Honda Moves into the Passing Lane

Tokyo - Takanobu Ito is used to making do on a budget. For years he commuted to work on his 250cc Honda Baja motorbike, eschewing the comforts of even an Accord or Civic. Today, although he became Honda Motor's (HMC) CEO in June, he works from a plain wooden desk in a room with nearly a dozen other executives. Many management meetings are held nearby at a small round table with four stools.

That kind of frugality has helped Ito—and Honda—successfully negotiate the downturn. For the fiscal year ended in March, Honda made a profit of $1.5 billion, while Toyota Motor (TM) lost $4.9 billion and Nissan Motor (NSANY) $2.6 billion. This year, Honda is predicting earnings of some $600 million. Toyota expects to lose $5 billion and Nissan nearly $2 billion. "Sales will continue to be slow, but compared with the others we are perhaps better off," says Ito.

It helps that Honda has the right product mix for the times. With its lineup of gas-sippers, it has benefited from U.S. drivers' abandonment of big SUVs in favor of compacts. And Honda is the world's No. 1 motorcycle maker. Bike sales are likely to account for half of operating profit this year as buyers in developing countries get mobile on two wheels.

NO BIG PICKUPSBut Honda's recent strength is also due to its culture. The company has long emphasized quick thinking, conservative investments, and a level-headed assessment of its own capabilities, industry watchers say. "The beauty of Honda is they are willing to hear the painful reality," says Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo.

Honda's dearth of large vehicles, for instance, is no accident. Earlier this decade executives bucked conventional wisdom when they chose not to follow Toyota and Nissan in building big pickups. "We discussed [developing a V8 engine] several times, but we decided to be prudent," says Ito, 56.

Instead, Honda boosted profits by doing what it does best: building small and midsize vehicles. While bigger cars typically make more money, Honda finds economies by concentrating on four key models—the Fit compact, Civic and Accord sedans, and the CR-V small SUV—in huge volumes. Worldwide, each sells more than 500,000 annually, and together they account for more than three-quarters of unit sales.

Another differentiating characteristic is that Honda is relatively unhierarchical and forgoes many of the trappings of corporate success. Most top executives, including Ito, are engineers and seem more energized talking about technology than discussing finance. While Ito has ditched his motorcycle for a chauffeur-driven Legend sedan (the home-market version of the Acura RL), Honda says it's only for security. And virtually everyone refers to the boss as Ito-san, rather than the more formal Ito-shacho ("President Ito"). "The thing about Honda is their pragmatism—it's one of the reasons they don't lose money," says Andrew Phillips at KBC Securities in Tokyo.

Although Ito concedes Honda was slower than some rivals to tackle the global downturn, he says it was because the company initially fared reasonably well. "Once we started to consider what we had to do," he says, "we were quick in the decision-making process." Honda delayed construction of two factories in Japan and postponed expansion of plants in India and Turkey. A plan to launch Acura in Japan in 2010 was axed, as was a new sports car, a project Ito had once overseen himself. In January all Honda directors took a 10% pay cut and saw bonuses slashed.

As the former chief of Honda's racing programs, Ito says the hardest move was pulling out of the Formula One circuit in December. He worried the change "might hurt the motivation of Honda people." But quitting the sport saves some $500 million a year. "I have no regrets whatsoever," Ito says.

Ito must now steer the company through a period of depressed sales while readying it for a recovery. One hurdle is the strengthening yen. At its current level of 89 to the dollar, profitable exports from Japan are difficult, although Honda is better off than Nissan and Toyota because its North American factories make 80% of the cars it sells there.

Some critics complain that in its frugality, Honda has abandoned flashy models such as the S2000 roadster. The CR-Z, a new sporty hybrid due out in 2010, may appease enthusiasts, but Ito says he won't add zippier cars unless they are environmentally sound. "We want to offer consumers fun-to-drive vehicles," he says. "But gas-guzzlers are not something we want to do."

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