Honda is the company to watch - Opinion & Analysis: The Business - Honda Motor solves efficient capacity utilization problem - International Pages - Brief Article

Automotive Industries, Feb, 2002 by Maryann Keller

Three or four years ago, amid the industry's flurry of acquisitions, I often found myself debating people who speculated about which auto giant would gobble up Honda Motor Go. Sure, Honda was making money, but it was too small to stand alone, according to the commonly held notion that size determined viability.

My argument that Honda didn't need or want to be acquired by an amorphous global company was generally viewed as quaint and uninformed. But as 2002 begins, the company that has everyone, including Toyota, watching is Honda.

Ironically, until about two years ago Honda was all but absent from the booming American light truck sector. Likewise, Honda's Acura brand hadn't quite made it into the luxury category another growth sector in the U.S. It had lost part of its foothold in Europe when BMW acquired Rover. And its Asian investments paled compared to the big bucks thrown at China and other markets by its larger rivals.

But Honda remains one of the few mass marketers able to sell most of its product line without incentives. Because of predictably high residual values, Honda is able to offer shoppers leases with monthly payments below those of less expensive models. Honda has not relied on fleets or rental car companies to dispose of surplus capacity -- the company is capacity constrained even though it has raised capacity in North America and supplemented local production with imports. Honda vehicles appeal to young buyers, even as loyal older customers move up market into more expensive near-luxury Honda models.

When Honda finally entered the full-size minivan market, it easily stole share away from each of the domestic producers despite their decade-long head start in the category. No one doubts that the new Pilot mid-size SUV will cut into the sales of rivals without the discounting that prevails today in the category. Its sister model, the Acura MDX, still sells at a premium over list price, and dealers have a six-month waiting list for the model -- proving once again that you don't have to be first in a segment to be successful.

Even in Japan, Toyota is taking notice. Late last year Toyota was forced to cut the price of its popular small car, the Vita, as the Honda Fit became the top seller. Although comparable in size to the Vitz, the Fit offers more interior room, more features and better fuel economy at the same price.

Honda has always relied upon clever designs and features to set itself apart from the competition. Combined with superior engine technology it has created the solid foundation that's enabling it to move almost effortlessly into new countries and new market segments in the U.S. and Japan.

More remarkably, Honda appears to have solved the challenge of efficient capacity utilization that seems to be the primary handicap for smaller, broad-line assemblers. Simply put, Honda has targeted vehicle design so that several models can be easily produced in any of its plants around the world. This allows it to maximize sales by adjusting production to meet global demand for many Honda vehicles.

Meanwhile, Honda has figured out how to build small assembly plants that are profitably producing as few as 20,000 units a year. The greatest challenge every assembler has is to balance capacity glob ally rather than by model or market, and it seems that Honda may be close to doing that. Instead of localized shortages and surpluses that reduce the profitability of other producers, Honda will maximize returns on investment.

Honda has focused on the basics. It has never allowed itself to get distracted by fads or the pronouncements from competitors about the parameters for success in the future. But it also seems to have paid attention to those who highlighted its size limitations. Honda's answer has been to turn our notions of optimum production volumes and assembly flexibility upside down

MARYANN KELLER is a veteran auto industry analyst and author of the books "Rude Awakening The Rise, Fall And Struggle To Recover At General Motors" and "Collision: GM, Toyota and Volkswagen And The Race To Own The 21st Century."