Japan Auto's Talented B-Team

Toyota and Honda may get all the press among Japanese car makers, but second-tier players like Mazda and Suzuki are making impressive gains

by Ian Rowley

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Compared to the possible sales drama at Chrysler, the financial travails of Ford (F), or Toyota's (TM) quest for industry supremacy, this bit of industry news out of Japan barely registered. Yet on Feb. 6, the once-hapless automaker Mitsubishi Motors (MMTOF) actually managed to post a $35 million quarterly net profit for the first time since it started reporting quarterly in 2004.

While Japan's first-tier car companies such as Toyota, Honda (HMC), and Nissan (NSANY) tend to grab all the attention, the fact remains that smaller Japanese automakers operating under the radar are making some interesting strides as well.

In the case of Mitsubishi, whose brand was crushed by a product recall scandal several years back, the fact that it is on track to post its first full-year profit since 2003 for the fiscal year ending this March is a big step in the right direction. And other second-string Japanese players such as Mazda (MZDAF) and Suzuki (SZKMF) are wowing consumers and impressing rivals with smart designs and imaginative business plans that offset their lack of scale and production muscle in the hotly contested global auto industry.

Crossover Success

Despite the unrelenting bad news from Ford these days, one big positive is the U.S. company's alliance with Mazda. This financial year Mazda, which is one-third owned by the U.S. automaker, is set to post record profits of $634 million, a rise of 12% on a year earlier, and will increase unit sales by 3% to 1.18 million.

Its stock price, at $5.80, has increased almost five-fold from 2001 when the company lost $1.25 billion. And having fought hard to reduce debt and straighten out its balance sheet, new designs such as the CX-7 and CX-9 crossover SUVs are winning plaudits (see BusinessWeek.com, 5/9/06, "Mazda Crosses Over to U.S. Opportunity").

Christopher Richter, an analyst at CLSA in Tokyo, adds that Mazda's recovery, which dates back to Ford taking a stake in 1996, has been achieved without Ford investing heavily in Mazda. "Ford has helped through co-purchasing agreements, sharing R&D and other peripheral benefits, but there was no big infusion of cash," Richter says. "They've restructured this company the old-fashioned way—from their own operating cash flows." Nissan's recovery under Carlos Ghosn, while spectacular, was aided by several billion dollars of investment from Renault (RNSDF).

Real Innovator

Suzuki is just as impressive. While a small player in the U.S., this pint-sized automaker last year sold 690,000 cars in Japan. That's only 10,000 fewer units than mighty Honda. It did so by its mastery of Japan's white-hot demand for minicars—ultra-small compacts with engines that typically don't deliver more than 60 horsepower. In other words, by thinking small, Suzuki managed to grow smartly in a car market that overall shrank by 2% (see BusinessWeek.com, 11/16/06, "Land of the Lilliput-Putt").

However, it is Suzuki's overseas strategy that really marks the company as an innovator. Last week, Nissan and Renault, in a deal with Indian automaker Mahindra & Mahindra (MAHMF), became the latest car company to announce expansion plans in India, one the world's most promising emerging auto markets outside of China at the moment. Toyota, Honda, General Motors (GM), and others are also bolstering India plans.