Honda: Can The Company Go It Alone?

It has always been the Honda way: an almost fanatical devotion to independence, a hubristic pride about its engineering prowess, and a maverick disregard for conventional wisdom. Defiance has been in Honda Motor Co.'s bones since founder Soichiro Honda disobeyed Japanese government orders to stick to making motorbikes 36 years ago.

Now, Honda's preference for the solitary path is about to be tested as never before. The past year has brought astounding change to the automotive industry. The DaimlerChrysler merger created a new giant. Ford snapped up Volvo. Much closer to home, Nissan Motor reached out to France's Renault for rescue. Whispers of a tie-up between Fiat and Mitsubishi Motors are the latest buzz.

Meantime, Honda has become the auto industry's biggest contrarian: a holdout in the rush to consolidate that most other players view as inevitable. Does Honda, making just 2.3 million cars a year, have the clout to take on the titans who make twice as many cars and trucks annually? Can it afford to match rivals' investments in cars that will meet stricter future pollution standards? Will it be able to foot the bill on its own for the next generation of engine technology--when its rivals, joining forces, will massively outspend it?

BRUTAL DISPARITY. Going it alone is a huge gamble for the world's No. 8 carmaker. The disparity of resources is brutal: Ford has a cash pile of $23 billion vs. Honda's $3.2 billion, while General Motors' $9 billion annual research and development budget swamps Honda's $2.6 billion effort.

Many of the world's biggest players predict an all-or-nothing future populated by tiny boutiques and giant supersellers. "There will be room for niche players with strong brands," says Ronald L. Zarrella, president of GM North America. Otherwise, he says, "you've got to have volume." Ford Chief Executive Jacques Nasser says that auto makers who sell fewer than 5 million vehicles a year will need partners. As a senior manager at another Honda competitor puts it: "It will be a tremendous challenge for Honda to be independent."

A challenge, but not impossible. Some analysts bet Honda could flourish in the middle ground between the goliaths and the niche players. In early June, Autofacts, a consulting subsidiary of PricewaterhouseCoopers, listed its "Global Six" auto makers with the best chance of succeeding independently: Ford, GM, Toyota, Volkswagen, DaimlerChrysler, and Renault-Nissan. Although Honda didn't make the cut, Autofacts consultant Greg S. Bonner is loath to write it off entirely. "If Honda were able to become big enough and remain nimble enough, it could be around for decades without having to merge with anyone," says Bonner. In the fast-changing global marketplace, agility counts. "There's absolutely no proof that monstrous size conveys competitive advantage," argues Maryann N. Keller, auto analyst at ING Baring Furman Selz in New York.

Yet even those rooting for Honda figure it could do itself a big favor by finding a partner while it is still strong. But don't expect Honda to start looking. Just ask Honda's tough CEO, Hiroyuki Yoshino, what he thinks about finding a partner. "Nothing," says the blunt-speaking engineer. "I am not interested in that."

He is, however, keenly interested in reinventing Honda so it can survive--and thrive--in a giants' world. Yoshino is betting the company's future on a simple proposition: that a carmaker can save billions without resorting to the megamergers its rivals predict are inevitable. Already, Yoshino's technical staff is working on new manufacturing methods to cut the cost of making a car in half. Over the next three years, Honda will be spending $1 billion to build new assembly lines and overhaul plants in the U.S., Britain, and Japan. The trick will be to hone its edge in cost-efficient, flexible manufacturing so that it can pounce on customers' fast-changing tastes much more quickly--and cheaply--than huge rivals.

Beating out other world-class manufacturers will be tough. Toyota, especially, is seen also as having an edge in state-of-the-art production. To push the envelope in manufacturing, Honda must tailor its lineup to far-flung markets by producing everything from compact cars to light trucks on flexible platforms. And Honda has a brief window to foment its revolution: Merged rivals will probably struggle to meld different cultures, equipment, and armies of suppliers, even as Honda upgrades its plants.

CRUCIAL BETS. Soon, the overhaul could release close to $1 billion a year in extra cash flow for Honda, whose 7% operating profit margins already exceed Ford's 5% and GM's 4%. Over the decade through 1998, Honda's profit machine has been a marvel. Sales zoomed 80%, to $52 billion, while net profits tripled, to $2.5 billion. If Yoshino's plans pay off, then Honda could keep earning like a giant while remaining a nimble midsize player.

Given such health, why would Honda ever have to consider a merger? One reason: Sometime in the next century, the era of the internal combustion engine may draw to a close. As the fuel of choice, "gasoline will not last forever," says Richard Colliver, American Honda's executive vice-president for sales. So the big question is which new engine technology will prevail--fuel cells, electric batteries, or hybrids of electric motors and gasoline-powered engines. "It's one of the big cost issues facing the industry," says consultant Bonner. "It's like VHS and Betamax: Only one format is going to win, and you had better bet in the right direction." Of course, Honda could just adopt whatever engine standard a rival produces. But that's not Honda's style. Says Yoshino: "We don't like to buy our engines from others."

The alternative is to hedge bets by investing in each possible technology. But just starting a viable fuel-cell program costs half a billion dollars. Staying the course to a fully developed fuel-cell car could cost $1 billion. Same goes for electric and hybrid engines. No wonder General Motors and Toyota are already working together on fuel cells. Ford and DaimlerChrysler are in cahoots with Canadian fuel-cell maker Ballard Power Systems: The cost of developing a next-generation engine partly explains Chrysler's decision to merge with Daimler. Yet Yoshino is wagering that Honda can produce a better fuel-cell car faster: "It is quicker. And it's under our control."

"THREE JOYS." Typical Honda cockiness. Even if Honda succeeds, its fuel-cell technology may still not become the standard because of its relatively small size. So the answer for Honda, say many: find a good partner. Some believe a link with Germany's BMW, which, like Honda, excels in engineering and branding, would be ideal. Shortly before France's Renault took a large stake in Japan's Nissan, pushing Honda down the rankings, Honda Chairman Yoshihide Munekuni invited several top analysts out for dinner. But when they pitched different prospects for partnering, says Koji Endo, automotive analyst at Schroders Japan Ltd., Munekuni "just listened and smiled." Then he explained why Honda could go it alone.

It is up to Yoshino to preserve that independence. Like every other Honda employee, he is imbued with a culture emphasizing the "three joys"--that is, buying, selling, and creating cars--that, according to company handbooks, "make Honda a company that society recognizes and wants to exist." So Yoshino is making an ambitious triple play of innovative manufacturing, new products, and spot-on research in new engines. "Everything is necessary for our survival," he says.

He's right there. Honda can't, for example, afford a major misstep with any of its big-selling and top-earning models, such as the Accord or the Civic. When Ford's 1996 model Taurus bombed with customers, the carmaker was able to absorb the financial hit. In similar circumstances, Honda is more likely to suffer the fate that befell BMW after it took over Britain's Rover for $1.3 billion in 1994. The big losses subsequently piled up by Rover humbled the proud Bavarian company and cost Chief Executive Bernd Pischetsrieder his job.

BIG TRUCKS? There are other potential rust spots beneath Honda's golden sheen. It depends on North America for about 85% of its operating profits. Any U.S. slowdown would hit it hard. And DaimlerChrysler will pare down Honda's cost edge if it generates the promised $3 billion a year in merger-linked savings.

Meanwhile, top Honda brass in the U.S. want to extend the model line to include big pickup trucks and sport-utility vehicles based on them, where gross profits often top $10,000 per vehicle. "You've got to get in those monster truck races," says Thomas G. Elliott, executive vice-president of American Honda Motor Co. Without a partner, that will be hard to do in a hurry. So there's plenty of tension with the home office. Yoshino insists that making pickup trucks in the U.S. is not in the cards: Honda will have its hands full satisfying North American demand for its Odyssey minivans.

Yoshino has several recent marketing coups to buttress his point. Honda's redesigned $23,600 Odyssey minivan, launched in October, 1998, is luring sales away from both Chrysler's $22,000 Voyager and Ford's $19,000 Windstar. Indeed, it is so hot that U.S. dealers say they could sell twice as many if Honda delivered more than the current 4,300 monthly.

DAUNTING. That's no fluke. Americans rejected the first Odyssey as undersized. But Honda does not give up. It gave Kunimichi Odagaki, the Odyssey's executive chief engineer, a second shot. Odagaki traveled extensively in the U.S. with a team of 20 American designers who took sneak shots of people using rivals' minivans. The result was a minivan arguably as American as anything Chrysler has produced.

Each seat has individual overhead lights, like an airplane. And the rear seat folds completely down so there's enough cargo space to carry a 4-foot-by-8-foot piece of plywood: The team observed people loading such boards into their minivans.

Yoshino is striving to reproduce that success in an expanded lineup. Indeed, Honda is making a dash for growth by launching everything from minicars such as the $8,000 Life in Japan to the $10,800 entry-level Logo subcompact in Europe to new SUV models in the luxury Acura line.

Leading Honda in its quest to remain independent is a daunting challenge. It took Yoshino's predecessor, Nobuhiko Kawamoto, three months to persuade him to take the job in the summer of 1998. "This is not an enjoyable task," says Yoshino. Yet in many ways, he embodies the Honda way. Yoshino, 59, has earned deep respect from insiders for a stubborn drive that he developed early on. As an 8-year-old at the close of World War II, he hiked across Manchuria, where his father had been teaching math, with his parents to reach his home in Japan. He spent his first three years at Honda poring over NASA documents, working out whether it was possible to strap gas-turbine engines onto cars.

Throughout his career, Yoshino has been the executive who has implemented many of Honda's dreams--dreams often criticized as being too big for such a small player. He is one of a vintage crop of Honda executives who joined the company in 1963. They are Honda's whiz kids--Yoshino's predecessor, Kawamoto, is a member, as is Koichi Amemiya, who now heads Honda's overseas operations.

Once before, in the 1970s, Yoshino saved Honda's skin at a critical point. As chief engineer at the time, he won approval for Honda's big-selling CVCC engine from the U.S. Environmental Protection Agency. He proved that the engine met the requirements of the Clean Air Act even though it ran on leaded fuel, unlike competitors'. It gave Honda the edge it needed in the U.S. "The life of the company depended on that," recalls former colleague Shoichiro Irimajiri, now president of game company Sega Enterprises.

QUICK SWITCHES. Now, Yoshino has to defy the new orthodoxy that size is all. Honda is already smart when it comes to squeezing the most out of every square inch of factory space. In Japan, for example, Honda makes as many as eight different models on single assembly lines. In North America, it has boosted auto production by 40% and engine production by 80% despite adding only one new plant in the past four years. The newest, built in 1998 in Alliston, Ont., is two-thirds the size of its neighboring Civic plant. Innovations there include a new general welder with 20 movable robot arms that in just 88 seconds fuses sheets of metal that make up the roof, floor, and both sides of the Odyssey minivan. It replaces robots with 137 weld points that took far longer to do the job.

In Honda's vision of the future, the most critical component is designing production lines that can seamlessly change over to new models anywhere in the world. That way, it can keep pace with changing consumer tastes. If it succeeds, Honda would be able to crank out minivans--a complex task--as efficiently as minicars. "It's a new form of Japanese just-in-time," says Takaki Nakanishi, automotive analyst at Merrill Lynch & Co. in Japan. "When consumer preferences change, Honda will probably be the most flexible company to capture demand."

Yoshino also aims to slash the investment costs of bringing out new models by using flexible platforms. U.S. versions of the Civic to debut next year will look and feel different from those being produced in 16 factories in 13 other countries simultaneously. By using more general-purpose machine tools and squeezing longer lifetimes from equipment, Honda will save hundreds of millions of dollars.

Meantime, Honda continues to roll out cars incorporating new technology. This spring, for example, it one-upped luxury-car makers Porsche, Mercedes-Benz, and BMW with its new S2000 roadster. The car has one of the most powerful engines on the road that meets low-emission vehicle (LEV) standards. Next, it aims to trounce Toyota's Prius hybrid car, powered by gasoline and electricity, when it launches a more fuel-efficient hybrid called the VV worldwide.

GETTING HIP. Technical virtuosity won't matter a jot unless Honda builds autos that customers want to buy. In North America, this means shifting gears to light trucks. Honda used to shy away from vehicles such as minivans and SUVs. But now it aims to corner 4% of the U.S. light-truck market, up from a 2.6% share. The Odyssey's success is attracting more affluent buyers, who might trade up to a sport-utility coming next year or an Acura TL.

As rivals go increasingly global, Honda can't focus on the U.S. alone. In Japan, Honda has lost some of the market share it gained in 1996 when it mesmerized young buyers with a series of hip recreational vehicles such as the $16,000 Stepwagon minivan. Although the Life model was a hit, the HR-V was a flop. "We misjudged what young buyers want," admits Michiyoshi Hagino, a Honda managing director. Honda plans a slew of launches to sell 43,000 more vehicles a year.

In Europe, the going is tougher. There, Hondas are regarded as staid cars for oldies. It's now trying to drum up excitement by bringing over hot niche vehicles such as its CR-V sport utility and the HR-V, advertised as a "Joy Machine" in Britain and promoted through events such as skateboard championships. But Honda is far from its initial target of selling 300,000 vehicles by 2000, compared with about 230,000 this year.

The multifront war between auto makers is likely to be an exhausting struggle to reshape the industry. David E. Cole, director of the University of Michigan's Office for the Study of Automotive Transportation, thinks the choice of future engine technology is the make-or-break issue for Honda. Going it alone is "a big roll of the dice" for Honda, says Cole.

The ultimate irony may be that Honda's tradition of fierce independence, which has served it so well for half a century, could be its Achilles' heel. Even if Honda were to make an honorable match with GM or Ford, its distinctive culture would make for a stormy marriage. For better or worse, Honda must make its independence succeed.

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