Leopoldo Orellana
President and CEO
Mazda México Sales and Commercial Operators
View from the Top

Mexico Benefits from Yen Exposure Vulnerabilities

Mon, 09/01/2014 - 17:13

Q: Why was Mexico chosen for Mazda’s recent major investment in production outside of Japan?

A: One of the main reasons for our major investment in Mexico was that we were seeking to relocate investment from Japan to emerging economies. After an extensive analysis of several countries, Mexico was chosen. The main advantages that we identified here were Mexico’s labor force, its FTAs with 45 countries, and access to a 45 million-unit market. That allowed Mexico to stand out considerably from Brazil for example, which is a closed market. The site that we chose in Salamanca has excellent highway connections, a railway nearby, and good airport access. We are able to build local content in Mexico from suppliers that are already established here. Although domestic demand in Mexico is not growing exponentially, the expectations are that the regional market at large will keep growing. Looking at all of the factors in Mexico’s favor, it really is almost impossible for senior managers to choose an alternative location for investment in this region.

Q: What were the main factors that led to Mazda moving away from home-based production?

A: Prior to the establishment of the Mexico plant, 80% of the production of Mazda was based in Japan. This provided excellent quality and a high technology base for the company, however, we were highly leveraged to the yen, meaning that whenever the yen strengthened, Mazda’s results weakened substantially. Mazda was also the Japanese OEM with the highest levels of local sourcing from within Japan. For these reasons, we were more vulnerable than other companies to currency fluctuation. For that reason, removing production from Japan was a strategic decision for Mazda in order to create a low-cost base for production as well as a regional base for the Americas.

Q: How established is your current supplier base around Salamanca?

A: There are three key suppliers from Hiroshima that are now based in Salamanca to support our investment. The Salamanca government has been very professional and supportive in helping suppliers to come to Mexico, which has been immensely helpful. We are also working with suppliers that were already based here, and we are developing them in order to increase our local content levels. NAFTA regulations allow a five-year grace period for reaching the required 62% of local content, allowing us to have just 50% during that period.

Q: To what extent is increased Japanese penetration propelling production sophistication development locally?

A: The Japanese heritage of quality and technology is undoubted and this is now being brought to the Mexican market. Our plant in Salamanca has worldclass technological processes in place, which is helping to further develop the human talent in this area. For example, the height of the assembly line in Salamanca is adjustable according to the processes taking place, which results in better working conditions for the technicians. One of the defining qualities of Mazda worldwide is the flexibility of its assembly lines. Being able to change models within the same assembly line is a major benefit. Nevertheless, improving processes in assembly lines through technology creates small benefits at a time; it is a slow march toward progress.

Q: How challenging has it been to carve a market niche for Mazda in Mexico?

A: Mazda has been in the Mexican market for just nine years, which is less than half as long as many other Japanese players. When we entered the market, Ford was a partial owner of Mazda and that gave us an advantage. According to stock exchange regulations that gave Ford control of Mazda, we could not compete with each other. Mazda was therefore able to take advantage of Ford’s dealer network and we were able to pick the best dealers. We spent a lot of time studying the market and understanding the motivations of the dealers, who were looking for an appealing new brand. On the other hand, the consumer market was a challenge. We had to effectively communicate our brand in a market saturated by many brands. The perception of Mazda was one of a high technology Japanese brand, which was positive, and our sporty styled models helped differentiate ourselves from the competition. Mazda offers the soul of a sports car in a high technology brand, even if you are driving one of our SUVs, and that helped us carve out a unique niche.

Q: What is the role of the partnership with Toyota in your Mexican activities?

A: We will be building approximately 50,000 Toyota cars a year in Salamanca. We only share the production so the information remains individual, and Toyota plans its export strategy independently. The technology of the car is going to be new generation Mazda technology, while Toyota is developing the top hat. The benefits for both Toyota and Mazda are huge; it gives Toyota a production base in Mexico and allows us to enjoy economies of scale.

Q: What are Mazda’s priorities for the next year in Mexico?

A: We are focused on consolidating the Mazda facility in Salamanca, where we are currently producing the Mazda3. We will start production of the Mazda2 at the end of 2014 and our project with Toyota will be launched in 2015. The Salamanca plant has a capacity to produce 230,000 vehicles a year. On the commercial side, Mexico is currently the 8th market for Mazda worldwide. We want to increase our current 3.7% market share to around 4-5%. To achieve this, we will need to compete with bigger brands that offer older generation technology to the market. We are looking for new dealerships in places like Campeche, Pachuca, and border cities. At the same time, we are perfecting our aftersales customer service, which is one of our main strengths. We eventually want to enter the big Latin American markets, and Mexico could provide an ideal export base for that. Our original plans for that market changed when Brazil adjusted its importation levels, but we hope to once again revisit that. We have not been part of the export quotas to Brazil as the country has enforced a requirement for OEMs to have production in Brazil and Mexico at the same time in order to export there. Another tax was created that amounted to about 30%, placing our cars outside of that market for now.