The Honda Today - Case Analysis

Introduction

Honda Motor Company, Ltd. enjoyed a 13 % market share of the micromini vehicle market in 1988 with its Honda Today. Now that the vehicle has just been totally redesigned, there is word of tax changes that would drastically affect the micromini market and Masami Kamimura, the Large Project Leader (LPL) of Honda’s Today team is faced with a decision. What should Honda do to keep the Today competitive in this soon-to-change market?

The "Honda Way"

The "Honda Way" is what made a small manufacturing company of engine-powered bicycles to become one of the largest engine manufacturers in the world. Honda, the man and the company, "believes that the primary method of communicating Honda’s philosophy was through their products. Honda engineers were particularly proud of their accomplishments in engine development, as well as in elegance and efficiency of interior and exterior design."

Honda development teams were decidedly different from their competitors, which may contribute to Honda’s success. Throughout most automobile companies, engineers tended to stick with their specialty and spread their talents across several different automobiles’ developments. By contrast, at Honda development teams were independent and focused organizational units; that is, a team of engineers was dedicated to the development of a new car model. This means that each engineer stayed within their specialty, but didn’t migrate between projects.

In addition, while other industry competitors believed that the simultaneous design of a new engine and a new car was too risky, and thus tended to introduce new cars with old engines or vice versa, Honda engineers felt each new car deserved a new engine. Only by refining, reoptimizing, or totally redesigning the engine could the engineers achieve a coherent match between the body, chassis, and engine. Additionally, Honda engineers believed that only through such coherence could they realize the vehicle’s true character.

The Micromini Car Market in Japan

The micromini car, one whose engine’s displacement is less than 550 cubic centimeters, made up 4.1 % of Japan’s automobile market, the world’s second largest. Japan’s Ministry of Transportation set specifications that defined each of the car categories, of which the micromini was the smallest. Microminis were exempt from some parking restrictions and benefited from current tax laws. In the tax reform package passed in November 1988, for example, the new sales tax on microminis was 3 %, while sales on all other cars were taxed at 6 %.

Experts felt that two considerations particularly influenced purchasing decisions in the micromini market. First, the cars had to be practical. Second, cost was considered crucial, since many of the automobiles were purchased as second cars to provide basic transportation.

The Honda Today

The Honda Today was introduced in September 1985, in advertising, Honda consistently described the Today’s elegance and sophistication: the car was often described as "simple beauty" in newspaper ads and television commercials. The Today also projected a more serious and urban image than that of its competitors. The concept and design of the Today was unusual for a micromini. In contrast with competitor models, it had a relatively low and streamlined body configuration. While not as tall as other microminis, the Today did not sacrifice roominess. Honda engineers had managed to design the car layout so efficiently that its interior offered almost as much space as competitors models. This had been described in the automotive press as a major breakthrough. The only major drawback of the Today was its mere two-cylinder engine.

In January 1988, Honda introduced a new version of the Today which exhibited updated exterior styling and a new, three-cylinder engine. This significant effort and expense of this redesign took about three and a half years and was considered a major development program by the company. The production process for the new design had been largely redesigned and equipped, involving a large capital investment, in excess of 5 billion yen. However, one week after the introduction of the new Today, rumors of the government’s planned tax change circulated; two weeks later, the Japanese Automobile Manufacturers Association (JAMA) task force was formed to study the impact the tax change would have on the micromini market and to consider the changes in the micromini specifications that it would recommend to the Ministry of Transportation.

The Tax Changes

The proposed government tax changes would result in a JAMA recommendation to the MOT to redefine the specifications for a micromini vehicle. These specifications were expected to include an increase in engine size and an increase in overall vehicle length. Kamimura received news that the JAMA recommendation was to increase the engine displacement in the range of 650 to 690 cc, and an increase in overall length of 50 to 100 mm. In order for the Today to compete in the changing market, its design would have to be changed again to put it closer to the extreme of the specification, since Honda expected its competitors to do the same. The release of the new classification of microminis will be released as close to the date the new tax laws take effect and in order for Honda to keep its market share, the Today has to be one of those releases.

The Today’s Options

The Honda Today needs to have its engine displacement increased to 660 cc and Kamimura has four options that will accomplish this:

increase the cylinder stroke length,
increase the cylinder bore, or diameter,
increase both the stroke and bore,
redesign the engine entirely;

and Honda’s president, Tadashi Kume, and Managing Director, Nobuhiko Mawamoto, are counting on him to "once again make a good choice." Each of the choices is described below, the next section explains the repercussions of each.

Increase the stroke length

Expanding the cylinder stroke involves changing the height of the cylinder block. This would be accomplished by redesigning part of the engine block casting as well as a few other engine parts, with an approximate investment of 1.5 billion yen in new tooling.

Increasing the cylinder bore

Expanding the cylinder bore is the easiest and cheapest option, it would involve relatively minor tooling changes in the machining process, but not changes in the engine castings. The approximate retooling cost for this change would be about 500 million yen.

Increasing both the stroke and bore

This option would involve the costs of both previous options plus the added design challenge and risk of changing two major design parameters in a single effort.

Redesign the engine entirely

This option would involve an increase in the engine block width and is quite expensive since it would involve a completely new casting design for the engine block as well as a change in the cylinder pitch. The total investment is estimated to be greater than 5 billion yen.

Decision Considerations

There are several important considerations that Kamimura must make while thinking of his decision, not the least of which is cost. Honda just spent 5 billion yen revamping the Today for its January 1988 introduction and may not be prepared to spend another 1.5 to 5 billion yen to redo all of that work. These values, when compared to the 1987 sales of the Today, which were 100,660, should be totally out of the question. Granted, the Today is a close second in sales with a 22 % share of the Japanese market, but there is no way that the expected return on investment could justify such spending. The Honda Today, like all micromini vehicles, is first and foremost an economical car and Honda cannot afford to make any redesign decisions that might force them to increase the sticker price of the car.

There is also the consideration of engineering talent. Since the "Honda Way" prevents engineers from working on multiple projects, the Today would have to keep its very talented engine design engineers on the project for at least another year if the engine is to be redesigned. This would prevent them from going to "other projects that promised greater returns to the corporation." This could impact not only the bottom line for the Today, but also some of the other models that Honda might have on the drawing board, just waiting for the engineers to be released from their current projects.

Last but not least is the deadline that the Today must meet. If the Honda Today is not released with the specified 660 cc engine close to the date the new tax laws and vehicle specifications go into effect, Honda could lose some of the ever-increasing micromini market share and perhaps tarnish its image for future models. By choosing an inexpensive and simple method of increasing the engine displacement, Kamimura would all but guarantee that the new Today would be ready on time for the change in tax laws.

Recommendations

Even though it is possible that some of Honda’s competition would go through the process of engine redesign, those competitors may not have just spent 5 billion yen on a major undertaking for their micromini vehicles. For this reason, I feel that Kamimura should keep whatever engineering talent is needed to perform the "minor tooling changes in the machining process" to increase the cylinder bore in order to increase the engine displacement to 660 cubic centimeters. Even though this decision is contrary to Honda’s usual policy of introducing a new engine with a new car, the 660 cc Today could be treated as a derivative of the 550 cc model released earlier that year and thus would not be considered a new model.

Increasing the cylinder bore diameter would change the stroke/bore ratio from 0.95 to 0.87 which would lower the fuel economy slightly, but increase the horsepower. This increased horsepower could be a partial selling point for the Today, which is a consideration that has previously been thought of as being secondary. Releasing the engineering talent to other projects would be better for the company, overall, and would display Kamimura’s commitment to Honda, and not just the Today.