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Automobiles

Honda drives drastic R&D reforms to reverse slow auto business

Company seeks to cut dependency on motorcycles and duplicate minicar success

Honda Motor President Takahiro Hachigo moves to revamp carmaking operations.

TOKYO -- After Takahiro Hachigo took over at Honda Motor in 2015, the Japanese automaker has implemented a string of reforms to shore up its auto business, including closing plants at home and abroad and shaking up supply chains. But it left one entity untouched -- Honda R&D, its crown jewel research unit, once headed by legendary founder Soichiro Honda more than a half century ago.

But no more.

In April, Hachigo announced plans to have Honda absorb the research unit's auto development business. Many analysts see the move as a sign that the company is determined to turn around its auto business, which has been plagued by inefficiency and anemic profits.

On July 1, Honda will set up a joint venture with Neusoft, a group unit of a major Chinese tech company strong in artificial intelligence. The venture will develop Honda Connect, a service that can automatically alert local officials when a vehicle is involved in an accident.

Hachigo said Honda's strategy is to "clearly separate a 'competition area,' where we develop on our own, and a 'cooperation area,' where we work with other companies." The move by the maker -- which has always touted its unique technologies -- kicks off a joint deal in an advanced technology in the name of efficiency.

"We have launched the biggest initiative since our establishment," Hachigo told about 600 new employees on April 1. Honda usually holds a large welcome ceremony at the Suzuka Circuit in Japan's Mie Prefecture for new employees, but this year's event was held online due to the coronavirus pandemic.

Hachigo told the future successors of "Hondaism" about his determination to implement reforms that hold the key to the company's survival.

On April 1, Honda drastically reformed its automobile business. Previously, it had what it called an SEDB structure, where sales, engineering, development and buying divisions operated autonomously but cooperated with each other. The latest organizational change has integrated all four areas so they can be operated as a whole.

Specifically, production and purchasing headquarters and the development divisions of Honda R&D were integrated into Honda Motor's automobile business. It also absorbed some functions of Honda Engineering, a key production technology subsidiary in Tochigi Prefecture.

A business unit officer, who is responsible for overseeing an entire process from design to mass production for a group of products, has also been introduced. The aim is to improve efficiency by integrating steps from development to production.

"We needed drastic reform for our survival," Honda R&D President Toshihiro Mibe said at the company's Haga headquarters in early April. He explained the purpose of the change to employees who had been transferred to the parent on April 1, as well as to those who remained in the lab.

Why is the integration of Honda R&D's development divisions such a major reform? Because Hachigo is trying to redefine Honda's carmaking in line with the times.

Late Honda founder Soichiro Honda, left, with his right-hand man Takeo Fujisawa, who led the establishment of the company's independent research institute.

It was Takeo Fujisawa, the right-hand man of late Honda founder Soichiro Honda, who overcame opposition to separate the research and development arm. "If Honda Motor is not willing to spin off its research and development unit, the company will be no good," said Fujisawa.

He made this observation when Honda fell into financial distress due to slumping sales caused by quality problems with its motorcycles in 1954. "We were too dependent on founder Soichiro Honda and needed an organization that could cover for him," Fujisawa wrote in his book.

Honda was one of the few global automakers that spun off their research and development unit. The move was aimed at inspiring engineers in a free and low-stress environment away from the parent.

Honda R&D, which encouraged engineers to express their creativity, achieved epoch results. In 1972, the company developed a compound vortex-controlled combustion engine -- the first of its kind to meet U.S. emission requirements, which were at the time considered to be the most strict in the world. Honda's Civic with CVCC engine became a big hit in the U.S., laying the foundation for its passenger car business.

Honda R&D has always operated independently from its parent company. About 5% of Honda Motor's sales were allocated to the company. In turn, Honda R&D has supplied product drawings based on the parent's business plans.

For the fiscal year through March 2019, Honda R&D posted sales of 715 billion yen ($6.66 billion) and a net profit of 28.4 billion yen. It has about 14,000 employees. For a long time, whoever headed Honda R&D was seen as a serious contender for the future post of president at Honda Motor itself.

Hachigo's plan to revamp the organization's automobile business unsettled staff at both companies. Roughly 10,000 employees of Honda R&D were transferred to Honda Motor. Honda R&D will now specialize in the long-term research and development of products and technology, including new mobility and robotics.

"It's a de facto breakup of the institute," said one employee.

Hachigo decided to intrude into sacred territory -- despite strong opposition from former and current employees -- in an effort to shore up its sluggish automobile business. For the fiscal year through March 2020, the automobile business' operating profit fell 27% on the year to 153.3 billion yen and its operating profit margin was as low as 1.5%. The unit logged an operating loss of 75.6 billion yen in the January-March quarter of 2020.

Soichiro Honda, right, unveils the CVCC engine in Tokyo in 1972.

Meanwhile, Honda's motorcycle business generates an operating profit of 285.6 billion yen, nearly twice that of its automobile business, despite sales being about one-fifth those of the auto business. Its operating profit margin is almost 14%. "It's safe to say that Honda's earnings are supported by motorcycles," said an analyst. "Automobiles' low margins are the biggest challenge we are facing," said Hachigo.

The low margins of Honda's automobile business were brought by a failure in its expansion strategy pushed by former president Takanobu Ito after the global financial crisis. Ito -- who tried to reduce dependence on the U.S. after the crisis -- aimed to increase global sales by 50% to 6 million units. He expanded into emerging markets and hammered out "simultaneous development and production" in the world's six major regions.

But Honda's overextended markets and sales drive hurt the quality of its products, resulting in recalls of some of its Fit compact models.

The division of work between Honda R&D and Honda Motor became even less efficient at the time of expansion. As both organizations grew, employees focused solely on their own divisions. As a result, they were swamped with unnecessary work as they dealt with overlap and adjustments.

"We should have produced cars that consumers wanted, but we started doing our jobs for jobs' sake," said a Honda executive. As Honda R&D became more bloated, "employees also became too bureaucratic," said a former employee.

Now, Honda will aim to "decide and execute promptly" by naming officials in charge, from development to production to sales. Employees from different departments will be involved from the initial development stage to reduce the number of reviews. These moves are hoped to increase the speed of introducing new models and improve quality.

Production line of new minicars at Honda's Suzuka plant in Mie Prefecture: Honda aims to duplicate its success in the production and development of minicars.

Hachigo was successful in a project called SKI, which launched in April 2012. Employees from development, part procurement and production departments worked on the same floor. Assembly line workers and engineers had heated debates and repeatedly revised drawings. They also reviewed procedures and operations.

SKI produced Honda's hit N-WGN minicar. It was once rumored that Honda would stop producing minivehicles, but it sold 357,402 units in fiscal 2019 -- more than a twofold increase from fiscal 2010.

Honda now aims to make up for lost ground through its first drastic change in 60 years. As head of Honda R&D, Soichiro Honda conveyed the following message in 1961: "A true technology comes from philosophy. The true meaning of research is to create products that will please people of the world by recognizing a global perspective and respecting ideals, ideas and time."

Soichiro Honda stressed that the engineer's goal is to develop products that please consumers around the world, instead of debating whether to seek independence or integration -- a concept that Honda Motor should not forget when embarking on historic reform.

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