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Mazda RX 7

International pricing and value creation strategy.

The Mazda Motor Corporation was formed in 1920 under the name of Toyo Cork Kogyo Co., Ltd. At first, Mazda was a machine tool manufacturer. Starting in 1931, however, the firm began to produce automobiles. Although all the vehicles created by Toyo Kogyo Co. were technically called "Mazdas," the company didn't officially adoptthe name "Mazda" until 1984. In 1979, Mazda sold a quarter of its shares to the Ford Motor Company. Following a period of instability during the 1990s, Mazda handed even more control over to Ford. As a result, over the past quarter-century, Ford and Mazda have borrowed ideas from one another. Ford used Mazda's Japanese platform to access international and Asian markets, while Mazda used Ford toreach domestic U.S. consumers.

In the 70s and early 80s, Mazda suffered from a poor image in the US, due to the poor technical performance of its RX5 model, based on the revolutionary RX5 rotary engine. In 1986, Mazda was taken over by a non-Japanese CEO, Henry Wallace. At the time, Japanese industry leaders feared that Wallace would cut jobs, but he led Mazda to a resurgence and helpedbreak new ground in terms of Japanese corporate diversity. Wallace was followed by two other non-Japanese CEOs, James Miller and Mark Fields. In the early 1990s a new model was launched, the RX7, which was to mobilize 600 million dollars’ worth of PPE, one third of which was to come from loans from its bankers. Trade creditors were expected to account for roughly one month of CoGS, itself equivalentto 47% of sales. The model was to use Mazda’s expensive rotary engine (unit cost: $6k). Sales were forecast to hit 110k units in 1992 of which 90% to the US), with a net profit of 3.1%. The recommended sales price in the US was 14.499 $, i.e. 13% below Japanese prices. When the car was launched in the US in 1991, buyers queued up to buy the car. Demand was so strong that many re-sold the car with a$2 to 5k premium after owning it for barely a few days.
In the original plan, a stock of 40,000 cars was to be set up in the US, adding up to Japanese inventories of approx. $ 300M. Dealers’ markup was a recommended 14,7% and it would take on average one and a half month of transit to deliver the cars to the US. Mazda planning to extend a free six-month credit to its US dealers, as comparedwith the industry’s average 3-months term.

While Mazda’s Japanese directors stressed the fact that the net profit margin was a healthy 3.1%, with an Ebitda of 6.5% and Japanese corporate taxes standing at 27%, their US-appointed boss, James Miller, had some trouble explaining that this plan “just wouldn’t sell to Ford on a strategic, value-creation basis.” Miller thought Mazda’s financingmix was wrong, stressing that Mazda’s cost of equity stood at 15.3%, as compared with Ford’s 11.1%, while its after-tax cost of debt stood at 3.21%, as compared to Ford’s 5.09%.
Miller further proposed using a Ford engine as an alternative to Mazda’s costly rotary engine, thus saving well over 1/3rd on the cost of the engine itself. “If that entails opening a transplant, let’s study thatoption,” he added. Miller further stressed that OpEx using young, non-unionized American workers in Alabama would likely be at least 5% below Japan’s. But the Japanese countered that Mazda was synonymous with Made-in-Japan. Senior MD Yamamoto was unsure whether Mazda would successfully replicate its Keiretsu system in Alabama. While Yamamoto appreciated the efforts by Ford to see the company back intothe black, “we need to maintain Mazda’s unique image.”
In 1998 Ford had introduced a number of management techniques to Mazda, including conducting meetings where conclusions are worked out through the active exchange of opinions and ideas, paying more attention to market research when making decisions, and establishing clearer accountability. Kenichi Yamamoto, 55, MD in charge of...