THE Car Company

Since I've long admired Honda, having owned about 1/2 dozen, both Civic's and Accord's, and Forbes just decided to "Archive" pieces like this, even though I'm a long time print subscriber, I'm going to post the text here.

Engineers Rule: Finance Guys And Marketers Rise to the Top. Not at Honda
Forbes


By Jonathan Fahey and Tim Kelly

Sept. 4, 2006

At American auto companies, finance guys and marketers rise to the top. Not at Honda.

Of all the bizarre subsidiaries that big companies can find themselves with, Harmony Agricultural Products, founded and owned by Honda Motor, is one of the strangest. This small company near Marysville , Ohio produces soybeans for tofu. Soybeans? Honda couldn't brook the sight of the shipping containers that brought parts from Japan to its nearby auto factories returning empty. So Harmony now ships 33,000 pounds of soybeans to Japan .

An inveterate tinkerer, Honda also set up a center nearby to develop better soybean varieties and improve agricultural processes.

This is from a company that sold 21 million internal combustion engines for cars, motorcycles, lawnmowers and boats last year. But there's nothing Honda hates more than waste, and there is nothing Honda likes more than an engineering problem. Indeed, how else to explain why Honda has studied the maddeningly evasive cockroach (for anticollision technology), decoded the rice genome (to increase crop yields and create more-productive crops for biofuels) and developed a robot that can get instructions by reading human brain waves (to learn how machines and humans can better coexist).

Honda's engineering obsessions have the Japanese company better prepared than perhaps any other automaker for high oil prices and roiled energy markets. Most auto companies have placed big bets on one or two alternative propulsion technologies while they dabble or play catch-up in others. General Motors, for example, has focused on fuel cells, Toyota on hybrids, DaimlerChrysler on diesels. Honda, the world's eighth-biggest automaker, has developed a panoply of technologies: hybrids, fuel cells, clean
diesels, natural gas vehicles and the world's most sophisticated mass-market gasoline engines. It even announced in July it will sell a small, fuel-efficient jet (see box, p. 116).

Honda's ability to juggle these technologies successfully is perhaps a matter of survival. It competes in the mass market against companies, such as Toyota , General Motors, Ford and Nissan, that are either bigger or in alliances with other automakers. Other small carmakers like Porsche and BMW flourish by selling high-margin luxury cars. So that leaves Honda, with just 9 percent of the U.S. market, on its own and adamant that it remain unattached.

The trick: "You need to give people the freedom to spend and the freedom to make mistakes," says Takeo Fukui, Honda's 61-year-old president. "If management oversight is too strong, then it's difficult to innovate."

Longtime auto analyst John Casesa, who now runs a consulting company, says, "There's not a company on earth that better understands the culture of engineering."

The strategy has worked thus far. Honda has never had an unprofitable year. It has never had to lay off employees. In the fiscal year that ended in March, profit grew 12 percent, to $5.1 billion, on $84 billion in sales. In the U.S. , which accounts for 43 percent of Honda's sales, vehicle sales are up 7 percent through July, even as the industry slipped 5 percent. The company sold more vehicles in July than one member of the old Big Three, the Chrysler Group.

The lean and compact Fukui , like all of his predecessors, is an engineer who started in R&D and later ran the subsidiary. While other auto chief-executives-to-be were punching keyboards in an accounting office, Fukui ran the company's motorcycle racing operations. He's still racing. He hikes the stairs to his tenth-floor desk–tenth floor so he's in the middle of things at Honda's 16-story Tokyo headquarters and a desk because executives at Honda don't have offices. Honda doesn't disclose executive pay in detail, but the sum of salaries and bonuses that Fukui shares with 36 board members, $13 million, is just about enough for the boss at a big
American company.

Honda traces its resourcefulness to the 1960s, when the Japanese government tried to keep Honda, then just a motorcycle maker, from building cars because it feared there were too many carmakers. Honda quickly produced a tiny car driven by a chain, like a motorcycle, called the S-500. This led Honda to adopt perhaps the sappiest slogan in corporate history: "To be a company that society wants to exist."

"It's not just words," Fukui swears. "It's something that has always been at the core of our company." Whatever the case, Honda believes that society does not cotton to companies that melt ice caps and kill coral reefs. Cars that create less pollution also cost less to fill up. Honda's recent growth has been fueled by a pair of small cars, the newly redesigned Civic that sells for $15,000 to $22,000 (and gets 34 miles per gallon) and an even smaller car, the Fit, that sells for about $15,000.

Gunnar Lindstrom, who is charged with marketing Honda's alternative fuel vehicles in the U.S. , believes that by 2020 six fuels will split the market: gasoline, diesel, biofuels, hydrogen, natural gas and electricity, perhaps working side by side in a single vehicle. "It's risky to have just one fuel strategy," he says. "In the event of a crisis of any sort, we would like to be flexible. These are insurance policies that have some realistic assumptions behind them."

Honda spent $4.4 billion on R&D last year, 5.2 percent of sales, but, like most carmakers, it won't disclose how much is for basic research. One big investor says: "The good news is that they are run by engineers. The bad news is that they are run by engineers."

Honda announced in June that, by 2009, it will market an all-new hybrid vehicle, the company's fourth, and offer a clean diesel passenger car that will likely get 45 miles to the gallon. Honda has sold 141,000 hybrids since 1999 in the U.S. , second to Toyota 's 273,000.

The hype about hydrogen fuel cell cars has died down in the last year or so, but Honda hasn't noticed. Fuel cells are twice as efficient as combustion engines, and that is enough for Honda. Honda was the first to certify fuel cell vehicles for private use in the U.S. and is already leasing a few to individuals in California . Yozo Kami, Honda's fuel cell chief, promises to solve all of fuel cell vehicles' technical problems by 2012 and to have the cost of fuel cells to "Accord-level" by 2020. GM's goal is to to build a prototype by 2010 that could be reasonably priced if mass-manufactured. Toyota doesn't make any public predictions about its hydrogen fuel cell efforts.

And if Honda needs to be the one to solve the issue of creating
infrastructure to enable hydrogen-powered vehicles, so be it. In back of Honda's Torrance , Calif. research campus are a pair of prototype appliances designed to produce hydrogen at home. Engineers have built a contraption of water heater size that strips hydrogen out of natural gas while burning the carbon to provide heat for the home.

Then there's a wall of solar panels attached to an electrolysis unit that turns water into hydrogen. This thing is just a wee bit cumbersome: 700 square feet to create enough hydrogen to run a fuel cell car 10,000 miles a year and supply electricity for the house. Engineers like to point out that it takes just one-and-a-half gallons of water–one toilet flush–to create enough hydrogen for an average day's driving, 30 miles. The thin-film solar panels, developed by Honda, are more efficient than current solar panels,
so Honda will market them on their own to homes and small businesses.

Also this year, Honda became the first to offer a natural gas-powered vehicle to the public. The Civic GX is $7,000 more expensive than a gasoline Civic (before the effect of a $4,000 federal tax credit), the range of the vehicle is just 250 miles, and there are only 800 public natural gas refueling stations in the country.

Ah, but Honda thought of that too. As a test case for hydrogen refueling, Honda will also offer to Civic GX buyers in California and New York a home refueling unit cheekily called Phill. The backpack-size Phill, costing $3,500, fills up the car overnight in your garage from your utility's gas pipe, at a gasoline-equivalent cost of $1.20 per gallon. (Buyers get a $1,000 federal tax credit to boot plus, sometimes, state subsidies.)

Honda's sales target for the car is a modest 1,000 per year. It's easy on the conscience: Most natural gas is domestically produced. And, over its lifetime, the Civic will emit less pollution than is produced by spilling a teaspoon of gasoline on the ground. Maybe this is what Fukui means when he talks about society wanting Honda to stick around.