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Honda breaks with tradition to bring in fresh ideas

A single-seater electric car featuring a cookie company's logo takes center stage at the Ceatec Japan trade fair in Chiba.

TOKYO -- The tiny electric car unveiled at the Ceatec Japan consumer electronics show in early October was a big hit with visitors to Honda Motor's booth. The curved body makes it look more like an amusement park ride than a car. The single-seater electric car featured the logo of a local shortbread company, who will use the prototype as a delivery vehicle.

Sourcing external technology

"Proposals for value-added manufacturing through open innovation processes," was Honda main theme for the annual technology trade fair, held in Chiba, just outside the Japanese capital. Open innovation essentially means sourcing ideas both internally and externally. The new car is a joint development with a Tokyo-based startup specializing in 3-D printing technology. It took a mere two months to complete the design and prototyping process. The use of 3-D printing allows the automaker to customize models according to customer requests in a short period of time.

Honda has long pursued its own technological development and has steadfastly maintained the independence of the company, but now collaborating with other industries has become a new strategy for the manufacturer. In the modern world, Honda recognizes that making greater use of external ideas and technologies is inevitable, with automakers around the world rushing to develop new products, such as electric cars, self-driving vehicles, and automobiles with direct access to the internet. Honda President Takahiro Hachigo said, "The passion of Honda engineers alone can no longer underpin our efforts."

The industry has seen dramatic growth in strategic alliances between rival firms. Toyota Motor and Suzuki Motor have agreed to explore the possibility of forming a business tie-up. Nissan Motor completed its acquisition of a 34% stake in scandal-hit Mitsubishi Motors.

Adhering to the closed approach to innovation may lead to a decline in competitiveness. Toshihiro Mibe, the operating officer in charge of Honda's R&D division, said. "As we have already abandoned our traditional closed-door approach, we are ready to talk with individuals outside our company more often."

In order to advance development of artificial intelligence, Honda opened a new AI research center in Tokyo's Akasaka district in September 2016. The automaker has also partnered with telecommunications company SoftBank to develop AI-equipped products. In the U.S., Honda and General Motors are working together to develop zero-emission fuel-cell technology, with the aim of launching a hydrogen-powered vehicle by the end of 2020.

Japanese automakers are expanding R&D spending. Honda's R&D expenditure of 690 billion yen ($6.58 billion) for the year ending March 2017 is at record-high levels, surpassing Nissan's 560 billion yen. But the figure is well below the 1.07 trillion yen projected by Toyota, the Japanese auto industry's top R&D spender.

Honda spent 115% of its initially projected operating profit on R&D -- a large burden relative to its profit size --- compared with 67% for Toyota and 79% for Nissan. Honda's Mibe said, "We will reach our spending limit someday."

The automaker needs to make every effort to improve its profit margin, while cutting back on R&D costs through collaboration with its partners. The two major challenges facing the company are the development of more appealing vehicles and production efficiency. Honda's current annual production capacity is 5.7 million units, 800,000 more than its yearly sales. In the current fiscal year, the automaker is expected to operate at 86% of capacity, far below the capacity utilization rate of 97% in fiscal 2007, just before the collapse of Lehman Brothers in 2008. Even now, the company's utilization rate in Thailand and Brazil remains at nearly 50%

Flexible network

In order to raise production efficiency, Honda has begun to revamp manufacturing systems abroad and changed its basic policy of engaging in local production and encouraging local consumption. The new Honda Civic Hatchback arrived at North American dealerships starting in September. The new model is produced exclusively at the company's U.K. plant, which exports it to the North American market. The U.K. factory is likely to operate at almost full capacity after having suffered a low utilization rate. Honda is looking to build a flexible cross-border supply chain.

Although Honda is the only Japanese automaker that projects an increase in operating profit in fiscal 2016, its operating profit margin, or the percentage of operating profit relative to sales, is limited to just over 4% due to rising manufacturing costs, compared with the 6.2% reported by Toyota based on its initial projection for fiscal 2016. Honda is still far behind American rivals in terms of profitability. According to data published by U.S. financial information provider FactSet Research Systems, GM achieved an operating profit margin of 5.5% in the year through December 2015 and Ford Motor posted a profit margin of 5.1% in the same year.

Before the Lehman shock, Honda had maintained an operating profit margin of around 8%. If the automaker can optimize the performance of its bloated production system and regain the management efficiency it once enjoyed, shares of Honda Motor would almost certainly take a turn for the better.

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