At almost the same time news broke that PSA Peugeot Citröen and GM were in alliance talks, Ford’s former alliance partner, Mazda is going in the opposite direction. The Japanese automaker is looking to raise up to $2 billion USD (162.8 billion yen) to shore up its balance sheet.
The share offering – Mazda’s second in just 2 1/2 years – represents a massive dilution to existing shareholders. If all 162.8 billion yen is raised, existing shareholders will see their holdings diluted by 69 percent.
Right now, Mazda has way too much of its global production capacity centered in Japan, where despite efforts of the Bank of Japan to intervene in currency markets to weaken the yen, the Japanese yen has risen to levels that make Japanese production extremely costly. Currently, 70 percent of Mazda’s global production happens in Japan, and 90 percent of its Japanese production is exported. Having most of its production in Japan is fine in a weak-yen environment, but with current exchange rates, it’s a huge problem. Toyota, Honda, and Nissan have diversified their manufacturing bases over the past decades and are much less reliant on production in their home country today, which helps insulate them from exchange-rate problems.
Even with Toyota producing cars around the globe, the company plans to shift even more production from Japan in the coming years due to the strength of the yen. In fact, Toyota will export US-made cars to South Korea, rather than just shipping them across the Korea Strait from Japan. Japanese industrial production itself is on the ropes, with the country reporting its largest trade deficit on record last month. In 2011, Japan posted its first annual trade deficit in decades, and more of the same is expected this year.
Back to Mazda, though. Most of us know that Ford owned a sizable stake, including managerial control, of Mazda until Ford began divesting itself of its ancillary automaker holdings such as Jaguar, Land Rover, Volvo, and Aston Martin. Ford’s ownership stake in Mazda has dropped from 33.4 percent at its peak to just 3.5 percent today. With the coming dilution as a result of the share offering, Ford’s ownership of Mazda will drop to just 2.1 percent.
The answer for Mazda is to link up with a larger, healthier competitor, as nearly every other automaker has done. But that doesn’t seem to be on the table at all, with Mazda CEO Takashi Yamanouchi telling reporters last week that instead of a capital alliance, it would pursue project-based partnerships with other automakers instead.
When Fiat CEO Sergio Marchionne said several years ago that there would be a shakeout of the marginal players in the global auto industry, he noted that an automaker or alliance would need at least 5-6 million annual unit sales in order to be competitive in the global arena. Mazda is far, far from that number. It remains to be seen whether one of the last independents can remain so, or whether the company will have to swallow its pride and pair up with another company, if for no other reason than it’s incredibly expensive to develop leading-edge environmental and safety technology on its own.
Of the 162.8 billion yen, Mazda plans to spend 35 billion yen on factories in Russia and Mexico (both are necessary), 30 billion yen to improve manufacturing capabilities in Japan, and 93 billion yen to develop next-generation safety technologies. From a shareholder’s point of view, would that 93 billion yen be better spent elsewhere if another company like Toyota or Ford has already invented – or is inventing – next-generation technology? Why spend that kind of money that they don’t have just for the sake of independence?
More questions like that will be coming. This will not be the last time that we hear of Mazda’s problems.