Rotary Was Flash Point in Mazda Comeback Strategies

HIROSHIMA – The rotary engine has been both a blessing and a curse for Mazda Motor Corp.

An integral part of the auto maker’s corporate culture since the early 1960s, the engine, brainchild of German inventor Felix Wankel, put Mazda on the automotive map.

In 1967, six years after entering into a licensing agreement with Wankel, Mazda launched its first rotary car, the Cosmo Sport, and immediately earned the reputation for being the little company that could. None of its larger competitors, including giant General Motors Corp., had succeeded in overcoming several technical obstacles to making the rotary road ready.

The next six years witnessed a doubling of production and sales as Mazda, then named Toyo Kogyo Co. Ltd., pulled ahead of Honda Motor Co. Ltd. and Mitsubishi Motors Corp. to become Japan’s third largest auto maker.

And powering growth was the rotary.

By 1973, one out of three Mazdas built was rotary powered, and the great majority of those – nearly 200,000 units – found a home in the U.S., where Mazda outsold Honda more than two to one.

Then the bottom fell out of the U.S. market. In 1973-1974, the industry was hit by the Arab oil embargo, which resulted in long lines at the pump and a sharp drop in new-vehicle demand. Mazda suffered additionally from a devastating Environmental Protection Agency report that slammed rotary-powered cars as gas hogs.

With rotaries accounting for four out of five Mazdas sold in the U.S., the auto maker’s fortunes suffered a sudden downturn. U.S. sales fell 50% over the next three years, triggering a financial crisis that saw Mazda’s net debt balloon to nearly ¥280 billion ($2.5 billion), a staggering sum for a company its size in that period.

A similarly sized bailout package from Sumitomo Bank probably saved the auto maker from bankruptcy and the city of Hiroshima from a major crisis, as Mazda was responsible for one of four jobs either directly or indirectly. In exchange, Sumitomo sent three executives to Hiroshima to serve on Mazda’s board, an unwelcome development for most in Mazda’s engineering group, but a price that had to be paid for management’s misreading of the marketplace.

While this was going on, Kenichi Yamamoto, the engineer who led the original rotary development effort, was called back to rescue the engine and, perhaps, save the company. Working well into the night, often seven days a week over the next three years, Yamamoto’s team succeeded in doubling fuel economy of the rotary. Their efforts culminated in the 1978 birth of the RX-7.

RX-7 marked debut of more fuel-efficient rotary engine.

Yamamoto’s reward was promotion to Mazda’s board of directors, then to president of the company in 1984.

Not widely reported were the internal fights inside Mazda over the value of the engine. The arguments in favor of doing away with the engine, and resurrected in the mid-1990s by some executives sent by Ford Motor Co. to restructure the auto maker once again, included the engine’s poor fuel efficiency and its need for a special vehicle platform to accommodate it.

The rotary’s inherent cost was diverting Mazda’s limited financial resources away from conventional powerplants, critics said.

But others fought to retain the engine.

“We needed something to distinguish ourselves from other car makers,” said Yamamoto, who served as Mazda president and then chairman until 1991 and would defend the decision to retain the rotary through the end of his tenure. “The mistake was adopting it for all cars.”

In 1979, with earnings on the rebound, Sumitomo Bank approached Ford to acquire its initial equity holding in Mazda. Again in 1993, this time with Mazda bleeding red ink, the bank approached Ford to raise its stake and effectively take over Mazda management. Three years later in May, the bank got its wish.

For Ford, this was a chance to reenter Japan as more than just an importer after a nearly 60-year hiatus. In 1924, Ford became the first foreign auto company to assemble vehicles in Japan – knockdown Model Ts at a plant 25 miles (40 km) southwest of Tokyo in Yokohama.

GM arrived the following year. By the mid-1930s, the two auto makers were turning out 30,000 vehicles annually. Toward the end of the decade, as Japan geared up for war, both companies would be forced out, never to return.

Insiders claim that the unassuming Henry D.G. Wallace, brought in by Ford to assist in the Mazda turnaround, did not seek out the job of president and that he was satisfied to work behind the scenes as special advisor to Mazda President Yoshihiro Wada – functioning as a strategist, arbiter and even a lobbyist in dealings with Ford.

Wallace (and to a lesser extent Technical Affairs Director Ross Witschonke, who rose to managing director before returning to Ford in spring 1997) is credited with “selling Mazda” to Ford, thus paving the way for his successors to press for an expanded role in joint platform and powertrain development.

During this initial phase, Wallace, who came to Japan by way of South America, where he had been president of Ford Motor de Venezuela, pushed quietly yet firmly for stricter inventory controls, capital spending cuts and staff reductions – but only where necessary and strictly adhering to Japanese labor practice, which concentrated on “early retirements” or buyouts for older employees.

In one especially slow period, he prevailed in temporarily suspending plant operations rather than building up huge inventories and heavily discounting vehicles in order to move them.

Working in this manner, Wallace’s team helped Mazda slash nearly ¥202 billion ($2 billion) from its bloated cost structure while trimming nearly 4,000 employees from the company’s 30,000-person workforce.

That was just in the first two years.

As a tangible reward for the effort, Mazda reported its first positive cash flow in nearly a decade in the fiscal year ending March 31, 1996.

This is not to say everything went smoothly.

Immediately after the announcement Ford would raise its stake in Mazda, a leading Japanese newspaper characterized the move as a return of the “black ships,” an unflattering reference to the forced opening of Japan in 1853 by Commodore Matthew Perry and his flotilla of black gun ships.

In fact, Wallace later quipped there were times he pictured himself as a modern-day William Wallace (no relation), the Scottish independence leader (and the subject of the movie “Braveheart”) who was disemboweled by the English 700 years ago.

Like Carlos Ghosn at Nissan Motor Co. Ltd., who was charged with an even bigger restructuring effort, Wallace possessed those intangible qualities that inspire loyalty and motivate others to give something extra.

Not that Mazda employees were averse to working long hours – that was part of their corporate culture. In this case, something extra meant working in a more controlled and disciplined manner.

“Henry brought focus and set priorities,” says Ronald Leicht, at the time head of marketing and sales for Mazda. “And you couldn’t not like the guy, so developed were his people skills. He had that unique ability to give people bad news and actually have them thank him for it. And no matter what the situation, he made it non-confrontational, while providing great leadership.”

Despite initial apprehension, mostly involving fears of massive layoffs, Wallace’s tenure could be described as a honeymoon for the two companies. That honeymoon abruptly ended at a hastily organized news conference in November 1997, when Wallace announced he would leave the auto maker – immediately – and that a relatively unknown Ford executive, Jim Miller, would be taking over.

Unlike Wallace, who spent more than two years in Hiroshima working with Mazda’s Japanese management team before becoming president, Miller was there for just four months. Differences in style were noticeable even in that initial news conference when Miller, in his opening remarks, emphasized his “Ford” bona fides and “Ford’s” strategy, rather than “Mazda’s.”

At Wallace’s periodic meetings with the media, there was never a hint he was anything but a “Mazda man.”

In the months following, disagreements over the company’s direction became more pronounced. These tended to involve future product plans, as some among Mazda’s Japanese management believed the Ford management team was pushing Ford’s interests ahead Mazda’s.

For instance, from the 1996 debut of the Demio wagon (sold outside Japan at the time as the 121), Mazda went several years without a major new model launch – excluding a pickup truck in Thailand built as part of a joint project with Ford and overhauls of the popular Miata sports car and under-performing 626 sedan.

Meanwhile, there was pressure to shelve the rotary in favor of the Miller-cycle engine, a V-6 version of which was optional on the upscale Millenia sedan.

And while the end result ultimately was good, better than good in light of last

year’s record profits, there also were missed opportunities. High on the list was the company’s decision to delay entry into the all-new compact SUV segment with a model to compete against Toyota’s RAV4 and Honda’s CR-V.

Mazda engineers were ready to receive their marching orders in late 1995, having displayed a nifty concept at the 1995 Tokyo Motor Show. Codenamed SU-V, the model effectively was killed despite a generally favorable response, then reborn as the slightly larger Tribute that shares a platform with the Ford Escape.

The Tribute/Escape collaboration served as a good warm-up for future joint developments, in particular the CD platform on which the Mazda6 and Ford Fusion are built. However, a case can be made that Mazda missed a golden opportunity to cash in at the start of the compact SUV boom.

While Tribute sales have not been bad since the model made its American debut in summer 2000 (averaging 43,500 units per year, all built by Ford at Ford’s Kansas City plant), they also have not kept pace with the RAV4 and CR-V, which combined last year for more than 150,000 units.

And this does not factor in two, perhaps three, lost sales years back in the 1990s, when Mazda had no vehicle in the segment, and potentially lost sales outside of North America, where the smaller RAV4 and CR-V seem to be more popular. Honda, after all, is now building the CR-V in the U.K. and Thailand.

For Ford, the collaboration has been a tremendous success - as combined Escape (and Mercury Mariner) sales last year, including hybrids, approached 250,000 units.

Part of the problem that surfaced after Wallace’s departure can be chalked up to growing pains experienced as Mazda shifted from being a full-line producer of cars and trucks to a development partner and slightly below-premium brand within the Ford group. There also were communication problems, the sort that often occur in trans-cultural business settings.

The Ford team did not speak Japanese. Most lived in luxury apartments in an upscale neighborhood in downtown Hiroshima. Those who had children sent them to costly international schools, where they received their education in English, not in Japanese like the children of their management counterparts. And when they went out socially, it was often among themselves, dining at each other’s apartments. The result was an informal board structure that excluded their Japanese colleagues.

As one team member commented, “It was four of us against 24,000 of them.”

But there also were important issues about the auto maker’s future direction as witnessed by the Tribute/Escape decision.

“Mazda will not survive if it is only a Ford clone,” a former Japanese executive warned. “Many people forget that even in fiscal 1993 and 1994 (when Mazda lost ¥90 billion [$798 million]), the company would have been profitable had the exchange rate stayed at ¥130 to the dollar.”

In April 1994, the yen rose to a single-day high of ¥79:$1. For the full year, the exchange rate averaged ¥102:$1, rising to ¥94:$1 in 1995.

In December 1999, after less than two years on the job, Miller was replaced by 38-year-old Mark Fields. Health was given as the official reason for the executive shuffle.

Miller’s sudden departure and the decision to replace him with the relatively junior Fields, passing over Gary Hexter, who was next in line in seniority and rank (only two individuals, the president and chairman, were slotted above him), was rife with risk.

Hexter had been there since the start and arguably knew more about the company than any other member of the team. He also had made enemies with Mazda’s Japanese management team by his iron-fist rule over corporate finances.

Working behind the scenes, Wallace, by that time back in Dearborn as Ford vice president-Asia/Pacific and, thus, indirectly overseeing Mazda, defused the issue by selecting Fields.

Fields had been instrumental in restructuring Mazda’s domestic dealer network and, working with Martin Leach and others, in creating a brand strategy.

At the time, there still was resistance to appointing a Japanese president, though that became a priority of Lewis Booth, who succeeded Fields.

The result of musical chairs at the top was that the restructuring plan suffered a setback. Analysts, when looking back and comparing Mazda’s recovery with Nissan’s, cite this as a key factor to why Nissan turned its operations around more quickly. Carlos Ghosn, though no longer based in Japan, remains CEO at Nissan – seven years later.

In part because of his age, expectations were low for Fields, who now is president-The Americas for Ford and is charged with duplicating the Mazda recovery at the parent company’s North American operations.

But Fields proved most skeptics wrong. Under his leadership, Mazda completed one of the final pieces of its restructuring with the announcement of a mid-term business plan in November 2000, which would be implemented by his successors, Booth (currently head of Ford of Europe and the Premier Automotive Group) and Hisakazu Imaki (current chairman, president and CEO).

Although Mazda still remains too dependent on exports and lags its Japanese competitors in setting up an overseas production base, it now is operating solidly in the black. Management projects this year it will surpass the last fiscal year performance, when operating profit hit ¥135 billion ($1.2 billion) and sales reached a record ¥3.1 trillion ($27.2 billion).

And the rotary engine lives on.