Case Analysis
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STRATEGIES
estled in a bay on the Sea of Japan lies Mazda Motor Corp.'s Hofu assembly plant, a feat of au- tomated manufaeturing and work-
er-friendly industrial design. In the 'tru- man zone," workers in spanking-white coats operate under gleaming fluores- cent lights. Hot, heary, noisy work is flrlly automated in a separate axea. The decor is soothing greens, grays, and blues. Modular minilines churn out sub- assembled sections.
Unfortunately, this ergonomic marvel is rururing at only 35Vo of capaaty. Maz- da sank $550 million into the plant, which it opened in 1992 to make upscale passenger cars. Then, Japan entered an economic slump, and consumers turned to sporb utiJities, wagons, and vans. But the Hofu plant can't make those kinds of cars. "Hofu is our most modern plant and our most efficient, but it's also our least flexible," concedes Mazda Presi- dent Henry D. G. Wallace, who was dis-
patched by major shareholder Ford Mo- tor Co. more than two years ago. 'TVe tend to run into restrictions with what we want to do at Hofu."
Ford is rurining into a lot of restric- tions vrith Mazda. The U. S. auto maker shelled out $481 million to raise its stake to 33.47o in June and effec- tively take control of the ailing $12 billion Japanese carmaker. Ford portrayed the buy as a bold move to find massive savings in development costs while extending its reach in Japan and South- east Asia. Ford would reduce Mazda's bloat- ed cost structure by shaking up suppliers and reducing person- nel. At the same time, it would inte-
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grate the Japanese parbner into a global "Ford 2000" strategy
UNToUGHABL* The aging Ujina plant is aital to Hiroslyima's economy
to beneflt foom Mazda's technical and engineering abilities.
Six months after word of the deal broke in April, it's clear the task is more diffrgull than'Ford wants to admit. Long admired by car buffs for engineering marvels such as the Miata sports con- vertible, Mazda has made some very bad business deeisions. Itre largely idle Hofu fadnry is only one syrnbol. Mazda's faith- firl engineers also cling to sentimental Ioss-leaders such as the gas-guzzling ro- tary engine. A rigid corporate cultwe keeps a brake on the pace of cost-cutting in the aging Maada worldorce. PAROCHUIL MINDSET. Mazda's entire cost structure is bloated---rven by Japan's pricey standards. A parochial mind-set
has left the eompany with only one major overseas plant, in Flat Roc\ Mich., which puts it way behind its rivals in establishing a global strategy. Mazda's passenger-car
market share in Japan has fallen to a mere 4.\Vo, and its U. S. sales have
dropped sharply because of L Poor image and market-
AHtRtCfft StHURfrl Wallace appears in ads to reassure bu;ers about
I Mazda having a foreign boss
FORD HAS A tOilG HAUL AT MAZDA Can it solve the Japanese carmaker's knotty problems?
108 BUSINESS WEEK / OCTOBER 7, 1996
ing. This year Lhe company wiil churn I
out a Lota.l ofjust 800.000 vehicles, vs. 1.4 I
miilion in 1990. Mazda had cumulative net losses of more than $700 miilion from 1993 to 1996, and it carries a staggering $4 biliion debt load.
No one is arguing that the Mazda dilemma wiII break Ford, which earned $2.5 billion in the first half of this year. But it will take a long time to make Mazda a smooth-running gear in the Ford machine. Mazda will require more management-and possibly more mon- ey-than initially expected. Ard the in- tegration of MatAa with the rest of Ford, for example, could slow the pace of Ford's sweeping global reorganization, Ford 2000. The risk that Ford could end up with redundarrt small-car development operations in Europe and Japan, limit- ing the economies it hoped to achieve. PARTTAL vlElY. Officially, Ford does not aelmowiedge that the problems atMazla are deeper than it understood. But it's elear Ford didn't have a complete pic- ture of what was going on inside Mazda before it took control. With less than a one-third ownership stake in the Japan- ese carmaker, legal restricbiors kept Ford in the dark on vital business'decisions. It took a year of encouragement from Wal- lace and Sumitomo Bank Ltd., Maada's second-largest shareholder, before Ford signed off on the deal-without having complete access to Mazda's inner work- ings. Before that, 'We never had the ability to share at the strategic level," says Edward E. Hagenlocker, president of Ford's auto operations.
Finding a way to make it work is Job One for Wallace, a lanky Scottish trou- bleshooter, and W WalT re Booker, Ford's executive vice-president in charge of emerging markets. In brainstorming ses- sions, Ford execs are trying to eome to grips with tough issues such as how to Ieverage Mazda's core strengths-small- car design Imowhow and engineering ex- cellence-and team up to find cost sav: ings. At the same time, top Ford and Mazda executives are groping for ways to rebuild Mazda's market share in Japan, jump into the race to fashion a low-cost "Asian car," and possibly shift some of Ford Europe's small-car design work back to MatAa, according to Booker. The two also hope to marry Mazda compo- nents and auto 'llatforms" to cut devel- opment eosts by as much as one third.
Rivals are openly skeptical that Ford can move fast enough to stanch the red ink and convince Japanese consumers that Mazda is not being Americanized. "The question is whether they can take the drastic action they need and still be accepted by Japanese society," says a
top executive at Toyota MoLor Corp. Drastic action is needed because Maz-
da has a huge capacity crisis. Even if it did regain its peak domestic sales- 600,000 vehicles in 1990-it would still fall far short of its 1.4 million arinual ca- pacity. Mazda always relied on exports, but overseas sales have been hit hard by the high yen, even now that it has re- treated to 110 to the doilar. If Ford picks up market share in Japan, Mazda might
MAZIIA'S TAIE OF WOE PROI'UGTIO]I Iil JAPII{
HAS PIU}IiIETED...
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DATA: COMPAI{Y REPOFIS
get a boost by building Ford cars. Mazda made 30,000 of the 48,000 Ford Escotts and Lasers sold in Japan last year. But that's not much of a Iifb agailst overca- pacity of more than half a million cars.
That means Mazda needs to quickly step up saies in foreign markets vrith hot new affordable products. Otherwise the U. S. company at some point would have to face up to the necessity of clos- ing a Mazda factory. "These guys have to get sales back up to what they were in the good oid days or close a plant," says Christopher Redl, an analyst at tNc Barings Ltd. in Tokyo.
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'nO: '91., lg2 '93 '94 '95 '96* MILLIONS OF CARS.
Maada has two huge passenger-car piants in Japan, and ehoosing which to shut dor,ur is a devilish dilemma. Hofu is new and efficient, but inflexible. The oth- er choice is the S0-year-old Ujina plant near headquarters in Hiroshima. Like many auto plants, it's aging-along with its worldorce. The average worker in a Mazda plant is in his early 40s. "Aging workers are losing their eyesight, and in some cases, their judgment ability," says Toshihide Deguchi, executive vice- president for operations. But closing the plant is hardly an option. Maada is the economic heart of l{iroshima, and closing the plant would trigger an intense back- lash from political leaders and consumers.
So for now, the goal is to build up sales, begirming with Japan. Mazda had a lot riding on the success of the Demio, launched on Aug. 26. A station wagon so compact as to almost be a minicar, Demio is the first new domestic model designed under Ford's aegis. It was priced very aggressively, with the most popular model going for about $10,500. The advertising shows Chicago Bulls star Scotty Pippen, a grant as he drib- bles around the tiay vehicie. Then he gets inside, suggesting that it only ap- pears to be small. Wallace also has ap- peared in ads, praising Mazda's rebirth under Ford and attempting to ease buy- ers' concerrls that a gaijin, or foreigner, is running Mazda. DEslcN SHAIGUP. The stratega has been a success so far. In its first tio weeks on the market, Demio pulled in 11B00 or- ders, against a monthly target of 4,000. But it's a distinctly small success, and it remains to be seen whether the Demio phenomenon will last. In other, bigger market segments, Mazda has few new models in the pipeline. Meanwhile, Tbyota and other rivals have begun new sales pushes.
That's why Ford executive Ronald J. Leicht is pressing ahead with a market- ing division, which is researching con- sumer needs and communicating them to Mazla design teams. In short, he's aL tempting a complete shakeup of Mazda's design culture. For years, Mazda's pride in engineering combined with a lack of cost controls led its development teams to design cars with little customer in- put. One result: what one analyst terms a 'fata] fascinatiort''with niche cars such as the Miata. 'TV'e've got to make what the customer wants, not what some people here on the fifth or sixth floor think is a reaily neat idea," says WaIIace.
Even though Ford has financial con- trol of Mazda, the Japanese company's execs are resisting Ford's attempt to alter their ways. "Regarding the future
I I2 BUSINESS WEEK / OCTOBER 7, 1996
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of Ford and Mazda development, who is going to be in control is a big ques_ tion," says Deguchi.
It's a particularly big question as Ford tries to fold Mazda into its giobal reor_ ganization. Ford is aiming to develop its ears and hucks on ,\rorld cal, platforms by 2000. But the Hofu factory isn,t even compatible with the Hiroshima plant, so it will be triclry to design cars that can be made by various factories worldwide. Tlrg t*o co-mpanies have teamed up on design in the past-the Ford pro]5e is essentially Mazda's 626, atdMazda,s l2l is a rebadged Ford Fiesta.
- The problem now is deciding who will design what. The new Escort" launchJ T May in the U. S. was based o" iVfrra-ut Po!"Sj, but indushy sources expectedthat the next generation of proteg6s
gl .!h. wali long ago, and prepared. Mojten Corp. diversifled into inflatabtes such as pontoons and basketballs as well as medicai equipment. It also broadened its customer base and built a factorv in Thailand. Others, too. are considering Southeast Asian plants and are tryin[ to breal< away foom dependence onfltad_ da, which is encouraging such moves, once deemed heretical. ,,Il they want to swwive, they're already doing it,,, says Jama-mo_to. But many
-supplilrs 'clearly
face Emlo-uptcy if pushed ioo hard, too
fast. That's why Ford can't go a.ny faster in shaking up the supplier blase.
"
In view of how long it,s going to take to impose greater efficiencies on Mazda,s operations, Ford may have little choice but to aJlow Mazda to gain against Ford,s om models in the U. S. and Europe.
da's parochial mind-set. A breai<through lasL year was persuading Mazda exe'cs to give up the unprofltable but senti_ mentai business of making taxis. Most taxis in Hiroshima are Mizdas, just as those in.Toyota City. Japan, are ioyotas. tsut taxis require expensive ."t.rr_ur_ tgpatlc rear-door openers on the drivels side,.for example-and margins are low. pactl"S taxi production was a decision Mazda executives couldn,t make. "EMOTtot{AL tSsUE" If that was contro_ yg..plr imagine the emotion attached,to Mazda's rotary engine. Research contin- ues, but the engine,s future is decidedlv fuzzy rxtder Ford. .,It's clearly ,n
"*o'-tional issue within Mazda with the older memb.ers of ouy management group,,. says Waliace.
Other, subtier tactics aim to change TEAYIIIG TIIE LIB Mazdais counting on big sales for the Demio station wagon-the firsr domestic model designed under Ford's aegis
wouid be based on a Ford platforrn from Europe. Now, however, Ford execs are eon- sidering giving some of that to Mazda, which will dispiease the Ewopean designers.
Another point of resistance to. Ford is Mazda's suppJiers, who were long protecLed by the company's loyaltv to thl Hiroshima area. Ford,s efforts to launch joint worldwide pur- chasing with Mazda is a ai-
tives at length. "I- stand here as the pros_ ecutor t0 speak for Hiroshim4,, tre sda. "If,s 1o good if only Mazda reeovers, with_ out the rest of Hiroshima.,,
, .M.-iq is trying to minimize the pain:It's helping its parts makers m"et the challenge by offering to send out teams of technicians and production experts to analyz,e production systems. Some 4g lo_ cal suppliers took them up on the offer. Many sawy suppJiers saw the writing
This raises the delicate issue of.what the Japane_se eall tomogui, or ,,eating one.s own."^ 11 the U. S., Mazda had t-o drop out of the hot sport-utiJity market be_ cause Ford refused to give it a fow_door version- of its popular Ford Explorer, of_ fering it instead a two-door mod"l_th" Mazda Navaho-that eonsumerc shurmed.
Ford could also be forced to shift som_e production from its U. S. plants to Japan to get the Mazda faci,ories h.umming. "Ith not impossible to envi_ sron that we would use that capacity for Ford products,,, Booker .ry.. ,,ThL issue is cost." The United Auto
-Workers
would take a dim view of that. so it would be a tough decision.
While Ford will have to make some painfrl adjustments, the bwden will fall more heavily on Mazda. And that means Ford has to keep chipping away at Maz.
Mazda's corporate culture over the lons haul.. Employees with foreign-languagE abilities are being cultivated] anei foiu ye3m of !1p hiring Mazda this year wilt !ak9 on 260 new employees, more than double the number in the previous year, even as it continues to try [o cut paytolls.
Wallaee says he was fascinate,i ilid" cover that the Japanese who used to copy and adapt from the West had de_ veloped closed minds toward what he regards as modem management meth_ ods. "I've so often heard:7you don,t un_ derstand Japan,"' Wallace says. ,What that reaily meant is: ,Our minds are closed,.and we don't want to hear any_ thirig else.'lhat was a surprise to me".,, All he can hope for now is ihat the sw_ pnses are over.' By Ed,ith Hill Upd;ike in Hiroshima and, Keith Naughton i,n Detroi,t
I 14 BUSINESS WEEK / OCTOBER 7, 1996
rect threat. "It's a foreign-pur- chasing revolution.,,' savs Ft*F Yamamoto, u*".rtir. vice-pres- i_dent for purchasing.^Mazda used to buy