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Honda Goes Its Own Way
I know it's long, but it's really a facinating read...
Quote:
from FORTUNE.com
The youngest of the world's major automakers--and one of the most profitable--doesn't want to grow up.
FORTUNE
Monday, July 22, 2002
By Alex Taylor III
Honda Motor is the Peter Pan of the auto business--the company that refuses to grow up. As the youngest of the world's major automakers, and one of the few to remain independent, it revels in its individuality. Honda fiercely preserves the do-it-alone, go-fast culture of its founders and defiantly follows its own road on issues as diverse as global strategy, product concept, and sustainable resources. When conventional wisdom sends the rest of the auto industry racing one way, Honda takes note, then heads off in another direction.
The strategy has worked fine for Honda since 1948, when it was founded as an upstart motorcycle company. It is now the world's seventh-largest automaker, and one of the most profitable. With 15% of the market in Japan, Honda has passed Nissan to become the second-largest seller of cars there, after Toyota. In North America, where Honda makes nearly two-thirds of its operating profits, it has opened a fifth assembly plant and is launching a determined assault on the Big Three's last stronghold, light trucks. It enjoys a strong position in alternative fuels too. While other automakers struggle with mileage and emissions--issues that will dominate the industry in the 21st century--Honda is already a leader in both.
But is it time for Honda to grow up? In a global industry where giant groups like DaimlerChrysler, Volkswagen, and Renault-Nissan reap dividends from economies of scale, staying small and nimble may no longer be sufficient for success. Honda's limited product line will inevitably slow its growth. And more than a decade after the death of its founder, Soichiro Honda, it is losing touch with its entrepreneurial roots. As the last generation of executives who worked alongside the founder prepares for retirement, Honda must increasingly rely on managers who have no direct connection to the company's early years.
Change won't be easy because Honda still relishes the role of underdog. Its executives are mostly unassuming men who walk with little of the swagger of their industry peers. At Honda offices around the world, they work in cubicles or at desks in open rooms, saddled with multiple responsibilities, and practice frugality as a way of life. Further down the ladder, Honda managers are renowned for working longer hours for fewer perks and less pay than competitors--and for checking their egos at the door. "Honda does not recruit highflying engineers or management talent," says one admiring competitor. "It goes for solid, grounded people. It may pay them a little more than before, but it is still very low on the competitive scale."
As if to flaunt their individuality, Honda people like to mess around with offbeat engineering projects that have little to do with the company's core businesses of cars, motorcycles, and power products. Honda has spent 16 years and several hundred million dollars developing a four-foot-tall humanoid robot called Asimo that climbs stairs, shakes hands, and earlier this year rang the opening bell at the New York Stock Exchange. Some day Asimo's descendants may help fight fires or handle hazardous materials, but for now the robot project seems to function more as a source of job enrichment for engineers than a future stream of earnings. The same goes for a skunkworks in North Carolina, where Honda is developing a business jet made from composites and powered by a Honda-designed turbo-fan engine. The goal is to build a corporate jet with the same qualities as a Honda car: superb packaging and excellent fuel economy. But the corporate-jet business is at least the equal of the auto industry in its intensity of competition and quantity of capital investment, and Honda still has no business plan for the research project.
None of those diversions has braked Honda's performance. For the fiscal year ended March 31, Honda's sales rose 13.9%, and its net income shot up 56.2%, thanks in part to a cheap yen that boosted earnings from the U.S. Honda's operating margins from cars alone increased to 8.8% from 6.1% the previous year, putting the company alongside Porsche and BMW as one of the most profitable automakers in the world (losses in Europe dragged down its overall results). And Honda forecasts another blowout this year. It expects to sell 4.8% more cars in Japan and 8.9% more in North America, where it is launching five new models, including two light trucks and a new version of the Accord, its perennial bestseller. Says Garel Rhys, professor of business at the Cardiff Business School in Wales: "Honda has demonstrated that you can enter the industry at a late stage with ingenuity of manufacturing, smart management, and above all, products that fill its plants. It is as good as any vehicle manufacturer in the world."
The man responsible for Honda's results, President and CEO Hiroyuki Yoshino, worked for Soichiro Honda and is devoted to his memory. Like his predecessors, the unassuming Yoshino, 62, made his way up the company in engineering jobs, working for the motorcycle group and running Honda's R&D operation; he would still rather talk about piston rings than P&Ls. Yoshino rarely ignores an opportunity to expound on Honda's do-our-own-thing credo and applies it to everything from engine design to corporate strategy. "We don't like to follow others," he says. "We like to go in a different direction."
Yoshino keeps Honda's independent spirit alive by preaching the virtues of "small is smart." Acting small means Honda strives to be quick and nimble, speeding products to market. But thinking small means the company is cautious about big decisions. Instead of making a giant leap, it takes many tiny steps, acting as if it were on the verge of financial Armageddon. Typical of this approach is Honda's new plant in Lincoln, Ala., which was built to assemble a popular vehicle already in production, the Odyssey minivan. The plant was designed with a capacity of 120,000 units a year, but less than a month after it opened Honda decided to boost capacity to 150,000. Now that the facility has been running for eight months, Honda is getting ready to expand again. Analysts expect it to double capacity to 300,000 by building a duplicate plant next door.
Such incremental decision-making comes at a cost, and Honda leaves money on the table every day it does business in North America. To make sure its plants run at capacity, Honda manages its supply so that it is almost always less than demand. The Odyssey minivan has had a waiting list since it was introduced four years ago. That means Honda has to turn away customers. And it gives dealers an opportunity to gouge buyers by charging more than the sticker price.
If its strategy of incremental production increases goes awry, Honda has a backup plan--a belt to go with its suspenders--to balance supply and demand. Three years ago Yoshino directed the company to install a new manufacturing system, nicknamed Ultimate Flex. While other automakers have boosted productivity by dedicating each plant to a single model line, Honda retrofitted its plants so that each one could build nearly every car in its lineup. Should demand for the Odyssey minivan sag, Honda can quickly "flex" the Alabama plant by adding production of the Acura MDX sport-utility vehicle, made from similar components, or any of its other cars.
Honda already starts up new models faster than other carmakers by keeping production-line changes simple; now it can move even faster with Ultimate Flex. Instead of installing new tools and jigs, it simply reprograms them with the touch of a button. When it begins production of 2003 Accords this summer in Ohio, Honda expects to lose only about 3 1/2 days of production, or 6,900 cars--56% fewer than it lost during the previous changeover, in 1998.
Yoshino is also pushing Honda to go fast to take advantage of market opportunities. When the company was developing the Fit, a subcompact for Japan, it planned to introduce the car last September. Shaped like a loaf of bread with one end diagonally sliced, the Fit looks homely to American eyes. But Honda's Japanese dealers were clamoring to sell the car, so Yoshino pushed the launch ahead by three months. "Dealers strongly requested to have it earlier," he says. "I made up my mind to make it happen." His hunch was shrewd: The Fit has become the bestselling car in Japan, more popular than the Toyota Corolla.
The go-fast approach applies to the U.S. too, where Honda shaved six months off the time required to build the Alabama plant. The project was unusually complex because the plant combined a car-assembly line with an engine-building line under one roof. But after breaking ground in April 2000, Honda used stepped-up schedules to drive the first Odyssey off the line last November. The extra half-year of production will enable Honda to build an additional 75,000 vehicles, worth more than $2 billion at retail.
Honda's speed in operations is counterbalanced by its deliberateness in making large investments in factories and models. To guard against layoffs and avoid getting too far ahead of the market, it has waited years before moving into new segments. The strategy has hurt Honda in Europe, where it was slow to respond to customer demand for diesel-powered cars and where it has been losing money for the past three years.
In North America, Honda caught on late to the light-truck boom. After watching from the sidelines for most of the 1990s, it did a few un-Hondalike things. First, it brought into the U.S. a small, underpowered Odyssey minivan. Then it bought Rodeo SUVs from Isuzu and rebadged them as Honda Passports. American buyers didn't like squeezing into the Odyssey, and they quickly discovered that the clunky, defect-ridden Passport wasn't up to Honda standards. "These were placeholders for diehard Honda people," concedes Tom Elliott, Honda's top American marketing executive. "We wanted to get into the market but didn't have the money to do what we wanted to do."
Not until 1998 did Honda finally get serious about vans and SUVs, and it is quickly making up for lost time. It redesigned the Odyssey to be bigger, more powerful, and better looking to American eyes. It has developed several other models, one of which, the Pilot, arrives at showrooms this summer. This $30,000 SUV combines typical Honda thoroughness and detail with equally typical ho-hum styling--and it will probably be another stirring success. Dealers are already charging a premium over list price.
By never allowing its reach to exceed its grasp, Honda achieves stability in a world of turmoil. But despite its Peter Pan complex, it isn't a small company anymore. Yoshino's strategy will be put to a critical test in the next few years as Honda goes it alone to search for a successor to the internal-combustion engine. Having pioneered hybrid power trains, which combine gasoline engines with battery power, Honda has an excellent track record. But developing a hydrogen-powered fuel cell that emits only water is a huge step that most automakers are attempting only in partnerships with each other or with suppliers. Even much larger Toyota has signed up with General Motors to share the cost of fuel-cell development. But Yoshino is determined that Honda should work by itself. "We do not delegate responsibility for research and development to others," he says.
Retirement rules at Honda are vague, but at 62, Yoshino has reached the age at which his predecessor, Nobuhiko Kawamoto, stepped down. "I'm certainly not going to work for four or five more years" is all Yoshino will say about his plans. When he goes, another engineer will probably take his place. Insiders have tabbed Takeo Fukui, 57, the former head of Honda R&D, as the most likely successor. If so, he will have to make tough choices about how much longer Honda can continue its independent ways--and if it does, how it can preserve the unique culture that allows Honda to outperform the behemoths that surround it. In other words, he will have to decide how much longer small will be smart for Honda.
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07-10-2002, 06:05 PM
