Honda’s drive to re­store its sput­ter­ing rep­u­ta­tion

The com­pany aims to make bet­ter cars and im­prove pro­duc­tion “Honda’s cul­ture used to be more open and re­laxed”

Bloomberg Businessweek (Asia) - - CONTENTS - −Jie Ma and Yuki Hagi­wara, with Craig Trudell

Last fall, Honda cel­e­brated the North Amer­i­can launch of its re­designed 2016 Civic sedan at its Greens­burg, Ind., plant, where it had in­vested $97 mil­lion in up­grades over three years. Six days be­fore the event, an en­gine on one of the new Civics seized up dur­ing qual­ity-con­trol checks.

By early Jan­uary, three more en­gines had failed in the field and an­other had bro­ken down at a Honda fa­cil­ity north of Toronto. More re­ports emerged of en­gines seiz­ing up, re­sult­ing in a fire and one al­leged in­jury, ac­cord­ing to fil­ings by the com­pany to U.S. reg­u­la­tors. By month’s end, Honda had to re­call 53,000 cars.

The Civic is Honda’s best-sell­ing model, and the mis­step is a set­back for the Ja­panese au­tomaker and its new chief ex­ec­u­tive of­fi­cer, Takahiro Hachigo. Since he took over in June, the 56-year-old en­gi­neer and Honda lifer has been try­ing to re­as­sure an­a­lysts, deal­ers, and con­sumers that the spate of re­calls in re­cent years as­so­ci­ated with faulty air bags made by Takata and other qual­ity-con­trol prob­lems are a thing of the past. He chalks up many of the chal­lenges to a com­pli­cated or­ga­ni­za­tional struc­ture and in­ad­e­quate com­mu­ni­ca­tion among Honda’s units. “We need to im­prove on that,” Hachigo says.

Un­der the pre­vi­ous CEO, Takanobu Ito, Honda set an au­da­cious goal in 2012 to dou­ble sales, to 6 mil­lion units, by March 2017. The au­tomaker built plants in China, In­done­sia, and Thai­land and ac­cel­er­ated prod­uct de­vel­op­ment, plac­ing huge de­mands on its en­gi­neers.

“Honda’s cul­ture used to be more open and re­laxed,” and en­gi­neers had more time to plan and test prod­ucts, says Noboru Sato, a guest pro­fes­sor at Nagoya Univer­sity who was a Honda en­gi­neer for 26 years and has writ­ten a book about the com­pany. “But now, with so many new tech­nol­ogy de­vel­op­ments re­quired to be com­pet­i­tive in the mar­ket—elec­tric cars and au­ton­o­mous-driv­ing sys­tems—too many tasks” are be­ing put on them, he says.

Honda’s Fit and Vezel sub­com­pacts were called back sev­eral times each for per­sis­tent en­gine and trans­mis­sion glitches from 2013 to 2014. The car­maker says it’s also re­plac­ing more than 30 mil­lion Takata air bag in­flaters, which can rup­ture and spray plas­tic and metal shards at pas­sen­gers, af­ter in­ci­dents that re­sulted in at least nine deaths.

Costly re­calls and a stronger yen have con­trib­uted to a 19 per­cent slide in Honda’s stock this year. Its U.S. mar­ket share is about two per­cent­age points short of where it was in 2009, and it’s lost ground to Toy­ota

“We have given the full con­trol back to R&D, ap­point­ing peo­ple to be re­spon­si­ble for plan­ning a prod­uct and strength­en­ing its com­pet­i­tive­ness.” ——Honda CEO Takahiro Hachigo

and Nis­san in Ja­pan. Over­all, Honda ex­pects ve­hi­cle sales to rise 8 per­cent, to 4.7 mil­lion units, for the fis­cal year end­ing on March 31.

Hachigo plans to pull off what he calls a “fun­da­men­tal trans­for­ma­tion.” He’s reshuf­fled top man­age­ment and is con­sol­i­dat­ing re­spon­si­bil­ity for prod­uct plan­ning, de­vel­op­ment, and eval­u­a­tion. “We have given the full con­trol back to R&D,” he says, “ap­point­ing peo­ple to be re­spon­si­ble for plan­ning a prod­uct and strength­en­ing its com­pet­i­tive­ness.”

Hachigo has pulled back from his pre­de­ces­sor’s sales tar­gets and is slow­ing things down. Take­hiro Kono, man­ager of a Honda plant in Yorii, north of Tokyo, says the com­pany has beefed up qual­ity checks on the Fit and Vezel cars made there. “The lead time needed to roll out a ve­hi­cle has be­come longer.”

Honda is also re­think­ing its global man­u­fac­tur­ing net­work and plans to shift some pro­duc­tion back to Ja­pan from mar­kets where the ve­hi­cles are sold. “Mak­ing a good global model is more ef­fi­cient than in­tro­duc­ing a num­ber of vari­ants for each re­gional mar­ket,” Hachigo says.

To lock in sav­ings from the cheaper yen, Honda will be­gin ex­port­ing the Ac­cord Hy­brid sedan from Ja­pan to North Amer­ica for the first time this year, and it’s also con­sid­er­ing ex­port­ing Civic and CR-V sport util­ity ve­hi­cles.

To re­vive sales, Hachigo is count­ing on sev­eral new mod­els, in­clud­ing the re­designed Ridge­line pickup truck, the CR-V, and the Odyssey mini­van in North Amer­ica. He has big hopes for a lo­cally pro­duced Acura lux­ury SUV in China and the Freed mini­van in Ja­pan. The com­pany plans to in­crease do­mes­tic pro­duc­tion by 30 per­cent, to about 950,000 ve­hi­cles, by 2020.

Green cars are cen­tral to Hachigo’s plans. Af­ter the Clar­ity fuel-cell sedan goes on sale later this year, a plug-in hy­brid ver­sion built on the same plat­form will de­but by 2018. By about 2030, two-thirds of Honda’s sales will be hy­brids, plug-ins, or fuel-cell ve­hi­cles, he says.

Takata re­mains a big con­cern, says Takashi Aoki, a fund man­ager with Mizuho As­set Man­age­ment. “It’s hard to say the bad news is over.” As for the 2016 Civic re­call, Hachigo played it down, say­ing that re­place­ment parts are ready and re­pairs can be­gin and that the com­pany has taken mea­sures to pre­vent the er­ror from hap­pen­ing again. The speed of Honda’s ex­pan­sion “has been too fast, and that has in­creased the work­load at the re­search cen­ter and the plants. It’s my top pri­or­ity to change that.”

The bot­tom line Hachigo has reshuf­fled Honda’s ex­ec­u­tive ranks and plans to raise do­mes­tic out­put by 30 per­cent, to 950,000 ve­hi­cles, by 2020.

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