INSIGHT-After Civic bruising, Honda fights for its soul

TOKYO/DETROIT, March 2 Thu Mar 1, 2012 7:12pm EST

TOKYO/DETROIT, March 2 (Reuters) - The future of Honda Motor Co may rest with a pair of contrarian Japanese car engineers working from a drab Tokyo suburb with a hotline to the boardroom. Their mission: just say no.

Honda's creative directors Toshinobu Minami and Yoshinori Asahi are out to kill any mediocre car designs rumbling down the pipeline. In short, they have been told to stop anything like the 2012 Civic, a cheapened redesign that prompted critics, consumers and rivals to wonder how Honda had so badly lost its way.

Inside Honda, in both Japan and the United States, that same question has also been asked with urgency. Honda, many say, slipped into designing cars by committee in recent years and drifted away from the iconoclastic ambitions of its founder. Honda had become boring.

"Somewhere along the way, we lost the ability to express ourselves more freely," Asahi told Reuters. "We have a lot of designers here, and when we ask ourselves, 'Which Honda car would we want to buy?' Sometimes, some of us draw a blank."

That's a startling admission at a company long praised for the quality and durability of its vehicles -- a company that caught U.S. automakers flat-footed in the 1970s with inexpensive, fuel-efficient cars like the original Civic.

Touted four decades ago for its CVCC engine that boasted cleaner tailpipe emissions -- as well as inspiring the Civic name -- Honda has trailed with advances such as six-speed transmissions and direct fuel-injection systems.

In recent years, Honda's "car guys", the engineers that built the automotive upstart into a powerhouse, were overshadowed by the "bean counters", financial executives more willing to cut corners on vehicle content to shore up margins, insiders say.

That approach looks good on a spreadsheet, but it also carries the risk of a backlash. Consumers can turn on a debased version of a popular car and the resulting publicity can burn a brand -- a lesson GM, Ford and Chrysler all learned the hard way in the slide to crisis in 2008.

Ironically, Detroit's willingness to settle for also-ran status in small-car quality created the opening for Honda in the 1970s and 1980s. Now, analysts and industry executives wonder whether Honda can rekindle the underdog ambition of founder Soichiro Honda. ==================================================== U.S. Honda Civic incentives have increased since the 2012 version was introduced last April:Civic sales pick up as supply squeeze eases====================================================

Changes at Honda can't come soon enough after a terrible year. Slow to recover from the earthquake and tsunami in Japan a year ago, Honda's U.S. sales tumbled 7 percent in 2011. By contrast, Nissan bounced back with a 14 percent sales gain to almost match Honda's market share.

Nissan, in particular, has made it a mission to overtake Honda in the United States and has closed the gap since 2010.

Meanwhile, Hyundai Motor Co and its affiliate Kia Motors Corp have overtaken Japanese automakers as the benchmark for value-for-money. The Koreans have also taken advantage of a favorable exchange rate to install pricier fuel-saving technologies and other extras while Japanese brands struggle to offset the debilitating impact of a strong yen.

"Honda somehow managed to get very, very far away from their engineering discipline," AutoTrends Consulting President Joseph Phillippi said, adding it could take three years for Honda to show it has turned the corner in car development.

A financial rebound could come quicker, though. Honda has not given detailed forecasts for the fiscal year starting April, but executives see U.S. sales up by as much as 25 percent in 2012.

Honda's earnings remain supported by a strong finance arm and its leading motorcycle business. In addition, the automaker is taking steps to shift more production to North America to shore up profitability.

In another move that shows the importance Honda attaches to getting it right in the United States, the board last month promoted North America chief Tetsuo Iwamura to become the No. 2 global executive, the first time that job has been based outside Japan.

But behind the scenes, the battle for Honda's automotive soul is being played out in places like Asahi and Minami's sprawling third-floor studio in the Tokyo suburb of Wako. If the upscale Aoyama neighborhood that houses Honda's headquarters can be likened to New York's Fifth Avenue, then Wako would be a dreary town in New Jersey.

Since September, when they were promoted to fix Honda's car designs, Asahi, 47, and Minami, 44, have been working from Wako with a mission to shake things up. Both worked in the early 1990s on the fourth-generation Accord, a bigger Honda that won praise for its simplicity and a near-indestructible four-cylinder engine.

"He hates doing what he's told to do," Asahi says of his partner with approval. "Just like me."

Minami says it's a struggle to get Honda's designers to shed a conservatism born of the consensus-building approach typical of Japanese corporate culture. "I want designers to be heard at the company, but for that I need them to stop playing nice and compete more fiercely with each other," he said.

OUT OF FAVOR

"Playing nice" has already taken a toll on Honda.

Last summer, Consumer Reports magazine savaged the redesigned Civic for a low-quality interior and choppy ride. It dropped the car from its recommended list and ranked it next to last among 12 compact sedans tested. It was the first time the Civic had failed to make the list since the buyer's guide was launched in 1993. As a brand, Honda lost its coveted top spot in the magazine's annual report on quality this week.

"(It was as if they said) 'OK, we've got the marketplace. We're going to put in cheap interiors. We're not going to keep up with engine technology," said David Champion, senior director at Consumer Reports' auto test center.

Honda executives realize their mistakes.

"We should have been more aggressive," said Honda's top engineer, Yoshiharu Yamamoto. "The Civic is a cornerstone. And to have that car get the feedback that it did, we have to take that to heart."

John Mendel, Honda's U.S. sales chief, has argued fallout from Consumer Reports' poor review has been minimal, pointing to the Civic's segment-leading sales in recent months. For the first two months of 2012, Civic's U.S. sales were up 45 percent.

But industry research firm TrueCar.com says incentives on the Civic have more than quintupled since its debut last April to almost $1,900 per car in January, suggesting sales are being driven by attractive deals.

Mendel acknowledges Honda cut costs on the Civic interior because it believed back in 2008 that consumers would want a cheaper small car at a time when the economy was sliding into a deep recession. Instead, rivals including Hyundai, Ford and GM all found American consumers ready to spend more for small cars with richer interiors, quality sound systems and extras like navigation and heated seats.

"We missed a trend," Mendel said. "We zigged, the market zagged a little bit. We did some things that we thought were less important to the consumers."

Honda is rushing a redesigned Civic to market late this year, essentially a facelift to protect the image of a car that is key to both Honda's future and heritage.

The Civic is the model that famously put the then little-known Japanese automaker on the map in 1972. With a base price of around $12,000 in today's prices and a slogan that emphasized its no-nonsense engineering - "It will get you where you're going" - the Civic was a hit with Americans looking for a fuel-sipping small car in the wake of the first oil price spike.

The Civic now accounts for one of every five of the three million-plus cars Honda sells worldwide.

"They erred by taking the content out of the vehicle," said Mike Shaw, who owns Honda dealerships in Texas and Louisiana. "The bean counters probably did take over. They now have been overruled. That's an encouraging sign."

Industry observers and insiders said Civic's large U.S. following -- 9 million sold -- tempted Honda to stick with a design that wouldn't alienate repeat buyers.

MISSING 'MR THUNDER'

Honda has always thought of itself as an engineering firm -- its formal name in Japanese translates to Honda Technology Research Industry -- and its CEO has always been an engineer.

To avoid boring redesigns, Honda has had a long-standing policy of not letting engineers lead development of the same model twice. The idea was to encourage project leaders to "compete" with the previous version.

"The structure was there, but maybe not the culture behind it," Minami said. "None of us, including top management, has ever worked with Soichiro Honda. It's a totally new generation."

During his reign, engineers lived in fear of Soichiro Honda's surprise visits, which typically ended in deafening rants against mediocrity that earned him the moniker "Mr Thunder".

He retired in 1983 and died nine years later. Many outside Honda say the company could really benefit from the aggressive drive he championed.

"Soichiro Honda was definitely the opposite of a bean counter; he was like the automotive Steve Jobs," said Bob Lutz, a former GM vice-chairman and one of the industry's best-known "car guys", referring to Apple's late visionary leader.

"He was always for technical progress and 'Don't tell me it's too expensive'," said Lutz, speculating Honda engineers no longer had the founder's voice ringing in their ears. "If they did, they would definitely have better technology and better styling. They've just lost it."

'BEHIND THE SCREEN'

Honda executives want to shatter that view. Yamamoto, the R&D chief, has a message for designers: worry less about what other departments may want. "I want them to work more freely."

In the past, Honda designers didn't need permission to veer off script. They often banded together to work in secret on an alternative version of a car when unhappy with the approved blueprint. Going "behind the screen", as it was called, often had the tacit backing of managers who felt it upheld the spirit of Soichiro Honda.

Asahi knows the power of going "behind the screen" first-hand. In the late 1990s, he began dreaming of an open-top sports car for Honda and spent his days drawing out models even though he was assigned to focus on car interiors. A rushed clay model that he developed with a group of like-minded designers outside work hours became the prototype for the S2000, a zippy roadster launched in 1999.

"I've personally seen a lot of these dreams become a reality at this company," Asahi said. "That's why under the new Honda, I want to draw out the guys who have that kind of passion and make cars that way."

Honda's creative duo now have a direct line to Chief Executive Takanobu Ito. Frustrated with the pace of decision-making at Honda, Ito has put himself in charge of Honda's car operations, splitting the core of the company into three units headed by engineers: the Acura premium brand, mid-sized vehicles and small cars.

Analysts say the first true test for the "new" Honda will come with the redesigned Accord due later this year. The Accord is Honda's best-selling vehicle and previous generations made the Japanese automaker's reputation for easy-to-drive, smartly engineered cars with good fuel mileage.

"It has to be a home run," said Lars Luedeman, head of Grant Thornton's auto advisory practice. "It's their bread and butter, a very high-margin vehicle."

Unlike the Civic, the next Accord will be equipped with Honda's newest engines and transmissions -- technologies the company hopes will make its cars the most fuel-efficient in their class by 2015. It will be the first time in a decade Honda has overhauled the Accord's engine.

Rivals have watched Honda's missteps with private glee.

Nissan even ran a commercial last August which shows a loaded Nissan car carrier being driven past a frustrated Honda dealer in a poke at its rival's low inventories due to last year's Japanese earthquake and Thai floods.

For Asahi and Minami, the pressure is on. They must ensure the next generation of Honda vehicles wow consumers. "What we need to do is to raise the quality of the output by such a high margin that it will shut everybody up," said Asahi.

To that end they have already sent numerous projects back to the drawing board, they said. "The tension when we did that -- it was like all the air was being sucked out of the room," Minami said. "But that is our job."

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