Online Extra: Q&A: Honda CEO Hiroyuki Yoshino

The head of Japan's No. 2 carmaker on the sales outlook for the U.S. and Europe, and manufacturing in China

Back in 1963, the powerful Japanese Trade Ministry warned Honda Motor Co. (HMC ) to steer clear of the passenger-car market and concentrate on two-wheeled vehicles such as motorcycles and scooters. Needless to say, Honda ignored that unsolicited advice and went on to become one of the most competitive -- and profitable -- auto makers in the world. A recent string of hits, including the Odyssey minivan in America and in Japan, have buoyed Honda's group-revenue take to record levels.

The feisty carmaker's knack for tickling car buyers has been a constant irritant to much larger rivals, such as industry leader Toyota Motor (TM ) and Nissan Motor (NSANY ), from which Tokyo-based Honda took the title of second-largest Japanese carmaker last year. But can Honda stay at the top of its game amid slower economic growth in the U.S. and Japan? CEO Hiroyuki Yoshino, 61, spoke about this and other topics in a May 29 interview with Tokyo BusinessWeek Correspondent Chester Dawson. Here are edited excerpts from their conversation:

Q: What's your outlook for overall auto demand in the U.S. this year?

A: I think 16 million units is a fairly high level, but there should be just enough demand this year to sell that many vehicles in the U.S. We don't expect the market to deteriorate that much [from last year's record levels]. It's unlikely sales will fall back to the 12- to 13-million-unit range.

Q: What's the prognosis then for continued growth at Honda?

A: Last year was an extraordinarily good year for us. So it'll be tough to top that this year. Right now, it's more a question of how close we can get to matching last year's performance.

Q: Do you expect rising prices at the pump to rekindle American car buyers' interest in more fuel-efficient vehicles?

A: That's only natural. Honda has always placed a lot of emphasis on improving fuel efficiency, so we don't plan any big strategic shifts in our product line. It's hard to say if higher gas prices alone will translate into increased demand for Honda cars. But we may see a pickup in sales of hybrid gas-electric engine cars like our Insight sedan.

Q: Honda expects to maintain strong sales in the U.S. at a time when the Big Three are seeing their American sales slip. Isn't that a recipe for renewed auto-trade friction?

A: Most of the cars we sell in America are made there. Very few are imported from Japan. But if [the U.S. government] wants to make it a problem, it will become a problem.... The real issue is the Japanese market, not the American market. Yet with enough investment, foreign cars will sell here. European cars are selling in Japan. So I don't see any need [for a government-brokered auto-trade pact].

Q: Honda has been doing well not only in the U.S. but also in its home market of Japan, where it makes four of the top-10 best-selling cars. Can Honda do no wrong?

A: Our biggest worry is weak sales in Europe. We sold fewer than 200,000 cars in the region last year. But we're moving quickly to deal with that problem. In three years' time or less, I want our European sales to reach 350,000 units.

Q: Honda put all its eggs in one basket by concentrating European production in Britain, which has exposed it to losses in continental Europe from the rising value of the pound against the euro. Will Honda try to neutralize currency losses by exporting cars to Europe from a plant in a low-wage country outside of Britain and Japan, such as China?

A: I won't deny there's a possibility we might manufacture [our newest subcompact] in China. But no decision has been made on that one way or the other. First, we would have to determine how much demand there would be locally for a car made in a third country [outside Japan and Britain]. It's also a matter of cost, quality, competitiveness, and various other factors.

Q: Even so, Honda will boost Chinese output of its Accord sedan to 50,000 units this year and has expressed interest in making the Odyssey minivan in China. How bullish are you on China's development into a major auto-manufacturing hub?

A: There's a lot of uncertainty involved when it comes to China. We started production on the mainland after discovering the Chinese were importing 20,000 to 30,000 units a year of our American-made Accord. Honda was called in when Peugeot's facility in Guangzhou got into trouble, and we wound up manufacturing the Accord at the plant.

But China isn't the kind of country where you can do whatever strikes your fancy [because of red tape]. For us, an opportunity was offered, and we took a chance.... Of course, we see the most promising future markets in countries with huge populations.

Q: What about the long-suffering Japanese economy -- is a recovery in the offing now that Japan finally has a new government committed to carrying out economic reforms?

A: Prime Minister [Junichiro] Koizumi is quite popular, and we'll have to see what happens in the July election for the upper house [of Japan's parliament]. But everything depends on to what extent he can actually implement reform measures. We haven't seen many detailed policy proposals yet and probably won't until the election is over.

One thing's for sure: There won't be a recovery without reform. But it will take a tremendous amount of energy to reincarnate an ailing economic system that's 50 years old. As soon as details are unveiled about planned economic reforms, the negative side effects will become all too clear. So, winning over the general public will be a tall order.

Japan's corporate world has already started to get a handle on its red ink by undertaking a lot of restructuring. It's other areas of the Japanese system -- politicians, the bureaucracy, and how these two groups deal with each other and the private sector -- which have yet to be dealt with. But momentum is building. As long as public support holds, Japan seems to be headed in the right direction.

Q: You became vice-chairman of Japan's top big-business lobby, the Keidanren, on May 25. Isn't that an unusual post for the head of a company long known for its "lone wolf" practice of eschewing contacts with the broader corporate community in Japan?

A: This doesn't reflect any particular agenda of mine. It's true that in the past we kept a certain distance from business circles, but [as we've grown into a much larger company] that's become increasingly untenable nowadays.

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