How Honda Thrives

Dec. 21, 2004
Honda Motor Co. is thriving amidst a struggling Japanese economy, and here's why.

Japan's official unemployment level is now 4.3%, the highest on record. Keizo Obuchi just became Japan's eighth prime minister in nearly as many years. Confidence that his administration can turn Japan's economy around is low. And the final bill for fixing the sour loans held at Japan's financial institutions could top 1 trillion (more than US$7 billion).

Yet, there are some big-name Japanese companies that are doing well despite the gloom-and-doom forecasts for the world's second-largest economy. One is Honda Motor Co. Ltd.

There is no one reason why such companies thrive. In the case of Honda, though, it has much to do with the company's leadership, specifically Nobuhiko Kawamoto. Although he stepped down from the presidency in June, Kawamoto will continue as an adviser.

Yet few observers believe the transition threatens the company's success. The new president and CEO, Hiroyuki Yoshino, an engineer by training, joined Honda about the same time as Kawamoto and pursued much the same career track. Yoshino seems intent on pursuing the same level of flexibility that turned the company's fortunes around, even as Japan's economic miracle slid further into chaos during the last seven years. Kawamoto signed on with Honda in the 1960s for one reason only -- to drive Formula One race cars. Instead, he devoted his career to inventing better machines and climbing to the top of Honda's management ladder. After 30 years, he reached the presidency.

But that was the early 1990s, and Honda was in trouble. Japan's booming economy had collapsed. The era of easy money was over for Japan and Honda. Engineers ruled the company, and their increasingly far-out designs were turning off consumers. To shake up the company, Kawamoto pulled the plug on his own dream -- Honda's involvement in the Grand Prix.

Following Kawamoto's lead, the company did an about-face on everything from decision-making to design. Bureaucracy was out, marketing took the wheel, and the engineers soon started turning out consumer-friendly designs. By 1996 the company had reduced the number of platforms and introduced flexibility in production.

Today Honda is one of only two Japanese auto companies showing a profit (the other is Toyota Motor Corp.). The last fiscal year was Honda's best ever, the second consecutive "best" year. On a consolidated basis, sales were up 13.3% to 6 trillion (more than US$43.4 billion). Operating profits were up 15.2%, at 462 billion (nearly US$3.4 billion). Ordinary profits rose 13.5%, and aftertax profits of 261 billion (about US$1.9 billion) were up 17.8%.

Honda is an American Company

"Honda is really an American company," says Nori Hiwakata, an auto analyst at Morgan Stanley Japan, Tokyo. "More than 70% of its operating profit comes from the U.S. market, including exports to the U.S."

Sales in Europe also are strong, but the U.S. market is Honda's savior.

The exchange rate is a factor on Honda's profit sheet, although without a strong product line and effective strategies the company would have little cause to rejoice. Japan's yen continues to weaken against the dollar, so revenue earned in dollars yield more yen. With effective exchange-rate hedging, a Japanese company can increase operating profit by well over 10%. Honda did. So did Sony Corp., another company coping relatively well with Japan's downturn.

In its home market Honda is in trouble, as is every other Japanese auto company. Honda's domestic production has been cut back by at least 10% so far this year. But other Japanese carmakers are cutting back even more. And in mainland Asia, although Honda has a production facility in Thailand and is penetrating the Chinese market, its exposure is far less than that of other car builders, such as Mitsubishi Motors Corp., a company really on the ropes in Asia.

Honda says it is determined to maintain its presence in Asia -- awaiting the return of the good times. The company bought out its Thai partners, taking a 93% stake in the company. (One partner is the investment arm of the Thai royal family.) Honda has promised to sell the shares back to the partners as the economy improves, a move sure to endear the company to the Thai establishment.

Despite Honda's success outside Asia, the general pessimism about Japan's economy is contagious. Just a few months ago, analysts predicted Honda's growth levels would continue to soar well into 2000. Now, the prognosis is more sober.

"Depending on the situation in the [Japanese] domestic market, they will continue to perform well, but mostly they are doing well because they are strong in the U.S. market," says Yasuhiro Watanabe, client manager for Honda in Chase Manhattan Bank's Tokyo office. "If the market situation in the States continues as it is now, [Honda] should make some profit."

The good news may be Europe. Even though Honda is doing well in the U.S., there are concerns demand might fall off. Starting in 1999, Europe's auto markets will be liberalized, and Honda says it will be ready with new, small cars, a size favored on Europe's narrow streets and roads. Honda already has a manufacturing presence in Europe, with research and development done in Germany and production in the UK.

Honda's management style is far more American than, say, Toyota or Nissan Motor Co. Ltd. It is less bureaucratic than either, and its upstart image (the company didn't start making cars until the 1960s) helps it to attract more creative and innovative staff than many more-conservative Japanese firms.

After cutting back on research-and-development the last four or five years, Honda announced in May plans to boost investments, including R&D. Honda's investment level is predicted this year to reach 70% of its peak, which occurred before the Japanese bubble burst. The company has forecast record spending in R&D. Flexible management is the key to Honda's success, says Kunihiko Shiohara, an auto analyst at ING Barings, Tokyo.

"It is relatively easy for Honda to change its mind, unlike other Japanese companies, such as Nissan or Mitsubishi Motors. Its manufacturing line is flexible. The number of platforms is small. In the case of the Accord, Honda has only one platform, but five lines. Production is different in each market. This level of flexibility is quite unique."

Nevertheless, Honda has developed a simplified way of making cars. The company uses the same basic design for most of its models. This means fewer differences in parts and supplies and fewer production lines.

"'Small is smart' is the company's latest strategic catch phrase," says Shiohara. The plan is to change the profit structure by focusing on relatively smaller cars -- aimed at the opening European market, in particular. Analysts cite these factors as reasons for their cautious optimism about Honda's future. Honesty is another.

Few Japanese companies adopt the kind of accounts disclosure required for listing on U.S. stock exchanges. Honda does. This means that the company's huge pension liabilities are public knowledge, but since most Japanese companies are known to be carrying such losses -- but not owning up to them -- Honda's honesty looks good. Honda faces some risks in the next year.

Domestic market share could decline further if Honda's popular RV models fall out of favor. ING Barings' Shiohara says the latest trend is for sport utility vehicles, a fad that is helping Fuji Heavy Industries Ltd. boost its performance. And trade friction between the U.S. and Japan could flare up once more, particularly over cheap autos. Congress would have Honda firmly in its sights should this battle be relaunched, an increasing likelihood the weaker the yen gets. The cheap yen makes for cheap Japanese imports. Honda hopes to bypass the problem by restarting its "reimport" strategy. S

tarting in 1988, Honda sent Accord coupes assembled in the U.S. to Japan. Other Japanese automakers rapidly followed suit, especially as the yen neared the 80-to-the-dollar mark in 1993. The yen's reversal, toward nearly 140 to the dollar today, saw the strategy fade out. In turn, Honda's exports to the U.S. jumped 58% last year and are forecast at 60% this year. Hence, the renewal of reimporting. Honda plans to reimport luxury minivans made at a plant in Ontario.

Meeting these challenges will be the test of the new president's mettle and of his successor. At 58, Yoshino has been described as a caretaker president. The company's mandatory retirement age is 60, although Kawamoto was 62 when he stepped down. Meanwhile, Kawamoto says he will be on hand if needed. But he may be a little preoccupied. His dream is about to be realized. Honda is to reenter Formula One racing. It is widely expected Kawamoto will be named to head the operation.

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