April 2 (Bloomberg) -- The slide in the yen has turned Mazda Motor Corp.’s biggest weakness into its biggest strength. All Japan’s most export-dependent automaker has to do now is sell more cars.
Japan’s fifth-largest car company has the wind of the yen’s 16 percent descent in the past six months in its sails. Shares have tripled to their highest level since 2008 as more-profitable exports and cost reductions steer Mazda toward its first annual profit in five years.
Despite Mazda’s status as the top performer on Japan’s benchmark stock index over the past six months, the Hiroshima-based carmaker needs to make a hit out of a new version of the Mazda3, its top seller, due this fiscal year, to prove it doesn’t require a weak yen to compete against its bigger rivals.
“It’s very critical,” Ashvin Chotai, London-based managing director of Intelligence Automotive Asia, said of the Mazda3, which accounts for a third of the automaker’s sales. “Mazda is a small company and they can’t afford to make any mistakes.”
Few companies better illustrate how Prime Minister Shinzo Abe is reversing Japan’s fortunes by weakening the yen. About a year ago, Mazda was so desperate for cash that it printed 1.22 billion new shares, equivalent to almost 70 percent of outstanding stock, at the expense of existing investors, who saw their holdings diluted. The stock fell to record lows.
Now, the cheaper local currency is giving Mazda Chief Executive Takashi Yamanouchi, 68, breathing room to show his turnaround efforts are bearing fruit and for the company to focus on rolling out new models.
The yen’s drop to a 3 1/2-year low -- it is about 93 to the dollar now -- has turned its operations in the U.S., Mazda’s biggest market, more profitable. For the fiscal year that ended March 31, Mazda has projected it would post a profit of 26 billion yen ($279 million), emerging from a loss of 107.7 billion yen the previous year, though its global sales target was only slightly higher. Mazda said it may report earnings at the end of this month.
The weaker yen is projected to boost profit for the January-March quarter. Mazda based its 25.4 billion yen quarterly operating income forecast on rates of 85 yen per dollar and 110 per euro. The Japanese currency has never been that strong in 2013.
It’s still expensive based on its average of about 107 to the dollar over the past 20 years, according to data compiled by Bloomberg.
A one-yen change against the dollar, euro, Canadian dollar and Australian dollar has a 9.1 percent impact on Mazda’s operating profit, according to estimates of Bank of America Corp., based on Mazda’s own forecast for the current fiscal year. That compares with 4.7 percent at Fuji Heavy Industries Ltd., which makes Subaru cars, and 3.1 percent at Toyota Motor Corp.
The cheaper yen has encouraged analysts to boost their ratings on Mazda. About 50 percent of those who cover the stock rated it a buy at the start of March, the highest level since August 2010, according to data compiled by Bloomberg.
The stock fell 2.6 percent to 262 yen at the 3 p.m. close in Tokyo, while the benchmark Nikkei 225 Stock Average declined 1.1 percent. It has gained 51 percent this year, compared with a 15 percent rise in the Nikkei index.
Mazda shares are trading at about 10 times estimated earnings for the coming fiscal year, in line with other Japanese automakers, according to data compiled by Bloomberg. Honda Motor Co. is valued at 10 times estimated earnings, while Toyota shares have a multiple of 11.
Advanced Research Japan analyst Koji Endo said his view is “positive” even though Mazda’s price has tripled from its historic low last year. “As long as the yen stays at around 90-95 against the dollar, Mazda’s profits could double in the fiscal year to March 2014,” he said.
Takashi Aoki, a fund manager at Mizuho Asset Management, said he has also expected a jump in Mazda earnings this year. However, Mazda is still too reliant on the yen, he said.
“If the Japanese currency goes up to more than 90 yen versus dollar once again, which is not unlikely, it can be a risk to Mazda,” he said.
The company’s drive to more than triple profit by 2016 calls for car sales to increase by more than one-third. Top-selling models are being reintroduced with fuel-saving engines Mazda spent billions of dollars developing as its own answer to the demand for more environmentally friendly cars.
The Mazda6, on sale in the U.S. since January, and the Mazda3, expected later this year, will compete against market leaders like Toyota’s Camry and Corolla. Together, the pair make up about half of all Mazda sales.
Details about the next Mazda3, including when it will be introduced, remain elusive. Mazda won’t comment on whether the car follows similar design lines to the Mazda6.
The Mazda6, also set to go on sale in China later this year, will probably shed light on how the new generation of cars might fare in the market.
The Mazda6 was designed to convey the company’s determination to do things its own way, according to project manager Hiroshi Kajiyama. “We are a small carmaker, so we wanted to make it a distinct car with Mazda’s characteristics, make it the flagship car,” Kajiyama said, speaking in an interview in March.
Kajiyama said the Mazda6 design project involved finding five Mazda fans in different countries and studying their lifestyle, interests, driving habits for about a week. The goal was to figure out what their ideal Mazda would be, Kajiyama said.
The car’s external shape is sculpted to cut wind resistance and boost handling, and heated seats are supposed to mold themselves to the shape of their occupiers. It’s an embodiment of Mazda’s philosophy of “car and driver as one,” he said.
Mazda was inspired by the fans’ suggestions to move the driver and passenger compartment toward the rear of the car, giving its nose and bonnet a sloping, aerodynamic look without compromising on trunk space. The accelerator pedal is also made more sensitive to driver foot pressure.
Satomi Hamada, a Tokyo-based analyst at IHS Automotive, said Mazda’s choice with the Mazda6 design shows the company’s determination to make cars that stand out. “It is extremely rare for carmakers to design a mainstream car using just five people as a data sample,” Hamada said.
The global economic slowdown that followed the 2008 financial crisis, combined with the yen’s rise to near post-World War II record levels, sent Mazda to losses.
A long-standing relationship with Ford frayed. Having once owned about a third of Mazda, the U.S. automaker began cutting its stake in 2008 to raise cash as it struggled to cope with the impact of the financial crisis. It now owns 2 percent of the Japanese company.
As demand for environmentally friendly vehicles grew, industry rivals developed hybrid gasoline-electric cars or plug-in battery-powered vehicles. Mazda went its own way. It began work on what it calls SkyActiv cars, named for a suite of technology applications based on conventional diesel and gasoline engines. These includes new automatic transmissions and lighter car frames to cut down on fuel use while increasing engine output.
Mazda declines to say how much it has invested in SkyActiv. The automaker typically spends about 100 billion yen each year on research and development, according to its financial statements.
Mazda will incorporate SkyActiv technologies in the Lafester minivan it will produce for Nissan and an open-top sports car it has agreed to produce for Fiat SpA under the Alfa Romeo brand.
Mazda has cut production costs by 20 percent and boosted profit margins by increasing efficiency in logistics and eliminating waste, according to the company. It says the SkyActiv technology means it can break even on exports even when the yen is stronger than now: Its CX-5 sport-utility vehicle, the first to make full use of SkyActiv systems, would make money even if the yen traded at 77 to the dollar, Mazda says.
The early response to the CX-5, introduced in February 2012, offers Mazda some hope. It was named Japan’s “Car of the Year” last November by the industry panel that oversees the annual award and has sold more than 190,938 units in its first year in market, compared with Mazda’s target of 190,000 units.
Mazda aims to raise operating income to 150 billion yen and introduce a total of eight models that fully adopt SkyActiv by March 2016. The company says its annual sales target by then will be 1.7 million cars, more than a third above current levels.
Mazda is opening a plant in Mexico that’s scheduled to start production in 2014. It also raised the planned initial production capacity at the plant in Salamanca City, Guanajuato State to 230,000 cars from 140,000 in order to meet the increasing global demand for SkyActiv models, as well as for production of a vehicle for Toyota, it said last year. Mazda declined to say whether the cars it produces for Toyota in Mexico will also use the technologies.
Still, Mazda’s sensitivity to yen’s fluctuations will not change, at least until production begins in Mexico.
“Eventually, you need to have higher localization rate in the longer term. Mazda is in the right direction,” said Goldman’s Yuzawa. “But it’s too early to say their sensitivity is going to go down, so we have to bet on currency when we invest in Mazda.”
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