The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Katrina Hamlin

HONG KONG, Jan 28 (Reuters Breakingviews) - Japan’s car market is ripe for consolidation. Years of falling sales both at home and abroad had already been putting financial pressure on several of the country's seven major automakers. Now they have to contend with the additional burdens of U.S. tariffs and Chinese competition. One attempt at a tie-up floundered last year when the country's then second- and third-largest players - Nissan Motor 7201.T and Honda Motor 7267.T - abandoned talks. But a Suzuki Motor 7269.T takeover of Mazda Motor 7261.T would be a smart move.

DECLINE AND FALL

Car registrations in Japan have been in decline for about a quarter of a century. That's unlikely to reverse: the country's population has contracted every year since around 2009. And while Toyota Motor 7203.T and its compatriots were among the first automakers to go global by exporting to Europe and the Americas, that model, too, is in trouble. Shipments peaked nearly 20 years ago; by 2024, they were a third lower than 2008. They are still falling, along with Japanese companies' overseas output, and margins are down too as competition and trade wars bite. The average pre-tax margin for the country's seven top carmakers was less than 5% in 2025, compared with 8.4% in 2023, Visible Alpha shows.

Sputtering carmakers have a knock-on effect: sales have weakened at several major domestically listed parts suppliers, including component makers Koito Manufacturing 7276.T, Jtekt 6473.T and Rohm 6963.T, whose net margins will only reach around 3% at best this financial year, according to Visible Alpha. Smaller players in the supply chain could face a crisis if they are overly dependent on that client, just like Nissan supplier Marelli, which filed for Chapter 11 bankruptcy proceedings last year.

Mazda epitomises those woes. Sales are stalling, with revenue dropping 6.5% to 2.2 trillion yen in the six months to the end of September, while total unit sales slipped 3.3% to 609,000 vehicles. The group is expected to report a net loss of $3 million for the full year, per analysts surveyed by Visible Alpha. If its problems deepen, they will be passed on to a web of local suppliers clustered around its Hiroshima headquarters, creating fresh headaches.

Suzuki, meanwhile, is in a better position thanks to its focus on the Indian market - largely closed to Chinese rivals - and lack of exposure to the U.S. market and its levies. The group could extract some value if it were to buy its struggling compatriot. The two manufacturers' forecast sales for the current year would come to roughly 4.5 million vehicles, making the hypothetical combined entity Japan’s second-largest carmaker, with much improved economies of scale.

True, Mazda has weathered tough times before. It has not signalled that it wants to sell, and the company did not respond to emails seeking comment on the idea. But if nothing changes, driving solo looks gruelling. Many of the problems behind recent lacklustre numbers are beyond Mazda’s control.

DOUBLE TROUBLE

President Donald Trump's administration has sextupled to 15% the tariff on vehicles made in Japan, while the levy for cars made in Mexico is now set at 25%. Those two countries, though, are Mazda’s largest manufacturing hubs, while the U.S. is Mazda’s biggest single market accounting for 435,000 of 1.3 million sales in the most recent financial year. Yet Stateside production lines churned out only around 114,000 units over the same period, per Visible Alpha.

Meanwhile Chinese rivals are dominating in the People's Republic. Foreign badges’ market share declined to 30% in the first 11 months of 2025, less than half the 64% they managed in 2020, according to consultancy Automobility. Mazda’s own sales fell to 65,000 in 2025, almost 70% lower than its full-year 2020 showing of 210,000.

Mazda is ceding ground to Chinese competition elsewhere, too. The brand’s sales fell 23% across six key ASEAN markets in 2024 from a year earlier, according to PwC, while BYD’s 002594.SZ rose 62%. Its compatriots are suffering there as well, with sales declining at Toyota, Honda, Nissan, and Suzuki, while Mitsubishi Motor 7211.T was flat. The Hiroshima-based group is especially susceptible to Chinese competition as it has been slow to develop a portfolio of pure electric cars.

Mazda is not, at least, saddled with debt. Its gross leverage is 2.8 times forecast EBITDA, about half Japanese automakers' average, per analyst estimates. And it has a net cash position of $1.6 billion, though that fell by $1 billion in the six months to the end of September. That leaves less to invest in crucial new technologies like battery power and assisted driving, which it will need to compete with upstarts from China and beyond.

It has a powerful patron in Toyota, which owns a 5% stake. The world’s largest carmaker, which has weathered the industry's myriad challenges better than most, could in theory help its long-time partner, say by increasing its holding. However, this would be at odds with both Japan Inc’s efforts to curb cross-shareholdings and Chair Akio Toyoda’s preferred strategy: he has argued forcefully against stretching Toyota’s already massive manufacturing footprint, expected to surpass 10 million vehicles in 2026, preferring partnerships for specific projects such as the pair’s long-term collaboration on engines.

HITCHING UP

That’s why allowing Suzuki to take the wheel might be a more plausible option. The $28 billion company is going from strength to strength. Focusing on India and other markets that are less vulnerable to both Chinese rivals and trade wars has helped it to continue riding Japan’s tried and tested export model, overtaking Nissan to become the country’s third-largest Japanese manufacturer. Suzuki is the only one of the seven players whose pre-tax margin is higher than three years ago. And at some 11% it both outstrips industry leader Toyota’s and dwarfs estimates for a 1.6% margin at Mazda this financial year. With a net cash position of over $1 billion and total cash of almost $6 billion, on paper it has the firepower to buy a smaller group like Mazda outright, make an all-stock offer or use a combination of cash and shares.

Suppose Suzuki were to offer a premium of around 20% for Mazda’s stock, valuing its enterprise at around $4.5 billion after factoring in its cash position. Suzuki’s zealous cost controls could help Mazda to achieve its targeted cuts of around 40 billion yen, which otherwise appear ambitious since the company is not planning drastic measures such as factory closures, according to researchers at Pelham Smithers Associates. A proportionate increase in the consensus forecast for Mazda's operating profit in the year ending in March 2027, taxed at around 25%, would bring net operating profit after tax to almost $700 million. That would equate to a roughly 15% return on invested capital, versus Mazda’s 4.4% weighted average cost of capital as calculated by Morningstar.

Mazda makes some sense for Suzuki strategically, too. Besides the added scale, it would help diversify Suzuki’s markets and portfolio. Today, the brand depends on India for about half its sales and lacks a significant U.S. base. While that has been a blessing this past year given Trump’s tariffs, in the future the world's largest economy could be an attractive area for expansion, leveraging Mazda’s sales network and modest local manufacturing capacity. The latter’s more premium vehicles would add variety to Suzuki’s budget-friendly options as well. Mazda technology such as its Wankel rotary engine, which suits increasingly popular extended-range hybrids that charge batteries via a gasoline motor, is also attractive.

True, history suggests any tie-up between Japan’s storied automakers will be hard to pull off. Distinct corporate cultures and historic marques’ enormous pride in their own engineering and brands complicate integration. A mooted deal between Honda and Nissan last year imploded after the two clashed over terms and a turnaround plan, Reuters reported.

However, Suzuki has proved it is more than capable of constructive collaboration with incredibly different companies. A standout is its 40-plus years of partnership with Maruti in India, which at one point accounted for half of sales in the country. Today their market share is closer to 40%, but investors remain confident – locally listed Maruti Suzuki India MRTI.NS shares started the year at a record high. It has worked closely with other partners, too, ranging from giants Toyota and Volkswagen VOWG.DE to Mazda itself, with which it has offered cross-badged vehicles – models made by Suzuki, sold under the Mazda brand.

Japan’s sprawling auto industry is more than ready for consolidation. A Mazda-Suzuki mashup might bring back corporate matchmakers’ bad memories of Nissan and Honda’s doomed romance, but the idea deserves a closer look.

Follow Katrina Hamlin on Bluesky and LinkedIn.

(Editing by Antony Currie; Production by Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on HAMLIN/katrina.hamlin@thomsonreuters.com; Reuters Messaging: katrina.hamlin.thomsonreuters.com@reuters.net))