Will Mazda Ever Be Anything but a Headache for Ford?

In Japan, where company loyalty is a virtue valued above all others, it was a disturbing sign. At 10 a.m. on February 19, Mazda Motor Corp., the beleaguered Japanese carmaker controlled by Ford Motor (F ), offered early retirement packages to the first 1,800 employees who applied. That quota was filled by 10:01 as more than 2,200 workers rushed to sign up for the deal. More disturbing, those departing included some of Mazda's best and brightest. Among them: Norihiko Kawaoka, a top designer hired this month by Suzuki Motor Corp.

Mazda employees have a right to be scared. Although the carmaker, Japan's fifth-largest, finally turned a profit in 1998 and 1999 after five straight years of losses, that turned out to be a false dawn. Earnings took a sharp dive again for the year ended in March, with Mazda posting a record $1.3 billion loss on $17 billion in sales. The numbers were so bad Mazda cancelled dividend payments. It wasn't just the deteriorating Japanese market that sapped earnings. The red ink also flowed from Mazda's operations in Europe and the U.S., which account for a combined 45% of revenue.

When Ford bought a 25% stake in Mazda in 1979, the company then looked like a promising gateway to the Japanese market and a source of new technology, especially in engines. But the company has never been a big moneymaker, even after Ford increased its stake to a controlling 33.4% in 1996 and installed its own execs. "There are question marks about the role of Mazda in the Ford family," says Howard Smith, auto analyst for ING Baring Securities in Tokyo.

Mazda still enjoys cachet for the sporty styling of models such as the Miata coupe and its unique rotary engine technology. But in Japan, Mazda has long been sniffed at as a mediocre product. Sales in its home market are forecast to tumble 9% this year, to 280,000 vehicles. At a time when Toyota Motor Corp. (TM ) and Honda Motor Co. (HMC ) are rolling out new models at a rate of roughly one per month, Mazda won't introduce a single new offering this year. Instead, the company will hold off until 2002, when its introduction of new models will coincide with a program to share vehicle platforms with Ford.

Despite its problems, Mazda expects to break even this year. Stronger sales of newer products such as the five-seat, five-door Tribute compact SUV in the U.S. and the "323" midsize sedan in Europe, will help. And the ex-Ford staffers, who manage Mazda, led by CEO Mark Fields, have promised the turnaround will be real this time. To do that, the carmaker is cutting procurement costs by 15%, production capacity by 25%, and the workforce by 10%. "Mazda now has to deliver and we realize that," says David Thomas, Mazda's senior managing director for marketing. For Ford, Mazda remains what is has always been, more of a problem to solve than an opportunity to exploit.

By Chester Dawson in Tokyo

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