Mazda does not have a great history. It is older than Nissan and Honda but smaller than both. It has escaped bankruptcy but only because Ford bought 33.4% of the company and took control. It has ploughed great wedges of wonga into the whirling Wankel engine without commercial success. Its cars are not universally recognised as state of the art. Its market share in Europe is a skinny 1.6%.
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If you were looking for a brand in Europe to hold up as a glowing example of a great business model making stacks of money, you would not pick on Mazda. But you would be wrong. Mazda is the goose that lays the golden egg.
There is one very big reason for that and lots of less obvious ones. Big reason: Mazda does not have a factory in Europe and therefore does not have the costs of that in its European P&L. What that means is that a claim to extraordinary profitability is slightly specious in that the margin arises from transfer pricing.
Ask the President of Mazda Europe, James Muir, for some facts and he is helpful but not detailed. He agrees that Mazda is ‘probably’ the most profitable brand in Europe.
Muir flashes a page of data that shows a lot more than it is possible to absorb. What is clear though is that the UK is second in size to Germany but bigger in profitability. Russia in third place is catching up fast.
This year, that could change around a bit because Muir says that he is taking the opportunity to restructure the dealership networks in both Germany and France. Five-year contracts expire in 2010 and there is an obligation to give two years’ notice to the back markers. Clearly there is the opportunity to enhance the profitability still further in those two territories.
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By GlobalDataAll the European markets make profits. And all the cars in all the markets make profits. Nothing is sold at a loss. Operating margins end up in double digits. As a hurdle rate – Porsche, which might be expected to have had a phenomenal couple of years (but has a factory) has just reported pre-tax margins of 9.3% for the first half of its financial year.
Unsurprisingly, Europe is Mazda’s best market worldwide. According to equity analysts’ reports on Mazda, Europe does 25% of the global volume of a million cars but makes 40% of the profit. This is a matter of some pride to Muir who had run the UK and set it on course for its indecently good returns, and then took charge of Europe in 2003.
Though the economies are slowing, Mazda Europe could be in for an even more golden year. With the new Mazda2, 5 and 6 the average age of the product in the market will be under two years.
Whether Mazda needs a factory or not is an interesting question. It has tried and failed to share one with Ford for the Fiesta/Mazda 2 at Valencia in Spain, and if it does one at all, it will do it on its own. “Valencia was interesting but we only got 40,000 units. We just could not get the suppliers. The quality was fine but we could not find all the people to make what we needed.”
Other brands close to Mazda in the European league table are reaching decisions. Hyundai (now at 308,000 sales) is setting up in the Czech Republic and will be flat out building cars in 2009. Kia (250,000) is going to Zilina in Slovakia. Suzuki however (290,000) is going to depend on India where it has Maruti. It reckons that its best bet for an economical small car will be to make it cheaply there and ship it in.
James Muir says: “We need to be able to get 200,000 cars off a common platform before we build in Europe. But we do need to grow Mazda to get scale, and that means 500,000 cars in Europe. That will need a currency hedge and that will need thought – including the
building of a factory.”
Rob Golding
