HIROSHIMA – When Mazda Motor Corp. announced its fiscal 2005 financial results in April, it reported the largest operating profit in the company’s 75-year history – ¥123.4 billion ($1.1 billion).

While production volume still is below the 1990 peak, the auto maker reported a respectable 4% return on record sales of ¥2.92 billion ($26.2 billion) in the fiscal year ended March 31, 2006.

And management is projecting even better results in the current fiscal year, including a nearly 10% increase in operating income, to ¥135 billion ($1.2 billion) and record sales of ¥3.1 trillion ($27.2 billion).

Moreover, all signs point to a further reduction in Mazda’s once-mammoth debt, which last year fell to a near 20-year low of ¥246.8 billion ($2.2 billion) and more than 60% below the mid-1990s peak.

Ten years ago, the situation couldn’t have been more different. The auto maker, known for its nifty sports cars and rotary engines, was on the verge of bankruptcy, having run up more than ¥69.5 billion ($600 million) in operating losses over the previous three years, while net debt ballooned to a record ¥658 billion ($5.7 billion) by early 1995.

As a result, the company’s debt-to-equity ratio rose to a dangerous 200%. By the time the hemorrhaging stopped, Mazda registered net losses in excess of ¥126.4 billion ($1 billion), while reporting seven consecutive years of negative cash flow. Domestic production and sales had plunged 50% to 1960s levels, and the auto maker’s share of the Japanese market had slid to 4%.

The story of one of the industry’s greatest turnarounds began in mid-April 1996 at a crowded Tokyo news conference. There, Mazda named Ford Motor Co. executive Henry D.G. Wallace president and announced that Ford, its largest shareholder, would pay $480 million to boost its equity stake to a controlling 33.4%.

Wallace, who had served two years as special advisor to outgoing Mazda President Yoshihiro Wada (including 22 months as executive vice president), formally assumed his new duties at the auto maker’s June directors’ meeting.

A straight-talking Scotsman who went on to become chief financial officer at Ford, 51-year-old Wallace arrived in February 1994 as part of an advance team that included Gary Hexter, a specialist in cash-flow management who helped right Jaguar Cars at the start of the decade, and Ross Witschonke, already in Hiroshima for nearly two years as technical affairs director for Ford’s Asia/Pacific operations. Ronald Leicht, the final member of the team, came in June 1995 to run marketing and sales.

What they found wasn’t pretty: a bloated cost structure; a marketing and sales organization in disarray with too many channels and too few models developed with specific customers in mind.

Mazda also suffered from a dispirited product-development organization that had seen a decade of work come to naught, as car after car failed to meet minimal sales targets. Its too-heavy reliance on exports left Mazda highly vulnerable to exchange rate fluctuations.

The new management team also discovered a company with tremendous engineering capability that, if properly directed, might assist Ford in developing and producing cars for Asia and other emerging markets.

They did not foresee – and could not have foreseen – that Mazda would play such an integral role in future powertrain and platform development for Ford’s North American and European operations, as it does today. Mazda, after all, largely had been excluded from Ford’s ill-fated “Ford 2000” global reorganization plan.

Against this backdrop, one of the team’s first tasks was to overhaul Mazda’s product-cycle plan to schedule new model launches in a way that would maximize publicity and enhance consumer awareness.

Most importantly, management sought to provide clarity and consistency about product objectives so that everyone in the organization – from designers to salesman and senior management to shop-floor foremen – would be on the same page, not working at cross purposes.

Later, cycle planning would incorporate joint platform development with Ford.

In a break from the past, the team would steer Mazda’s product team toward becoming more customer-driven.

“Before, Mazda challenged its engineers to make their dreams,” says Witschonke, now in retirement in Boca Grande, FL. “(The new management team) wanted them to make the customer’s dream.

“But please note,” he adds, “Mazda made wonderful cars. That was never an issue.”

Witschonke and Leicht, also retired and now residing in scenic Bucks County, PA, spent much of the first year laying the foundation for what would become Mazda’s “Zoom-Zoom” brand strategy.

“All of our preliminary market research indicated Mazda’s strengths were great styling and fun-to-drive cars,” Leicht recalls.

Mazda’s current trademark front end, with its unusual 5-point grille, was conceived during this period. Management also made the decision to pursue a more “European” styling direction featuring sharper edges and smoother curves.

Martin Leach and Phil Martens, eventual successors to Witschonke in Mazda’s product development organization (and who eventually moved on to senior management positions with Ford in Europe and North America, respectively, before leaving the auto maker), further refined these concepts and incorporated them into Mazda’s new brand identity, characterized as “stylish, insightful and spirited.”

Translation: responsive handling at any speed, under any driving condition.

Meanwhile, Hexter, who is widely credited with rebuilding Mazda’s finance organization, said in a 1998 interview the auto maker was too optimistic in evaluating product programs.

Related document: Mazda Dealerships in Japan

“They tended to rely on assumptions that, taken collectively, were like hitting consecutive homeruns,” he said. “Only if everything went right, could you expect to deliver.”

And Mazda only hit one homerun with the 1990 launch of the Miata sports car. Most other vehicles that came out of its extremely active product-development center would not reach first base, some never achieving yearly sales of 10,000 units.

Under the Ford team’s direction, Mazda set profit targets for the company as a whole, broke those targets down by vehicle segment, then split each segment into domestic and export markets. Taken into account were such factors as “substitution” (the extent to which one model cannibalizes another) and retail-versus-fleet sales – with the strong emphasis on retail.

In conjunction with introducing more rigorous methodologies, including extensive use of market research to develop new models, the Ford team put the brakes on runaway spending. Implied but not stated: Stop trying to compete head-on with Toyota Motor Corp., which had five times Mazda’s sales volume and market share.

From the mid-1980s through the early 1990s, Mazda’s executive council signed off on a costly $3 billion expansion program that included more than two dozen models to fill the auto maker’s five sales channels, three of which had been formed in the late 1980s just before Japan’s economic bubble burst.

And until the plug was pulled, the auto maker was preparing to launch a luxury channel in the U.S. to compete against Acura, Infiniti and Lexus.

Mazda research executive Seita Kanai, a senior chassis engineer at the time, minces no words about the decision to create five sales channels in Japan.

“It was simply out of control,” he declares. “We were going in so many directions we damaged our brand. There was no consistency in what we were doing.”

Takaharu Kobayakawa, who was general manager in charge of Mazda’s design division, says the company’s marketing strategy “overstretched (its) development organization. We simply couldn’t support it.”

By spring 1999, Mazda had eliminated the Eunos channel, merging it with Enfini, and sold its stake in Autorama Inc., which had trafficked mostly in Mazda-built Fords, to Ford Japan Ltd. Prior to the turnover, Ford had renamed the channel Ford Sales Japan Ltd.

The result: Mazda was left with three channels: Enfini, Mazda and Autozam – with Autozam more of a sub-channel that sells 0.66L minivehicles built for Mazda by Suzuki Motor Corp.

Meanwhile, Mazda slashed the number of dealerships from an early 1990s peak of more than 1,200, the great majority operating in the red, to a more manageable 300, almost all of which are turning profits.

Kobayakawa, who like scores of other engineering graduates in the 1960s joined Mazda because of his interest in the rotary engine, had an added concern.

As program manager of the ill-fated third-generation RX-7 sports car, which came to symbolize what went wrong at Mazda, he feared the auto maker’s precarious financial situation might bring an end to its 4-decade involvement with the engine.

He also was acutely aware of the Ford management team’s concerns about the rotary’s financial viability. Fairly or unfairly, the car’s marketplace problems were pinned mainly on the high cost of the rotary engine and the need for a special platform to accommodate it.

Often forgotten, the car, which hit Japanese showrooms in 1992, was developed when the dollar traded at nearly ¥140. Over the next four years, the greenback lost more than one-fifth of its value, falling to an average of ¥108 and forcing Mazda to tack on another $5,000 to the model’s sticker price.

Moreover, Kobayakawa’s development team had been instructed to move the car up-market from the previous generation (which sold for about $20,000, the price of the current Miata) and position it atop Mazda’s new premium-car lineup.

As a result they loaded it with such value-enhancing features as a new and improved suspension system and twin-turbochargers for the engine, and they made extensive use of aluminum in the body to enhance driving performance and fuel economy.

When the auto maker finally pulled the RX-7 from the U.S. market in 1996, it listed for nearly $40,000.

Nevertheless, the RX-7 was a success with critics, winning various car-of-the-year awards in the U.S. and Japan.

Looking back, Kobayakawa, who retired from Mazda in 2002, says “the decision (by Leach and Fields, who later headed Mazda) to back the RX-8 program lifted a great burden from my shoulders.”

Mazda unveiled the concept for the RX-8 (named the RX-EVOLV) at the 1999 Tokyo Motor Show together with a new multi-side-port rotary that simultaneously boosted horsepower and reduced emissions.

The RX-8, a 4-door sports sedan, went on sale in 2002, the same year Mazda finally stopped production of the RX-7.

For Fields, a marketing whiz who served as president from December 1999 to April 2002, the decision was a no-brainer.

“We needed an ‘icon’ product to get people back into our showrooms,” he said. “Every car company needs something that sets it apart, and for Mazda it was and is the rotary engine.”

Whether the RX-8 still is bringing people into the showroom, 36 months after its fast start in the U.S. market, now is in doubt. Since the end of last year, sales have fallen below 1,000 units in five of the past six months, roughly half the levels during the first two-plus years.

Related document: RX-8 Sales in U.S.; Production in Japan 2003-2006

But that slack since has been picked up by other models, mainly the Mazda3, which has been the auto maker’s biggest hit since unveiling its “Zoom-Zoom” brand strategy.

The new CX-7, a sporty cross/utility vehicle due this month, also has received solid reviews for both styling and performance.

The auto maker is counting on these models to help it achieve 5% global sales growth and meet its current fiscal year target of 1.2 million units, the highest total since the early 1990s, and a 6% return on sales.

And Ford now is hoping to capture some of that magic for its own brands in North America. Fields earlier this month tapped Moray Callum, who led Mazda’s most recent design resurgence, to head design for North American cars.

Fields also is copying engineering philosophies used at Mazda for production development at Ford.

“We reorganized in the fourth quarter of last year to create a central engineering group, which is one of the hallmarks of the Mazda system,” Fields said last month.

“Opposed to having two engineers working in two different product groups developing HVAC (climate control) systems, we now have one. Organizationally, that will help drive a lot of commonality, where we’ll get our economies of scale.”

This also will free up engineering resources to refine and develop new products, Fields added.

CEO Bill Ford also has signaled Mazda is the template for Ford’s North American recovery plan.

“It's worked with Ford of Europe, worked at Mazda, and it's working at Land Rover as we're sitting here,” Bill Ford said in February in announcing the auto maker’s “Way Forward” plan. “A lot of the levers we're pulling were pulled before, and it's worked.”