Thursday, September 1, 2011

Interesting Q&A with AHM

In our TOV/TOVA forums board, member CB77 posted a Q&A with the AHM's VP of sales John Mendel. While the Q&A is done with an executive of the U.S. Honda office, many of the questions, and thus the answers as well, relates to concerns and interests worldwide. So, with permission from CB77, I publish the Q&A here for the benefit of TOV/TOVA readers outside of the U.S. Just bear in mind this is specific to the U.S. market but has some applicability to the rest of the world as well. Read the Q&A after the jump.

American Honda's Excecutive VP of Auto Sales recently held a Q & A with American Honda employees. I was pleased to see that some of the questions posed are questions that I often hear on this site (TOV/TOVA)

Q1. The execution of ideas is often an even more critical or a common point of failure in the industry than strategy. What are your thoughts on the top 2-3 root causes for AHM's execution challenges?

A1. This is a thorny one because I don't want to hurt anyone's feelings, but those who know me understand that I don't pull any punches, so here goes:

1) Complacency -- Long periods of success, while making us proud, can lead to weakness. One can begin to believe that we can do no wrong and that we can cut corners and still be successful.

2) Discounting the competition -- Our industry has a history of discounting new competitors. In the 1970s, Detroit automakers discounted the ability of the Japanese to build credible vehicles. In the late '80s and early '90s, some questioned whether Americans would ever buy a Korean-made vehicle. And today, many discount whether China, or India, etc. can compete with their vehicles. Underestimate new competition at your own peril.

3) Danger of Denial -- Even when faced with direct customer feedback or the success of new competition, we can find ourselves unable to accept those facts as reality and continue along a deleterious path. As a pilot, I know that the majority of aircraft incidents are a result of pilot error, and most of those incidents come from pilots who are overly certain of their own abilities vs. the truth displayed by their instruments.

In short, it comes down to 1) Don't become self-satisfied, 2) Discount no one, and 3) Don't ignore the facts.

Q2. I have often heard that Toyota sells more vehicles than Honda because they participate in "fleet sales." Can you please explain this concept in layman's terms and why specifically Honda does not participate in this sales opportunity?

A2. When we refer to Fleet Sales, we (Honda) mean fast turn rental and commercial vehicles that are typically sold at huge discounts (thousands of dollars below dealer cost) and are then sold back into the market by those entities.

The short answer to the question is that this practice destroys residual values (what a car is worth when you're done with it). Ignoring the lost revenue opportunity for Honda, we don't do it for one major reason -- it devalues the investment made in our products by individual retail customers.

Here's how: say you purchase a new Civic for $19,000 and a fleet customer buys 500 of the same vehicles for $15,000. In 12 months, both of you put your cars up for sale on the used market. Clearly the fleet customer can and will sell the used vehicle at a significant discount to yours and still come out "whole". Thus, the "market" for the used vehicle is much lower, and the customers lose their investment.

The fact that we don't do this is one reason why Honda and Acura are always at the top of residual value performance in the market.

Q3. Honda has a history of competitive models in the Sport Compact Car segment (Prelude, Del Sol, older generations of the Civic Si)--does Honda have any plans to improve its competitiveness in this category?

A3. I thought you would ask "Where is the next S2000 or NSX?" To that, I would ask you to stay tuned ... we might have some good news very soon.

Q4. Some Honda "options"/accessories, such as fog lights and navigation systems are notoriously expensive for customers. The navigation system often costs almost $2,200 extra and the fog lights sometimes require a new bumper and lots of dealer installation cost. A navigation unit costs a fraction from other OEMs and options such a fog lights should be much cheaper and easier to add on. Does Honda plan to be more competitive with options and accessories?

A4. The short answer is, yes, we plan to be very competitive. But your question begs a bit of explanation because you make it sound as if we are uncompetitive in the marketplace now. Granted, in some areas like dealer installed options, we are much higher priced for an accessory than if it was a factory installed piece. But I think that the bigger answer revolves around providing true value for the customer.

Your example of Navi is a good one. For instance, I can get a Tom-tom or Garmin Navi for my car for around $400. It functions just fine on many levels, but the screen is small, it sticks on either my dash or front window and interfaces with nothing else in my car.

If you look at the 2012 model Civic, the new Navi price was reduced $500 on the EXL, a huge reduction in price from the outgoing 2011 model. In addition, it is integrated into the instrument panel and provides interface for USB, iPod, pictures and audio controls. While I'm not certain we'll ever compete with a hang-on unit from a price standpoint, you'll continue to see technology costs become much more competitive and their value proposition for the customer increased.

Q5. Why do we have the same grilles on all the Acuras? If someone doesn't like one, they won't like any. I believe the public spoke on the TL so we toned down the grille on it. Honda is going a very similar way. Why? For distinction?

A5. Distinction in the marketplace is part of the reason but it's also about carving out an identity. Not that long ago we were criticized for having "a lineup that didn't look like they belonged to the same family." We want our vehicles to be part of the Honda and Acura family and be readily identifiable as such.

The challenge is to be distinctive for each brand, without alienating customers. To a certain degree, we pushed a little too far with the Acura grille several years ago, but I think we have dialed it back to a great cohesive look for the entire brand.

Q6. The recent perception that the new Civic is "cheap" does not help our image and can hurt our sales. How are you going to address the issue of continuing to provide quality products at a low cost while satisfying our ultimate quality testers, which are our customers?

A6. Obviously, when anyone attacks one of our "children", the first reaction is to get defensive. Some associates might feel my "Perspective" that was published online falls into that category of response. That wasn't my intention. My goal was simply to convince our customers to take their own look, rather than turn their heads away after a single negative product review. However, while we may disagree with the conclusion of Consumer Reports (as have other respected rating institutions like KBB) we need to always listen with an open mind, to what consumers have to say.

The challenge is that, due to constrained supply, we have yet to get a good sense of customer reaction to the new Civic. When we do, we plan to react quickly to fix any issues that they believe need addressing. Of course, this must be the starting point of every new model project -- to deeply understand our customers' needs and expectations. This is how we will continue to address the issue of balancing quality and cost to please our customers.

Q7. Why doesn't Honda offer a clean diesel option to customers? We already have an Accord (TSX) Diesel in Europe as well as the Civic and CRV. We should start by offering these models here and let our customers decide what they want to drive.

A7. The truth of the matter is that diesel powertrains are very expensive. Additionally, unlike in Europe where diesel fuel is highly subsidized and much cheaper than gasoline, diesel here in the U.S. is actually more expensive than gasoline. This makes the value proposition a difficult one for the consumer in spite of the better fuel economy

You will no doubt cite VW or Audi or other European brands who offer diesels on some of their vehicles here. The reality is that because they build primarily diesel-powered vehicles for Europe they have a huge scale advantage and therefore can offer the vehicle as a low take rate option here in the U.S. with little additional investment required.

Q8. The 2006 Stream for the Japan market is an excellent product, why did we not bring this model to the U.S. market? Why don't we offer a microvan with third row seating in the U.S.?

A8. While there was much interest in the Stream in past years, the reality is that "federalizing" the vehicle for the U.S. market -- by that I mean re-engineering it to meet safety and other requirements for this market -- would have made it cost prohibitive to sell here.

In terms of our interest in the segment, going forward, we continue to assess the market to identify opportunities which will provide the right value equation.

Q9. With a wave of new customers coming to market, have we considered a third entry level automotive brand to capture Gen Y customers? Has that strategy worked for Toyota with the Scion brand?

A9. I'll bring this answer back around to where we started on the discussion about execution. Several manufacturers have embarked on strategies to capture Gen Y or frankly, different customers from their main brand. We also have looked at this strategy. Now, while I wouldn't call Scion a failure like Saturn, you cannot argue with the fact that they are struggling; execution of the strategy long term, has been a challenge.

The key to capturing Gen Y or any other specific customer target is the product. If you don't have the right product, then it doesn't matter what you call it or where it is sold. If you do have the right product -- take Civic which still captures more Gen Y customers than any other vehicle -- then you win, regardless of the channel. In the end, it's about execution.

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