Mazda's next big challenge

HIROSHIMA, Japan -- Masamichi Kogai, Mazda Motor Corp.'s cost-conscious CEO, says he has no plans to revive the discontinued RX sports car series. Instead, he wants to plow limited resources into improving the Skyactiv technologies that set the brand's bread-and-butter vehicles apart from the competition.

The move underscores the fragile state of Mazda's recovery and the challenge the CEO faces in keeping products competitive with the first round of Skyactiv redesigns already halfway over.

Mazda's seven-vehicle lineup is almost stretched to its max, Kogai said. It's time to focus on a new generation of improvements.

"It's difficult for us at present to further expand our lineup," Kogai told Automotive News at the company's headquarters here. "The company is still in the process of improving its financial structure. We want to focus our limited resources on the Skyactiv products that we have today."

Every nameplate except the CX-9 crossover and Mazda5 minivan has received a Skyactiv makeover. Skyactiv is the name Mazda gave to a variety of technologies behind a more efficient powertrain, lightweight body and sportier chassis.

The Skyactiv Mazda2 has yet to reach the U.S. but is on sale in Japan. The overhauled MX-5 Miata roadster was unveiled this year with a 2015 U.S. launch date. And a new CX-3 subcompact crossover based on the Mazda2 will debut this month at the Los Angeles Auto Show.

The big question for Kogai: What next? The small, export-reliant company is under pressure to meet increasingly stringent emissions standards around the world. But it lacks the deep r&d coffers of Japanese rivals Toyota Motor Corp., Nissan Motor Corp. and Honda Motor Co.

When Kogai, 60, took office in June 2013, he inherited a company that had just recorded its first annual profit in five years.

In many ways, today's Mazda looks stronger than ever. It is booking record profits, U.S. sales are outpacing the industry's and it has rebalanced its global production footprint with a new plant in Mexico. Incentives are down; transaction prices are up.

But Kogai's challenge is keeping that momentum with a tight lineup and preparing future products on a shoestring budget.

"Mazda is at a turning point," said Takaki Nakanishi, an auto analyst with Jefferies Japan in Tokyo. "Consistent success will be determined by the next generation of products."

Kogai says his top immediate priority is achieving quality sales, not just higher volumes. Discipline will be key: He favors a more focused core lineup over flashy cars such as the RX-8, and lower incentives. So far, his strategy has been working.

Take the redesigned Mazda3 compact. U.S. sales fell 2 percent to 87,505 units through October. But Mazda says its share of retail, nonfleet sales in the compact segment is actually up.

Average incentives on the Mazda3 fell by half to $1,203 in the first nine months from the year-earlier period, according to TrueCar Inc. By contrast, average incentives for the entire compact segment rose 24 percent to $2,048.

Mazda's incentives as a brand have been in reverse since 2011, said Edmunds.com analyst Jonathan Mandanici. And average transaction prices are up 10 percent so far in 2014 vs. 2012.

"We're holding down incentives, without pursuing volume," Kogai said. "The challenge for us now is how we can sustain this."

Kogai has scaled back his forecast that Mazda's U.S. sales could hit a record approaching 400,000 vehicles in the fiscal year ending March 31, 2016. Now he says he doesn't consider that figure "an absolute target," though he'd like to get there "eventually."

Maintaining discipline also means not being tempted into ego entries, such as a revived RX sports car, he said.

Mazda retired the RX-8 in 2012 amid slumping sales.

Despite being a signature car for the Mazda, equipped with the brand's famed rotary engine, RX is dead for now, Kogai said.

"We don't have that kind of vehicle in our future product plan," he said.

"If you increase the number of segments, then the resources we can allocate to each will decline and that will prevent us from developing truly good products."

Kogai added that the company is continuing development of its rotary engine drivetrain for possible use in future cars.

"It's a unique technology that only Mazda has, and I don't think we should allow the flame to go out,” he said.

Still, analysts applauded the decision to park the RX car.

"A brand this size needs only so many poster cars," said Kurt Sanger, an auto analyst with Deutsche Securities Japan in Tokyo.

Kogai, an avid baseball fan and former pitcher, draws from the diamond when planning his product portfolio. The truly successful company doesn't rely on just one product, just as a pennant-winning team doesn't rely on a star power hitter. "We don't need a home run, if each player hits a single," he said.

But Kogai knows Mazda's Skyactiv engines, which first appeared in 2011, need updating to keep getting on base with customers.

That plan hinges largely on a new generation of engines, dubbed Skyactiv 2, that could debut by 2020 with a target of achieving 30 percent better fuel economy than the current line.

Mazda engineers outlined the strategy this year, saying the gains will come through improvements in the existing combustion engine technology and through the introduction of homogeneous charge compression ignition, or HCCI.

The latter technology compresses the fuel-air mixture to such a high pressure and temperature that it ignites by itself without requiring a spark, similar to the way a diesel engine operates. It's a technology that numerous automakers have pursued for decades, so far without commercial success.

Kogai declined to discuss the progress toward introducing HCCI.

Analyst Nakanishi expects the first such engines around 2018. They will use HCCI only during limited combustion ranges and rely on traditional spark ignition in others, he predicted.

Mazda's determination to squeeze better performance from the internal combustion engine diverges from the strategies of rivals with bigger r&d budgets, who are pursuing a range of alternative drivetrains, such as hybrids and fuel cells.

"They want best-in-class combustion engines, but they also will have to do something in terms of electrification," said Chris Richter, an auto analyst at CLSA Asia-Pacific Markets in Tokyo.

"Of course, there are worries," he said. "They are competing directly against automakers with a lot more resources."

Mazda has invested in electrified drivetrains to meet more stringent emissions standards, mainly engine stop-start or brake-regeneration technologies. It licenses its hybrid system from Toyota.

Controlling cost on the new technology is paramount for Mazda, one of the world's smallest global, mass-market automakers. One reason Kogai wants to keep refining the Skyactiv engine is because it is a cost-effective approach with a proven technology.

"The biggest challenge will be how we can reduce costs," he said. "If technology costs a lot, I believe you can't just force it on customers simply because it's good technology."

Yet by just piggybacking on existing Skyactiv engines, Mazda's next generation runs the risk of delivering only incremental, not revolutionary, increases in performance and efficiency.

"It won't be easy," Kogai said, "but we need technologies that can be deployed across the board, and a way of reducing costs."