Green-car era poses test for Honda
TOKYO–It was the late 1990s, and Honda was desperately trying to nurture a luxury performance image. To many, the fix was a no-brainer: Honda needed a V-8, like everyone else.
But Koichi Amemiya, then CEO of American Honda Motors, wasn’t convinced. When one dealer’s clamor reached a fever pitch, Amemiya silenced him with a shipment of V8 vegetable juice.
The V-8 engine was canned. And Honda’s stubborn independence paid off. Today, virtually every automaker is hurting from decisions to splurge on big engines, pickups, and SUVs.
Now, Honda’s go-it-alone streak is being tested anew–in a green-car era when automakers are racing to crank up the miles per gallon. Like a decade ago, Honda is charting its own course. For instance, it has no interest in electric cars, despite the buzz for emissions-free driving.
“Honda is doing it Honda’s way,” says Takaki Nakanishi, an auto analyst at JPMorgan Chase.
Honda’s eco-car strategy differs starkly from that of its Japanese rivals. They are lining up joint ventures to produce advanced lithium ion batteries; looking to take hybrid technology into big, luxury cars; and rushing to roll out ultraclean electric vehicles.
But Honda won’t commit to a battery manufacturer. It sees the future of hybrids in inexpensive compacts. And its response to electric vehicles is a resounding “no, thanks.”
Honda’s contrarian instincts are rooted in the company’s desire for financial and engineering efficiency. For example, Executive Vice President Koichi Kondo says the prescient decision to shelve the V-8 engine was partly a matter of not having the resources to invest in the products. But the other part was pure corporate DNA.
“Maybe 50 percent was luck. But the other half was trying to come up with something that is different from our rivals, something fuel-efficient and lightweight,” Kondo says. “That has been our way of doing things.”
That tradition continues in the company’s current hybrid strategy.
Honda’s rivals have been installing hybrid drivetrains in luxury sedans and SUVs. Toyota Motors is making its next-generation Prius bigger and rolling out a new Lexus hybrid next year. Nissans first in-house hybrid will go into an Infiniti.
Ford and General Motors have focused on hybrid SUVs and pickups.
Yet Honda’s biggest hybrid is the Civic. And the company’s hybrids are only going to get smaller.
The Insight dedicated hybrid arrives next year. That car will be cheaper and smaller than both the Civic Hybrid and the Prius.
The Insight will be followed by an even smaller sporty hybrid, based on the CR-Z concept.
Honda then will go to a new extreme with a hybrid Fit small car.
Masaaki Kato, president of Honda R&D, says small cars are better suited to hybrid systems because they typically are used for stop-and-go city driving. In that way, small cars take full advantage of the hybrid’s regenerative braking to recharge the onboard battery.
By contrast, other automakers see hybrid power trains as a way to improve their fleet fuel-efficiency averages by squeezing better gas mileage from sedans and trucks. Those companies also can better disguise the high cost of the hybrid hardware by wrapping it in an upscale vehicle.
Honda wants the opposite: smaller hybrids with smaller sticker prices.
“We are trying to make hybrid cars mainstream,” Kato says, “and the biggest obstacle to that right now is price. Therefore, we are trying to bring the costs down and make hybrids affordable.”
If Honda takes the pricing lead, the ramifications could be widespread.
“Honda is going against the grain by building a small, inexpensive hybrid. The new Insight is supposed to cost around $20,000, which would make it by far the cheapest hybrid,” says Michael Omotoso, senior manager of power train forecasting at J.D. Power and Associates.
“It might also force Toyota, GM and everyone else to lower their hybrid premiums.”
EVs? No, thanks
Honda also stands alone on electric vehicles, which many see as the future of automobiles. It pooh-poohs plug-ins and says today’s lithium ion batteries are too wimpy for practical use.
But Nissan, Mitsubishi, Toyota, and Subaru seem undeterred. They plan electric vehicles in the next five years.
Those cars will feature lithium ion batteries and have full-charge ranges of around 60 miles. GM is planning its Volt plug-in hybrid car for 2010.
Says Honda’s Kato: “Our stance is that the use of electric vehicles is limited. To get the performance of an Accord, in terms of driving range, from today’s battery-only drivetrain, we would need to carry 2 tons of batteries. That’s no good.”
In what critics call an even greater leap of faith, Honda is banking on hydrogen fuel cells as its future high-tech drivetrain. But even those rely on next-generation lithium ion batteries.
Fears of commitment
In another divergent strategy, Honda has no partnerships with electronics companies to build those sorely needed lithium ion batteries. Honda is sourcing current-generation nickel-metal hydride batteries from Matsushita Electric and Sanyo Electric
In contrast, Nissan has teamed with NEC on lithium ion batteries, Toyota is tied up with Matsushita, and Mitsubishi Motors has GS Yuasa.
What’s more, Honda is alone among those automakers in having no public plans to produce a car riding on lithium ion batteries, save its limited-edition FCX Clarity fuel cell sedan.
The technology is simply too immature to commit, says Honda CEO Takeo Fukui.
Any one of those battery joint ventures could end up the front-runner, so why commit now? Plus, safety concerns remain about lithium ion batteries overheating and catching fire.
Proponents of Honda’s green-car approach say it parallels the company’s earlier dismissal of full-sized pickups and V-8 engines. The automaker is prudent, conservative and focused on cost containment and fuel efficiency. The driving question is what is doable with the resources available.
“They are remarkably consistent,” says JPMorgan’s Nakanishi. “I think it’s a very successful approach.”
Yet even for Honda, there are plenty of potential pitfalls.
Its pursuit of small hybrids may yield only limited returns. Small cars, such as the Fit, already get excellent mileage–35 mpg on the highway and 28 in the city. So will budget-conscious drivers want to pay a hybrid premium for fuel efficiency that might only be marginally better?
Omotoso of J.D. Power thinks they might, if Honda reduces the hybrid premium to about $1,250 instead of a gap of $10,000 for hybrids using lithium ion batteries.
Still, Honda’s cautious attitude toward electric cars and lithium ion batteries could relegate it to an also-ran if someone else makes a breakthrough in these technologies.
The company already is playing catch-up in the hybrid race with Toyota and can ill-afford another first-mover stumble.
Honda easily could find itself pinched for sourcing if supply gets tight and it has to rely on a competitor’s joint venture for lithium ion batteries, one of the car’s most important components.
“Honda could well be at a distinct disadvantage,” says Michael Wynn-Williams, a Japanese auto industry analyst at Global Insight. “Honda offers a lot of models that are designed for the urban environment and so could lose out to the growth in electric vehicles.”
R&D chief Kato is unfazed. Honda has the technological and engineering firepower to roll out almost any vehicle to match the market, be it electric, hybrid, diesel, or fuel cell, he says.
And after years of booking record profits, Honda certainly has the money to back it up. The automaker spent 587.9 billion yen ($5.49 billion) on research and development last year and plans to boost that 4.6 percent to 615 billion yen ($5.75 billion) this year. The outlay is more than double that of a decade ago, when a much smaller Honda was debating V-8s and pickups.
Meanwhile, Honda will stick to affordable, fuel-efficient cars.
“Some manufacturers are going full steam ahead with electric vehicles and/or plug-ins to counter their image as producers of gas-guzzling vehicles,” says Omotoso. “Desperate times call for desperate measures, but Honda isn’t desperate.”