How Honda lost its mojo

The driver punched the air as his red and white Honda McLaren roared over the finish line. It was Suzuka, Japan, 1988, and Ayrton Senna had just become Formula One world champion for the first time. The McLaren racing team and its engine maker, Honda Motor, were unstoppable that year, their drivers winning all but one of the 16 grand prix races.

Off the track Honda had been tasting success, too. In the 1970s, its engineers had raised the bar for fuel efficiency and cleaner emissions with the CVCC engine. In the 1980s, as its engines were propelling Senna to multiple victories, the Civic and Accord cars were redefining the American family sedan. In 1997, Honda became one of the first carmakers to unveil an all-electric battery car, the EV Plus, capable of meeting California’s zero emission requirement.

Jump forward almost 30 years from that Senna moment and Honda is flailing. On the racetrack, the Honda McLaren partnership is in trouble: The team is without a single win this season, and McLaren is losing patience with its engine supplier and speaking of a parting of the ways.

On the road, the Honda fleet has been dogged by recalls. More than 11 million vehicles have been recalled in the United States since 2008 due to faulty airbags. In 2013 and 2014 there were five back-to-back recalls for the Fit and Vezel hybrid vehicles due to transmission defects. Honda has lost ground in electric cars to Tesla and others.

“There’s no doubt we lost our mojo – our way as an engineering company that made Honda Honda,” Chief Executive Takahiro Hachigo told Reuters. Hachigo joined Honda as an engineer in 1982 and became CEO in June 2015. Now he wants to revive a culture that encouraged engineers to take risks and return to a corporate structure that protected innovators from bureaucrats focused on cost-cutting. In interviews, more than 20 current and former Honda executives and engineers at the company’s facilities in Japan, China and the US recounted the missteps that they say contributed to Honda’s decline as an innovator. They also revealed new details of the firm’s efforts to rediscover its creative spark.

They said Honda had become trapped by Japan’s “monozukuri” (literally, “making things”) approach to manufacturing. This culture of incremental improvement and production line efficiency, called “kaizen”, served the company well in the decades after World War Two, they said, but today’s challenges – electrification, computerisation, self-driving cars – demand a more nimble and flexible approach.

Most importantly, they said, over the past two decades company executives in Tokyo were given too much control over research and development. In their view, this led to shareholder value being prioritised over innovation. There was a reluctance to draw on talent from outside Japan. In its quest to deliver for shareholders, Honda sought to maximise volume and profit and match the product range of its main Japanese rival, Toyota.

“The upshot was, as we obsessed about Toyota and beating it in the marketplace, we started to look like Toyota. We started to forget why we existed as a company to begin with,” Honda R&D President and CEO Yoshiyuki Matsumoto told Reuters. Honda’s revenues have grown strongly since 2000 and its operating margin stood at 6.0% in the financial year ended March 31, 2017, compared with 7.2% at Toyota. But Honda’s cars have slipped down quality rankings, from seventh in market research firm JD Power’s initial quality study in 2000 to 20th in 2017.

Honda Civic loses its shine

Striving to satisfy shareholders meant controlling costs. Honda’s chief executive from 2003 to 2009, Takeo Fukui, broke with the firm’s tradition of giving tech managers discretion over how to spend the roughly 5% of revenue allocated to the tech arm, according to the current and former Honda executives and engineers.

When Takanobu Ito replaced Fukui as CEO in 2009, he further tightened control over the design phase. He did this, the sources added, by moving several senior posts in the tech division to corporate headquarters in Tokyo from the research and development unit, whose main automotive centre is near Utsunomiya.

Honda’s popular Civic car was one of the casualties of these changes, according to the engineer in charge of the model’s redesign beginning in 2007. With a reputation for outstanding engineering, reliability and affordability, the Civic was one of Honda’s top selling cars.

“Right from the get-go, the program was about making cost savings in real terms,” the chief engineer for the redesign, Mitsuru Horikoshi, said.

When the 2012 model year Civic went on sale in 2011, it was met with a barrage of criticism. R&D chief Matsumoto said the episode is a lesson that creativity should not be sacrificed on the altar of shareholder value. During previous assignments for Honda in Thailand and India, Matsumoto said he had looked at headquarters from afar and recognised a lack of creativity there.

Honda went back to the drawing board. The redesigned model that replaced the 2012 Civic was named the 2016 North American Car of the Year by car journalists. A former senior executive said the decision to reduce costs was taken in the context of a global economic slowdown.

James Chao, Asia-Pacific chief of consultancy at IHS Markit Automotive, said Honda failed to keep up with developments in suspension and transmission during Fukui and Ito’s tenure, but the firm was doing well enough financially, which masked the problem.

 Today , the industry is facing new challenges, however. Artificial intelligence and self-drive cars are forcing carmakers to rethink the way in which they design and produce vehicles.

Reuters