Behind the wheel: Honda thinks outside the box

NEW YORK – When it comes to business, no one wants to settle for second best. Companies, almost by definition, are always trying to ensure that they are in front of their rivals in terms of market share, sales and brand recognition.

Despite often leading the pack in terms of technological innovations in the industry, Honda Motor Co., a 66-year-old automaker founded by Soichiro Honda, has always been overshadowed by its Japanese archrival, Toyota Motor Corp. So dominant is Toyota’s position in the market that its capitalization is almost three times larger than its nearest domestic competitor.

Perhaps reflecting their respective positions in the market, plenty of books have been published on Toyota — “The Machine that Changed the World” by Daniel Jones, James Womack and Daniel Roos, “The Toyota Way” by Jeffrey Liker and “The Toyota Mindset” by Yoshihito Wakamatsu, to name but a few — but, manuals aside, there have been much fewer books published on Honda and certainly none with much insight into the inner workings of the company.

Veteran business journalist Jeffrey Rothfeder changed all that in July last year, publishing a book titled “Driving Honda: Inside the World’s Most Innovative Car Company” that questioned the conventional wisdom that Toyota sits at the top of the domestic auto industry.

Granted rare, unfettered access to what goes on behind “Honda’s infamously private doors,” Rothfeder argues that the company’s resolute commitment to an unorthodox management style is what businesses around the world should emulate. These management tenets — “decentralization,” “simplicity,” “experimentation” and “unyielding cynicism toward the status quo” — put the company in a better position to localize its global operations.

Furthermore, Rothfeder argues, that Honda’s willingness to encourage risk in addition to respectful disagreement and debate between opposing viewpoints is a philosophy ailing domestic companies could learn from as they try to shake off the fog of deflation that has crippled their operations in recent times — if it’s not already too late.

“I wanted to write about great global companies and people kept telling me about Honda,” Rothfeder says in an interview with The Japan Times.

“Honda in the United States basically became a U.S. company,” says Rothfeder, who was one of the founding editors at Bloomberg and has published numerous books, including “McIlhenny’s Gold,” which dissected the McIlhenny Co. that produces Tabasco on Avery Island, Louisiana.

It took Rothfeder six months to convince Honda to grant him access to the inner sanctum. Once it gave its approval, he spent the next two years interviewing more than 50 of Honda’s current and former employees as well as dozens of industry experts. “Honda thought it was time for its story to be told,” Rothfeder says.

Rothfeder’s praise may now be undermined by recent events in the United States, with the carmaker ordering a recall of defective airbags supplied by Takada Corp., which occurred despite the firm leash the company holds over its suppliers. (“Driving Honda” was published before the first recalls were announced.)

And Honda’s not the only automaker that has been forced to deal with such difficulties in recent years. Toyota, for example, has been forced to recall millions of defective vehicles in recent years, with the carmaker agreeing to pay a $1.2 billion penalty to end a criminal probe into unintended acceleration.

Nevertheless, Honda deserves some long-overdue credit, Rothfeder says.

For a start, Honda put one over its American counterparts before it had even opened a production line in the U.S.

In 1974, Honda launched a four-door Civic that was aimed squarely at the American market. The energy crisis of the 1970s and subsequent emissions regulations required automakers to cut carbon monoxide, hydrocarbon and nitrogen oxide levels by 90 percent by 1975. Honda managed to meet such regulations without having to fit catalytic converters into its Civics, a move that would have reduced pollution but also raised the cost of production as well.

Richard Gerstenberg, chairman of General Motors at the time, dismissed the achievement, saying it could only work on a “little toy motorcycle engine.” He doubted Honda could do the same with a GM car engine.

Yet, the founder of Honda imported a GM vehicle and successfully fitted it with a compound vortex controlled combustion engine, passing all emissions tests put in front of it. In 1989, Soichiro Honda was included in the Automotive Hall of Fame in Dearborn, Michigan — a man who “devastated Detroit’s most lucrative and muscular era with a nonpolluting engine in a tiny car.”

Honda has also led its auto rivals, both at home and abroad, on a number of other occasions in its history. Honda was the first Japanese automaker to produce cars in the United States, opening a plant in Marysville, Ohio in 1982. Honda stunned its competitors again in 1999 and 2002, developing the world’s first hybrid and fuel cell-powered vehicles respectively (although Toyota would eventually get its versions out on the market a little faster).

Honda also has an excellent record of financial health, never once falling into the red since its inception. The company has also recovered well from the global economic meltdown that was triggered by the 2008 subprime loan crisis, nearly doubling its stock price since then. It has allocated more than 5 percent of its budget to fund research and development since 1957, when Honda co-founder and financial officer Takeo Fujisawa first created a R&D division. This percentage is higher than any of Honda’s competitors. However, Rothfeder says, these achievements were always overshadowed by the accomplishments of Toyota, which was able to formulate better marketing strategies.

But this isn’t necessarily a disadvantage, Rothfeder says. The anonymity under which Honda operated tended to create a better environment for innovation.

In “Driving Honda,” Rothfeder takes readers back to Honda’s decision to open a factory in Lincoln, Alabama, in 2000. While the company’s competitors preferred larger towns such as Smyrna, Tennessee, Honda chose Lincoln because it wanted “anonymity and no big-city spotlight or distractions,” Rothfeder writes.

“There is no sign that shows you where the Honda factory is when you are driving up the highway,” Rothfeder says. “If it were in Tennessee, there are signs that say there the Toyota factory is.”

Rothfeder believes Honda’s reticence is derived from an “almost religious regard for internal innovation and individualism, and a concomitant ineptness about promoting its accomplishment.”

“Honda’s work is, first of all, developing workers so that they can be good Honda workers,” Rothfeder says. “They just don’t want to do it in front of everybody else. They’d say, ‘We don’t want to promote ourselves like that.’ “

Internal innovation is what founder Soichiro Honda spent his life trying to achieve. Born into a family that owned a bicycle repair business in a small village near Hamamatsu in 1906, the self-taught engineer produced pistons for Toyota before World War II.

However, he sold his company to Toyota for ¥450,000 after the war and took a 12-month “human holiday,” teaching himself to play the bamboo flute, converting medical alcohol to sake and attending parties every night even though he was married with children.

His wife, Sachi, grew tired of his shenanigans and finally snapped one day in what Rothfeder calls “the most important phase of Honda’s business career.”

Sachi returned home on bicycle one day after failing to buy rice on the black market and vented her anger at her husband. In an attempt to placate his fuming wife, Honda promised to build her a motorized bicycle. This bicycle eventually became the foundation of Honda Motors.

Although Honda’s first creation was pretty crude given the scarcity of materials at the time, Sachi seemed pleased with her new motorized bicycle. Seeing the excitement on his wife’s face, Rothfeder says, Honda came up with an idea he called the “Joy of Buying,” a concept that was later incorporated into Honda’s overall corporate philosophy.

Upon its foundation, Honda’s corporate beliefs were expanded to include the “Three Joys” — of producing, selling and buying — that would encourage its employees to take pride in their work, thereby creating exceptional products, inspiring customers and improving their own lives.

Honda has always lagged behind Toyota, which was already an established manufacturer before Honda was founded, and therefore has always been at a disadvantage. The company also faced protectionist policies imposed by the government that initially permitted only Toyota and Nissan to sell cars outside Japan as well as restrictions that were placed on new carmakers from making four-wheel vehicles to compete against large U.S. automakers.

This, to some extent, explains why Honda was constantly encouraging his workers to be innovative and “never imitate” the competition. Without sufficient funding to invest in die-casting equipment, which used to be an essential part of mass production, Honda instructed his employees to make the casts by hand.

Honda’s success with casts became “a critical precedent,” Rothfeder says, because it reflected the company’s entrepreneurial mantra of originality. Unlike its competitors in the auto industry, Honda has single-handedly developed most of the equipment it uses on production lines, from robotics to automated machinery. This alone, Rothfeder says, continues to give Honda an advantage in terms of production flexibility and cost.

Honda had a rather eccentric philosophy, Rothfeder says. Honda believed his company couldn’t be No. 1 in Japan unless it held the lion’s share of the global market. Japanese companies have long struggled to globalize their operations because the domestic market has been shrinking due to the country’s aging population. Since the 1950s, however, Honda has been encouraging its workers to look beyond the domestic market in terms of “its potential customer base and factory footprints.”

“Japan is a small county,” Rothfeder says. “Companies such as Toyota and Honda had to outgrow it so they could figure out a way that will allow them to compete against large companies such as GM.”

From the outset, Honda adopted radical corporate strategies among its employees that were far from conventional.

For a start, Honda encourages its employees to solve problems through debate regardless of rank, a practice described as waigaya. The company also expects its workers to acquire knowledge by participating in each step of the production process — a practice known as sangen shugi — so that they are able to discuss ideas based on fact rather than assumption and/or theory. Finally, Honda actively encourages individualism, going so far as to promote and hire employees with unusual backgrounds based on a merit system.

Structurally, Honda has divested more decision-making power to local operations. Production plants based in North America, for example, no longer have to follow instructions from Honda headquarters in Japan.

“Toyota is institutional, while Honda still maintains its startup spirit,” Rothfeder says. “Honda lets the people on the spot have the power. Under that principle, local staff feel empowered in a way that they are going to care enough about the work.”

Nothing defines Honda’s open working environment quite like its openness to debate among employees. Waigaya is not a Japanese word but an onomatopoeia coined by Fujisawa that mimics the sound created by heated discussion among myriad participants. An employee can have as much say as he or she wishes during the discussion but everyone has to follow a decision once it’s made.

This sense of equality is unusual for many Japanese companies, which often value rank ahead of other factors such as performance or initiative. At each Honda factory, all workers wear the same white top and pants, and each employee has his or her first name written in red on their shirts — a practice that helps eliminate rank.

Sangen shugi (three reality principles) is not original to Honda, but many industry observers say that Honda has employed this principle most effectively.

In “Driving Honda,” Rothfeder discusses the example of Shoichiro Irimajiri, a graduate of the University of Tokyo who failed to test his engine under race conditions and didn’t communicate with drivers and engineers on the circuit during Honda’s disastrous 1964 Formula 1 debut. Irimajiri’s piston rings overheated, causing the engine to catch fire. Honda scolded Irimajiri, who later became the president of American Honda Motor Co., but not because of the result. Honda was angry with Irimajiri because he relied solely on lab calculations when he should have designed the engine by trial and error.

When taking on new staff, Honda deliberately tries to avoid hiring people with experience in the auto industry. Instead, it attempts to bring in employees who have a clean slate and are willing to learn “the Honda Way.” Chuck Ernst, for example, designed Honda’s factory in Lincoln, Nebraska, and became head of research and development in the United States — yet he had no prior knowledge of assembly lines when he was first hired.

The carmaker has also been careful to let production plants overseas act according to the local conditions, Rothfeder says. The corporate structure of Honda, he says, is flexible enough to allow local operations to deal with difficult market conditions.

The clearest example of this occurred when the government bought the Senkaku Islands in the East China Sea from private owners in September 2012, a move that sparked diplomatic friction between Tokyo and Beijing. The islets are administered by Tokyo but claimed by Beijing.

Japanese automakers’ share of new car sales in China declined from 21 percent to a paltry 9 percent between April 2012 and October 2012, Rothfeder writes in his book, and Honda did not escape the fallout.

Honda had confronted local opposition with a large degree of success before. When it became the first Japanese carmaker to produce cars in the United States, a mayor in Wapakoneta, Ohio, near Honda’s Anna plant, resigned in protest because he did not want his voters to think he was siding with the foreign automaker. Honda, however, agreed to give autonomy at the plant to an American management, which helped reduce the tension.

Although the political backlash in China was beyond Honda’s control, the automaker refused to blame local conditions for its poor performance, Rothfeder writes. Instead, the carmaker attempted to rebrand itself as a Chinese company by opening a third production line in Guangdong and producing three brand-new cars that were designed by local engineers for the Chinese market. Honda also opened a second production plant in Wuhan, almost 1,000 km north of Guangdong, and let engineers at the first plant in the city design the entire assembly line.

In essence, Rothfeder writes, this sums up Honda’s global strategy. Rather than imposing Japanese employees, plans and concepts on overseas units, the carmaker “nurtures these enterprises to gradually blossom into autonomous operations.” Honda’s overseas research and development divisions also work tirelessly to help spur local innovations.

If Honda has any weakness, it’s in the way the automaker is able to control its suppliers, a weakness highlighted by the massive recalls of Takada air bags in recent weeks.

Takada’s defective air bag is believed to have caused several deaths, triggering recalls by 10 automakers, including Honda. Criticism against Honda has mounted, with some reports saying that the carmaker was aware of the problem as early as 2002.

Rothfeder believes Toyota’s recall of more than 15 million vehicles over a accelerator pedal defect between 2009 and 2011 was a result of an internal disconnect between the Toyota headquarters in Japan and Toyota in the United States. Toyota employees in the United States received an official memo that showed management was aware of mechanical problems that were affecting its accelerator pedals, but they didn’t report this to Toyota headquarters because they assumed “Japan did not want to hear this.”

Honda’s current situation is different, Rothfeder says, because the automaker didn’t produce the air bags. However, he says, Honda could have handled the situation with suppliers better because the carmaker had traditionally implemented strict quality control measures.

The automaker has traditionally turned its suppliers into “carbon copies of Honda, with the same ideals, methods and objectives,” Rothfeder says. So much so that it sends its employees to the supplier when there is a problem so that Honda can help rectify it as soon as possible — another example of sangen shugi in action.

“I think Honda messed up,” Rothfeder says. “If Soichiro were alive, he would grab them by their ear.”