Honda's Civic Lesson

By rights, late 1991 should have been a time of triumph for Ron Shriver. The Honda engineer, then 33, had just helped launch the all-new 1992 Civic at the company's East Liberty (Ohio) factory. Already, car magazines and enthusiastic buyers were showering praise on the spunky little subcompact. "Honda has achieved the pole position in the small car sweepstakes," declared Car & Driver.

But instead of celebrating, Shriver was worried. Slick new features such as rear-seat heat vents and a beefier engine had hiked costs just as auto sales were slumping in the U.S. and Japan. American car buyers were balking at sticker prices that topped out at $15,000, yet the yen's relentless run-up against the dollar showed no signs of slowing. Honda Motor Co.'s profit margins, already razor-thin, looked as if they would disappear. So even as the first 1992 model-year Civics were hitting the road, Shriver put together a 12-member team that would spend the next 18 months scouring Honda's U.S. suppliers and its Ohio factory workers for ideas to make the next Civic cheaper to build.

Shriver didn't yet know it, but back in Japan, Honda executives from President Nobuhiko Kawamoto on down had reached the same conclusion: The rising yen meant Honda could no longer afford to overengineer. So Hiroyuki Itoh, the Civic's chief engineer, began putting together his own team--one that within months would merge with Shriver's U.S. crew to collaborate on an all-out battle to wring costs out of the Civic.

LOWER STANDARDS. It would prove a difficult collaboration at times; for once, U.S. manufacturing engineers and marketers had a big say in shaping a new model from the earliest designs. With the high yen all but forcing Honda to boost local content from the U.S., the carmaker also worked far harder than ever before with North American suppliers. It even had to relax its vaunted engineering standards. And Japanese engineers also used an unprecedented number of money-saving suggestions from factory workers and suppliers on both sides of the Pacific--often only after a struggle.

Now, Honda is about to find out if the hard work has paid off: With the unveiling of the new model in the first week of September, car buyers--and Honda's Detroit rivals--will get their first chance to see how well Itoh, Shriver, and team have done. The new Civic will provide a key test of Honda's--and the entire Japanese auto industry's--ability to remain competitive in the face of a strong yen and a muscular Detroit. For Japan's No.3 auto maker, whose worldwide revenues hit $46.9 billion for the fiscal year ended last March, the Civic's success is crucial. It's Honda's biggest seller at home and abroad, accounting for a full third of the 1.78 million cars the company sold. In the crucial U.S. market, it's Honda's second-biggest seller, behind only the midsize Accord. "They can't afford to have a flop," says Alison Shimada, a Tokyo-based analyst with Fidelity Management & Research Inc.

BELOW COST? Still, with the yen trading just below 100 to the dollar, analysts believe Honda now loses money on every Civic it sells in the U.S. But Honda can't afford to swing the balance too far from quality as it trims costs. Some critics say that Toyota Motor Corp.'s recent models have become too spartan. Meanwhile, U.S. carmakers such as Ford Motor Co. have been criticized for improving features only by adding excessive costs. "It's value we have to stress," Kawamoto says.

So how well has Honda succeeded? In Japan, the new 1996 Civics will sell for roughly 3.2% less than last year's models. In the U.S., new prices haven't been announced: The 1996 Civics won't hit showrooms until October. But Honda is clearly trying to hold the line. "Our goal is to keep the same price range as the current model, even though the car is moving up in size and features quite substantially," says Thomas G. Elliot, executive vice-president of Honda's American sales unit. Analysts expect the cost of a new Civic to rise just 1% above 1995 models; the popular four-door Civic LX, for example, should start at around $13,600, roughly $200 over last year. Although they won't reveal how much they've saved overall, Honda executives say that research and development spending and capital investments were half what they were for the 1992 Civic redesign. Manufacturing costs have also been slashed. Analyst Christopher W. Cedergren of AutoPacific Inc., a consulting firm in Santa Ana, Calif., estimates the new model costs some $800 less per car to build than the old.

The 1996 Civic is an evolutionary step rather than a quantum leap from its predecessor. A fresh front-end design with sportier headlights gives a more European look, while the interior is bigger. The roof has been raised slightly and the rear seat has been pushed back, adding much-needed head- and legroom. In the U.S., a bigger, peppier 1.6-liter engine is now standard; one version will be the first mass-produced gasoline engine to meet California's tough new emission standards. And by fastening the engine onto the body with sophisticated hydraulic mounts and adding a new electronically controlled automatic transmission, Honda has given the Civic a much quieter, smoother ride.

Such improvements may not be enough to keep the Civic far ahead of the small-car pack, though. The redesigned 1996 Saturn is also quieter and more refined than its forerunner. Ford will replace its aging Escort with a more competitive version early next year. Honda may find it increasingly hard to convince buyers to pony up the typical $2,000 premium over American rivals. "It's not head and shoulders above" competitors, says George C.

Peterson, president of AutoPacific. "It's maybe just a head above."

The new Civic is the first Honda model entirely conceived and executed since Kawamoto shook up the company in the early 1990s. For 20 years, Honda's renowned R&D engineers had always dictated new designs. Success bred arrogance: Even in Japan, sales and manufacturing teams were only consulted after designs were nearly set; when disagreements arose, the engineers had the final word. And the U.S. unit had no say over any but cosmetic changes. "We always did what we wanted, thinking it was the right thing," says Kawamoto, a 27-year R&D veteran who took over Honda's top job in 1990. "But we had to see that profits wouldn't keep growing."

So, soon after the fifth-generation Civic debuted in 1992, Kawamoto ordered Itoh to begin by revamping Honda's design process itself. Because Honda's R&D specialists in the past hadn't sought input early enough from manufacturing, factories had rarely had time to test designs to minimize capital investment. Kawamoto also knew that Honda had to work earlier with suppliers to eke out production efficiencies.

Itoh's first step was to end the engineering dictatorship. Early that year, he put together a seven-member redesign team that united Japanese executives from engineering, manufacturing, purchasing, quality, and sales from day one--and all had equal say. Soon after Itoh formed his team, Shriver and a group of Ohio employees flew to Tokyo to outline their plans to ferret out excess costs in the U.S. "We received input from the factory much earlier," Itoh says. "We wanted to get sales thinking, `How can we sell this?' and the factory thinking, `How can we make this?"'

The result was a host of money-saving manufacturing tricks that Honda hopes customers won't notice. Although none brought huge savings individually, collectively they add up to a bundle. While the old Civic sported a complicated trunk hinge that made it easy to retrieve luggage, the new model returns to a simpler, traditional hinge that's cheaper to make, if not quite as convenient. Elsewhere, the dashboard and the inner door trim are made from one molded piece each, instead of two or more, which simplifies manufacture. And the cloth on the rear seats, which get less wear, has 30% fewer threads.

Still, Japanese designers and engineers sometimes accepted new ideas only after a struggle. For instance, East Liberty paint shop employee Jodie Kavanagh had a suggestion to simplify the design of front and rear plastic bumper covers, or fascias. On the old Civic, the front fascia had two separate air inlets and a bottom section that had to be individually masked before painting. In the summer of 1992, when Itoh and 10 Honda execs made a fact-finding trip to Ohio, Kavanagh proposed building the fascias with removable grills that wouldn't need masking. But the executives, cautious because Japanese consumers are very picky about paint, nixed the idea.

SHOCKED ENGINEERS. Unfazed, Kavanagh persisted. She countered with several alternatives, which executives presented at later design meetings. Eventually, Itoh accepted a compromise. The front fascia would have only one easily masked opening, while the rear would require no masking. Honda's annual savings: $1.2 million in the U.S. alone. Honda's engineers "weren't accustomed to hearing from the factory so early on," says Kavanagh. "They had to get over the shock."

The U.S. sales team also pitched in. The Civic's air conditioning and sound systems had always been dealer-installed options, for example. Dealers charged what they could get, typically $1,200 to $1,500. Now, however, air conditioning will be installed at the factory, for just $850. Audio systems will see similar savings.

But by far the most straightforward way to chop cost was to boost the use of inexpensive U.S. parts. Although U.S. managers had long pushed for more local parts, Honda only slowly built relations with suppliers struggling to meet its tough standards. The rise of the yen changed all that.

Indeed, Honda eased some of its strict procurement rules to make it easier for innovative U.S. suppliers to win business. Shape Corp., a bumper supplier in Grand Haven, Mich., had no business with Japanese carmakers until 1993. That January, President Peter Sturrus and two associates carried several ski bags filled with bumpers to a Tokyo trade show. They expected to woo potential customers for five to eight years before landing a contract.

To Sturrus' delight, however, Shape signed a deal with Honda after just six months. Honda's engineers were won over because Sturrus' steel bumper had just three parts, vs. 13 for the prior version, cutting weight by two pounds and cost by one-third. Itoh and his team were so taken that they will use the bumpers not only in Ohio but on 36,000 Japan-made Civics each year as well.

Relations between the two companies hit potholes. Honda first insisted that Shape's bumpers be exact to within a millimeter of specs. Shape protested that the best it could deliver was three millimeters. After much haggling, they split the difference. Says Itoh: "In the past, if a company's part didn't measure up we gave up, but this time, we'd go back two, three, four times."

As a result, U.S. suppliers are providing 320 parts for the new car. Honda expects to buy $1.93 billion in parts from U.S. suppliers next year for the Civic, a $164 million increase from 1995. The 1996 Civic has 32 new American suppliers--for a total of 211--some of whom will also export to Japan. U.S. content has increased from 82% to 92%.

Back home, Honda was also working closely with suppliers to bring costs down. Nisshinbo Industries Inc., which had sold brake pads and linings to Honda for 30 years, was pressing it to also buy its antilock brake systems--already supplied to Mitsubishi, Nissan, and Suzuki. In the past, Honda had designed its own antilock brakes, then had them manufactured by an affiliate. "We had studied their system and knew ours was better, so we were pitching hard," says a manager in Nisshinbo's ABS division. Honda pitted its own engineers against Nisshinbo in a competition to create brakes for the Civic. In the winter of 1993, Honda engineers had to admit that the supplier's system, at half the weight and price, had all the performance. Nisshinbo won the contract.

So with Honda's factories around the world starting to spit out shiny new 1996 Civics, can Shriver and his colleagues finally relax and celebrate? They'd better not. Despite the dollar's recent recovery, many analysts expect the yen to continue its decades-long upward trek. And with Detroit steadily improving its small cars--while straining to maintain a $2,000-per-car price advantage--Honda's entry-level sedan is under more competitive pressure than ever before. Time to get cracking on the Civic redesign for 2000.

Honda Saved Enough Money Where Customers Wouldn't Notice...To Add Features and Refinements Where They Would

-- Replaced rear disk brakes with cheaper drums; switched to simpler, less expensive antilock system.

-- Integrated dashboard clock into radio display.

-- Replaced trunk hinge with a simpler design that cut costs in half.

-- Used 30% fewer threads in rear seat materials and replaced vinyl and interior trim with cheaper fabrics.

-- Bumpers, dashboard, and other parts are now made with fewer pieces, cutting manufacturing costs.

-- Air conditioning that is factory-installed--rather than dealer-installed--trims price from $1,200 or more to $850.

-- A more powerful 1.6 liter engine that meets California's tough new emissions standards.

-- Hydraulic engine mounts and electronic controls for automatic transmission make for a quieter, smoother ride.

-- Radio standard on all models; doubled number of speakers to four.

-- Rear seat folds in two sections instead of one, adding versatility.

-- A higher roof and improved design create a more spacious car with extra rear legroom.

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