Mazda Motor (MZDAF
) appears to have found its groove once more. On Apr. 28, the Hiroshima-based auto maker announced record net profits of $567 million -- a rise of 46% over a year earlier. Sales rose 8% to more than $25 billion, and on May 8 Mazda's share price reached its highest level in more than a decade. Not bad for a company that five years ago posted a $1.25 billion loss.
Just as important, though, is the arrival last week of the first shiploads of the new Mazda CX-7 crossover SUV on U.S. shores. The CX-7, to be followed by the larger CX-9 early in 2007, will be Mazda's first entry into the vibrant crossover SUV segment. These product launches are crucial and, if successful, could be a key driver of Mazda's sales and profit growth over the next couple of years. "North America has been the laggard in Mazda's recovery," says Kurt Sanger, an analyst at Macquarie Securities in Tokyo. "But this is a very good opportunity."
Indeed, while the likes of Toyota (TM
), Nissan (NSANY
), and Honda (HM
) make the majority of their profits in the U.S, Mazda has relied on Europe. There, Mazda's sporty image and fun-to-drive cars have long been popular. While the company doesn't reveal what proportion of earnings are derived from North America, analysts say that, unlike other Japanese carmakers, they are relatively low.
IN THE MIX. That's one big reason why, despite record earnings, Mazda's operating margin is all of 4.2% -- less than half of industry leader Nissan. "The North American business is the biggest challenge for us," Mazda CEO Hisakazu Imaki said at an earnings news conference in late April.
What explains Mazda's relative weakness in the North America? In short: model mix. Mazda's U.S. sales tend towards less profitable passenger vehicles like the Mazda3 and Mazda6, rather than bigger, more profitable models that have stoked profits at rivals.
To make matters worse, larger Mazdas have either been unpopular in the U.S. -- like the soon-to-be-defunct MPV minivan, which was considered too small for U.S. buyers. And the Tribute light truck is manufactured by Ford (F
), which owns 33% of Mazda. "Generally, the manufacturer takes most of the profits so that benefits Ford more than Mazda," notes Andrew Phillips, an analyst at Nikko Citigroup in Tokyo.
STEPPING UP. But the launch this month of the CX-7 into the red-hot crossover SUV segment -- where sales grew 119% last year to 671,000 -- should be a big step in the right direction. Built in and exported from Japan by Mazda, the CX-7 is expected to help the company meet a target to raise U.S. sales 11% through March, 2007, to 290,000. The SUV, priced at $23,750, would also help raise U.S. profitability levels. "We're very hopeful of hitting a sweet spot with this model," says Dan Morris, senior managing director in charge of global marketing and sales at Mazda in Hiroshima.
Morris says Mazda is targeting sales of 40,000 through March next year, while a CX-7 Web site set up four months ago has received 620,000 hits. Likewise, sales of the larger and more expensive CX-9 should add further momentum in 2007 and could even provide a template for Ford on how to come up with savvy designs (see BW Online, 4/14/06, "Want To Fix Ford? Look at Mazda").
Of course, the CX-7 and CX-9 will certainly need to play well with customers if Mazda is to hit its aggressive growth targets. Mazda wants to increase sales in the U.S. by 28,000 by March, 2007, at a time when sales of the aging Mazda3 and Mazda6 are expected to flag.
TOUGH TIMING. One concern is how Mazda's dealers -- accumstomed to selling RX-8s and Mazda3s -- will adapt to selling crossover SUVs. One factor in Mazda's favor is that it has already increased the number of exclusive Mazda dealerships to 43% in the U.S. and plans to reach 50% in the next year.
Those dealers will have to be savvy. While the price and lines of CX-7 look good and demand is rising fast for crossover SUVs, Mazda is hardly the only game in town. The 2.3 liter turbo charged CX-7 will be up against the likes of Honda CR-V, Toyota RAV-4, and soon-to-be-released Mitsubishi Outlander, among others.
"We can only ponder how well the CX-7 would have done if it had been released a couple of years ago," says Tatsuo Yoshida, an analyst at Merrill Lynch in Tokyo.
SLOW AT HOME. Yoshida adds, however, that he has fewer competitive concerns about CX-9, which debuted at the New York auto show last month. While its appearance is similar to the CX-7, the CX-9 is powered by a 3.5 liter V6 engine, has room for seven passengers, and is longer than most crossover SUVs. As for looks, unlike rivals, the CX-9 avoids a boxy, functional design. "It's unique in that it's a seven seater and it's stylish," Yoshida says.
What is clear is that Mazda can't afford to rely on its home market for growth. Japan's car market shrank last year as a whole and Mazda expects only flat domestic sales for the year ahead. In Europe, Mazda is predicting unit growth of just 2.9% to 300,000 units. And in other markets outside Japan and the U.S, such as Australia and China, 3.5%. That's why the U.S. market and vehicles like the CX-7 and CX-9 in particular are vital if Mazda wants to keep on delivering record sales and better margins.