researching consumer needs and communicating them to Mazda design teams. In short, he's attempting a complete shakeup of Mazda's design culture. For years, Mazda's pride in engineering combined with a lack of cost controls led its research and development teams to design cars with little customer input. One result was what one analyst terms a "fatal fascination" with niche cars such as the Miata. "We've got to make what the customer wants, not what some people here on the fifth or sixth floor think is a really neat idea," says Wallace.
TECHNICAL STRENGTHS. Even though Ford has financial control of Mazda, the Japanese company's execs are resisting Ford's attempt to alter their ways. "Regarding the future of Ford and Mazda development, who is going to be in control is a big question," says Deguchi.
It's a particularly big question as Ford tries to fold Mazda into its global reorganization. Ford is aiming to design and develop all its cars and trucks on "world car" platforms by 2000. But the Hofu factory isn't even compatible with the Hiroshima plant, so it will be tricky to design cars that can be made by various factories worldwide. The two companies have teamed up on design in the past--the Ford Probe is essentially Mazda's 626, and Mazda's 121 is a rebadged Ford Fiesta--but merging the two companies' design functions will take an unprecedented level of cooperation.
Mazda's engineering strengths are quite real. The Miata and Millenia both made Automobile magazine's "All-Stars" list this year--the seventh year in a row for the snappy Miata. Mazda's Miller-cycle engine was named one of the "Best Engines of 1996" by Ward's Auto World. "Mazda has some excellent engineering and technical skills," says Jacques A. Nasser, Ford's group vice-president for product development.
But Ford has its own engineering staff. The problem is deciding who will design what. The new Escort launched in May in the U.S. was based on Mazda's Protege, but industry sources have expected that the next generation of Proteges would be based on a Ford platform from Europe. Now, however, Ford execs are considering giving some of that to Mazda, which will displease the European designers.
If the two companies can't define what role Mazda will play in Ford's global design operations or vice versa, that doesn't augur well for Ford's hopes of using Mazda's expertise in designing cars for Asian markets. The two are still mulling over a passenger-car or truck project to add to their pickup-truck joint venture in Thailand.
Another point of resistance to Ford is Mazda's suppliers, who were long protected by the company's loyalty to the Hiroshima area. Ford's efforts to launch joint worldwide purchasing with Mazda is a direct threat. "It's a foreign-purchasing revolution," says Katsuaki Yamamoto, executive vice-president for purchasing. Overseas purchasing has been rising about 6% per year, but with new models, that figure will rise faster. Mazda used to buy its rear suspensions from local suppliers, for example, but for its hit RV Bongo Friendee camper, Mazda buys from America's Monroe Corp.
"THE PROSECUTOR." That's politically sensitive. At the Mazda shareholder meeting on June 27, Koji Nakai, a shareholder formerly from Hiroshima, berated the assembled executives at length. "I stand here as the prosecutor to speak for Hiroshima," he said. "You think you're the greatest, but it's no good if only Mazda recovers, without the rest of Hiroshima."
Mazda is trying to minimize the pain: It's helping its parts makers meet the challenge by offering to send out teams of technicians and production experts to analyze production systems. Some 48 local suppliers took them up on the offer. Says purchasing director Yamamoto: "Mazda's production is more than 40% down, so it's really urgent for them to restructure."
Savvy suppliers saw the writing on the wall long ago, and prepared. Molten Corp. diversified into inflatables such as pontoons and basketballs as well as medical equipment. It also broadened its customer base and built a factory in Thailand. Others, too, are considering Southeast Asian plants and are trying to break away from dependence on Mazda. Mazda is encouraging such moves, once deemed heretical. "If they want to survive, they're already doing it," says Yamamoto. But many suppliers clearly face bankruptcy if pushed too hard, too fast. That's why Ford can't go any faster in shaking up the supplier base.
In view of how long it's going to take to impose greater efficiencies on Mazda's operations, Ford may have little choice but to allow Mazda to gain against Ford's own models in the U.S. and Europe. This raises the delicate issue of what the Japanese call tomogui, or "eating one's own." In the U.S., Mazda had to drop out of the hot sport-utility market because Ford refused to give it a four-door version of its popular Ford Explorer, offering it instead a two-door model, known as the Mazda Navaho, that consumers shunned.
Ford could also be forced to shift some production from its U.S. plants to Japan to get the Mazda factories humming. "It's not impossible to envision that we would use that capacity for Ford products," Booker says. "The issue is cost." With the yen weakening to around 110, the cost question could swing in favor of producing Ford cars at Mazda's factories in Japan. The United Auto Workers would take a dim view of that, so it would be a tough decision.
TAXI SACRIFICE. While Ford will have to make some painful adjustments, the burden will fall more heavily on Mazda. And that means Ford has to keep chipping away at Mazda's parochial mind-set. A breakthrough last year was persuading Mazda execs to give up the unprofitable but sentimental business of making taxis. Most taxis in Hiroshima are Mazdas, just as those in Toyota City are Toyotas. But taxis require expensive extras--automatic rear-door openers on the driver's side, for example--and margins are low. Sacking taxi production was a decision Mazda exexutives couldn't make.
If that was controversial, imagine the emotion attached to Mazda's rotary engine. Research is continuing, but the engine's future is decidedly fuzzy under Ford. "It's clearly an emotional issue within Mazda with the older members of our management group," says Wallace.
Other, subtler tactics aim to change Mazda's corporate culture over the long haul. Employees with foreign-language abilities are being cultivated. After four years of limp hiring, Mazda this year will take on 260 new employees, more than double the number in the previous year, even as it continues to try to cut payrolls. The search will include non-Japanese and midcareer workers, too. These measures represent an attempt to change Mazda's insular attitude from the bottom up as well as from the top down.
Wallace says he was fascinated to discover that the Japanese who used to copy and adapt from the West had developed closed minds toward what he regards as modern management methods. "I've so often heard: `You don't understand Japan,"' Wallace says. "What that really meant is: `Our minds are closed, and we don't want to hear anything else.' That was a surprise to me." All he can hope for now is that the surprises are over.By Edith Hill Updike in Hiroshima and Keith Naughton in DetroitReturn to top