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A Car Is Born


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A CAR IS BORN

On Feb. 20, 1991, Honda Motor Co. President Nobuhiko Kawamoto slipped across Tokyo in his chauffeured black Legend to meet with a living legend--Soichiro Honda, the company's 84-year-old founder. Honda was the technical wizard with a motorcycle shop and a stubborn streak who had become a folk hero in Japan. Defying powerful government bureaucrats who wanted to restrict the number of Japanese auto makers, Honda broke into the car business in 1963 and built Japan's most innovative car company. He lured top talent from rivals, spurred engine advances with mottos such as "success is 99% failure," and led large group meetings, dubbed waigaya, in which decisions were made on everything from styling to growth strategies. The man inspired generations of bright-eyed gear heads who dreamed of designing sports cars. One of them was Kawamoto.

That's why Kawamoto, then 54 and president for all of eight months, wanted his idol's blessing for what he was about to do. Well before competitors had an inkling that the coming recession would devastate their sales, Kawamoto sensed trouble inside his company. A 10% cost overrun on the just completed 1990 Accord showed that Honda's cherished engineering culture was out of control. Waigaya also bogged things down now that the company, though still a niche marketer in Japan, had 85,500 employees worldwide and sales of $42 billion. At Mr. Honda's office, Kawamoto bowed, sat down, and got to the point. "Not everything you taught is right for the future," he said. "From here on, I will do things that may not be agreeable to you. Please allow me." Honda swallowed. Then he nodded.

NO DISGUISES. With that, Kawamoto launched the most wrenching realignment in Honda's history. Ditching waigaya, he and two top deputies began ruling by fiat. He divided the company by product lines so the robust motorcycle and power-equipment groups wouldn't disguise trouble in cars. Kawamoto himself took over autos, now 75% of Honda's sales. He reined in Honda's free-spirited engineers, even though he had once been one, and pulled out of Formula One racing--the testing ground for Honda engines where his career had started. Most important, Kawamoto directed an all-out attack on costs on the new car that would largely determine the company's U.S. success through the 1990s. "We were a company run by inspiration," says Takeomi Miyoshi, president of Honda R&D Europe. "We are switching to logic and reasoning."

Now comes the day of reckoning. The 1994 Accord--the first U.S.-bound car developed with Honda's new approach--will hit showrooms on Sept. 9, and already the industry is abuzz. Even as rivals switch to bigger and pricier midsize cars, Honda is staying with a compact Accord. The four-cylinder sedan is sportier than its boxy predecessor--though cautiously so to still play to the Accord's traditional baby-boomer customers. The car is safer, with dual air bags and beefed-up door beams. An optional version of the 2.2 liter engine boosts fuel economy by 20%. "Spectacular," says DRI/McGraw-Hill auto analyst Bernard G. Campbell. "It's the smoothest, quietest, most expensive-feeling four-cylinder engine I've ever experienced."

Best of all, it's affordable. Thanks to penny-pinching where it doesn't show--more than 50% of its parts by value are from the 1990 Accord or the Civic--the new Accord will be priced roughly the same as its predecessor, starting at $14,330. "This car at this price is going to slow the perception that the Big Three are back," argues Jack Kirnan, auto analyst for Salomon Brothers Inc.

For Honda's sake, he had better be right. The Accord was America's best-selling car from 1989 to 1991. Then competitors weighed in: the Toyota Camry, Nissan Altima, and Chrysler LH sedans. In a flurry of incentives and fleet sales, Ford Motor Co.'s redesigned Taurus took the 1992 sales title last December, winning by 8,820 cars. Through July, the Accord's sales were down 27.3%, to 165,534, while the Taurus slipped only 4.7%, to 200,928. Tomoyuki Sugiyama, chief of the '94 Accord development team, downplays pressure to reclaim the title. Yet he code-named his baby CY, for car of the year.

SURVIVAL TEST. Much more than bragging rights hinge on the new Accord's popularity. All Japanese carmakers are hurting--even mighty Toyota Motor Corp. expects operating losses this year. But Honda--an also-ran in Japan, where it ranks fourth with a 8.4% market share--is especially vulnerable. It missed the booming minivan market, and though its Acura brand was the first Japanese luxury-car line in the U.S., Toyota's Lexus and Nissan Motor Co.'s Infiniti have captured much of that lucrative business. Of Honda's $14 billion in U.S. sales, more than 50% come from Accord sedans, coupes, and wagons. So as the old Accord slipped and the dollar plunged vs. the yen, Honda's profits slumped 41% in the year ended in March, then 62% in the June quarter, when it took a 25-billion-yen hit in currency losses. Kleinwort Benson International Inc. auto analyst Steve Usher thinks Honda will post its first operating loss this quarter. "If this car fails, we won't survive," says Kawamoto.

While that's unlikely, the Accord will prove the wisdom or folly of his reorganization. More than with any previous model, American design, production, and marketing ingenuity had a hand in bringing this Honda to life. And Honda's pampered Japanese engineers learned, many for the first time, how to cooperate with other parts of the company. Both are important now that the fiercely independent but cash-strapped company realizes it can expand overseas only with the help of partners such as Britain's Rover Group Ltd. and South Korea's Daewoo Corp. "The CY development was like a trial run in learning how to work more intricately with international partners," says Executive Vice-President Yoshihide Munekuni.

The '94 Accord will also foreshadow how well Japanese carmakers can rebound against Detroit. After decades of steady growth in which there was always some new market to conquer or a misstep by the U.S. Big Three to exploit, the Japanese have hit a wall. Japan's home market has reached saturation. Europe is increasingly protectionist, and Detroit has fought back with quality products such as the Taurus and General Motors Corp.'s Saturn. No longer able to count on sheer volume for profit, Japan is cutting costs. "From now on, every Japanese product launch will reflect these efforts," says Kleinwort Benson's Usher.

"ROUGH STARTUP." The story of the '94 Accord begins in September, 1989, just after the 1990 model went public. Sugiyama assembled a core team of some 20 engineers to conceptualize the next generation. And though the 1990 model was striking gold, the need for drastic changes was obvious. Despite its ho-hum styling, the '90 had cost a mint. A switch from a cast-iron engine block to an aluminum one plus other changes required new assembly lines and caused glitches galore. "We had a rough startup," recalls Al Traucht, associate chief engineer of the New Model Center at Honda's Marysville (Ohio) plant. In fact, while the company's sales in 1990's first quarter jumped 24.1%, net income rose only 8.9%. So the '94 team set basic objectives: Hold total spending level with the 1990 Accord. Cut new equipment investment in half. Carry over 50% of the parts--and anchor the price.

The '90 offered another lesson: Making one world car may be impossible. To preserve Honda's American image as a maker of well-engineered family cars, project chief Miyoshi hadn't changed styling much on the '90 model. Yet R&D, anxious to bolster Honda's sportier image in Japan, had come up with a spiffy five-cylinder engine. Debates raged over whether to sell the same Accord in all markets and what it should look like. Time ran out, and Honda ended up wasting millions by throwing money at two completely different cars. The Accord, heralded as a world car, sold poorly in Japan, and the Acura Vigor, with the five-cylinder engine, flopped in the U.S.

Sugiyama was determined to avoid such waste on the '94 model. But he also didn't want to churn out just another cheap car. "Value for money" became the CY mantra. The values he stressed were safety, in the form of air bags and a stronger body, and the environment--improved fuel efficiency. Honda executives felt they sold 400,000 Accords a year in the U.S. because their customers prized good fuel economy. So Honda stayed with four cylinders, even though most competitors offer V-6s. Top-end 1994 EX models will have a more powerful four-cylinder engine that uses an advanced design--adapted from Formula One racing--to match the acceleration of a V-6 and best it in fuel economy.

That decision also reflected Honda's limited resources. Executives opted to launch the two-door version weeks after the '94 sedan, followed by a wagon within three months. This meant Honda couldn't afford to offer a V-6 until the '95 model. Some sales staffers had even considered delaying the entire car for a year. But senior executives vetoed that, since Toyota and Chrysler were aiming at the Accord with the Camry and LH Sedan. "Right now, everybody's real glad that we had the new car ready when we did," says Scott N. Whitlock, executive vice-president of Honda of America Manufacturing Inc. in Marysville.

AGING DRIVERS. Styling for the CY was another tough call. "Many of us thought the '90 Accord was too conservative," says Thomas G. Elliott, executive vice-president at American Honda Motor Co., the U.S. sales group. Honda was also watching the average age of Accord buyers climb--to 44.5 years for the '90 model from 40 for the '86--while their average income jumped from $47,000 to $55,000. The team fretted that if the trend persisted, Honda would be making family cars for people who no longer needed them. It also thought family incomes would climb more slowly than in the '80s, making price more important. So Honda aimed the 1994 model at a younger market--40 years old for the sedan and 35 for the coupe. "With the CY, we knew there had to be a revolutionary change," says Elliott, who joined Honda fresh out of college in 1970, three months after the company began selling cars in the U.S. "We wanted more contemporary styling, especially for the two-door coupe."

In June, 1990, Honda kicked off the CY project with a meeting of more than 100 people--and for the first time included key U.S. and European players. At the Hotel Urashima, Sugiyama laid out his development priorities and Whitlock, a former lawyer who had run Marysville since 1985, said his plant needed strong early communication with Japan to avoid the problems of the previous model. Then the U.S. design team unexpectedly presented a color slide show and video of their concept. "Those guys are always surprising us," says Koichi Hirata, chief designer at Honda's studio in Wako, near Tokyo.

An intense rivalry soon developed among Honda's four design studios. Each picked an image to set the theme for its entry, submitted sketches in July, then returned to Wako with a quarter-scale model in September. The Americans--using a shark theme--came up with an aggressive car with dramatically tapering sides and no grille. Ichiro Yamaguchi of the European team says a cheetah inspired its design's narrow band of windows on a wedge-shaped body. Hirata's team started with a shooting star image but quickly changed to an American bald eagle--to express a winglike shoulder, or bulge, sweeping along the sides of the car. Hirata also acknowledges that he modified his design after seeing the U.S. team's sketches.

The final design meeting was held on Dec. 18, 1990, at the Wako research grounds. Each group leader presented his $300,000 full-scale mock-up. Sugiyama felt the U.S. offering was too similar to other cars; Miyoshi found the shark imagery too aggressive, too American. "We don't want a car with American taste, we want Honda taste well-fitted to the American market," says Miyoshi. They huddled, then Hiroshi Zaima, the Wako studio chief, pronounced Hirata's look the winner. The CY's styling had been decided--a year earlier in the cycle than with the '90 Accord.

TWEAKING. The production side got an early start, too. In August, 1990, the first of nearly 60 production engineers and their families came to Japan to make sure designers paid as much attention to the manufacturing needs of the Marysville assembly plant and the Anna (Ohio) engine factory as they did to Japan's Sayama assembly plant and Wako engine factory (page 68). It was one of the biggest technical exchange programs ever by a Japanese company. White-coveralled American "associates," as Honda calls employees, toted three-inch-thick binders stuffed with more than 1,000 suggestions from their colleagues.

Some were minor tweaks. Marysville proposed a new design for the 48 plastic clips that attach rubber sealing around doors. It avoided sore fingers for line workers by requiring only one-eighth the previous pressure to install. Other suggestions held down costs. Michael Jett's engine team from Anna intervened when Japanese designers blithely eliminated a bracket on top of the engine. In Marysville's overhead-rack system, the bracket was used to transport the engine through the assembly process. A change would have cost thousands of dollars, so Jett's team persuaded the designers to leave the bracket on.

Sometimes, the Japanese and Americans agreed to disagree. Designers at Wako wanted to save money by using the same aluminum case on the Accord that holds the automatic transmission's torque converter on a Prelude. But Anna's engineers figured it would run them $800,000 for new dies to cast the case and $66,000 in new cutting tools to machine it. They proposed minor changes to the '90 casing, using existing equipment. So the Accord will have two different cases. By the same token, cost dictated building the optional V-6 in Wako, where Honda assembles a similar engine for the Legend. That could be done for $2 million in extra tooling--vs. $50 million for a new line at Anna.

The CY's designers also were more influenced than ever before by the skills of their suppliers. In the summer of 1990, Honda sent engineers to 33 key subcontractors in Japan and 28 in the U.S., which together make parts that represent 60% to 70% of the car's value. In the U.S., this led to Rockwell International Corp. redesigning the rear cargo area of the wagon to add storage. "Instead of saying 'Here's the design,' we used theirs," says James C. Wehrman, Marysville's purchasing manager.

Each part also had to pass a grilling by senior engineers on the newly created Value Engineering Evolution Team (VEET). Why this shape? Why this material? Only after this ordeal could a designer sketch a prototype part. Both the supplier visits and the VEET drill took extra time. But by driving down the cost of each component, the process held procurement costs flat vs. the typical 10% increase for a model change. The process also slashed postprototype design changes by 20% vs. the '90 model.

Japanese carmakers are under heavy political pressure to buy more American-manufactured parts, so Honda made that a top priority. It says the local content of the new Accord will be 73% measured under new, stricter U.S.

rules. That wasn't easy to reach. After evaluating U.S. sunroof suppliers, Honda chose ASC Inc. of Southgate, Mich. But nearly all its factories were in South Korea. So Honda persuaded ASC to build a $5 million factory in Columbus, Ohio, and muscled Yachio, its current supplier in Japan, into providing factory tours and selling some equipment to its new

competitor.

SUITS AND TIES. As the CY took shape, Honda's troubles grew. In March, 1992, the company posted its third straight annual profit decline. And 1992 unit sales dropped 10.3% in Japan and 4.3% in the U.S. Kawamoto restructured further by splitting the company into four geographic regions--North America, Europe, Japan, and other markets--as the first step toward greater local autonomy. In Japan, he began shifting from automatic, seniority-based pay raises to a largely merit-based system--progressive management, maybe, but also a way to hold down payroll. A key management loss caused added pain. Executive Vice-President Shoichiro Irimajiri resigned abruptly in March, officially for health reasons, though he then moved to video-game maker Sega Enterprises Ltd. "It took me two months to recover from his departure," confesses Kawamoto.

The rest of the Japanese industry was also slipping into crisis. Companies that once churned out 87 steering-wheel choices for one model slashed options. They also tried to standardize parts. Honda had been one of the worst culprits because its engineers had so much freedom. So Kawamoto co-opted the top engineers, bringing them into headquarters where they report to him. Wearing suits and ties instead of white overalls, they keep their R&D colleagues in check and eliminate duplicate work among the Civic, Prelude, Legend, and other teams.

Through all this turmoil, Kawamoto kept an eagle eye on the CY. Hirata's rendering of side windows with no center pillar had been dropped. But Kawamoto was keen on the look. Finally, the rejected section was retrieved from a scrap heap and slapped back on the model to prove the designers right. During many visits to Tokyo, American marketer Elliott persuaded designers to change the shape of the car's headlamps and taillights and to retain folding side mirrors rather than using cheaper fixed ones. He also lobbied successfully for protective side molding, which the designers wanted to do without.

Inevitably, the efforts to balance fuel efficiency, safety, and aerodynamics clashed. To save weight, the engine team designed a new, lighter subframe to support the motor. But it pushed the engine slightly higher, and Hirata's hood wouldn't shut. In meeting after meeting, he defended his low front on styling grounds. But Wako's Watanabe argued that the CY needed the frame to help pare 127 pounds off the car to allow for added safety equipment. After more than three months, Hirata gave in.

Then one snowy day in March, 1992, Kawamoto took the first running prototype for a spin at a test track north of Tokyo. Seeing it outside, something bothered him. The nose, he decided, was too low and flat to balance with the body and needed to be thickened or the car would appear to tip forward. "Styling is the expression of our company," says Kawamoto. "In a time of confusion, I make the final design decisions." Sugiyama was horrified. "You saw it 10 times, why didn't you notice it before?" he recalls muttering. The cost wasn't much. But when a leader who espouses early decisions and tight schedules contradicts himself, morale suffers. "We lost our spirit," says Sugiyama. "They were furious at me," concedes Kawamoto.

GRILLE WORK. For two weeks, Hirata resculpted the clay model. Elliott jetted over to look. Marysville fretted over the specter of delays. Yet once the key players had gathered, "we all agreed he was right," says Hiroshi Kuroda, then deputy project leader of design. So they raised the hood by three-quarters of an inch and made the grille a quarter-inch taller. Test-track engineers had also found that the engine overheated--but that was solved with the larger grille. All told, factory managers had lost a month reprogramming machine tools, which threatened to delay production.

Trouble also erupted in the body group. Marketing staffers argued that the upper rear corner on the sedan's back door angled down too sharply, so passengers brushed their heads. Designers clung to the steeply slanted line for its sporty look. But after a year of haggling and studying rivals, they relented. With just eight months to go until manufacturing began--far later in the process than normal for such a change--they lifted the top of the door by three-quarters of an inch. It cost only $40,000 in machine-tool reprogramming. In fact, Kuroda says he used less than half his $14 million design-change budget for the CY.

TOO COMFY. By November, 1992, prototypes were running from Los Angeles to Denver and from Death Valley to Las Vegas. Elliott took the wheel and said the CY had more the sluggish feel of a U.S. car than the crisp response of a Honda. In balancing the appeal to younger and older drivers, Honda had leaned "too much toward comfort instead of handling." Engineers scrambled to fine-tune the suspension. Kawamoto then stole through Los Angeles streets at night during a prototype test last March to make sure the CY handled right.

By then, the pressure on Honda was excruciating. Accord sales had plunged once Taurus-fighting incentives of $1,000 were removed. Honda advanced the sedan's production start by a week to Aug. 24. It pulled the coupe launch ahead by a month, to Oct. 1.

Next, Kawamoto hopes to apply the lessons learned from '94 Accord to a version made for Europe and possibly an Asian model. Given Honda's limited resources, he'll also likely strike new partnerships, such as a deal announced last December, to sell sport-utility vehicles built by Isuzu Motors Ltd. in the U.S. in 1994 under the Honda name. Managing such ventures is just one of his challenges. As Kawamoto charts a course into the 21st century, he must also beware of extinguishing the creative spirit that has sustained Honda for so long.

And he has to do it without the loyalty commanded by Soichiro Honda, whose charisma inspired streams of Honda employees and owners to lay flowers and gifts outside his home at his death two years ago. Still, by renovating the company, Kawamoto is in a way following the founder's precepts. "I rejected Mr. Honda's way, but that is the Honda spirit," he says. With new Accords on their way to dealers, he is about to discover how well his way works.THE 1994 ACCORD: FROM DRAWING BAORD TO SHOWROOM

1989 SEPTEMBER As the 1990 Accord is launched, a concept team in Japan begins

brainstorming for the next full-model change, scheduled for model-year 1994.

1990 JUNE Nobuhiko Kawa-moto takes over as Honda's president. For the first

time, American and European engineers and marketers are flown to Tokyo to help

with early-stage planning for the new model.

AUGUST Nearly 60 American production engineers and their families begin

moving to Japan for two- to three-year stints working with development

engineers at Honda's Sayama assembly and Wako engine plants in Japan. They're

to make sure each part can be easily and cheaply manufactured at Honda's plants

in Ohio.

DECEMBER The Japanese auto market begins a three-year slide. After a contest

among Honda's studios in Japan, the U.S., and Europe, top Honda stylists choose

the 1994 Accord's design. An entry from the Wako studio beats out the designs

from the U.S. and Europe.

1991 MARCH Faced with disappointing sales and surging costs, Kawamoto

radically restructures Honda and takes personal control of auto operations.

DECEMBER For the third year in a row, the Accord is America's best-selling

car.

1992 MARCH Kawamoto drives the first '94 Accord prototype and asks for

changes in styling: a raised hood and taller grille. A test run shows that the

engine overheats.

SEPTEMBER To save money, Honda decides to pull out of Formula One racing,

which it had used to hone many engine advances

DECEMBER Ford's Taurus breaks the Accord's run as the top-selling car in

America.

1993 JANUARY Accord sales plunge after Honda removes $1,000 dealer rebates

it had used to battle Ford.

JUNE Honda's profits slump 62% at the close of its first fiscal quarter, and

the company predicts an additional 40% drop for the year ending in March, 1994.

SEPT. 9 The 1994 Accord will hit the showrooms.

DATA: BUSINESS WEEK

Karen Lowry Miller in Tokyo, with Larry Armstrong in Los Angeles and David Woodruff in Marysville, Ohio


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