Honda's First U.S. Bruiser

With the Ridgeline, it jumps into a crowded -- and lucrative -- market

It boasts a chiseled physique meant to appear carved from a single block of metal. It has four-wheel-drive, a hardy V-6 engine, a 1.5 meter-long open cargo bed in back, and a decidedly outdoorsy name -- the Ridgeline. The manufacturer? Not Ford (F ), Chevrolet (GM ), or Dodge. Try Honda Motor Co. (HMC ).

Honda? For years the Japanese company has prospered by churning out solid and reliable compacts, sedans, minivans, and small sport-utility vehicles. Truth to tell, the Honda lineup was a trifle boring, and in the U.S. -- the company's biggest market -- pickups weren't part of the mix. The top Japanese management thought pickups didn't fit the brand's image.

Today, though, Honda is looking to the spunky Ridgeline to help revive its flagging fortunes in North America. Sales will begin in the spring after a splashy kickoff with a pair of 30-second spots during the Super Bowl on Feb. 6. Critics snicker that the Ridgeline lacks a V-8 engine, can't tow big trailers, and shares some of its underpinnings with a minivan. Then there's the matter of the four-door cabin, roomy enough to haul the whole family

But the bold new addition to Honda's lineup is key to its bid to retain once-loyal drivers fleeing the brand for beefier vehicles. Although Honda hasn't announced pricing, it will compete with the Toyota Tacoma, Ford Explorer Sport Trac, and Nissan Frontier, all of which cost under $30,000. "Honda customers are typically buyers of compacts and minivans, but now they're clamoring for pickups," says Takeo Fukui, who stepped in as Honda's president 18 months ago. "The Ridgeline helps us meet that need."

Honda could use a pick-me-up. It's not in desperate shape, but it's clearly losing ground to rivals Toyota Motor Corp. (TM ) and Nissan Motor Co. (NSANY ) in the all-important U.S. market. Even as the other two burn rubber in North America, Honda expects unit sales there to grow just 0.1%, to 1.56 million vehicles, for the year ending in March. In the six months ended on Sept. 30, it posted a 7.7% drop in North American auto revenue, to $18 billion. One big reason: Honda doesn't offer full-size SUVs, rear-wheel-drive luxury cars, or pickup trucks -- among the most profitable segments of the U.S. market. Nissan and Toyota are competitive in all three categories.

That spells trouble for Honda. Although the company's car sales in Japan jumped 14.2% in the first half, to $6.9 billion, North America is where the action is. The region made up 80% of Honda's $4.5 billion in 2003 profit. Honda's poor showing in the U.S. is aggravated by the yen's weakness against the dollar, which is eroding earnings. Honda expects income to drop 3.7% this year, to $4.3 billion on sales of $84.4 billion. Honda "has lost a bit of its steam," says Chrysler Group (DCX ) CEO Dieter Zetsche.

Honda isn't pinning all of its hopes on the Ridgeline. Fukui also plans to introduce a revamp of Honda's bland Civic compact next year. Sales of the car in North America have declined 8.7% from their peak in 2001, to 300,011 last year. The company is keeping details about the new model, due out next fall, under wraps, but execs promise a sportier engine and snazzier styling. Unofficial spy shots depict a low-slung two-door car with a sloping hood -- very unlike the uninspiring Civic silhouette of today. The new Civic follows the December launch of the hybrid version of the Accord sedan, to rival the popular Toyota Prius. The new car has wowed the auto press by getting 37 miles per gallon in highway driving and yet zipping from 0 mph to 60 mph in only 6.7 seconds.

The Ridgeline, though, has the biggest growth -- and profit -- potential. While hybrids have carved out a trendy and growing niche, Americans show little sign of abandoning gas guzzlers, and margins on pickups can be double those for compacts such as the Civic. Designed and engineered in North America, the Ridgeline is a daring first step into a highly competitive market the company has long avoided. The project was greenlighted in May, 2003, while Fukui served as head of research and development, and just a month after Honda announced that he would become president. While it's built with a half-ton payload capacity, the vehicle is designed to appeal to city slickers with its five roomy seats, garage-friendly height, and extras such as removable Maglite flashlights in front door panels. "We're very excited" about the Ridgeline, says Adam Dungan, sales manager at Park Honda in Akron. "It's going to open up another area for customers who might be thinking about buying" rival models.

The Ridgeline could also serve as a test case for Honda as it tiptoes toward the full-size truck segment. Should the Ridgeline prove popular, it will strengthen the hand of a faction inside the company that favors a shift toward larger pickups and SUVs. Such a move would eat up some $1.5 billion in development costs -- a big bill for Honda, which is comparatively small in the auto world and renowned for its frugality. The company won't disclose the cost of designing the Ridgeline, but it was able to limit the expense by using the same platform and factories that produce the Pilot SUV and Odyssey minivan. And the engine is based on the 3.5-liter V-6 powertrain used for those vehicles.

The next step up -- a full-size truck or SUV -- would require a bigger and costlier V-8 engine, which Honda doesn't make. "If the Ridgeline does particularly well, it might change some thinking among Honda's brass -- though probably not overnight," says Merrill Lynch & Co. (MER ) analyst Chris Richter in Tokyo.

Critics of the idea say the money would be better spent elsewhere. They argue that since full-size vehicles sell well only in the U.S., the project would drain resources from faster-growing markets such as China, and the trade-off isn't worth the cost. Even as Honda's earnings slid in North America during the first half, profits rose in Asia and Europe, according to research by Nikko Citigroup. And some observers even wonder whether the Ridgeline will be the hit in the U.S. Honda wants it to be. The Ridgeline could well appeal to Honda fans, "but will it bring new people to the brand? No," says Wesley R. Brown, an analyst at Los Angeles automotive consultant Iceology.

Fukui, who headed Honda's American operations from 1996 to 1998, may be trying to placate the critics. He says he's in no rush to jump into full-size pickups, which he amiably dismisses as "stupid-big." But if Americans warm to the Ridgeline, Fukui might yet find a place in his heart -- and Honda's lineup -- for trucks, even stupid-big ones.

By Chester Dawson in Tokyo, with David Welch in Detroit

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