Mazda’s New Invention: Diesel, Without The Diesel – Mazda Motor Corp. ADR (OTCMKTS:MZDAY)

When it comes to internal combustion engine innovation, Mazda (OTCPK:MZDAF) has some important claims to industry leadership. For starters, it leads diesel sales in otherwise diesel-sparse Japan: here.

After multiple launch postponements, Mazda went on record in November 2016 to say that finally, finally, it would start selling diesels in the U.S. some time around October 2017. The launch vehicle will be its best-seller, the CX-5 small-to-almost-midsize SUV. In July 2017, it constituted 42% of Mazda’s U.S. unit sales: here.

The Mazda CX-5 is far from the market’s best-selling SUV in its class, which is host to the U.S. market’s three best-selling non-pickup-truck vehicles as of July 2017: here. As you can see in those tables, there are seven nameplates from other automakers who are ahead of it. Its sales are less than half of Chevrolet (GM) Equinox and Ford (F) Escape, and less than one-third of segment leaders Nissan Rogue, Honda CR-V and Toyota (TM) RAV4.

The all-new-for-2017 CX-5 is a fine member of its class, with the most important objection being that it doesn’t (yet) have Android (GOOGL) Auto or Apple (AAPL) CarPlay. I reviewed it here: here and here.

But back to Mazda’s diesel technology for a moment. I drove the Euro-spec version of the CX-5 diesel for a few days, mostly on a variety of country and highway roads. I say Euro-spec, because that version of the diesel engine differs slightly from the one that is intended to be sold in the U.S., presumably starting in only a couple of months from now.

I found that the Euro-spec CX-5 diesel performed admirably, revving with a kind of ease that is not typical for diesel engines. That’s not to say that it is better than a more traditional diesel engine from almost any automaker, such as the German-headquartered ones. However, it felt very “natural” and more like a gasoline engine. It felt “lighter” in more ways than one, and spooled up in a most responsive and eager manner.

I was able to achieve just over 45 MPG under ideal conditions – perfect weather and rural country road speeds of around 50-55 MPH. From there, fuel economy declined with speed and throttle aggressiveness all the way down to 30 MPG and even less, once speeds were much higher and I pretended that the rural areas of our planet were my personally rented racetrack. Still, at an average of at least somewhere around 35 MPG, it’s much better for this tall SUV – like, at least around 30% – compared to an equivalent gasoline engine.

So why is Mazda’s diesel so good? This video provides some clues: here, Notice in particular the very low compression ratio of 14:1. That’s exceptionally low for a diesel – by far the lowest in the industry.

That low diesel compression ratio takes us to the next step in the equation: Mazda also has some of the highest compression ratios for gasoline engines – very close to an almost-impossible 14:1 ratio.

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Something should now be dawning on you the reader: Mazda’s low-compression diesel is only one step from merging, on paper, with its high-compression gasoline engines.

Today, Mazda announced the final step in closing this circle: here. Basically, what Mazda is doing is offering a sort-of diesel engine that runs on gasoline. This is said to have all sorts of benefits ranging from power, torque, fuel economy to emissions. It would be offered in Mazdas starting in 2019.

This kind of innovation may be partially what’s behind Toyota’s increasing partnership with Mazda: here.

Wide ranging in nature, from equity cross-ownership to factories and technology, the most visible portion of this Toyota-Mazda agreement will be the building of a new factory in North America. Toyota will be making the Corolla in the new Toyota-Mazda factory somewhere in the U.S. (Mississippi?), and Toyota will instead make the Tacoma pickup truck in a second (new) factory in Mexico.

Toyota is tied with the Volkswagen Group and the Nissan-Renault-Mitsubishi constellation in terms of being the world’s largest automaker. If this agreement with Mazda were to go even further, and Mazda would at some point be considered part of a more consolidated Toyota sphere, it would vault Toyota into the undisputed number one position.

Mazda’s agreement started already around April 2015 with an agreement to cooperate on powertrain technology. In addition, Mazda started making a “2” Sedan in Mexico that it badged for Toyota, initially as a Scion but quickly transitioning for the 2017 model year into a Toyota, seeing as Toyota killed the Scion brand.

I have yet to drive Mazda’s new “diesel engine that runs on gasoline,” and some numbers in today’s press release nonwithstanding final specs are not yet available. I’m sure we will have more to report some time before the intended 2019 commercial launch.

For Mazda’s share price, which has gone pretty much nowhere in the last year, this technology, and this agreement with Toyota, may just be what it will take to unlock the shareholder value.

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Disclosure: I am/we are long GM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA and long F, GM and GOOGL. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers. Mazda provided the car for review.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.