Honda Takes a Big Gamble, Races to Front of the Pack

Everybody knows that Hondas have been popular for years among upscale baby-boomers, the small but influential group of affluent young adults who have been assured, mostly by word-of-mouth, of the correctness of the cars’ styling and of their rock-solid quality.

But now, Honda’s once-obscure cult has flowered into a full-fledged mass movement. A relatively minor player in the Japanese home market, Honda has suddenly become the No. 1 Japanese nameplate in America.

Traditionally a distant third among the Japanese car makers in the United States, Honda took over Japanese leadership in the world’s richest auto market from perennial leader Toyota during the first three months of 1985, after having leapfrogged No. 2 Nissan in 1984, when Honda’s sales rose 26.8% above the year before. Honda’s 872 dealers are each selling an average of nearly 100 more cars a year than Toyota’s 1,085 dealers, and Honda’s dealer network now leads the entire auto industry in sales per outlet.

Even though Honda is now selling more than 500,000 cars here each year, the baby-boomers still can’t get enough. Dealers can’t keep them in stock, and consumers continue to pay high premiums over list price for the privilege of owning anything with wheels and a Honda badge.

Honda’s success in its upscale markets with its lineup of Accord and Prelude compacts and Civic subcompact models has been so remarkable that it has prompted at least one jealous Ford Motor official to grouse that only “lemming, follow-the-crowd yuppies buy the Accord.” He grumbles further that the sporty Prelude is the favorite among “yuppie feminists who ignore the fact that one of the highest-ranking female employees of Honda in Japan is the chairman’s tea-pourer.”

Ironically, Honda has import restraints to thank for much of its success.

Honda took the lead away from Toyota in the first quarter in part because Toyota’s shipments from Japan were down, since it had already imported most of the cars it was allowed for the quota period. But Honda’s imports were down, too; the company has taken over the top spot only because it is now building cars in the United States that are free from import barriers, and Toyota is not.

While both Toyota and Nissan worried over the possibility of locking themselves into high-cost, low-quality production facilities here and for years put off making a decision on whether to open U.S. auto assembly plants, Honda quickly took the plunge and became the first Japanese auto maker to build cars in the United States when it began Accord production in Marysville, Ohio, in November, 1982.

Analysts note that Honda has long been more internationally-minded than either Toyota or Nissan, because its weak position in the Japanese market has forced the company to emphasize exports.

“While its competitors concentrated more of their efforts on the Japanese home market, Honda realized that it had more to gain in the United States than in Japan, where it was difficult for the smaller firms to make inroads against Toyota and Nissan,” says David Power, founder of J. D. Power & Associates, which specializes in automotive research. “So its management focused a great deal of its attention here,” and quickly saw the need for domestic production, Power adds.

Much to the chagrin of its Japanese rivals, Honda has since pulled off the surprising coup of convincing its traditional, import-oriented buyers that Honda’s new American-built Accords are just as good as its Japanese models. A recent survey by J. D. Power found that owners of the domestic Accords were more pleased with their cars than those who owned imported models. In 1984, Honda sold 133,000 domestic Accords, compared with 123,000 of the imported version.

Helps Avoid Comparisons

(Honda’s strategy of selling only imported Accords west of the Mississippi River and domestics only in the East has helped, avoiding the problem of side-by-side comparisons by customers.)

Honda also has won over new domestic-oriented buyers in the industrial Midwest, where many consumers are attracted to Ohio-built Accords because they seem to be “guilt-free” Japanese cars--import-like models that don’t cost American jobs. One Honda dealership in the Detroit area even offers free “Made in the U.S.A.” window stickers for its Accord buyers who want to avoid controversy in the capital of the domestic industry.

“I think we have gotten plus-business in the Midwest from some customers who wouldn’t have considered us if we didn’t have a domestic car,” notes Tom Elliott, Honda’s vice president for U.S. automotive operations.

Overall consumer acceptance of Honda products has also risen; in J. D. Power’s 1984 survey of customer satisfaction with their new cars, Honda took over third place among all makes, behind only Mercedes-Benz and Subaru, while Toyota slipped to fifth from third place the year before.

With its domestic source of hot cars, unrestricted by quotas on Japanese imports, Honda has been able over the last two years to make dramatic gains in its U.S. sales and market share at a time when its Japanese competitors have continued to face the limitations imposed by import restrictions.

Mid-Size Standard

“There has been a really high demand for their products, especially for the Accord--it is the standard by which other cars in its mid-size segment are measured,” says Brad Hontz, automotive analyst at Ward’s Research in Media, Pa. “And with the addition of domestic production, the Accord has been able to take sales away from similar products from Toyota and Nissan.”

As a result, Honda’s early gamble on U.S. production is paying royal dividends. Not only is it the No. 1 Japanese company here, despite the fact that both Toyota and Nissan have received larger car allotments under the Japanese quota system, but it has also become the fourth-largest domestic manufacturer, selling nearly as many American-built cars each year as American Motors and Volkswagen of America combined. Now, the majority of Honda’s worldwide earnings, which totalled $409.3 million last year, come from the U.S. market, a company spokesman says.

“The bet on U.S. production has made them a great deal of money, and increased their market share here, which they couldn’t have done otherwise,” notes Donald De Scenza, automotive analyst with Nomura Securities, a Japanese investment firm.

And even though formal quotas were effectively lifted last month, the threat of protectionism remains strong in the United States, and the Japanese government is continuing to put some limits on auto exports. So Honda’s Ohio plant will continue to provide the company with production flexibility and a hedge against the possibility that stricter quotas will return during the next American recession.

Scrambling to Follow

The rest of the Japanese are now scrambling to follow Honda’s lead. The first U.S.-built Nissan Sentra subcompact rolled off the line in Nissan’s Tennessee plant earlier this spring, and Mazda is building a car plant outside Detroit. Mitsubishi dealers will be getting American-built cars in time for the 1989 model year from the company’s new joint venture with Chrysler. A production site for the Mitsubishi-Chrysler venture has yet to be selected.

Those projects could leave Toyota as the only major Japanese company without an American source of cars, since it doesn’t receive any from its U.S. joint venture with General Motors. All the output of that plant will be used by Chevrolet. That worries Toyota’s American officials. A spokesman says Robert McCurry, head of Toyota’s U.S. marketing operations, recently warned Toyota officials in Japan that the company might permanently lose its leadership position in the American market to Honda unless it builds a plant in the United States. The company is reportedly in the process of studying whether to build a facility here.

But it could be tough for Toyota or Nissan to dislodge Honda from its new perch. The U.S.-built Honda Accord, just two years after its introduction, is already the 12th-best-selling domestic model, while the Japanese-built Accord is the third-best-selling import nationwide and the best-selling car of any kind in California. Honda’s smaller Civic subcompact, including the hot CRX model, has become the top-selling import nationwide this year, and the company hopes that the Civic will become even more dominant when Honda expands its Ohio plant to add Civic production in 1986. Eventually, the Ohio plant will be building 150,000 Accords and another 150,000 Civics annually.

Developing Another Line

Honda is about to get even bigger. The company is in the midst of developing a second car line, called Acura, with a separate dealer network that will sell two new Japanese-built models--the Integra, a performance coupe, and an “executive” luxury sedan code-named the HX-- beginning in April, 1986. Honda, which sees Acura as a means of invading the affluent market still dominated by the Europeans, will start with 50 Acura dealers, all of whom will be chosen from the ranks of Honda’s existing dealer network. The firm hopes to sell 45,000 Acura models by the end of 1986. Eventually, Honda plans on having 600 Acura dealers nationwide.

Power and other analysts believe that the decision to move upscale with the new Acura line will help insulate Honda from the volatility of the subcompact market, which is bound to become more competitive, because the South Koreans are about to enter the U.S. small-car market and because Japan has decided to increase exports to the United States by nearly 25% over the next year, allowing many of the smaller Japanese firms to increase their sales here.

“I think Honda can maintain its sales leadership here as it moves upscale, because Nissan and Toyota stand to lose more sales to the smaller Japanese companies” and to the Koreans, Power said.

But Honda officials aren’t quite as confident. Elliott notes that Honda’s position could hinge on how the increased exports will be allotted among the major companies by the Japanese government in the coming year. Japanese press reports indicate that Honda will receive a slightly larger increase in its allotment than either Toyota or Nissan, but will still be relegated to the third spot in total volume.

At the same time, Elliott worries that Nissan, with its new U.S. car production, might challenge Honda’s position. But even if Honda eventually loses its top ranking, Elliott says, “I think we can at least hold onto No. 2.”