Honda: A Heckuva Time To Switch Drivers

Maintaining profits won't be easy for CEO Hiroyuki Yoshino

For eight years, Honda Motor Co. has been the carmaker that could do no wrong. By almost any measure--sales, profits, market share--Japan's No.3 carmaker is one of the country's few winners. Honda closed in on the rear bumper of titan Toyota Motor Corp. and raced ahead of rivals such as Mitsubishi Motors Corp. In the U.S., it built such a successful franchise that customers now demand more Accords than the carmaker can pump out of its Marysville (Ohio) plant. And as a latecomer to Southeast Asia, it has escaped the region's free fall mostly unscathed. As a result, Honda posted record profits of $1.8 billion on revenues of $41 billion for the year ended last March.

That's the legacy left for Hiroyuki Yoshino, who took over as Honda's CEO this summer. Yoshino, 58, would like to maintain Honda's Midas touch through the millennium, but he couldn't be taking the helm at a worse time. Japan's economy is in recession, shrinking the market for cars there, and competition is increasing. To face this challenge, Yoshino is trying to squeeze costs even more while counting on strong U.S. sales. And rather than build new factories, he's ramping up production at existing ones, despite being close to capacity. "First, we will try to increase production by strengthening our existing operations," says Yoshino.

CURRENCY EFFECT. The weak yen helps. Each one-yen drop against the dollar adds an estimated $55 million to Honda's bottom line. Honda will get an extra boost from the currency effect this fall when it plans to export 60,000 Accords to the U.S.--roughly the amount by which Yoshino expects sales to drop in Japan this year. But Honda must be cautious. Detroit's Big Three could take to the warpath if Honda relies too heavily on export strategies.

Honda is now selling all the cars it can make in the U.S., where its $19,500 Accord is the top-selling car this year. This fall, it will launch a new near-luxury Acura TL sedan and its largest vehicle--the 3.5-liter, V-6 engine Odyssey minivan, which will sell in the $20,000 to $30,000 range. With those launches, Honda will be able to produce nearly 1 million vehicles in North America annually. Yoshino has the flexibility of cranking up overtime assembly, which could push production to 1.2 million by 2000.

The new, larger minivan for the U.S., the size of a Dodge Caravan, is part of Honda's strategy of developing vehicles suited for the world's diverging car markets. In Europe, it's the opposite tack--a fleet of smaller cars as part of its "small is smart" strategy. Honda now plans to boost European capacity 40%, to 250,000 vehicles per year by 2000.

Skeptical analysts think Yoshino may have a hard time making money in Europe. Standard & Poor's DRI forecasts that Honda's market share will climb from 1.6% this year to 2.2% in 2002 after Honda makes inroads into Europe's market with a new 2.0-liter compact car later this year. But price competition in compact cars will be brutal. "With that volume, there is no way they can make money in Europe," says Koji Endo, automotive analyst at Schroders Japan Ltd.

LEAN MACHINE. Yoshino counters that he can increase the company's profit margins "even when we are producing smaller cars," but he's not saying how. "If we can do that, then the larger-size cars will be even more profitable," he says.

Yet some analysts worry that there are few places left to squeeze. In the past, Honda has been able to reduce production costs by as much as 30%. But that leaves little to cut. More than 80% of Honda's cars are built from the same bases, and many share as much as 60% of the same parts. "They can only milk the existing platforms so much more," says Stephen Usher, automotive analyst at Jardine Fleming Securities.

That means in order to cut costs, Yoshino, who trained as an aeronautical engineer and oversaw research and development before becoming CEO, may need a technological breakthrough. Yoshino wants to implement flexible production methods that will enable the company to keep profitable small-car and small-volume operations. But no one is sure how this will be done.

First, though, Honda needs to prove it can keep the market share it won last year at home. "Honda gained share because it had good cars and its dealers cooperated," says Toshio Nakata, president of the Honda Clio Tokyo dealership. "Now we have to work even more closely together to make sure these new customers are satisfied and continue to drive Honda cars." Led by the $9,590 Capa, a hip, ultrasmall minivan, and the $12,330 Stepwagon sport-utility, Honda continues to gain ground with fashion-conscious young buyers. It racked up 3.7% more car sales in July, even though the market overall slid by 8.4%.

In a scramble to woo buyers in a recession, carmakers plan to launch 64 new cars this year in Japan, more than twice last year's number, estimates Jardine Fleming Securities. Toyota plans a new, aggressively styled compact car. It will also slash the car's production cost by 30%, compared with its previous compact models. Yoshino revised Honda's calendar-year sales target for Japan down to 764,000 cars from 810,000. Honda will not easily suffer defeat, however. The company aims to repeat last year's success by counterattacking with two new minicars, a classy SSM sports car, and a new subcompact sport-utility.

Despite the tough road ahead, Yoshino is making it clear he thinks Honda can make it as a nimble player. He says Honda will not pursue any megamergers like the Daimler-Chrysler tie-up, nor will it invest aggressively in more capacity worldwide. Instead, Yoshino plans to follow a contrarian strategy of going it alone at a time when the rest of the world's auto heavies are joining forces. And, make no mistake about it, he wants to take them head-on.

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