Civic Minded At Honda

The carmaker is betting its restyled compact will lure Americans

On Oct. 23, thousands of young people are expected to converge on a shopping center parking lot somewhere near San Francisco. But they won't be there to buy jeans or shoes or iPods. Instead, they'll hear a concert by The Black Eyed Peas -- and, Honda Motor Co. (HMC ) hopes, check out a parade of new Civic sedans. The concert, one of a half-dozen similar events planned for this fall, is part of a guerrilla marketing campaign to build buzz around the Sept. 15 launch of the restyled compact. "We're trying to connect Civic with a new generation," says John W. Mendel, a senior vice-president at the Japanese auto maker's U.S. sales subsidiary. "It's a very different direction for Honda."

The company could use a change of course in the U.S. While the Civic is still profitable, U.S. sales this year will tumble to 280,000, down from more than 335,000 in 1998, brokerage CLSA estimates. Inexpensive Korean imports such as the $10,000 Hyundai Accent have undercut the Civic, and its share of the U.S. compact market fell to 11.7% in the first half of 2005 from 13.7% in the same period last year, according to market watcher Ward's AutoInfoBank. And both the Civic and the Accord midsize sedan have become tougher sells as Americans have turned to SUVs and pickups. But while Honda recently joined the trend with its Element crossover, Pilot SUV, and Ridgeline pickup, it's not about to abandon the core of its U.S. business. "The Civic and Accord are our bread and butter," says Honda President Takeo Fukui. "We still have high expectations for them."

The new Civic is central to Fukui's plan to recreate the magic that brought generations of young American car buyers to Honda's doorstep. The latest iteration of the once dirt-cheap hatchback features a racing-car-like sloped windshield, an extended wheel base, and a revved-up engine. Prices are expected to be about the same as this year's model -- starting at $13,660 and topping out at $21,000 for the gas-electric hybrid version -- but include extras such as standard side air bags, a first among vehicles in the Civic's class.

Honda is also reaching out to "tuners," twentysomething car nuts who modify and race compacts. Once Honda loyalists, many tuners scoffed at the current Civic, which they thought suffered from dowdy styling and lacked oomph. Today, the company is betting that it can quiet any doubters with a high-performance version called the Civic Si that features a 197-horsepower engine, a six-speed transmission, and standard 17-inch alloy wheels. "It looks like it's going to be a very strong winner for us," says Wade Shackelford, a sales manager at Carey Paul Honda in the Atlanta suburb of Snellville, Ga. "The tuner crowd is very big, [and] there's a huge market in Honda for that." The auto press likes it, too. The new model "should prove a segment leader -- if not a segment buster," writes.

Honda expects the new Civic to goose its results. Earnings in the U.S. -- the source of about 75% of Honda's global profits -- have come under pressure. In the quarter ended in June, Honda reported a 10% fall in North American operating income, to $662 million. The main reason is that Honda's givebacks shot up to an average $1,000 per vehicle in the last quarter, from about $610 in 2004, says brokerage Nikko Citigroup Ltd. That's still less than most rivals, but even so it's beginning to sting. Investors, though, seem to like the new look. Honda's shares are up by 12% this year.


While shareholders are clearly excited by the new Civic, the stock price has also been helped by strong results elsewhere that have offset the decline in North American earnings. In Japan, for instance, its Airwave station wagon and Stepwagon minivan have been hits. Europe is another hot spot as demand soars for diesel-powered Accords and CR-V compact SUVs. That positive news helped Honda post a 6.5% rise in operating profit, to $1.55 billion. The company also raised its full-year earnings forecast to $6 billion, up 5.4% over 2004, on a 9% gain in sales, to $85.7 billion.

Still, it's unclear whether Honda can roll back incentives. Detroit is keeping up the pressure with deep discounts, even as Fukui has tried to hang tough with the brand new Ridgeline. The refusal to boost incentives on the pickup has pushed Ridgeline sales down to about 4,000 a month -- well below an initial target of 5,000. No wonder. The Ridgeline, which starts at $27,700, typically costs nearly $10,000 more than similar rivals such as the Toyota Tacoma and Nissan Frontier, once incentives are factored in. Yet Fukui insists slower sales are acceptable to stay out of a price war he believes has nearly run its course. "Better to grin and bear it, because once you start cutting prices, there is no going back," he says.

At the same time, Honda is looking to emulate the surprising success Toyota Motor Corp. (TM ) has had in attracting entry-level buyers, especially with its Scion series, starting at $12,000. Just as Toyota has done, Honda is reaching into its stable of low-powered-but-stylish models previously unavailable in the U.S. -- in this case, the Fit, a 1.0-liter-class car dating to 2001. The idea is to offer something to budget-minded buyers who have been priced out of compacts like the Civic. The Fit sells for roughly $10,000 in Japan, but pricing hasn't yet been set for its U.S. launch next year. It will compete not only with the Scions, but also another new Japanese import -- Nissan Motor Co.'s (NSANY ) Tiida, which could be bound for the U.S. market as soon as next year.


The fit may be a hit with those worried about global warming or higher pump prices, but some fret that it could steal sales from the pricier Civic. The subcompact gets about 57 miles per gallon -- topping even the hybrid Civic -- and has cannibalized sales of the Civic in Japan. But Honda seems willing to risk such a trade-off to attract new buyers. "[What's] driving this is the search for the younger customers," says Chris Richter, an analyst at CLSA Asia-Pacific Markets in Tokyo. "If there is a demand for smaller cars and you don't provide them, then somebody else will."

At the same time, Honda isn't writing off heavy metal. Fukui hints that he may introduce a V-8 engine and more high-powered rear-wheel-drive cars. Honda has resisted those moves for years, citing the cost of upgrading existing plants. With Honda's factories near capacity, though, analysts say the company may be thinking now is the time for a new plant capable of making bigger engines and beefier cars and trucks.

That would be a big departure from Honda's roots as a maker of compact cars -- and could backfire if gas prices remain near their current stratospheric levels. But the U.S. sedan market has been shrinking for years, and even The Black Eyed Peas and a snazzy new Civic might not be enough to change that. So Fit subcompacts and Ridgeline pickups could well point the way for Honda.

By Chester Dawson in Tokyo, with Kathleen Kerwin in Detroit and Rishi Chhatwal in Atlanta

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