For the Japanese car manufacturer Honda, the domestic and international environments in the early 1970s brought tremendous challenges to its export strategy, previously based on mass production in Japan. Honda wanted to develop extensive international production capabilities in overseas markets, especially the US market. However, Honda doubted its foreign facilities could attain the quality level characteristic of its Japanese-built cars. Furthermore, Honda also wondered whether its foreign manufacturing facilities could achieve Japanese cost levels.
The environment in the early 1970s
Internationally, Honda faced three major environmental changes in the early 1970s: the rising value of the yen against the US dollar, new US regulations of tailpipe emissions and the first oil crisis. Although the rising yen threatened Honda’s traditional export strategy, the other two changes – together with the success of its small, fuel-efficient Civic model in Japan and the US – provided a window of opportunity for Honda to expand in the US.
Specifically, the rising value of the yen in 1971 increased the costs of exporting cars to the US, Honda’s largest overseas market. The first oil crisis of 1973 negatively affected Honda’s domestic operations, as rising oil prices significantly increased Honda’s manufacturing costs. At the same time, however, the public demanded more fuel-efficient cars to reduce the costs brought by the roaring oil prices.
In 1970, the US Congress passed the Clean Air Act, imposing stricter requirements on tailpipe emissions. However, the US automakers had not been able to reach a consensus regarding the appropriate technology to meet such requirements. Both the first oil crisis and the Clean Air Act pushed the demand for fuel-efficient cars, which became the market niche US automakers had not been able to occupy. Clearly, Honda viewed the US regulations as a welcome opportunity for it to catch up, as reflected in the words of Honda’s President Soichiro Honda: “(T)his allows latecomers like us to line up at the same starting line as our rivals”.[i]
In 1972, Honda brought to the Japanese market its Civic model with the CVCC (Controlled Vortex Combustion Chamber) engine, which met the US emissions standards. The CVCC engine permitted the regulated burning of a very lean mixture without the catalytic converter or exhaust-gas recirculation required by most other engines. In Japan, the Civic model won the Car of the Year Award for three consecutive years as of 1973; in the US, it beat all other competitors in a fuel-economy test for four consecutive years as of 1974.
Initial puzzle
The popularity of the Civic model in the US suggested an increase in car imports to the US, but such an increase might have provoked the US government to impose import restrictions. This fear, together with the rising yen and the first oil crisis, led Honda to consider establishing a motorcycle manufacturing operation in the US. For this purpose, Kiyoshi Kawashima, Honda’s President, requested a feasibility study in 1974. This study expressed doubts about the feasibility of achieving the required quality levels in US-based motorcycle production. Further, the study suggested a Honda factory would not be profitable if it manufactured only motorcycles. For those reasons, Kawashima decided not to build a manufacturing base in the US at that time.
However, the concept of a manufacturing base in the US resurfaced with the high demand for the Civic model in Japan and the US. To satisfy this demand, Honda’s Suzuka and Saitama factories had been operating at full capacity. Expecting further growth in market share, Honda had the option to expand its domestic factories, but Kiyoshi insisted on putting that plan on hold. He said, “[s]ince it [Honda’s auto business] is a budding business, we shouldn’t assume we’re ready to charge into competition with the other Japanese manufacturers, either in terms of sales or capital. So, rather than compete domestically to no avail, I would like to use this opportunity to take a chance in America, the world’s largest market. I would like to build a motorcycle factory and eventually an automobile factory in the United States.”[ii] Masami Suzuki, the managing director in charge of overseas manufacturing, was assigned the responsibility for a new feasibility study. With this mission, Suzuki left for the US in January 1976.
The second feasibility study
Suzuki first discussed the plan with the American managers at American Honda Motor Co. These managers expressed skepticism about achieving comparable quality standards by manufacturing in the US. They based their skepticism on their own experiences with what they saw as the intrinsic quality problems of contemporary American-made cars. For Suzuki, these discussions still left the quality issue unanswered.
In the spring of 1976, Lee Iacocca, President of Ford, gave Suzuki the chance to investigate the American way of auto manufacturing. Because Suzuki was negotiating selling CVCC engines to Ford, Iacocca gave Suzuki permission to tour the most highly rated plant at Ford. The tour gave Suzuki a detailed look at the knockdown system characteristic of American auto manufacturing. With the knockdown system, the main car assemblies were shipped via railroad from Detroit, Michigan, to the Ford plant, where multiple-variety and small-volume production methods were used to manufacture cars. Compared with the American system, Honda’s manufacturing system used much less presswork, more integrated welding processes, and delivered better real cost-performance.
Suzuki came out of the tour convinced that car quality depended primarily on the management system, and that Honda would be able to produce high-quality cars in the US by applying its existing management principles. At that stage, Honda started to search for an appropriate US location for its plant. Honda wanted a site of 100 to 200 acres, with easy access to railroad transport and a pool of highly skilled labour.
In 1976, Honda commissioned an American consulting firm to search for an optimal location, and in 1977 it hired a research institute to analyze labour-market conditions. Based on these two research results, Suzuki and his colleagues visited more than fifty sites in Ohio without finding the right site.
Just before giving up on an Ohio location, Suzuki visited the state governor and the chief of Ohio’s Economic Development Bureau in July 1977, leading to the selection of a location in Marysville, Ohio.
Employees and suppliers required to manufacture motorcycles
Honda of America Manufacturing (HAM) was established in 1978. It planned to manufacture motorcycles first, and cars later once it had built up sufficient manufacturing experience. HAM’s top priority, to manufacture high-quality products, was deemed to depend on two key elements: capable employees who would make the cars, and reliable suppliers who would provide the parts and raw materials.
The first challenge: selecting and training employees. To do this, a selection committee, led by HAM’s Executive Vice-President and Manager of General Affairs, chose 50 people out of more than 3,000 applicants. Interestingly, they were hired not because of their experience or knowledge in motorcycle manufacturing, but because of their passion for their work. Honda believed it would be easier to transfer Honda’s work philosophy to this type of employee.
In 1979, Japanese engineers started to train the workers at HAM, and HAM’s American managers were sent to Japan to learn about Honda’s manufacturing processes. In September 1979, HAM started to manufacture the CR250R, a motocross bike. After the workers gained sufficient experience, the production of the Gold Wing GL1000, a more sophisticated model, was transferred to HAM in April 1980.
The second challenge: developing a lean supplier network in the US. In Japan, Honda had its supplier groups, but only a few of them agreed to follow Honda and build plants in the US. To supplement those suppliers, Honda had to develop a supplier network from three sources: suppliers of motorcycle parts (who had to be willing to eventually make auto parts); other small suppliers in Ohio and surrounding states, which had to learn Honda’s requirements of quality, cost and timely delivery; and large suppliers which also serviced other automakers, especially the US Big Three (General Motors, Ford and Chrysler).
Honda decided to focus on the first two groups, as it felt managerial attitudes were more important than technical expertise per se. The first two groups appeared more willing to respond to Honda’s needs, despite facing challenges in terms of technical and organizational skills. The third group, with superior capabilities, was not as responsive to Honda’s requirements as the other two.
To upgrade the expertise of the selected suppliers, Honda became actively involved in their operations, from examining manufacturing processes, to developing quality circles, to hiring new managers. The core of such supplier development activities later became a programme called ‘BP’, which stood for Best Position, Best Practice, Best Process and Best Performance. With the BP programme, Honda sent out teams of specialists to its suppliers, to help them improve to the required performance level.
HAM expanded its supplier network from a handful of local suppliers in the early 1980s to 320 North American suppliers by 1994. In that year, more than 80 per cent of its parts were purchased locally.[iii]
Start of car manufacturing in the US
In January 1980, Honda announced its plan to manufacture cars in the US, with the construction of the necessary facilities starting in December 1980. The prime focus of this new operation was still to build high-quality products. In order to achieve this objective, Honda sent about 300 experts and veteran associates from its Sayama plant in Japan to the US. Additionally, many experienced workers involved in motorcycle production at HAM were transferred to the new HAM auto plant. HAM’s first Accord rolled off the production line on 1 November 1982, with the promised high level of quality.[iv]
Since then, HAM has become Honda’s largest manufacturing plant, producing cars not only for the US, but also for Japan and other countries. In 2012, Honda employed more than 13,500 Ohioans and purchased more than US $16 billion in parts and materials from 600 suppliers in North America.
Following the 2008 financial crisis, favourable exchange rates and lower labour costs signaled a revival of the American automotive sector in 2012. In that same year, Honda announced intentions to invest US $218 million into expansion of two Ohio-based plants.[v]
The ‘Honda Effect’
Honda’s successful entry into the United States was largely credited to the company’s strategic and managerial expertise. Calling it the ‘Honda Effect’,[vi] Richard Pascale noted that it was management’s flexibility in reacting strategically to new challenges that allowed the company to be successful in a new market.[vii] Because of this “strategic accommodation”,[viii] and “adaptive persistence”,[ix] Honda currently operates in Africa, Australia, China, Europe, the Middle East and South America.[x]
A core dimension of the firm’s managerial flexibility is reflected in its decentralized organization[xi]. Viewing itself as a large manufacturer with an entrepreneurial small business spirit, Honda has not only had a history of giving regional executives responsibilities for decision making[xii], but has also operated functions in business segments such as motorcycle or automobile business in a collaborative way. For example, the collaborative structure came to life in the automobile business: In Japan and the USA, each of the Sales, Engineering/production, Development and Buying/purchasing (SEDB) departments maintained autonomy, yet collaborated across these countries[xiii].
Moreover, Honda took a fresh approach to R&D, being one of the few global automakers that separated the R&D unit from the parent company.[xiv]. Since its early years, Honda R&D Company has reported its own financial results, had its own headquarters with executives, and developed cars without much input from Honda Motor, which then subsequently manufactured and sold cars designed by Honda R&D Company[xv]. The decentralized structure encouraged engineers to take risks and protected them for a long period of time from cost-cutting practices of bureaucrats at the parent company[xvi].
Losing its ‘mojo’
The decade following the financial crisis has been challenging for Honda’s automobile business in various ways. Natural disasters, such as the tsunami in Japan and floods in Thailand in 2011 disrupted production and supplies. Further, until 2017, faulty air bags led to more than 11 million vehicle recalls in the US; and in 2013 and 2014, transmission defects resulted in recalls for the Fit and Vezel hybrid vehicles[xvii]. After its market share in the US had reached its peak in 2009 with 10.10%, its market share declined and remained around 8-9% in most years until today[xviii]. The 2012 Civic model was strongly criticized for its poor-quality interior, with Consumer Report dropping it from its ‘recommended’ list for the first time since 1993[xix]. Similarly, in the vehicle dependability report by J.D. Power, Honda’s brand slipped from 4th in the US in 2002, to 5th in 2015, and then to 18th in 2019[xx]. These downgraded positions led to speculation as to whether Honda was losing focus on its manufacturing edge and key product – the Civic. Commented one industry analyst, “Honda management has lost its way somewhat … Over the past decade, they’ve lost track of what the fundamental basis of their business is, and what appeal they hold on the market.”[xxi]. Even Honda’s CEO Takahiro Hachigo said in 2017 that “(T)here’s no doubt we lost our mojo — our way as an engineering company that made Honda Honda”[xxii].
Moving away from independent SEDB units
At this stage, Honda faces different challenging issues. First, Honda grew large and complex. Symptoms of what the Japanese call “big-company disease”, such as fiefdoms and coordination difficulties, became increasingly evident[xxiii]. Employees at both Honda R&D Company and Honda Motor focused on their own divisions, with ultimately less attention to consumer needs.
Second, Honda’s decentralized SEDB model led to complexity in vehicle models and engineering processes. To illustrate this, Honda had both global models such as the Civic (with these models accounting for 60% of its global sales) and regional models such as the Crider sedan in China or the Pilot SUV in the US (with these models accounting for 40% of global sales), with many more variations than its competitors. The engineering complexity from many options and vehicle trims for each model significantly increased workload and led to quality declines[xxiv].
Third, a focus on cost and budget gained increasing attention. As a consequence, Honda R&D Company faced tighter controls ever since Takeo Fukui became Honda’s CEO in 2003[xxv]. Takeo Fukui was the first CEO to break with the tradition of allocating around 5% of revenues to Honda R&D Company and giving them discretion over spending. His successor, Takanobu Ito, CEO between 2009 and 2015, further tightened control over Honda R&D Company However, the R&D chief executive Matsumoto argued that: “We have to be allowed to go wild at times. If you operated a technology center only from an efficiency perspective, you’d kill the place. Which is exactly what happened at Honda. We don’t want headquarters people telling engineers what to do”[xxvi].
In recent years, some Honda executives and engineers strongly proposed revolutionary changes at Honda, suggesting that Japan’s manufacturing culture, built upon kaizen (production line efficiency), lean manufacturing, and incremental design improvement, succeeded in reducing defects and improving quality and reliability, but the rise of disruptive technologies, such as autonomous driving, connected car technology, artificial intelligence, and electrification, calls for revolutionary approaches[xxvii].
In 2020, Honda announced major organizational and operational changes to its automobile business, combining all manufacturing and auto development functions into one organization in both Japan and the US. The autonomous SEDB units would be integrated; around 10, 000 out of the 14, 000 employees at Honda R&D Company transferred to the automobile business unit,[xxviii] but with many current and former employees’ objecting to Honda R&D’s integration[xxix], Honda was to bring R&D in house, integrate standalone units, and centralize its decision making.
QUESTIONS
- What was Honda’s distinct resource base, including elements of its administrative heritage, that provided internationally transferable FSAs?
- Which value-added activities in which foreign location(s) permitted Honda to exploit and augment to the fullest its distinct resource base?
- What were the expected costs and difficulties Honda faced when transferring this distinct resource base?
- What specific resource recombination (associated with each alternative foreign entry and operating mode) was required so as to make the proposed international value-added activities successful?
- How has Honda’s organizational approach as an MNE changed over time (centralized exporter, international projector, international coordinator or multi-centred MNE)?
- Can you provide an update on Honda’s “new” organizational approach in the realm of centralization and integration of R&D activities, and its aftermath, using materials available on the web?
[i] Honda, company information, 2005.
[ii] Ibid.
[iii] Kevin R. Fitzgerald, ‘For superb supplier development – Honda wins!’, Purchasing 119 (1995), 32–9.
[iv] Honda, company information, 2005.
[v] Boudette, N, ‘New U.S. car plants signal renewal for manufacturing’, Wall Street Journal (26 January 2012), B.3.
[vi] Robert Pascale, ‘The Honda effect’, California Management Review, 38(4) (1996), 80–91.
[vii] Ibid.
[viii] Ibid.
[ix] Ibid.
[x] Honda, ‘Timeline’, Honda Worldwide (2012).
[xi] Jeffrey Rothfeder, Driving Honda: Inside the World’s Most Innovative Car Company. (Penguin/ Portfolio, 2015).
[xii] Doron Levin, ‘Honda Decentralizes Management’, The New York Times. (21 May 1992)
[xiii] Honda, ‘Honda to Make Changes to its Organizational and Operational’, Bloomberg News, February 18, 2020, https://www.bloomberg.com/press-releases/2020-02-18/honda-to-make-changes-to-its-organizational-and-operational
[xiv] Yoshihiro Hara, ‘Honda drives drastic R&D reforms to reverse slow auto business’, Nikkei Asia News, June 21, 2020, https://asia.nikkei.com/Business/Automobiles/Honda-drives-drastic-R-D-reforms-to-reverse-slow-auto-business
[xv] Paul Horrell, ‘Why Honda’s restructuring will result in better cars’, Top Gear, June 7, 2020, https://www.topgear.com.ph/news/industry-news/horrell-honda-restructuring-tguk-a2602-20200607
[xvi] Norihiko Shirouzu, ‘How Honda lost its mojo, and the mission to get it back’, Reuters, September 7, 2017, https://www.reuters.com/investigates/special-report/honda-innovation/
[xvii] Norihiko Shirouzu, ‘How Honda lost its mojo, and the mission to get it back’.
[xviii] Goodcarbadcar, https://www.goodcarbadcar.net/honda-us-sales-figures/, accessed Jan 21, 2021
[xix] Norihiko Shirouzu, ‘How Honda lost its mojo, and the mission to get it back’.
[xx] Norihiko Shirouzu and Naomi Tajitsu, ‘With Honda mired in crisis over quality lapses, CEO Takahiro Hachigo seizes the wheel’, The Japan Times (12 December 2019), https://www.japantimes.co.jp/news/2019/12/12/business/corporate-business/honda-in-crisis-hachigo-seizes-wheel/
[xxi] Chang-Ran Kim, ‘Honda out to shake up market with 1st biz jet next year’, Reuters (31 January 2012); Chester Dawson, ‘Why Honda says it can fly (and GM won’t)’, Wall Street Journal (30 January 2012).
[xxii] Norihiko Shirouzu, ‘How Honda lost its mojo, and the mission to get it back’.
[xxiii] Doron Levin, ‘Honda, Stellar Name Among Car Buyers, Restructures To Win Regard From Equity Investors’, Seeking Alpha, June 30, 2020, https://seekingalpha.com/article/4356464-honda-stellar-name-among-car-buyers-restructures-to-win-regard-from-equity-investors
[xxiv] Norihiko Shirouzu and Naomi Tajitsu, ‘With Honda mired in crisis over quality lapses, CEO Takahiro Hachigo seizes the wheel’ /
[xxv] Norihiko Shirouzu, ‘How Honda lost its mojo, and the mission to get it back’.
[xxvi] Ibid.
[xxvii] Ibid.
[xxviii] Yoshihiro Hara, ‘Honda drives drastic R&D reforms to reverse slow auto business’.
[xxix] Doron Levin, ‘Honda, Stellar Name Among Car Buyers, Restructures To Win Regard From Equity Investors’.