Honda contemplates Survival despite record earnings

Takeo Fukui minces no words when asked about the main challenge facing Honda Motor Co. Ltd. today.

“Survival!” snaps the auto maker's new president, identifying global competition as “five to 10 gigantic rivals.”

Yet Honda, with worldwide annual sales of about 3 million automobiles, annual revenues of more than $70 billion and a market cap of $39.7 billion — seventh largest among all Japanese companies and almost twice that of General Motors Corp. — is not that small, weak or vulnerable.

Nor does Fukui, who took office in June, look ruffled or fearful as he surveys the company's future in an interview in Tokyo with Ward's.

He dismisses complaints that Honda styling is boring. “I don't think that criticism is fair. We're getting feedback about our styling, and the new Odyssey (for Japan) reflects our response,” he says.

However, Fukui is dissatisfied with the Acura luxury division. “We must boost the Acura image by improving both the product and service side of our No.1 car. Around the end of 2004, our flagship Acura RL will undergo a full model change.”

After that, the Honda Sports Concept (HSC) model shown at this year's Tokyo Motor Show will be the base for the next-generation Acura NSX, which is 13 years old.

Initially, at least, there will be little change in the basic direction set by his predecessor, Hiroyuki Yoshino.

Honda earned record profits during three of the five years under Yoshino, who pushed the company into China as well. Fukui, a 58-year-old engineer and a strong competitor in everything he's tackled, seems to be every bit as focused on earnings and marketing.

In 1999, Honda launched what has become one of the most successful automotive joint ventures in China. Production capacity at the Guangzhou plant has been increased three times to match the rapid jump in sales, which are projected to reach 117,000 this year and 200,000 in 2004.

But what counts most for Honda as a generator of sales and profits is North America, which provides more than half of global sales and most of Honda's profits. Even so, Honda shies away from the biggest sector of that lush market — fullsize pickups — despite the incursions of archrivals Toyota Motor Corp. and Nissan Motor Co. Ltd.

For several reasons, Fukui says Honda has no intention of building fullsize pickup trucks for the U.S. “We don't have the infrastructure, such as a V-8 engine or body-on-frame architecture to build a fullsize pickup,” he says. “Our business is based on passenger cars, with monocoque bodies and engines up to V-6. We plan to extend our product line based on this infrastructure. We have other things that we have to do before we get into that market.”

Honda, however, will display a Pilot-based “sport/utility truck” at next month's North American International Auto Show in Detroit, likely for an '05 arrival. An entry-level Acura SUV, smaller than the MDX, also has a green light for production but still is a couple years off.

Second in importance for Honda is its home market of Japan, site of critical research and development and the source of about one-quarter of global car sales.

A 22.8% decline in domestic sales in the first six months of fiscal 2003 is considered an aberration, rather than a turn for the worst, even though Honda has slipped from second place to third (behind Nissan) in the domestic market. Explosive sales of the Fit subcompact in the first half of fiscal 2002 were not matched this year.

“Another reason for the first-half decline is (that) the minivan market we created in Japan has been invaded by competitors, and competition has become harsher,” says Fukui. “The good news is the Life, launched in September, and the Odyssey, out in October, are enticing and should help domestic sales reach 765,000 in fiscal 2003, down only 11%.”

In Europe, Fukui says Honda is reorganizing dealerships, strengthening sales forces, importing transmissions from Indonesia and the Philippines to help shave costs and introducing diesel engines.

Until recently, although 40% of new European cars are fitted with diesels, Honda had none to offer.

“Our rivals had truck divisions, which required them to make diesel engines while Honda made passenger cars and did not need them,” Fukui says. “Our concern has been air pollution and, although it took some time, we have developed the technology to build a diesel engine which is eco-friendly.”

Large engines have limited appeal, although Honda builds V-10s for the BAR Honda Formula 1 racing team. “The technology is already there, but the decision, whether to commercialize a V-8, has not been made yet,” Fukui says. “The V-8 is a great engine but there's a trade-off. It's heavier and less fuel efficient. And we don't have a car in which we could mount one.”

Honda maintains a focus on the safety and environmental concerns now drawing attention worldwide. “We have an advantage over competitors in these two areas, which we are going to reinforce,” he says.

The company has actively explored alternative fuels and has developed hybrid vehicles with gasoline-electric engines as well as electric vehicles and others powered by compressed natural gas and fuel cells.

“We have several products, such as the ULEV (Ultra Low Emission Vehicle) with high combustion efficiency and CO2 (carbon dioxide) emissions far lower than the law requires,” says Fukui. “We have developed the first fuel cell which can operate below freezing in a driveable vehicle. And the safety features incorporated in our vehicles also go far beyond what laws require.”

He is particularly proud of Honda's Research and Development Center in Tochigi, 68 miles (110 km) north of Tokyo, which includes a $60 million (•6.6 billion) facility for omni-directional testing of vehicle crashes and tests to improve pedestrian safety, with the help of the world's first articulated dummy.

One of the next major breakthroughs in automotive technology identified by Fukui are collision-avoidance braking systems, another area of testing at Tochigi, and — later on — fuel cells.

“A marketable fuel-cell vehicle will be realizable in 10 years,” he says. “But the car cannot run alone. Getting the overall infrastructure needed to support these cars in place will take 20 to 30 years.”

The company is undertaking experiments in California with a home-energy station that can economically extract hydrogen needed for fuel cells from the natural gas used to heat homes.

Honda, still independent in a world of automotive mergers and acquisitions, is staying the course. The official forecast is for a 10% increase in consolidated net income in the current fiscal year ending March 31, 2004, to $4.2 billion, the fourth record in six years.

Even so, the perennial question is whether the auto maker can maintain its independence.

“The trend in mergers has somewhat subsided,” Fukui says. “But, as a result of increased competition in the marketplace, there may be another wave of mergers in future years. We are not interested because we do not believe a conventional merger, an acquisition with capital investment, would benefit Honda's customers.

“We're not just stubbornly trying to stay independent. I would not say ‘no’ to any opportunity that arises if it offers merit to our customers. If we see that kind of alliance in the future, we may not say ‘no’ to it.”