To ride out the current storm, Honda returns to its roots

As the global financial storm raged last fall, Honda Motor Co. faced wrenching decisions. It chose to put plans for a new factory on ice, cancel Acura's debut in Japan, kill the NSX sports car and drop out of Formula One racing. And the company cut thousands of jobs at home and abroad.

In short, Honda returned to its roots. It trimmed extras and relied on its long-standing less-is-more corporate philosophy. By at least one measure, the pain was worth it.

Honda was one of the few automakers worldwide to eke out a profit in the past fiscal year, despite its first quarterly loss in 15 years. And the automaker is one of the few still forecasting more black ink ahead.

President Takeo Fukui called the decision to offer buyouts--extended to most of Honda's 35,600 salaried and hourly workers in North America--his toughest during the current slump.

But Fukui added that the cuts should be sufficient to keep his company profitable in the fiscal year that began April 1. Honda said last month that operating income will plunge 94.7 percent to $102.8 million.

"We have a worst scenario in place," Fukui told Automotive News. "And based on that scenario, we're thinking it won't entail any more significant cuts."

Of course, making good on that vision will be up to Takanobu Ito, Fukui's successor, who takes the wheel this month. But key elements of Honda's survival plan are already in place.

Small is beautiful

The driving theme will be smaller, cheaper, and more efficient.

After the pickup market tanked, Honda won kudos for not being lured into full-size trucks. The company wisely steered clear of hefty V-8 engines.

Then, just as demand for compact cars began to boom, Honda capitalized on good timing with the opening of its Civic factory in Indiana.

Flexible factories in North America allowed Honda to swap models between plants to manage model mix, while rivals were handcuffed to less accommodating assembly lines.

Looking ahead, Honda will need to increase that flexibility and expand production and R&D overseas, Fukui said. The company must do that so it can react quickly to changes in local demand and also protect Honda from swinging foreign exchange rates.

"Instead of thinking about expanding production capacity in Japan, where the market has reached maturity, we should focus on the growth markets including the United States," Fukui said. "These are the areas where we have to expand our capacity."

As for product, Honda's vehicles soon will seem smaller than ever.

High performance is out, and lean performance is in. Besides canceling the NSX, Honda has halted plans to roll out a V-8 Acura.

Instead, Honda is banking on gasoline-electric drive trains to make it a top name in green cars. But unlike competitors, the company won't be pushing hybrid SUVs or luxury sedans.

Honda plans to take the Insight's newly developed hybrid system and put it in smaller packages. That system will go into a production version of the CR-Z sporty hybrid concept next year and a hybrid version of the popular Fit compact car after that. The system also will power the next Civic Hybrid.

The goal: Undercut the competition with lower sticker prices.

Bumpy road

A lurking danger is that archrival Toyota Motor Corp. is already latching on to this price-cutting strategy. To compete with the "affordable" Insight, Toyota is offering a stripped-down version of its third-generation Prius hybrid. Toyota is also working on a Yaris-based small hybrid to take on the Fit.

Honda also is behind its rivals in clearing out dealer lots. And after posting modest sales declines last year, Honda's business is now slumping in the same league with Toyota and Nissan.

Despite the hurdles, Fukui said Honda will stick to tried-and-true policies that have worked so far: no partnerships with other automakers and no aggressive incentives.

"Just because management is facing tough times, we can't easily accept the idea of entering into an alliance," Fukui said.

Yet will that be the winning formula in an era that Ito himself described as a "once-in-a-hundred-years crisis"? If anyone is circumspect about the challenges ahead, it is Honda's next president.

"Feeling honored was 47 percent of my reaction," Ito recalled of being tapped for the job. "Thinking 'this is going to be very tough' was about 53 percent."

(Source: Automotive News)