The Luxury Mazda Just Couldn't Afford

So much for Japan's vaunted long-term thinking. Just 14 months ago, Mazda Motor Corp. announced with great fanfare that it would enter America's luxury-car market with two pricey big sedans, a chain of dealers, and a new brand name, Amati. Then reality set in. On Oct. 26, at a hastily called news conference in hometown Hiroshima, Mazda declared that it had changed its mind.

The surprise announcement is the clearest indication yet that a slack world economy, along with rising costs and a sickly home market, have undermined the resolve of Japanese carmakers. Mazda is in an especially precarious position. While the company's passenger-car sales in the U.S. have held steady, its sales in Japan have plunged 7.6% in the first half of its current fiscal year. That has forced Mazda to slash its profit projections for the full year, which ends Mar. 31, 1993, to $29 million--a 62% drop. Analyst Steve Usher of Kleinwort Benson International in Tokyo goes further, predicting a loss of nearly $68 million.

SPENDING SPREE. The financial strain was too great to continue development of the costly new flagship car and the new U.S. dealer network. "Regardless of the product, it was beginning to look like Mazda wasn't going to have the cash to convince the public to come take a look at it," says Lewis M. Webb, president of Webb Automotive Group in Cerritos, Calif. Webb is one of 82 U.S. and Canadian car dealers that won't get the Amati franchises they had signed up for.

Mazda would have had to spend as much as $500 million over the next several years subsidizing its new Amati dealers and launching the cars with an advertising blitz, estimates William R. Bruce, general manager of Nissan Motor Co.'s three-year-old Infiniti luxury-car division. Development costs might have added $330 million more. "With established competitors like Infiniti and Lexus, and with the continued weak economic environment," Bruce notes, "the challenges would have been more difficult than they ever imagined."

Clark J. Vitulli, chief operating officer of Mazda Motor of America Inc., admits as much. "Sure, we could have made a go of it in different times, in a different economy. But it became painfully obvious that this was not the time." Even without Amati, Mazda has spread itself pretty thin. It has been spending at a $1 billion-a-year clip at home for the past three years in an effort to become Japan's No. 3 carmaker, behind Toyota and Nissan and ahead of Honda and Mitsubishi. It has doubled the number of Mazda showrooms by expanding from three to five distribution channels and has poured money into developing new cars to fill them. Over the past 18 months, it has launched 11 new models--just in time for the market to tank. Concedes Makoto Miyaji, executive vice-president: "Our timing was off."

Mazda also gambled $500 million on a new flexible assembly line at its Hofu plant, where the luxury cars, among others, were to be built. Production started in February, but sluggish sales forced Mazda to throttle back from two shifts to one. The line is now operating at one-third capacity.

FORD INJECTION. Mazda's financial troubles have sparked repeated rumors that Ford Motor Co. would raise its 25% stake in the company. This summer, Ford injected $380 million into its Japanese ally by buying half of Mazda's Flat Rock (Mich.) plant. And it increased its equity in Mazda's Autorama, a distributor that sells some 75,000 Ford-badged cars a year in Japan. But Ford is unlikely to invest more in Mazda itself. "If Mazda gets into trouble, we will help them ourselves," says Sotoo Tatsumi, president of Sumitomo Bank Ltd.

Sumitomo has helped before. It engineered the Ford deal in 1979 to bail Mazda out of an earlier financial crunch when the company's innovative but gas-guzzling rotary engine ran into the energy crisis. And the bankers clearly won out on Amati. Says Tatsumi: "We disagreed with the idea from the start."

So did most analysts. "Mazda had no business opening a luxury channel," says Usher. To get back on track, he says, Mazda next needs to scale back its Japanese expansion. One possibility would be to merge the two newest dealer networks: Eunos, built around the Miata roadster and the RX-7, and Autozam, targeting young women with minicars and cute showrooms. Saying sayonara to Amati may have been the easiest cut. Alone it may not be enough.

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