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Honda starts pivot from quantity to quality with Clarity Fuel Cell

Honda President Takahiro Hachigo with the Clarity Fuel Cell launched Thursday.

TOKYO -- Honda Motor is positioning the Clarity Fuel Cell rolled out in Japan Thursday as the start of a campaign to lead the market in high-value-added eco-cars. But the Japanese automaker will need to work quickly and marshal its resources effectively to make the jump from its old volume-oriented strategy.

     President Takahiro Hachigo called fuel cell cars a promising option to replace gasoline-powered vehicles and advocated measures to spur broader use, including building hydrogen filling stations. The Clarity Fuel Cell's fuel system is small enough to fit in a standard gasoline car, Honda said.

     The automaker aims to have electric and fuel cell cars account for 15% of total sales volume and hybrids more than 50% in 2030. It will consider expanding its lineup of fuel cell cars based on feedback from customers and other sources, Hachigo said.

The importance of R&D

Honda vehicles have been praised for their fuel efficiency and ability to meet strict emissions regulations without sacrificing much performance. But Toyota Motor leads the green-car market with the Prius hybrid launched in 1997 and the Mirai fuel cell car, which entered full-fledged mass production in late 2014. Although the Mirai is pricey at around 7.3 million yen ($64,218), it has been unexpectedly popular, with a three-year order backlog, according to Toyota. The company plans to boost output to 2,000 cars this year to meet demand.

     Competition is heating up as automakers see a need to be met, with Nissan Motor in Japan and Europe's Volkswagen and BMW planning to expand their green-car businesses.

     Funding for research and development is key to success. R&D spending is mounting steadily as more research areas crop up, such as software development for self-driving cars, seen as the wave of the future. Honda's R&D costs are on course to grow 10% to about 740 billion yen in the current fiscal year ending March 31. While this pales in comparison to Toyota's 1 trillion yen in fiscal 2014, it is well above the 506.1 billion yen spent by Nissan, or Mazda Motor's 108.4 billion yen.

     Honda's wide variety of products -- encompassing small aircraft, motorcycles and generators -- poses a barrier to focused R&D spending. The automaker had hoped to lift earnings by stepping up production. But it expects to sell only 4.74 million automobiles or so this fiscal year, still shy of the fiscal 2016 target of more than 6 million set in 2012 by former President Takanobu Ito.

     Honda sees group operating profit rising 2% to 685 billion yen for fiscal 2015 on strong showings in North America and Asia. But its earnings, weighed down by high fixed costs stemming from excess capacity, are outpaced by those of Toyota and Nissan, which forecast profits of 2.8 trillion yen and 730 billion yen, respectively.

Redrawing the road map

Honda has changed course under Hachigo, closing the gap between output and sales. A rigid production system that used local manufacturing to meet regional demand has been reworked. The company now ships products between regions to fill gaps as needed, improving capacity utilization at expanded factories.

     "Capital expenditures to increase production will run their course going forward," said Masataka Kunugimoto of Nomura Securities. Honda can pour the money it will no longer be using for capital spending into R&D to boost its development capabilities, he said.

     While Kunugimoto is optimistic about Honda's prospects, figuring out how to improve cost competitiveness without recklessly pursuing growth will be a crucial challenge. Nissan, which is about Honda's size, has a wide-ranging alliance with France's Renault that covers development, production and procurement. The duo expects to achieve cost savings of roughly 40%, or roughly 680 billion yen, in 2018 compared with 2014.

     "We have to cut overall costs" to promote broader adoption of fuel cell cars, said Sho Minekawa, a senior managing officer at Honda. "Honda can't lower costs easily on its own."

     The automaker is working with General Motors to develop a next-generation fuel cell system. The partnership will likely expand to include manufacturing and parts purchasing, with an eye toward bringing the system on the market around 2020.

     Honda has maintained financial independence in an auto industry filled with constantly shifting alliances. It will need to be careful to seek partnerships, like the one with GM, that let it maintain superiority in core technologies while benefiting from support in development and production.

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