Mazda Invests USD500 Mil. in Mexican JV with Sumitomo, Expects JPY1-Bil. Net Profit This FY

Mazda has announced that it has entered into a joint-venture (JV) agreement with Sumitomo Corporation to establish a manufacturing plant in Mexico's Salamanca city, in Guanajuato state. The Japanese automaker will have a 70% stake in the JV, called Mazda Motor Manufacturing de Mexico S.A. de C.V., while Sumitomo will hold the remaining 30%. The two partners have agreed to invest USD500 million in a vehicle assembly plant and engine assembly facility, which are expected to become operational in FY 2013/14. The plant will produce Mazda2 and Mazda3 cars and will have an annual production capacity of 140,000 units. It is expected to employ around 3,000 people. In addition, the two partners will set up a sales company in Brazil. The sales subsidiary, Mazda Motor do Brasil Limitada, with its headquarters in São Paulo, is also expected to become operational in FY 2012/13. The JV will be 70% owned by Mazda and 30% by Sumitomo. It will start selling vehicles in Brazil from FY 2012/13, initially through imports from Japan. However, once the Mexican plant becomes operational, the company will start shipping vehicles from Mexico.

Outlook for FY 2011/12

Mazda has released its first-half and full-year forecasts for the current financial year (FY) 2011/12. For the first six months ending 30 September 2011, the Japanese automaker expects a net loss of JPY35 billion (USD433.2 million), compared with a net profit of JPY5.5 billion during the same period a year ago. It also expects to suffer an operating loss of JPY20 billion during the first six months of the current FY, against an operating profit of JPY12.2 billion during the same period of FY 2010/11. Mazda forecasts sales during the first half to be around JPY960 billion, down 17.1% from JPY1.2 trillion a year earlier.

However, Mazda hopes to turn around its performance during the second half of FY 2011/12. For the full year ending 31 March 2012, it expects to record a net profit of JPY1 billion, compared with a net loss of JPY60 billion in the previous FY. The company also expects to record an operating profit of JPY20 billion, 19% lower than the JPY23.8 billion reported a year earlier. Mazda's operating income is expected to be hurt by unfavourable foreign-exchange developments (JPY3 billion) and increased expenses on marketing activities (JPY5 billion). The company forecasts the yen to trade against the US dollar at USD1:JPY83, against USD1:JPY86 in the previous FY. In addition, Mazda anticipates its capital expenditure during FY 2011/12 to increase by a significant 80% to JPY80 billion, compared with JPY44.7 billion in FY 2010/11. The company also projects it research and development (R&D) expenditure to increase by 4.4% to JPY95 billion. However, Mazda hopes to improve operating income by JPY12.6 billion through various cost-reduction initiatives. For the full-year period, Mazda projects its net sales to be around JPY2.2 trillion, down 5.8% from JPY2.3 trillion during FY 2010/11.

Mazda aims to sell 1.30 million vehicles globally during FY 2011/12, compared with 1.27 million units last year. In Japan, the company expects to increase sales by 1% to 207,000 units. The company intends to introduce new vehicles in the domestic market equipped with its SKYACTIV technology. Mazda has alreadt started taking orders for the new Demio compact in Japan, powered by a newly developed SKYACTIV G1.3-litre gasoline (petrol) engine (see Japan: 9 June 2011: Mazda Begins Taking Pre-Orders for Demio Compact in Japan). In overseas markets, Mazda expects vehicle sales in North America, its largest market, to improve moderately by 4% to 346,000 units. Within North America, the company expects its US sales to improve by 2% to 240,000 units. Mazda is planning to introduce the new Mazda3 equipped with SKYACTIV technology in the North American market. The company is expecting the strongest growth in vehicle sales to occur in China, at 34% to 270,000 units. Mazda is planning to expand sales in China by beginning local assembly of Mazda3 compact cars. However, in Europe the company fears a 10% decline in sales to 202,000 units. In other markets Mazda expects sales to improve by 3% to 280,000 units.

Outlook and Implications

Mazda's latest move to invest in a new vehicle production plant in Mexico is expected to strengthen its presence in Central and South America. The company entered the Mexican market in 2005 and has recorded steady growth in vehicle sales there in the last five years. Having a manufacturing presence in Mexico is expected to help the Japanese automaker further strengthen its presence in the country. Takashi Yamanouchi, chairman, president, and chief executive officer (CEO) of Mazda, said, "Since Mazda entered the Mexican market in October 2005, our sales results have steadily improved, and in 2010 we set a new record for both sales volume and market share. Building on this success, and by leveraging Sumitomo Corporation's extensive experience and knowledge of emerging markets, we will continue to strengthen our business in Mexico and throughout Central and South America, including the rapidly growing Brazilian market."

Overall, Mazda is planning to develop Central and South America as the third pillar of its emerging-market strategy, following China and the Association of Southeast Asian Nations (ASEAN). Mazda aims to make the new Mexican plant a compact vehicle manufacturing hub to cater for Central and South America. The company plans to benefit from the free-trade agreements (FTAs) in the region, which provide quick access to other emerging markets in the region, including Brazil and Argentina. Vehicle sales in Brazil have more than doubled between 2005 and 2010 and the country has emerged as the fourth largest automotive market in the world behind China, the US, and Japan. The Mexican plant may also eventually export vehicles to North America; Mexico is part of the North American Free Trade Agreement (NAFTA), which provides it with easy access to the two major markets in the region, the US and Canada. Last week Mazda decided to shift production of the Mazda6 from its Flat Rock manufacturing plant in Michigan (US) to its Hofu plant in Japan (see United States - Japan: 7 June 2011: Mazda Confirms Plans to Relocate Production of Next Mazda6 from US to Japan). This easy access to the North American market, combined with the low cost of production, could make the Mexican plant an ideal location for Mazda to cost-effectively serve the US market in future.

Mazda is expecting a strong improvement in its performance in FY 2011/12 after reporting worse-than-expected results in FY 2010/11 (see Japan: 28 April 2011: Mazda Reports Heavier Net Loss in FY 2010/11). Although the company's performance is expected to remain under pressure in the wake of the 11 March Japanese disaster, the company hopes to record a strong recovery during the second half of the current FY, led by a faster-than-expected improvement in the component supply situation in Japan. The company is expecting its domestic plant utilisation rate to reach 71% by the end of the first quarter, 87% by the second quarter, 88% by the third quarter, and full utilisation by the end of the fourth quarter. Mazda is even expecting its full-year production in Japan during FY 2011/12 to increase 4% to 900,000 units. The company also expects to return to normal production levels at its overseas facilities in China, Thailand, and the US, operated with its partner Ford.