Monday, April 23, 2012

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.

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