The Mazda 3 is a great car, but it’s not making money. Covid-19 could halt Mazda’s upmarket push.

Hans/Apr 24, 2020 03:51 PM

Last week, this column spoke about why the next generation rear-wheel Mazda sedan with a straight-six engine (possibly next generation Mazda 6) is something that enthusiasts should root for, and why Mazda has been doing a better job at preserving the joy of driving than BMW, which is (understandably) prioritizing infotainment and digitization over driver engagement.  

We applaud Mazda for their audacity but also concluded that Mazda will have to lose more money in their quest to build better cars before consumers will agree to pay to higher prices for better Mazda cars, which let's face it, no matter how good it is, it's still a car that wears the Mazda badge.

The biggest problem for Mazda is not its lack of snob appeal, because that can be fixed over time. No, the biggest problem is Mazda has hit an immovable obstacle – the global economic slowdown brought about by Covid-19.

However what made Mazda’s position even more precarious is that before the Covid-19 pandemic forced plants to shutter, Mazda was already battling against the rapid appreciation of the Japanese Yen against the Euro and Australian Dollar.

Unlike its bigger rivals Toyota and Honda, Mazda still builds most of its cars in Japan. It’s highly susceptible to fluctuations in foreign exchange.

In the third financial quarter ending 31-December 2019, Mazda’s profit slumped 76 percent against the previous quarter on the back of unfavorable foreign exchange and weak demand in North America, China, ASEAN, and Australia. Nine-month sales in those regions were down 5%, 10%, 21%, and 15% year-on-year respectively.

Source: Q3 financial results for financial year ending 31-Mar 2020 

Operating profit in the nine-month period is down 40 percent from last year. The company has yet to announce its latest financial results for financial year ending 31-March 2020.

Barely two months after Tetsuya Fujimoto, Mazda’s Executive Officer in charge of Finance announced the unfavourable results to investors, Covid-19 hit USA – Mazda’s most important market – hard. 

It’s almost like a repeat of Mazda’s fate in the ‘90s, when its last attempt to move upmarket with the Amati brand was torpedoed when Japan’s Bubble Economy burst, killing the stillborn V12 powered Mazda Amati sedan that was supposed to fight the Lexus LS 400.

Three decades later, Mazda second attempt to move upmarket is once again hampered by bad timing.

The Mazda 3 is a much, much better car than before, and it’s certainly a lot better than a Honda Civic or a Toyota Corolla. In fact, the 3 is not even in the same league as the Civic or Corolla Altis. It’s closer to Audi A3, BMW 1 Series and Mercedes-Benz A-Class.

However the irony is that despite the massive leap, there are less people buying the 3, mainly because prices have gone up quite a bit, even in countries where there’s no difference in taxes between an imported car and a locally-assembled one.

In USA, prices of a Mazda 3, once ticked with all the necessary options, is not very far off from a larger Mazda 6, or a CX-5. Over here, the comparison is not so straight forward because the CX-5 is locally assembled while the 3 and 6 are imported from Japan and are taxed a lot more.

Still, even in open markets like the US, many love the 3 but they don’t love it enough to pay CX-5 or Mazda 6 money for a compact sedan/hatch.

It doesn’t matter if the Mazda is better than a Mercedes-Benz A-Class or a BMW 1 Series, few will pay premium prices for a Mazda and that’s the biggest problem.

So what if the A-Class handles poorer or if the 1 Series feels cheaper inside? Nobody can argue against the three-pointed star/blue-white roundel badge.

The Mazda 3’s most important market is USA and China, the world’s two biggest market for C-segment sedans. While consumers all over the world are migrating to SUVs, there is still healthy demand for sedans there, even though it’s not as big as before.

In fact, sales of the Honda Civic and Toyota Corolla in the US are holding steady for the last two years. Circa 325,000 for the Civic and 304,000 for Corolla.

Not as good as a Mazda 3, but overall package is at the segment's sweet spot and it's a global success story

Sales of the Mazda 3 however, has dropped to its lowest level in 10 years. Last year, Mazda shifted just 50,741 units of the Mazda 3, down from 64,638 in the year before. Sales of the Mazda 3 peaked in 2012, with 123,361 units.

The C-segment market is contracting but demand for Civic/Corolla is holding steady. Sales of Mazda 3 is at a 10-year low.

Over in China, sales of the Mazda 3 was down 19 percent last year to 98,553 units. Meanwhile sales of the Honda Civic rose 12 percent to 243,966 units.

The hatchback variant is sold mostly in Europe, but sales slumped 9 percent to 34,874 units.

Will the current Mazda 3 will be a one-hit wonder?  

Mazda could weather seasonal economic slowdowns but something as severe as Covid-19, was totally unexpected.

We fear that this could put a stop to Mazda’s progress and will force Mazda to adopt a more conservative approach to the next generation 3 or 6. Toyota and Honda will snigger at the sidelines and say “We told you so.”

If that happens, history will remember the current 3 as the best 3 ever made because there will never be anything like that again for a long time. Good news for current owners, bad news for Mazda.

If you look into the past, of history of brands that succeeded in pushing themselves upmarket, all of them had the benefit of economic tailwind behind them.

Audi 80 was not a luxury car, but paved the way for the A4

Audi was the most recent example. It pushed upmarket in the ‘90s, just as the US economy – its most important market – was registering its strongest bull run ever. It gave Audi nearly 20 years of positive growth, enough to sustain its push to become the new Big-3 in automotive luxury by the 2000s, unseating Cadillac.

Before the ‘90s, Audis were merely better equipped Volkswagens, driven mostly by German civil servants who wanted something more plush than a Volkswagen but can’t be seen in a Mercedes-Benz or BMW.

The BMW 2000 wasn't a legit rival to a Mercedes-Benz, but set the stage for the 5 Series

It’s a similar story with BMW, which benefitted from the two-decade long post-war economic boom in USA and Germany, thus allowing its ‘New Class’ (equivalent to today's Mazda's upward pushing 7th generation models like the 3 and CX-30) range to lay the foundation for the 3, 5, and 7 Series cars to push BMW further upmarket in the ‘70s. Before that, a Jaguar was seen to be more premium than a BMW.

The problem with Covid-19 is that unlike natural disasters like earthquakes or tsunamis or typhoons – all of which are nothing new to Japanese companies – is that it’s impossible to predict when it will end.

The Covid-19 situation is unprecedented and is too fluid to make any predictions. Even after the pandemic ends, nobody knows for sure how long it will take before business activities can resume.

Example of why the Mazda 3 is so expensive: A hyper-realistic digital screen replicating an analogue dial. So good that your eyes can't tell the difference. A driver's car must have analogue dials and Mazda knows this.

If you love cars, you need to cheer for Mazda, even if you don't like their cars. Mazda is the last remaining 'quirky' car company, one that does thing differently, and has its own unique character. Even Citroen is not doing quirky, rogue cars anymore. Where is the fun when everyone is doing the same thing?

Even BMW and Mercedes-Benz are getting too similar in character - they all have a turbocharged four-cylinder engine, the higher performance ones are loud and will fart at upshifts. You can easily predict what the next BMW/Mercedes-Benz model will be like but can you predict what Mazda's next product will be like? 

Every other car company is going down the slippery slope of increasingly digitized controls, driverless cars, and electrification. They talk more about infotainment and driving aids rather than genuine driving experience.

They are reducing an analogue experience that real car guys crave for into a mere button-pushing, back slapping hard acceleration experience - a glorified smartphone on wheels that goes really fast. Great numbers, but actually not that fun.

It’s also why a slow Mazda MX-5 will be cherished and preserved by fans in ways that a Tesla will never be. A genuine enthusiast will understand that driver engagement and smiles per mile, rather than horsepower or fancy digital screens, are the ultimate measure of any driver’s car and Mazda is one of the last car companies that are still building cars according to that philosophy.

We hope that the pride of Hiroshima and Japan's guardian of the joy of driving will push though this difficult period, just like how they overcame the impossible to win Le Mans 24 Hours with that screaming 787B - a feat that even the Germans who invented the engine say can't be done because it's impossible to fix the engine's inherent flaws. 

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