BOSS Article Part 6

Apologies for the lapse in posting. To continue on the BOSS article series, here is part 6. Here is the link to TOV forum Part 6 thread.

“Dropping Out” in Europe and “Struggling” in the U.S. Nissan (Not Honda) Is Now Toyota’s Rival

Flooding of Honda’s Thai Factory

During the press conference announcing the company’s second quarter results on October 8, Toyota’s Vice President Satoshi Ozawa said something that made everyone doubt his ears. He said, “We want to learn from Nissan Motor.” 


Following the East Japan Earthquake on March 11 and recent massive flood in Thailand, all automakers were forced to stop production or make production cutbacks. Besides the direct damages suffered by their production factories, one major blow was the disruption of parts supply. Component manufacturers and second- and third-tier subcontractors were affected and lost the ability to supply parts. Many Japanese manufacturers have boosted efficiency by thoroughly implementing the Just In Time system (concept of supplying/producing the necessary items by the necessary quantities only when necessary) and carrying hardly any parts in stock. However, this approach backfired.

Recovery after the earthquake was quick and smooth, but the flood in Thailand again raised the same question. Honda and Toyota decided not to announce their business projections and their earnings are expected to be significantly affected. Toyota will resume production at its Thai factory on November 21, but production adjustments will continue for a while. Still, resumption of production points to a positive outlook going forward.

On the other hand, Honda is still in a very difficult situation. Its complete body unit (CBU) plant in Thailand was flooded on October 8 and water is still not receding as of November 14. Since there is sill water, nothing can be planned. It is certain that production in Thailand will remain stopped until after the New Year and the impact will be immeasurable.

Amidst this situation, Nissan Motor who quickly resumed local operations is the only automaker expecting production increases in this fiscal year. Nissan benefited from the alliance with Frances’ Renault having a global supply chain for parts. Nissan was also lucky to have been carrying more-than-normal parts in stock to respond to anticipated production increases reflecting strong global sales. Taking advantage of its good fortune, Nissan is even raising its business outlook for this fiscal year.

The comment by Toyota’s Vice President Ozawa mentioned at the beginning of the article represents the company’s commitment to building a system resistant to risks of natural disasters. Toyota believes a risk-resistant system is needed urgently, even if it means the company must readjust the “Toyota Production System” that has long supported Toyota’s growth.

In terms of luck, Honda had the least of it. Honda is the only one among the big four Japanese automakers whose CBU factory was flooded.
“The Nissan factory was also bracing for water. We build dikes to shut out water, but it came really close. Nothing can be done once water is in, like what happened to Honda.” (Source at Nissan)

Because this is literally an act of God, other manufacturers are making sympathetic comments. Fortunately Honda’s motorcycle factory was spared and has since resumed production, but resumption of operation is not yet in sight at the automobile factory.

How Honda is Different from Toyota and Nissan

One auto journalist let out, “Shouldn’t we acknowledge that Toyota’s rival is no longer Honda, but Nissan?” 

The emerging markets have grown tremendously in recent years. Nissan successfully took advantage of this momentum and is showing the kind of increase in sales volume that surpasses not only Honda, but Toyota as well. This is especially notable in the Chinese market where, in 2010, Nissan ranked first with 1,024,000 units sold among the Japanese automakers. Toyota was second with 846,000, while Honda was behind with only 655,000 units.

It isn’t just in the emerging markets that this is happening. Nissan’s advancement can also be seen in the industrialized nations, especially in the North American market. While Nissan enjoyed a 25.3% increase over the same month of the previous year with 92,964 units sold in September 2011, Honda’s performance was lackluster with 89,532 units, down 8% from the previous year, which finally forced Honda to surrender the fifth position to Nissan. Even with the on-going production adjustments after the earthquake, Honda has lost its shares to Nissan without putting up any fight.

Toyota can’t now help but pay attention to the momentum of Nissan who is well on its way to reach a worldwide sales volume of 5 million units. In contrast, Toyota’s view on Honda has become that of indifference. Koichiro Imoto, the journalist who wrote “Prius vs. Insight (Shogakukan),” says as follows: 

“The hybrid car showdown between Toyota’s “Prius” and Honda’s “Insight” attracted a lot of attention in 2009. Some of the Toyota people, however, seem to be voicing their regrets that the company had taken Honda’s challenge too seriously. As indicated by the number of sales, Insight was not at all a match. It is true, at the time, that there was an air of tension within Toyota against Honda, but it can be said that they no longer show such interest. Toyota’s compact HV to be released in December, “Aqua,” is said to offer fuel efficiency of 40 km per liter and is very much capable of driving out and putting an end to Fit Hybrid.”

Honda, on the other hand, is also expanding its HV line-up, but doesn’t offer much excitement as the company is, to one’s dismay, neck and neck with Mazda’s SkyActiv in terms of fuel efficiency. Despite being no match in the total number of sales, Honda has always battled against Toyota with its technological strength and creative power, and that is why Toyota has regarded Honda as its rival. With technology and creativity falling behind on the curve, however, wouldn’t Honda be losing its competitive edge against not just Toyota, but all manufacturers? If that were to happen, Toyota will then have to become mindful of Nissan who stepped up its presence.

The driving force behind Nissan’s rapid growth is its ability to successfully form alliances with competitors. With the capital tie-up with Renault as a start, Nissan has recently collaborated with such manufacturers as Daimler, Mitsubishi Motors and Russia’s AvtoVAZ, to lessen its internal burden and to become able to offer a wide-ranging line-up from Japanese K-class cars and eco cars such as EV or HV to luxury cars for all markets from emerging to advanced countries.

While also making progress in its own unique technologies, Toyota has formed technological alliances with Tesla Motors and Ford in the U.S. and is expanding its line-up that takes advantage of the technologies of the group companies, such as Daihatsu and Hino, as well as companies like Fuji Heavy Industries.

Set on its policy of individualism, Honda needs to handle everything on its own. As a result, the company is unable to offer an extensive line-up and is forced to have the kind of vehicle composition that disproportionately focuses on the areas of specialty. The reality is that the company is left with no option but to go with compact cars and minivans when there is no chance of winning with a premium line of luxury cars that offers a wide profit margin.

If Honda was to place too much confidence in its “technological strength” forever and believes that it’ll never lose, it’s only a matter of time that the company will have to pay dearly for its mistakes. Now that luck has turned against the company, how will Honda find a way out of the current state where the company suffers from sluggish business in China, while being on the verge of dropping out of the race in Europe and struggling in North America? The end of the individualism may be drawing near.

BOSS Article Part 5

Part 5 of the BOSS article on Honda's current state is after the jump. The TOV forum thread for this part is at TOV forum Part 5 thread.  In this part, the author diverted and took a look at Honda's motorcycle business.


"Honda Abandons” the Domestic Market: Asked to Show Its Responsibility as a Leading Global Company

Global motorcycle sales are said to have exceeded 50 million units and be approaching 60 million units. Of this figure, Honda accounts for 1,873,5000 units (in the fiscal year ending March 2011), translating to a leading share of approx. 30 percent.

Honda began as a motorcycle company when Founder Soichiro Honda began producing an accessory engine for bicycles in 1947. In 1952 shortly after the founding of the company, Honda began exporting its products and in 1958, it released the “Super Cub” that has become an ultra-long-selling product that continues to sell even today.

Furthermore, its motorcycle business is a filial son of Honda. In the fiscal year ending March 2011, motorcycles generated 138.5 billion yen in operating income, brilliantly covering the struggling automobile business that has suffered one crisis after another from the collapse of Lehman Brothers to the Japan earthquake most recently. At the half time in the most recent fiscal year, the motorcycle division is again making significant contributions by generating 83.8 billion yen in income (up 36.8% from the previous year) when the automobile business is 105.3 billion yen in the red.

In this situation, Honda introduced two new engines in September with a view to driving further growth of its motorcycle business. One is a 125-cc small engine for emerging countries, and the other is a 700-cc engine for industrialized nations. Both are mainly targeting overseas markets, clearly reflecting Honda’s focus shift in its motorcycle business.

This is all understandable given the fact that new motorcycle sales in Japan only amount to 380,242 units, less than 1% of Honda’s global share. The number has been declining steadily since the 1982 peak of 3.29 million units, and the current figure stands at only one-ninth of the peak sales. Even motor-assisted bicycles (381,721 units were sold in 2010) are selling more than motorcycles.

Reasons behind the declining sales of motorcycles include the falling birth rates, rising prices, and relative vibrancy of the used motorcycle industry led by “Bike King” whose commercials we frequently see on TV. However, the greatest reason is the “loss of interest in motorcycles” among the Japanese. In a way, motorcycle manufacturers are responsible for this lamentable trend.

In 1982 when the motorcycles sales peaked, the so-called “HY war” (sales war between Honda and Yamaha Motor) was the fiercest. To win the war both Honda and Yamaha introduced new products that would not be normally sold in the market. They set competitive prices by ignoring the profitability and exploited their corporate strength maximally. As a result, both were forced to carry massive excess inventories and make significant production cutbacks. R&D stalled and users lost trust in the brands. Honda and Yamaha could not increase sales even during the bubble economy and the domestic motorcycle market shrank to one-third of its peak size by 1990 or thereabout.

Manufacturers were also behind the tightening regulations on emissions and noise, etc. They reduced the number of models to comply with the regulations and, having lost popular models, raised prices to absorb higher costs. While this was going on in Japan, overseas motorcycle markets continued to grow. In this sense, the weakening of the domestic market was clearly caused by the failure of manufacturers to look at the Japanese market seriously.

Finally the motorcycle industry is beginning to demand the government to relax licensing and other regulations. The majority of motorcycle licenses issued in the world are in the 100 to 125-cc class, and in Italy and Spain a person receiving a car license is automatically given a 125-cc motorcycle license. Accordingly, manufacturers in Japan are asking the government to introduce the same system or shorten the mandatory training hours (currently 12 hours).

Still, it is extremely difficult to lure back the users who have lost interest in motorcycles, and even if the deregulation becomes a reality, it might well be a mere drop in the bucket. Currently there are more used motorcycles than new ones and a sweeping reform, including price restructuring, is needed.

As the industry leader, Honda must make active moves, but the company is less than willing because “The Japanese market accounts for only 230,000 units of global unit sales amounting to 18 million units.” (Source at Honda)
For your information, the manufacturer’s suggested retail price of Honda’s Super Cub 110 is 249,900 yen. Who wants to buy such an expensive bike?

New Honda Corporate TV Advertisement

Honda has released a new TV advertisement with what seems to be a corporate message. The advert features many vehicles (cars, bikes, even a lorry/truck) which seems to be selected on the basis that they represent the product with which Honda ventured to a new area. The advertisement is also narrated with a japanese poem. TOV regulars DanielGr, CR-V9 and Chocs did a translation of that poem and DanielGR has recreated the advert with subtitles/captions and put it into youtube. This video has been released in TOV for a few days and now I am featuring it on 'Honda Fan' so that more Honda fans are able to enjoy the video and able to understand its message. For discussions on this video, visit both our TOV forum thread and TOV news article.

To view the video/advert with our TOV subtitles/captions, click on 'CC' at the right hand bottom of the screen.

BOSS Article Part Four

Following after the jump is part four of the seven part BOSS article on Honda and its current problem. The link to the TOV forum discussion thread is BOSS article Part 4 TOV thread



Unable to Gain “Control” in “Treasure Chest” Emerging Markets

The Disappointing New Civic

Until the 1990s Japan, Europe and the U.S. were called the big three auto markets in the world, but as these markets matured the emerging markets of China, Asia and Central/Latin America are expanding rapidly in today’s auto industry. Among Japanese manufacturers, Honda is known as heavily depended on the U.S. market, and as such the company is shifting its course toward expanding shares in developing markets by reducing its dependence on the Americas and industrialized nations.

In August 2011, Consumer Reports having strong influence over American consumers trashed the new “Civic” released after a full model change in the spring, saying that the compact sedan “could not be recommended given its poor handling, ride comfort, brake performance and interior quality.” As a result, Honda rushed to implement major improvements ahead of schedule.

One primary cause of the setup that invited harsh criticisms was the order by President Takanobu Ito to cut more cost when the development had already made far progress, which led to unreasonable compromises. Why did he make such a decision? One source at Honda familiar with the situation explains as follows:

“It’s not that Honda will ignore the U.S. market, but the underlying assumption is that the company’s key battleground will shift to emerging counties in earnest.

Following the collapse of Lehman Brothers, the purchasing power of low- and middle-income earners is dropping faster than we think in Japan. To appeal to the users who would buy a Civic, the price must be lowered significantly. Honda’s idea is that, if the U.S. no longer generates as much profit as before, we should make and sell cars only to the extent of maintaining the status quo in the U.S., while diverting the management resources such as development and production technologies to tapping the emerging markets.”

The new Civic became a compromised setup in favor of cost reduction, not because Honda tried and failed to unreasonably increase the profit margin, but because it made a proactive decision to provide a safe car for the U.S. market that stopped expanding and to keep the share. It received a low mark from Consumer Reports only because the focus distributions were not correct.

Given the nature of Honda as a company, it is only natural that the company wants to shift its focus to emerging countries. The U.S. is like the second mother to Honda, serving as an important production hub and development hub. However, Honda’s business operations are clearly oriented toward developing users in emerging countries and developing countries.

Honda boasts the largest share in the global motorcycle market, producing more than 150 million units in cumulative total worldwide. The low-cost bike “Cub” series created by Founder Soichiro Honda is utilized as business bikes by all user segments including the low-income group. Honda also sells many affordable products that contribute to progress of civilization, such as ATVs (one-passenger or two-passenger four-wheel bikes), outboard engines, generators and small agricultural machinery.

“In India, for example, customers who buy a generator have relatively high income and can afford a car. There is also an element of brand loyalty in that users of a Honda generator also buy a Honda car. In developing countries, we see many cases where an owner of a low-cost generator or agricultural implement steps up and buys a motorcycle or car as his economic situation improves. It is one strength of Honda to be able to approach markets that are still small but present a growth potential in the future.” (Person in charge of power product sales at Honda)

In the 2000s Honda began reinforcing its emerging country strategy. The current model of Japan’s best-selling basic car “Fit” was released in 2007, where various ideas were incorporated in the new car development stage to cut cost, such as significantly reducing the use quantities of expensive materials not readily available outside industrialized nations. This was to eventually enable the model’s production in developing countries and emerging countries.

Furthermore, in 2011 Honda released the low-cost compact car “Brio” targeting users in emerging countries in Thailand and India. It is a ultra-low-cost model, sold for around 1 million yen in Thailand and 700,000 yen in India. “When I saw the real thing, the price was several hundreds of thousands of yen cheaper than the Fit, but the design was more appealing. Despite its compact body, the interior was spacious, probably to cater to the need to carry many passengers in emerging countries. Local R&D staff developing other models liked the car and asked us to import it right away because they wanted to buy the car themselves.” (Source at Honda R&D)

The current basic overseas strategy of Honda is to expand the lineup of low-cost models such as this one and gain shares in emerging countries where the market size is expected to increase by 20 million units to 30 million units over the next 10 years.

Despite its focus on emerging countries, Honda is not treading a smooth path when it comes to the company’s overall overseas strategy.

The biggest challenge is to strategize its course in industrialized markets such as Japan, Europe and the U.S. Honda has large production facilities in industrialized countries and regions such as Japan, North America and Europe. It is inefficient to export complete body units or CBUs for emerging countries from high-cost factories in industrialized countries, and Honda must obtain a certain level of share in each region in order to raise the utilization ratios of local factories.

However, it is becoming increasingly difficult for Honda to gain control in industrialized markets such as North America where the company has been traditionally strong.

The greatest risk is in the European market, including Germany having Autobahns or motorways with no speed limits, where average car speeds are the fastest in the world. Given the speed limits of 100 kph and 110 kph on national highways, which are equal to the speed limits of expressways in Japan, naturally European users are the most critical of cars in the world.

Honda is losing out in this European market in terms of sales. Honda’s share in the 187,000 units sold in Europe in 2010 was a little more than 1%, far behind Toyota who sold 600,000
units, Nissan who sold 400,000 units and even Suzuki who sold 195,000 units.

South Korea’s Hyundai Group is one Asian manufacturer in a contrasting position to Honda. Including the sales under its sister brand Kia, Hyundai has sold 620,000 units and has become the top-selling Asian automaker for the first time, surpassing Toyota. One executive of Honda comments on this dismal state: “ The European market is shrinking and no longer profitable, just like the U.S.” However, this is like eating sour grapes. Being ignored in Europe where car performance is evaluated against the strictest of standards is only negative for the brand image and there’s nothing to be positive about.

Luxury Cars That Don’t Sell

In the Japanese market Honda is not doing too bad, thanks to the healthy sales of hybrid cars helped by the environmental tax incentives. However, the majority of selling models are low-margin compact cars, and with the recent strength of Nissan, Honda’s ranking in overall sales including Japanese K-class cars is dropping from the previous high levels.

Among the industrialized nations, Honda is doing relatively well in the U.S., but this market is not without concerns. Hybrid cars, which are recognized as a symbol of advanced technology and contribute to enhancing the brand image, are not selling at all at Honda and Honda is falling far behind Toyota in this segment.

In 2009, Honda’s second-generation “Insight” and Toyota’s third-generation “Prius” were launched around the same time and went head to head. In the U.S., the Insight was priced differently from Japan, or around 5,000 dollars cheaper than the Prius, but Honda’s hybrid still suffered a crushing defeat to the Prius. The Prius has been enjoying constant sales of over 10,000 units a month, except during the time its production was affected by the earthquake. In stark contrast, sales of the Insight are less than 1,000 units.

The Civic Hybrid that underwent a full model change in 2011 is another complete failure, selling far less than 1,000 units per month as initially planned despite its expensive, high-power lithium ion batteries because performance-wise it is far inferior to the Prius.

Gaining power in the U.S. market by casting a scornful gaze at struggling Honda is Hyundai. Hyundai debuted its first hybrid model “Sonata Hybrid” this summer and received a spotlight when it sold more than all Honda hybrid cars combined. The Hyundai Group is increasing sales by using the high won-dollar exchange rate as a weapon, and closing in on Honda in total unit sales.

The size of unit sales is not the only concern of Honda in the big three industrialized markets. Another concern is the low-margin, high-volume sales structure where the majority of selling models are low-margin compact cars and luxury models that make sense to be manufactured in industrialized nations are not selling at all.

In the summer of 2010, a newspaper reported that Honda was “suspending the development of a new generation of its luxury car Legend” immediately before the mid-year press conference by the president. President Ito denied the report by saying it was “false” during the press conference, but the Legend (known as the Acura RL overseas) is suffering an extreme sales slump around the world, selling only 100 to 200 units a month even in the main battleground of the U.S. Given that sales are virtually zero in Europe and Japan, there is actually a call to shelve the model. “It makes no sense to include this model in the lineup. If we can’t make a truly good car, we might as well scrap it.” (President of Honda’s new car sales company)

Strong Rivals Appearing One after Another

The “Accord,” which is supposed to be fighting against Audis, BMWs and other middle-class luxury sedans, is suffering a terrible sales slump.

If the current situation continues, where only low-margin mass-market models are selling, Honda will have to stop producing in industrialized nations, although its brand name will probably survive. To prevent this from happening, Honda must go at making luxury cars again. However, there is little hope as “The top management has half given up, selfishly deciding that the era of luxury cars has passed.” (Source at Honda)

As for the battle in emerging countries, however, there is no guarantee that things will go smoothly as envisioned by Honda. Global auto giants such as Germany’s Volkswagen and the U.S’s GM and Ford are starting to introduce attractive low-cost models one after another by targeting emerging countries.

For example, the compact car “Up!” exhibited by Volkswagen at the Frankfurt Auto Show allows the manufacturer to build different models for industrialized countries and emerging countries by changing the quality of parts while maintaining the same shape. The new car even raised an alarm in one Toyota executive who said, “Given the fairly low cost, this car will be a tremendous threat in emerging countries.”
Having obtained a top-three share in China, Hyundai is also expected to enter the emerging markets by using the know-how of low-cost car development gained in China as a weapon. “ASEAN (Association of Southeast Asian Nations) countries are traditionally pro-Japan and the superiority of Japanese cars including Honda probably won’t change in the near future. However, European and U.S. manufacturers are gradually stepping up their offensive in other regions. If they gain momentum in these other regions and eventually enter Asia, we don’t know what will happen.” (Above executive from Toyota)

Honda was quick to introduce its emerging country strategy by actively attacking its strong segments. In a sense, however, the strategy is a way to “escape” from industrialized nations where Honda has been experiencing a series of failures in the high-margin luxury car business which is essential for any company operating in these countries.

If Honda remains too confident about its strengths, it may be forced to only defend itself when rivals that have been gradually gaining power eventually close in on the company’s stronghold. We anxiously wait Honda’s next move.

BOSS Article Part Three

Here's the 3rd segment of the article about Honda in the Japanese Business Journal "BOSS". The TOV forum thread for discussions related to this part is at TOV Boss thread Part 3.



Golden Days” under Kume and “Major Reforms” by Kawamoto Administration

10 Years after the Release of the “Fit”

Honda was on a strong march 10 years ago from 2001 to 2002. The “Fit” launched in June 2001 became a big hit and in 2002, the Fit stole the show when the model became the best-selling car in annual unit sales, beating the long-term winner “Corolla” from Toyota. Just 10 years since then, the “Fit” is still selling well but except for car manias, not many people can instantly name multiple Honda models other than “Fit.”

On October 27, 2011, President Takanobu Ito was nowhere to be seen at the premiere of Honda’s new car held at the company’s head office show room in Minami Aoyama, Tokyo. That’s because the new model was only a hybrid version of an existing model. Sho Minekawa, Managing Executive Officer and General Manager of Sales for Japan, made the opening speech.

“The environment that surrounds the domestic auto market remains challenging and the needs for greater economy and downsizing (of vehicle class) are becoming clearer. In this time, we want to make environmentally friendly, unique cars one after another. The “Freed” is received positively for its compact size and spacious interior and since its release in 2008, the model has sold over 270,000 units in cumulative total Today, we are proud to introduce its hybrid version. Honda will continue to pursue both economy and ecology.”

In his sales pitch Minekawa emphasized environment, ease of use and interior space---the three keywords promised on recent Honda models. When the new Japanese K-class car “N BOX” scheduled to be exhibited at the soon-to-be-held Tokyo Motor Show was premiered at the end of the event, Nobuyuki Matsumoto, Executive Officer and General Manager of Automobile Operations Business Division 3 gave this very engineer-like comment: “Although we cannot tell you the fuel economy, output and other numbers yet, it’s a Honda and I’m sure the car will meet your expectations for driving performance.”

Honda is far behind its competitors in its Japanese K-class car lineup and it is natural for the company to relook at this fast-selling segment, but another factor is that the company’s export business will collapse if the yen remains at the current record high level. To maintain the utilization levels of domestic factories, Honda must compete under the Japanese K-class car standard available only in Japan.

“Honda is the only company making small cars and Japanese K-class cars entirely in-house. We don’t use OEMs (original equipment manufacturers). Today we announce our determination to continue with this policy,” says Matsumoto. However, in this age where even Toyota uses OEM for its Japanese K-class cars through Daihatsu, Honda’s lofty declaration will surely impose higher hurdles on Honda than competitors in terms of maintaining factory utilization ratios and dealers.
 
As the market environment undergoes drastic change, Matsumoto holds a key to product planning at Honda. Matsumoto is the person responsible for developing the “Fit” that became a massive hit. Because the car was such as big hit, it is natural that all successor models of the “Fit” maintains the key concept of the original model and we can easily imagine that Matsumoto is relied upon in the company and has strong power.

When asked about what he thought about the “weakening DNA of Honda” during the blanket interview after the above mentioned premiere event, Matsumoto rebutted as follows after telling the reporters how they were “free to talk about what our DNA is: “Honda’s spirit is to create, lead and realize. We are all about innovating by providing both superior packaging and sportiness.”

When the questions drifted to differentiation with competitors, however, Matsumoto stopped mentioning driving performance or drivability as expected. As for the aforementioned “N BOX,” which is simply a boxy, tall wagon offering no fresh look, Matsumoto made these strong claims: “Look at the actual car at the Motor Show, and you’ll see how much easier it is to use the cargo area (compared to similar cars from rival brands). The ‘Fit’ is a product offering good fuel economy and excellent packaging in a compact car. This combination is even more important with Japanese K-class cars whose external dimensions are smaller. We will get serious about Japanese K-class cars and take on challenges to capture this segment where we first began, by ‘reconfirming the founding spirit.’”

Stagnating after an Unprecedented Success

The “Fit,” which has been the backbone of Honda’s domestic sales for the past 10 years is, to Honda, a car that excels in all four areas of fuel economy, interior space, ease of use and driving performance. However, not a few people have critical views about the car’s driving performance, saying, “The car is not fun to drive, but rather dry and insipid.” Many of these critics are not auto journalists, but car lovers who only know a little more than average consumers.

Groundbreaking features of the Fit included the center positioning of the gasoline tank that was traditionally placed below the rear seat, in order to ensure an unimaginably wide rear leg space while achieving versatile seat arrangements at the same time. Lured by this feature, luxury car owners switched to the “Fit” one after another.

In 2012 Honda finally saw a fruit of a quarter-of-a-century effort to develop a jet plane and began mass-production of the Honda Jet in the U.S. This jet plane also went against the commonsense notion that the engine must be located below the main wing, and carried its engine above the main wing. The innovation of the “Fit” was as impactful as this jet engine layout.

Of course, not all cars released by Honda over the past 10 years had the “Fit” platform and adopted the same center tank layout. However, we can easily imagine how Honda, after enjoying an unprecedented success, put top priority on interior space and ease of use in the name of needs of the times.

“Because this model was very profitable, it stripped Honda of its DNA and other precious traditions. Based on corporate logics, the choice would be a car that is boring but does sell volumes. Due to the great success of the ‘Fit,’ Honda lost sight of how it should grow the traditional two key flagship models ‘Civic’ and ‘Accord’ in Japan. In the meantime, the ‘NSX’ (super sport car) hybrid and high-output grade Type R are not the cars desired by Honda fans in the mass-consumer car segment,” says journalist Kiyoshi Tsukamoto. In his third year as Honda’s top man following his appointment in June 2009 shortly after the collapse of Lehman Brothers, Ito has not yet introduced a hit. However, Tsukamoto believes the current stagnation of Honda had begun in the second half of the rein of Takeo Fukui (2003 through 2009) who preceded Ito.

Certainly when Fukui became president, Honda had so much accolades from the “Fit.” For example, Honda introduced the unique, wide-bodied, six-passenger “Edix” having two seat rows in the following 2004. Nissan had already experimented with the two-seat-row, six-passenger car concept with its “Tino” and this was not the original idea of Honda. Personally I know someone who loves the “Edix” and is still driving it. Commercially, however, the car didn’t do very well and has already been discontinued.
 
With its current corporate strength, Honda should be able to be a little adventurous with such product-out model because even if it doesn’t sell, the effort can be well-justified as long as the car creates a buzz, even temporarily. However, Honda is completely resigned to refraining from such attempt. This is another strong example of “weakening DNA.”

“I suspect some confusion and chaos in product planning and development began to arise in the second half of Mr. Fukui’s rein. Given the fact that the super-high-efficiency engines Mazda and Daihatsu were developing in those days are now released, it’s not easy for Honda to catch up after all this lost time.” (Tsukamoto)

For Honda, the past 10 years is divided into the first five years when it enjoyed the success of the “Fit” and maintained its afterglow in a sense, and the second five years where it became stagnant in terms of product power.

Golden Days in the Late 80s

“Where did our Honda go?” Many Honda fans must be wondering. Let’s find out what the traditional DNA of Honda is by focusing on products.

The highlights of the era of Kiyoshi Kawashima who became the second president (1973 to 1983) after Soichiro Honda included the tall, compact car “City” in 1981 and start of first local passenger car production in the U.S. among all Japanese automakers in the following 1982. In 1981 Toyota also introduced the 2-door coupe, “Soarer” whose name subsequently became synonymous with a high-society car, but in those days there was a large gap between Toyota and Honda in terms corporate size. For your information, Honda reported 1 trillion yen of sales in 1980 (compared to approx. 9 trillion yen of consolidated sales in the first half of 2010).

Helped by the tailwind of the times, Honda could project its DNA best probably under the rein of its third president Tadashi Kume (1983 to 1990). Riding on the success of its “Soarer,” Toyota released several coupes including the “Levin/Toreno,” “MR2” and “Celica” in quick successions in 1983 to 1985, but Honda established an image of a sporty, young company surpassing that of Toyota having all these sport models.

A big turnaround came in 1985. In this year, Honda completed its head office building in Minami Aoyama and also set up three sales channels of Primo, Clio and Verno, carrying dedicated models under the keywords of family, affluence and personality, respectively (all dealerships were later consolidated into Honda Cars). It was also this year when Honda reentered the Japanese K-class car market and introduced its first luxury car “Legend.” President Kume was also there when Honda created a big buzz by doing well on the F1 circuit.

Honda enjoyed tailwind not only in the core business. In September 1985 when the Plaza Accord triggered a dramatic rise of the yen, competitors were far behind Honda in the U.S. where Honda had begun local production early. In the following 1986, Honda established Acura as a luxury car channel, and in 1987 the third-generation “Prelude” became an unprecedented hit. Honda showed some muscle parallel-importing its U.S. version “Accord Coupe” and the four-door “Accord Inspire” released in 1989 sold well.

It was only 1988 or 1989 when rival automakers managed to begin local production in the U.S., and Honda’s sales culminated in five years since 1985.

When the fourth president Nobuhiko Kawamoto (1990 to 1998) took over, however, the situation turned dramatically and Honda’s backbone was shaken. When the bubble economy burst in 1991, Soichiro Honda passed away and Kawamoto announced Honda’s withdrawal from the F1 race around the same time.

The primary cause of Honda’s dramatic fall was a dramatic shift in the consumers’ preference of cars. Projecting an image of a sporty brand, Honda was selling high-output cars driven by a high-rpm engine, particularly low coupes. When the economy worsened, however, top-sellers suddenly changed and multi-passenger minivans and SUVs became popular. Still, many engineers resented “Making minivans that look like commercial vehicles.”
 
Past Alliances That Failed to Ignite

However, Honda continued to lose ground in 1992 and 1993. It was around this time when the humiliating rumor that Mitsubishi might acquire Honda circulated. To keep the company alive, Kawamoto asserted the ultimate authority that earned him a nickname “Hitler” and continued to tell engineers to “Make cars that sell in a low-cost, profitable manner.”

Eventually Honda was blessed with the savior “Odyssey” in 1994. The 1995 “CR-V” and 1996 “Step Wagon” revised Honda completely. Without the “Odyssey,” however, actually Honda might have been swallowed by the waves of restructuring.

For your information, Honda, which now insists on maintaining its independence and not resorting to alliance, is not without a history of OEM partnerships and capital tie-ups. In the area of OEM, Honda supplied its “Odyssey” vehicles to Isuzu Motors when Isuzu withdrew from passenger car production in 1993, while receiving “Big Horn” and “Mu” SUV/diesel engines from Isuzu (the relationship of Honda and Isuzu was dissolved around 10 years ago).

Also, Honda’s tie-up with Britain’s Rover Group (at the time) was long and dates back to 1979. Honda acquired 20% of Rover shares, while Rover became a 20% investor in Honda’s British subsidiary. This tie-up lasted for 15 years until BMW acquired (and subsequently sold) Rover in 1994, but the two companies never developed a car jointly. The second-generation “Ascot” released in 1993 had a tall body similar to a Rover, but commercially this partnership was a disaster.

Looking back, Kume was the luckiest president who could maximally project Honda’s traditional DNA, while Kawamoto was forced to discover a different DNA when the company was struggling at the bottom.

“Mr. Kawamoto who singlehandedly turned Honda around had probably never dreamed of Honda’s uniqueness fading so much as it has today,” says Tsukamoto. One executive of Honda has this to say: “Now that our management base is very solid, there is not much damage. In 10 years Japan will become an extremely silver country and we can’t keep promoting Honda as a company with youthful creativity. Only history will tell whether our current path is correct.”

Honda as a company will prosper, yet its cars will lose appeal…I hope this cynical situation will not become a reality.

Result of case action regarding IMA battery of HCH

Below is an extract of an email sent to me by the PR agency for Honda. This is in relation to the email that you may have received regarding a claim about the fault IMA battery of the Honda Civic Hybrid. 

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Dear Members of the Media,

Good afternoon. 

Recently in the past few months, there has been an email circulating to you all by Ms. Latifah Emir regarding our Civic Hybrid which she purchased. In the email, she made some false accusations about our products (IMA battery) being faulty and also about Honda Malaysia. Due to the sensitivity of the case as it was under Judicial Review, we restrained to make comments or give any statements regarding that matter. 

On the 28^th of March 2012, the Kuala Lumpur High Court through Judicial Review R2-25-249-09/2011, in favor of Honda Malaysia Sdn Bhd & our Authorized Dealer Kah Motor Co Sdn Bhd, quashed the decision of the Consumer Tribunal after finding that the claim made by Ms. Latifah Emir was unsustainable. This put an end to the allegation by Ms. Latifah that the Honda Civic Hybrid’s IMA battery was a faulty product. The High Court acknowledged that Honda’s IMA battery is not a defective product as claimed by Ms. Latifah Emir.

The legal pursuit has ended in favor of Honda by proving that it had not misinformed its customers or the general public at any point in time about its Hybrid technology products. 

We sincerely hope that this statement clarifies any doubts of Honda’s Hybrid Technology that was created by Ms. Latifah Emir over these past few months. 

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BOSS Article, Part Two

Part two of the BOSS article about the current state of Honda appears after the jump. In total there will be 7 parts. The TOV forum thread related to this part is at TOV Forum BOSS thread Part 2.

Demand for President Ito

Two and a half years have passed since Takanobu Ito became the seventh president of Honda in June 2009, not so long after the infamous collapse of Lehman Brothers. Appointed against Honda’s traditional policy of selecting someone with experience in engine development or racing to lead the company, Ito became the first president with body development experience and was charged with the biggest mission: to reform Honda.

Pocketing many wins on the F1 grand prix circuit regarded as the highest echelon in the world of motor sports, becoming the first Japanese manufacturer to build a factory in the U.S., and developing/creating unique technologies and cars, Honda used to have a particularly strong “Young” image. But those days are long gone. Today, Honda is suffering from the so-called “big company syndrome” such as rigidification of creativity and bureaucratization of organizations.

Any company experiencing growth cannot avoid the big company syndrome, but Honda, whose growth has been driven by youthful energy and thinking, is particularly suffering from this illness in terms of both corporate governance and brand image. For Honda to reform itself, it must overcome the big company syndrome.

Has Honda changed since the appointment of President Ito?
“Not much, to be honest. Many employees have already known for quite sometime that the big company syndrome was eating on Honda, but if the big company syndrome could be cured with the awareness of employees, it would have been cured already. To change the situation, the top management must execute a reform. However, beginning with Ito the current management team consists of those who accomplished themselves in times when Honda was expanding globally and anyone could achieve success. None of them knows the real hungry spirit, so how can we expect them to understand what the true reform is?”

These are the words from a veteran engineer working at Honda R&D, which is a subsidiary solely responsible for all R&D activities for Honda from new car development to advanced technologies, referring to the actual state of Honda where the big company syndrome is not getting better.

The big company syndrome encompasses many symptoms, among which bureaucracy, one of the most troublesome symptoms characterized by an attitude of dodging responsibility, is agonizing Honda most.

There are concerned voices within Honda about the spreading “ostrich policy” where each person in charge focus more on how he can escape responsibility, rather than how he can lead the project to true success.

“When a new car is developed, sales planning is done concurrently and in this stage we always do preliminary studies targeting users and journalists. When we look at the results of these studies, it’s like a far-fetched story. For example, there was a concern that the hybrid car “Insight” would have too small a body with lack of rear seat space, but the conclusion was: ‘In a U.S. study many Americans didn’t see problems because they have lower seated heights. So, no problem.’ This is one example of many more statements that do not present a constructive proposal, but provide an excuse to escape responsibility later on.” (Honda employee involved in planning)

Sales is not the only one to blame. There is an insider joke about Honda R&D, which goes like this: “It’s not a place to study technology, but a place to study narratives.”

“Do you know the essential skill you need to have your presentation on technical development rated highly and to drive the project forward? It is the skill of creating PowerPoint slides. It is more important to give the top management an impression that the technology is excellent, regardless of whether or not the technology is truly excellent. Even if we are actually behind our competitors in technical development in a given field, before we know it the presentation makes it look like we are leading them. When the truth comes out later on, the executives who gave an OK want to protect themselves and only beat about the bush.” (Associate chief engineer at Honda R&D)

Honda is also attaching more importance to numbers. Today, the auto industry is questioning the merit of making cars in industrialized nations where labor, energy and other costs are higher. Companies are forced to make a decision to produce models offering high added value in industrialized nations, while making cheaper cars with less added value fully in lower-cost countries such as emerging countries and developing countries.

Adverse Effects of Ostrich Policy

It is easier said than done. To produce cars offering high added value, companies must try creating cars that make customers willing to pay money for design, driving feel and other intangible appeals. Japanese manufacturers are poor at identifying feelings that hold the key to increasing added value, because development engineers themselves seldom have an opportunity to enjoy a car to their heart’s content by taking a long vacation and driving 2,000 km in one go. That’s why Toyota, Nissan, Mazda and other Japanese manufacturers are going to great pains improving “feelings.”

It’s not that Honda is turning a blind eye to this area. Honda also thinks these feelings are important, just like competitors, and is focusing on creating good feelings. However, the reality is different. “Ride comfort, quietness and other items that can be explained by numbers to some extent are easier, but when it comes to styling and sophisticated ride comfort exceeding the simple ride comfort, we are reluctant to try new things. That’s because the decision makers, in an attempt to avoid responsibility, demand that ‘effects be demonstrated by numbers to show how good it is’ in many cases. As long as they have numbers, they can avoid responsibility if needed. This kind of attitude is preventing us from fostering momentum to focus on things that cannot be expressed by numbers.” (Source at Honda)

There were incidents where adverse effects of this ostrich policy manifested directly in a product. A good example is the one involving the new “Civic” released in May 2011 in the U.S. The Civic is one of key models of Honda, selling around 300,000 units a year in North America alone and having significant impact on Hondas’ earnings. To Honda’s dismay, the new Civic did not make it to the new car recommendation list published by “Consumer Reports” an influential consumer information magazine in the U.S. Consumer Reports has always rated the generations of Civics quite highly in its recommendation lists, until the previous model. However, not only did Consumer Reports gave a low mark to the new Civic, but it also included the “Elantra” by South Korea’s rising power Hyundai Motor in the recommendation list. Of course Honda had to make a statement saying, “The new Civic offers performance improvements in all areas such as fuel economy, safety and reliability.” It made those at rival manufacturer smile a bitter smile, as they were surprised by the “unprecedented rebuttal of a media report when there is no distortion of facts.”

The Civic is a far more trusted brand in the U.S. than what people think in Japan, being a safe choice for many American users who believe “You can’t go wrong with this car when you aren’t sure about which one to buy in the mass-market segment.” So, one low rating or two wouldn’t hurt the sales significantly.

“It sent tremendous shock waves throughout Honda, and we are moving to make major changes much earlier than scheduled to enhance the model’s product power. In fact, there is a reason why the Civic’s product power weakened. Half way through the development, President Ito said, ‘Why is the cost so high? Make it cheaper.’ So, we did all we could to meet his instruction, and the result was the new Civic.” (Source at Honda)


Cost control is the biggest challenge in new car development, but the flexibility to reduce cost ends after early stages of development where what car is to be developed is decided. It is difficult to reduce cost once the car is nearly complete. If Ito actually gave such instruction at such timing as the source at Honda says, probably the engineers had to play with items affecting the product power to meet the ultimate order from the top to cut cost, such as adopting cheaper, lower-grade materials or reducing features at the sacrifice of quality feel of the car.

Employees speaking up to the top saying, “If the cost is to be lowered significantly, the product power will drop” must have been the only way to prevent the outcome, but this is not easy to do at Honda where bureaucratic ideas are widespread. The persons in charge faithfully followed the president’s instruction because as long as they do, they would not be held responsible.

Making Cars to Catch Up

Honda must do something about this ostrich policy and bureaucracy as soon as possible. If all key strategic models and new technologies that determine Honda’s future turn out to be the second new Civic, Honda’s cars will lose its product power and eventually Honda’s backbone will be shaken.
The same thing can be said about sales activity. Maintaining good communication within the company is not as simple as the top management talking to general employees. That’s because “Unless the corporate culture must be changed to allow employees to speak up the truth, nothing happens if communication means flummery.” (Source at Honda)

It depends on the personal capabilities of President Ito to implement such reform of the constitution of the company.

Bureaucracy is not the only area Honda needs to reform. Due to the idea advocated by its founder Soichiro Honda, Honda is a very proud company that believes technologies it develops must be unique and superior to begin with. Being proud is not wrong at all, but the high-hat attitude is preventing Honda from calmly identifying the company’s strengths and weakness compared to its competitors.

In October, Honda premiered a full-scale mockup (model) of its new Japanese K-class car “N BOX” as part of the launch of the compact minivan “Freed Hybrid.” As Suzuki and Daihatsu led a fierce race for fuel economy with their Japanese K-class cars, Honda’s Japanese K-class car quickly became out-of-date. The N BOX is the first of a series of models Honda plans to introduce to revamp its Japanese K-class car lineup to counter this situation.

While selling the spacious cabin and modern styling, the N BOX is barely on a par with its rival models in other catalog specs such as fuel economy. Honda’s ever-lasting R&D aim used to be to become number one. Today, however, Honda can only catch up with the existing products by competitors at best.

“In the late ‘90s Honda realized the importance of electric energy and has since spent its development resources on hybrid cars and fuel cell cars. Gasoline engines are already fairly efficient and what we can do on them in the future is limited. However, knowing what we can do is one thing and actually putting them into shape is quite another. Recently what we call ‘Third eco cars’ offering greater engine efficiency and idling stop function are popular, and Honda has definitely joined this next-generation engine race late. The complacency that it is good at engines and cannot lose out to Mazda or Daihatsu brought Honda to a defeat.” (Associate chief engineer at Honda R&D)

Honda is also trailing its competitors not only in third eco cars, but also in clean diesel engines that will likely become more important in Europe, U.S. and emerging countries going forward. When Honda shifted its focus to technologies to utilize electrical energy such as hybrid cars, it virtually abandoned next-generation diesel engines which Honda has committed to develop until now.

Although already accumulated know-how is still there, the reality is that Honda must watch with a finger in its mouth competitors increase shares with their high-performance diesel engines.

Having spent many years at Honda R&D himself, and been a president there Ito is fully aware of the cons of this current stance of Honda. This awareness should help him grapple with the reality and implement a reform. However, the problem lies in his mentality.

Falling Behind in Developing Talents, Too

In the summer of 2010 Ito said, “We don’t worry about Hyundai, but feel Volkswagen is a strong enemy” when asked about the rapid progress of Germany’s Volkswagen and South Korea’s Hyundai Motor in an interview. In reality, Honda is already left far behind Hyundai in global sales, with Hyundai enjoying four times the share in Europe where consumers are most critical about the performance of cars. Therein lies a blind conviction, which is almost a wish, that Honda cannot be defeated by a manufacturer in an emerging country that cannot afford to have much R&D budget.

Another area of concern where Honda’s reform is stalled is developing talents. Ito will likely remain president for at least five years and there won’t be a need to choose his successor for quite some time, but development of talents must start now.

Traditionally Honda’s president is selected from among those with R&D experience, and one strong candidate for the next president is Executive Officer Nobuyuki Matsumoto. The brain behind the development of the compact car “Fit” that has grown into one of mainstay models of Honda, he is considered a thoroughbred.

However, Matsumoto is not the one and only talent because he developed both hits and misses. The fact that we can come up with only one candidate at this moment reveals that Honda is not doing well developing talents. This is one adverse effect of having the top management team consisting of R&D experts, which is the tendency to fall into vertical sectarianism, with the organizations divided according to research and product fields. This is another area where a reform is needed.

Having grown with youthful energy and thinking as the driving engine, Honda is suffering more from the big company syndrome. But does this mean Honda has no hope in the future? Not at all. Honda’s R&D division is one of the largest among global automakers in terms of size and scale of investment, and also has a large pool of human resources. Honda has also accumulated a wealth of technologies with the envy of mid-scale manufacturers and rivals in emerging companies, and Honda is well-poised to survive independently and play a central role in the restructuring trend.

It is not too much to say that whether this rare quality of Honda will be utilized or killed depends on how Ito reflects upon himself and implements a reform with a strong determination.