Will Wankel Work Wonders?

HIROSHIMA — In a strategic move to revitalize its brand and boost sagging earnings, Mazda Motor Corp., Japan's sixth-largest automaker, is turning back the clock and re-emphasizing its rotary engine tradition — this time with the blessing of partner Ford Motor Co.

The company, at last January's North American International auto show, displayed a near-production version of the rotary powered RX-8, the stylish 4-door sports sedan that received rave reviews when unveiled as the RX-EVOLV concept car at the 1999 Tokyo Motor Show. Mazda now confirms that it will build the curvy RX-8, powered by the automaker's next-generation RENESIS 250-hp rotary (Wankel) engine, beginning in late 2002.

In an exclusive interview with Ward's Auto World, Mark Fields, Mazda's 40-year-old president — now in his second year as Mazda's chief executive — characterizes the rotary as an “icon” product. “We need it to get people back into our showrooms,” he says. “Every car company needs something that sets it apart from other manufacturers. For Mazda, it was and is the rotary engine.”

Mr. Fields says that internally there has been tremendous momentum to bring the RX-8 to market, as the automaker chips away at once-prohibitive costs of the RENESIS, which, unlike Japan's current RX-7 rotary, is naturally aspirated. The rotary is a throwback to the glory days of the 1980s, when RX-7 sales averaged close to 4,500 units per month, compared to just 2,611 sold in all of last year. Robert Shanks, Mazda's chief financial officer, claims the company has cut the breakeven of the RENESIS to fewer than 100,000 units per year. With Mazda looking to sell the RX-8 in Japan, North America, Europe and Australia, he's bullish.

But when asked about launching a family of rotary-powered vehicles, including an upscale sport/utility vehicle (SUV) and multipurpose vehicle (MPV), Mr. Fields advocates caution. “The RX-8 is a business test case for us,” he says. “We're not going to bet the farm, but (we) will consider other options if we execute this project well.”

Mr. Fields, together with Martin Leach — Mazda's former product development chief, now vice president of product development for Ford of Europe — deserves credit for bringing the rotary out of mothballs. The pair teamed to formulate Mazda's new brand strategy in the 1990s, including the company's rotary heritage. Industry watchers, however, warn that the rotary alone cannot reverse the auto-maker's falling fortunes.

The question is how to stay on track in a see-saw economy that puts the company's fiscal 2000 losses in the ¥156.5 billion ($1.25 billion) range. The company explains that comes largely from a move to write off an expected shortfall in retirement benefits all at once, rather than spread over the next 15 years. But the loss is more than triple earlier estimates of a mere ¥49.5 billion ($423 million) loss for the year. Net debt remains a crushing ¥504 billion ($4.3 billion), leaving a bloated debt-to-equity ratio of 360%.

“Let there be no doubt,” Mr. Fields warns, “2001 is going to be a challenge. We are projecting a 5% decline in North American demand and virtually negligible growth in Europe and Japan. Our performance will depend heavily on exchange rates.” Mazda is particularly vulnerable to exchange rate fluctuations, as production in Japan still accounts for more than 80% of global output and nearly 50% of global sales, well above the industry average. Mr. Fields claims the strong yen cut earnings by ¥140 billion ($1.2 billion) in the last two years and is the single biggest factor contributing to this year's red ink.

Hopes are pinned on a strategic analysis made last spring, which probed into Mazda's strengths and weaknesses — from executive suites and factory floors to distribution channels and dealerships. The objective: to develop a five-year plan focused on delivering long-term growth and profits.

The so-called “Millennium Plan,” Mazda officials now say, is designed to give the Japanese automaker a more vital role in its partnership with Ford, while accomplishing its objectives to reemerge as the maker of expressive products and reasonable profit. Last month, Mazda announced it will engineer Ford's future front-wheel-drive C/D midsize vehicles, a classification that exists in Japan and Europe and includes Ford of Europe's Mondeo and Mazda 626. In the U.S., cars jump from C (Focus) to D (Taurus) with no in-between segment.

Mazda also will engineer all Ford Group 4-cyl. engines, says Mr. Fields, noting the Millennium Plan runs through fiscal year 2004. Mazda will launch 11 new products in North America between now and 2003, and several more in other world markets, including nine in Australia. Mr. Fields says Mazda's crucial next-generation vehicles, to be built from four completely new architectures, are “one giant step toward re-launching Mazda.”

Mazda in New York last month unveiled its new line of compact cars, which will be sold in most world markets except North America. They come with a new family of 4-cyl. engines ranging from 1.3L to 1.6L as well as a new-technology continuously variable transmission (CVT) and a 1.4L direct-injection diesel engine. Similar in design to the new Toyota Motor Corp. Matrix/General Motors Corp. Pontiac Vibe, the cars will be built in Japan beginning in 2002 and at Ford's Valencia, Spain, plant in 2003.

Developed from the current Focus platform, Mazda's new compact sedans go on sale in 2003, replacing today's Protege lineup. In all markets, the line will include a 5-door hatchback and another, larger, lineup of new 4-cyl. gasoline engines displacing from 1.4L to 2.3L, including a direct-injection diesel. Only the larger-displacement 2L and 2.3L gasoline variants will be sold in North America.

The 626-replacing midsize sedan will be joined by a station wagon and a 5-door hatchback. The wagon will come to North America, Mazda sources say, but the hatch is less certain. The lineup shares new 4-cyl. engines in 1.8L, 2L and 2.3L variants, with North America getting the 2.3L as the base engine.

Up-market models gain the all-new 3L DOHC V-6 that incorporates variable valve timing, although one Mazda source admits the engine is developed from today's existing Ford Duratec V-6.

While Mazda broadens its passenger car lineup, officials indicate expansion of the truck lineup to include a full-size offering are unlikely, but there are possibilities with crossover SUVs that use car platforms.

Beyond new products, other key elements of the Millennium Plan include:

Mazda also is tackling currency fluctuations by procuring more parts from overseas. Traditionally, the automaker purchased 5% to 6% of components overseas for its Japan-made vehicles. Current levels have risen to 16% to 17%, and Mazda has targeted overseas parts purchases to grow more than 20% of total components.

Management, meanwhile, has set clear financial objectives — 3% return on sales, 6% return on assets and 50% net debt-to-equity ratio — all by the end of fiscal year 2004. Aggressive market-share goals include 3% in North America, 3% in Europe and 7% in Japan. These will not be easy targets. Mazda's North American and European market shares totaled just 1.5% and 1.2% last year. In Europe, share fell 0.2% due mainly to the weak euro.

Part of the problem in North America can be attributed to the automaker's poor use of capacity at Auto Alliance International Inc., its manufacturing joint venture in Flat Rock, MI, where it builds the 626 and Ford builds the Mercury Cougar. “Right now, our capacity utilization is unacceptable,” Mr. Fields says.

The plant, which has been operating at under half of its 226,000-unit capacity and cut back from two shifts to one shift last summer, built 107,431 units in 2000, down 35% from 1999 levels of 165,143 units. The 626 production dropped 22.8% to 67,255 units from 1999's 87,065 units. “As we look at future product programs, we've got to find a way to make that place hum,” Mr. Fields says.

Mazda's Japan-market share, meanwhile, has fallen 0.2% to 5.3%, the first drop in three years, in the face of stiff competition from industry leader Toyota and strong demand for 0.6L minicars following 1998 regulatory changes. Though it doesn't itself produce a mini, Mazda purchases several models from Suzuki Motor Corp.

The Millenium Plan's clarity has impressed some analysts. Stephen Usher, of Jardine Fleming Securities (Asia), says that for the first time in a decade, Mazda has a comprehensive restructuring plan that includes plans to deal with imbalances in domestic production and overseas sales. “While not as dramatic as Nissan's revival plan,” he says, “it should return the company to sustainable profitability.”

Mr. Fields has grown used to the comparison with Nissan, pointing out that Mazda has taken a lot of the same steps, and did so first. “In the last four years, we've reduced our debt 50%; we've reduced our purchase costs over the last five years by 28%,” he says. “We've stripped out about $3.5 billion in costs; we have returned our domestic dealers back to profitability. We've reduced the number of platforms from 17 to 12. We've integrated back office operations with Ford in many overseas markets. We've spent a lot of time building our brand. So, we've done a lot of things,” he says.

Ultimately, the key to a successful Mazda is its evolving partnership with Ford, the world's second-largest auto-maker, which acquired a controlling 33.4% stake in the Japanese company in 1996. This will be expanded not only into Europe but also across a broad front.

The first example of shared platforms are the new midsize Mazda Tribute and Ford Escape SUVs, which went on sale in the U.S. and Japan late last year. Mr. Fields is confident that Tribute sales will reach 20,000 units this year in the most lucrative segment of the U.S. market, returning the operation to profitability and helping push other Mazda brands.

Additionally, Ford recently began production of a new, largely Mazda-developed 4-cyl. engine series in Dearborn and Chihuahua, Mexico. Mazda production is scheduled to get under way in Hiroshima this fall, to be followed in 2003 by the opening of a new Ford engine plant in Spain. At capacity, the companies plan to produce more than 2 million units annually.

AutoAlliance Thailand, a joint car and light truck production venture, has added a second shift and soon will reach annual capacity of 100,000 units — one year earlier than planned. The two automakers in Thailand, Taiwan, Australia and New Zealand have joined forces in sales and marketing. The companies also are coordinating fuel cell and gas-electric hybrid development activities, with Mazda relying heavily on Ford.

“We are again at a crossroad,” reflects Mr. Fields, hopeful that a sweeping restructuring plan, plus a little back-to-the-future in the shape of a new rotary car, will restore Mazda's flagging fortunes.