David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Sometimes it's more important to be the biggest than the best.

That's certainly the case for Mazda and Subaru-maker Fuji Heavy, the unattached minnows in Japan's rapidly consolidating automobile industry. The carmakers will both miss targets and see declining revenue this year, the Nikkei Asian Review reported Tuesday, in part because of the yen's strength.

Currency hits to earnings come and go, but the more enduring problem for Mazda and Subaru is they're simply too small to survive in a business that's changing as fast as it has in a century.

Best in Class
Subaru and Mazda have the strongest returns on invested capital of any major automakers
Source: Bloomberg
Note: Shows only car companies in developed markets with at least $10 billion in annual revenues.

The management of both businesses is exemplary. Their returns on invested capital are the best of any major automaker. The average employee at Daimler, the maker of Mercedes-Benz, generated about $46,000 in operating profit last year, barely more than the $42,000 at Mazda and about one-third of the $146,000 at Subaru .

Inputs and Outputs
Fuji Heavy and Mazda have some of the most productive staff in the auto industry, based on operating income per employee
Source: Bloomberg, Gadfly calculations
Note: Based on automakers in developed countries with at least $10 billion in annual sales. Employee number details not available for Peugeot, Hyundai, Kia

Perfectly formed they may be, but they're small too, and that's a problem in an industry that's facing once-in-a-generation capex and R&D challenges.

With Mitsubishi Motors getting swept up into Carlos Ghosn's Renault-Nissan empire and Suzuki buoyed by sales from Maruti Suzuki, its Indian subsidiary, the only major carmaker in a developed country operating on a similarly small scale is BMW, which targets a much more exclusive market.

Small Car
The combined sales of Mazda and Subaru would barely make it into the second tier of global automakers
Source: Bloomberg Intelligence
Note: Shows only automakers in developed countries.

You might think that well-run businesses without the scale to prosper would be perfect M&A targets, but there's a serious shortage of local dance partners.

One problem is Toyota: It has a 17 percent stake in Subaru, which is likely to deter any rival bidder, and last year inked a partnership agreement with Mazda that's produced little fruit to date but probably has a similar chilling effect. Toyota has a new alliance with Suzuki to rival Mazda in its affections, and is still digesting its takeover of Daihatsu. That probably leaves scant bandwidth for further deals.

Renault-Nissan, meanwhile, will have its work cut out bringing Mitsubishi into its orbit after Ghosn starts as chairman later this year, while Honda's chief executive officer, Takahiro Hachigo, seems determined to spurn the consolidation wave and remain a mid-sized producer.

One option would be for the two companies to join forces. There's a lot to be said for that: Mazda's expertise in building affordable sedans and nippy sports cars would make a nice complement to Subaru's leadership in larger station wagons and SUVs. With revenues that have closely tracked each other for five years and price-earnings valuations that have also tended to move in tandem, a share-based merger could in theory be workable, both operationally and financially.

There are two problems with that. One is that carmakers -- particularly Japanese carmakers -- remain fiercely protective of their internal cultures. Even if the duo could loosen their ties with Toyota, Mazda could be expected, with some justification, to regard an amalgamation with the more profitable and valuable Subaru as a takeover in all but name.

Scaling Up
Even combined, Subaru and Mazda wouldn't have the R&D and capex budget to measure up to the top tier
Source: Bloomberg
Note: Shows combined value of trailing 12-month R&D and capital expenditure. Budgets at affiliated companies and at Subaru-Mazda are presented together for illustrative purposes, though companies have separate R&D and capex arrangements. Ford and GM not shown as R&D data are lacking.

The other is that even that drastic step may not be enough to save them. Any carmaker that wants to win the next decade must spend a fearsome amount of money developing electric and hybrid vehicles, and probably autonomous-driving systems too. Combined, Subaru's and Mazda's R&D and capital spending would barely crack the top 10.

That's the flip side of having a great return on invested capital: It's often a result of not investing very much capital. If Subaru and Mazda don't want to be left behind by the next great automotive revolution, they'll need to do something about that.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Based on trailing 12-month operating incomes divided by latest fiscal year-end employee numbers.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Paul Sillitoe at