Monday, April 23, 2012

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.

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