MBA Strategic Management 24H Case Study - Honda - Jan 12

8/12/2019 MBA Strategic Management 24H Case Study - Honda - Jan 12

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Minyi Huang prepared this case under the supervision of Professor Ali Farhoomand for class discussion. This case is notintended to show effective or ineffective handling of decision or business processes.

© 2010 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced ortransmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the

internet)—without the permission of The University of Hong Kong.

Ref. 09/404C

ALI FARHOOMAND

HONDA: INNOVATION THE CHINESE WAY

Do not imitate others.

- Soichiro Honda, founder of the Honda Motor Group

Honda Motor Group (Honda) had always regarded innovation as the key to success. On 19July 2007, Guangzhou Honda, a joint venture between Honda and Guangzhou Automobile,developed Guangzhou Honda’s Research and Development Co. Ltd (“GHRD”). Unlike otherautomobile research and development (“R&D”) institutions started by multinational autocompanies in China, GHRD aimed to develop and build up the technological capabilities to

produce a completely new car from the ground up. GHRD would be responsible not only forthe styling but also the technologies employed in the new car, including core technologies thathad previously been owned solely by the foreign partners of auto joint ventures in China.While Honda Motor in Japan would provide technological support, the core technologieswould be owned solely by Guangzhou Honda. This arrangement differed from the traditionalR&D management at Honda, which, despite the existence of R&D centres around the globe,used to retain its core technologies at its R&D centre in Japan. In May 2008, GuangzhouHonda announced Li Nian as the brand name for its new car series. Given that Li Nian was

primarily manufactured for the Chinese market, should Honda change the way R&D wasmanaged in China? If so, how should GHRD be managed?

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09/404C Honda: Innovation The Chinese Way

2

The Automobile Industry in China

Market Potentials

The automobile industry was booming in China and had great market potentials. According to

Xu Changming of the Chinese State Information Centre, the Chinese automobile industry wascharacterised by rapid increases in internal demand, vehicle production, exports and imports.1

The automobile industry was a pillar industry in the Chinese economy. In 1994, the ChineseState Planning Commission issued the first industry policy to encourage the transfer oftechnology and management skills from foreign automakers to local automakers. However,there were quite a few restrictions. For example, equity participation by foreign automakerswas restricted to 50%. It also required separate sales channels for vehicles made in Chinafrom those imported from overseas, and that vehicles made by joint ventures with their owntechnology account for more than 50% of the total autos sold in China. In 2004, the newAutomotive Industry Development Policy released by the Chinese State Development andReform Commission had relaxed some of the rules, with the only exception being equity

participation. In order to raise the industry’s entry barriers, however, the commission set theminimum investment in new auto projects to about US$292 million, 2 including an R&Dorganisation with input of no less than US$73 million.3 In 2006, in accordance with China’saccession to the World Trade Organisation in 2001, China removed most tariff and non-tariff

barriers for the automotive industry.

In the same year, China overtook Japan to become the second-largest automobile market inthe world, with 7.2 million vehicles sold annually.4 Car sales in China grew 21.68% in 2007to reach 6.3 million units, following a 30.02% rise in 2006 and a 21.4% rise in 2005. 5 In thefirst half of 2008, both the production and sales of vehicles exceeded 5 million, an increase of16.71% and 18.52%, respectively.6 According to the Chinese State Information Centre, it wasestimated that China could become both the largest automobile consumer market and thelargest vehicle manufacturer in the world by 2010.7

The Consumer

With rising disposable incomes and favourable government policies, the average Chinesehousehold had replaced state-owned enterprises and government organisations as the drivingforce behind the auto purchasing spree that had begun in the late 1990s.8

1 ChinaReviewNews (9 February 2008) “China Becomes the Largest Automobile Manufacturer in 2010”,

http://zhaojun.net/doc/1005/6/5/3/100565318.html?coluid=10&kindid=259&docid=100565318&mdate=0209090244

(accessed 17 July 2008). [ (2008) “2010 ”.]2 The minimum requirement was Rmb 2 billion. Rmb 1 = US$0.146023 on 7 August 2008.

3 The minimum requirement was Rmb 500 million. Rmb 1 = US$0.146023 on 7 August 2008.

4 Auto China (2008) “China Is a Booming Market for International Investors”, http://autochina.auto-

fairs.com/en/leftnavigation/market (accessed 16 July 2008).5 Taylor, S. (11 July 2008) “Toyota’s China Sales rise 34 pct in First Half”, Reuters,

http://www.boston.com/business/articles/2008/07/12/toyotas_china_sales_rise_34_pct_in_first_half/ (accessed 21 July 2008).6 Information Department of China Association of Automobile Manufacturers (2008) “Brief on Automobile Industry Production

and Sales Situations in the First Half of 2008”, http://caam.org.cn/caam/caam.web/Detail.asp?id=3997 (accessed 15 August

2008). [ (2008) 2008,

http://caam.org.cn/caam/caam.web/Detail.asp?id=3997.]7 ChinaReviewNews (9 February 2008) “China Becomes the Largest Automobile Manufacturer in 2010”,

http://zhaojun.net/doc/1005/6/5/3/100565318.html?coluid=10&kindid=259&docid=100565318&mdate=0209090244

(accessed 17 July 2008). [ (2008) “2010 ”.]8 Adapted from Farhoomand, A., Tao, Z., Wang, I. and Lu, Y. (2005) “Shanghai Volkswagen: Time for a Radical Shift of Gears”,

Asia Case Research Centre, The University of Hong Kong.

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However, the Chinese market was highly fragmented. With 80% of Chinese auto buyersowning an automobile for the first time, their shopping habits were very different from thosein more mature automobile markets. Automobile buyers in tier-one cities such as Shanghaiand Beijing preferred sporty hatchbacks, while those living in inland, regional cities had amore traditional preference for branded automobiles.9 Experts believed the key to success wasto make an automobile that appealed not only to buyers with traditional brand associations,

but also to modern consumers looking for individuality in their cars.10

Chinese consumers’ attitudes towards purchasing automobiles were also changing. Speakingat the Economist’s China Automotive Industry Leaders Roundtable in Shanghai in March2008, Chen Anning of Ford China identified what he believed were three broad shifts inconsumer attitudes over the previous decade.

Ten years ago, Chinese car buyers were generally of the attitude that “anycar will do”, … Over the past few years, consumers stopped looking for justany old car; they wanted a good car. Nowadays, especially in the big cities,

people are not just looking for a good car, they’re looking for “my car”,

something that reflects their identity.11

- Chen Anning, director of vehicle programmes at Ford China

This emerging automobile culture was shaped by the younger generation’s desire to use moreconvenient transportation in fitting with a new lifestyle.12 Their preferences were based onemotional factors and intangible attributes rather than tangible attributes such as fuelefficiency or engine quality. Though they had not formed brand loyalties, they wereextremely brand-conscious and placed great importance on industry leadership.

As with most developing markets, word-of-mouth was important in decision-making.According to research by Taylor Nelson Sofres (TNS), a market research firm,recommendation by friends and family was the single most important factor influencing car-

buying decisions in China in 2007. Moreover, word-of-mouth among Chinese car buyersoverwhelmingly took place on the internet.13 Sina.com, one of China’s most popular internet

portals, contained very active internet car forums. Sina.com’s auto channel had 26 million page views per day, with a thriving message-board community where users could discusseverything from fuel efficiency to whether or not real patriots should buy only Chinese cars.14 The internet was considered a trusted source of information and, according to TNS, almost25% of Chinese consumers believed that online information was “credible”, 15 whiletraditional advertising and car dealers were much less trusted.

Moreover, Chinese consumers exhibited relatively high price consciousness. Those whoconsidered low-end, less-expensive Chinese brands were three times more likely to make a

purchase than those who considered foreign, more-expensive brands. For example, forBeijing-based taxi driver Yao Shenfu, fuel consumption and price were decisive factors in hisdecision to purchase a modest Hyundai Elantra.16

9 Plowright, M. and Tsang, C. (14 April 2008) “Wooing China’s Car Buyers”, China International Business.

10 Ibid.

11 GM China (21 January 2008) “General Motors Tops List of Companies Contributing to China”,http://www.gmchina.com/english/ctl?action=press_body&press_id=516 (accessed 18 July 2008).

12 This paragraph was adapted from Farhoomand, A., Tao, Z., Wang, I. and Lu, Y. (2005) “Shanghai Volkswagen: Time for a

Radical Shift of Gears”, Asia Case Research Centre, The University of Hong Kong.13

GM China (21 January 2008) “General Motors Tops List of Companies Contributing to China”,

http://www.gmchina.com/english/ctl?action=press_body&press_id=516 (accessed 18 July 2008).14

Ibid.15

Ibid.16

Ibid.

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Nevertheless, according to Volkswagen, Chinese automobile buyers were willing to spenddouble their annual salaries on cars.17 There were two main reasons for China’s newfoundlove affair with higher-end automobiles. First, thanks to the Chinese government’s subsidies,fuel prices in China were low by global standards, making thirstier luxury cars much moreaffordable. Second, there was a strong cultural link between automobiles and social status.Rising incomes among the upwardly mobile “urban elite” in China’s major cities spurreddemand for top-quality goods.18 Therefore, unlike in developed countries, these “urban elites”

purchased their automobiles in cash rather than through auto finance deals.19

If I were just choosing a car for myself, I probably would have gone with yellow or blue, a more eye-catching color, maybe a two-door coupe. But Iwent for a black, four-door model, one that can pass for a car that might sell

for RMB 70,000 (US$9,800). I’m young, and I work at a state ownedcompany. If I owned a coupe, people might just think I was a playboy or

something. It would be bad for business.

- Mr Li, a Chinese consumer 20

The Competition

In 2008, the Chinese auto manufacturing industry was composed of two main groups ofcompetitors. One group consisted of joint ventures between Chinese companies andinternationally recognised automakers producing under international brands. The other groupconsisted of local automakers producing proprietary branded cars [see Exhibit 1 for the topten brands in the first half of 2008].

As the Chinese market grew, competition intensified. Even back in 2003, all of the top 10global automakers had already entered China.21 The subsequent expansion of the Chinese automarket afforded these top global automakers room to expand rapidly. The top three globalautomakers [see Exhibit 2], Toyota, GM and Volkswagen, were also the top three automobile

sellers in China [see Exhibit 3]. They were also Honda’s main international competitors inChina.

Volkswagen was the top-selling automaker in China in 2007. Successful development ofsuppliers was one of the reasons for the success of its joint ventures in China.22 In 2008,Volkswagen initiated the establishment of 160 joint ventures between foreign and Chinesesuppliers, approximately 100 licenses and know-how agreements, and 250 tools andequipment agreements. Volkswagen’s imported product dealers covered over 25 provincesand municipal cities. Its product mix of not only traditional models like the Jetta and theSantana but also modern models coming onto the market catered to the entire spectrum ofconsumers.23

17 Burnick, M. (28 January 2008) “China’s Car Buyers Want to Ride in Style!”,

http://burnickblog.sovereignsociety.com/2008/01/chinas-car-buye.html (accessed 9 September 2008).18

Ibid.19

Adapted from Farhoomand, A., Tao, Z., Wang, I. and Lu, Y. (2005) “Shanghai Volkswagen: Time for a Radical Shift ofGears”, Asia Case Research Centre, The University of Hong Kong .

20 GM China (21 January 2008) “General Motors Tops List of Companies Contributing to China”,http://www.gmchina.com/english/ctl?action=press_body&press_id=516 (accessed 18 July 2008).

21 The top ten automakers in China in 2003 were GM, Ford, Toyota, Rensalt-Nissan, Volkswagen, DaimlerChryster, PSA,Hyundai and Toyota.

22 Volkswagen China (8 July 2008) “Volkswagen Group China Sells 531,612 New Cars in the First Half of 2008, an Increase of

23.3”, http://www.vw.com.cn/cds/?menu_uid=634&con_id=2235 (accessed 18 July 2008). [() (2008) “

531,612 23.3%”.]23

Plowright, M. and Tsang, C. (14 April 2008) “Wooing China’s Car Buyers”, China International Business.

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Meanwhile, local automakers received a big boost from the Chinese government’s “11thFive-Year Auto Industry Development Plan”, a target of which was for proprietary brands tooccupy at least 50% of China’s auto market by 2010. The leading local automakers in Chinawere Chery, Xiali and Geely [see Exhibits 1 and 4].

Chery was the largest proprietary-brand automaker and the fourth-largest passenger vehiclemanufacturer in China, an indication that Chery could successfully compete in a Chinesemarket traditionally dominated by joint-venture automakers. Chery also consolidated itsleading position among independently owned, domestic automotive companies in China.24

Xiali was one of the brands developed by Tianjin FAW XIALI Motor Co., Ltd (“TianjinFAW”) of the China FAW Group. Tianjin FAW focused on producing economical passengercars and creating “the core competitive power of developing, manufacturing and selling theeconomical passenger cars of the highest quality with the most economical methods and thequickest speed”.25

After entering the automobile manufacturing industry in 1996, Geely rapidly grew into a key

brand through its flexible operation mechanism and continuous concept innovation [seeExhibit 5 for sales of different branded cars produced by Volkswagen, Toyota, GM, Chery,Xiali and Geely in the first half of 2008].

Honda

Company Background

Honda Motor Co., Ltd was established in 1948 with its headquarters in Tokyo, Japan.Motocycles, automobiles and power products were its chief products [see Exhibit 6 for unitsales in 2006 and 2007, and Exhibit 7 for its financial performance].

Honda’s basic principles were “Respect for the Individual” and the “Three Joys” (the joy of buying, the joy of selling and the joy of creating). ”Respect for the Individual” meant thateveryone working for Honda would be trusted and treated equally, while the “Three Joys”indicated that interaction with Honda should be a happy experience for all the stakeholders,including employees, suppliers and consumers.

Honda entered the Japanese automotive industry in 1963. Since then, its car models, such asCivic and Accord, had become popular both in Japan and worldwide. Honda set up its salesnetworks, R&D centres and manufacturing facilities in different regions around the world inorder to meet the specific needs of local customers. Each region had set up a regionalheadquarters, which was led by a general manager from the board of directors or an operating

officer. The executive council and regional operating councils deliberated important globaland regional management matters, respectively [see Exhibit 8 for details on Honda’scorporate governance]. The central role of Honda’s Japanese operations was to bring newtechnologies, products and lifestyles to customers worldwide.

Honda had distinctive capabilities in dealer management. Honda had developed operating procedures and policies for merchandising, selling, floor-planning and service management,

24 Chery (2008) “Profile of Chery Automobile Co., Ltd”, http://www.cheryglobal.com/about_chery.jsp (accessed 21 July 2008).

25 Tianjin FAW XIALI Motor Co., Ltd (2008) “Introduction of Tianjin FAW XIALI Motor Co., Ltd”,

http://en.tjfaw.com/about/index.html (accessed 21 July 2008).

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which were used to train and support its dealer network.26 These were first developed for itsmotorcycle business and were later replicated in each new business Honda entered. Hondamanaged its dealers to ensure that they could become successful businesspeople. Acomputerised dealer-management information system was also developed to provide supportand competitive advantages to its dealers.

Honda was also strong in product development. In 2006, its automotive products capturedfive out of 10 number-one spots in Consumer Reports rankings.27 The Civic, Accord and theAcura TL, for example, were the winners of the under-US$20,000 sedan category, theUS$20,000–30,000 sedan category and the US$30,000–40,000 sedan category, respectively.Honda’s product development originated with the company’s founder, Soichiro Honda. Bothindividual ideas and routines were emphasised. Honda not only valued individual ideas andgave opportunities for them to develop, but also emphasised contextual details. Employeeswere encouraged to step into the shoes of their customers to understand products from thecustomers’ perspectives. Honda had a “Three Reality Principle”:28

• Go to gemba, the actual place where things happen.

• Know the actual situation by gaining tacit knowledge through touching, seeing and being

in contact with both human and technical agencies.• Be realistic by using gained knowledge to solve practical problems realistically.

In Honda, product development routines provided a collective framework to make sure thatemployees respected sound theory, made good use of time, and were mindful of the value ofresearch results [see Exhibit 9]. At the initial stage of product development, Honda hadroutine waigaya meetings, in which employees were able to exchange ideas, share and discussnew ideas, and challenge existing practices equally and openly, regardless of organisationalranking. During product development, Honda did not separate planning, proving andexecuting into three sequential activities as they were in traditional product development.Instead, planning and proving were ongoing, parallel processes, though separated fromexecution. The execution cycle was highly disciplined, with major production revisions made

every four years and minor revisions every two years. When facing problems in productdevelopment, “A”, “A0” and “A00” questions were used to guide the solutions. “A” questionswere about product specification, “A0” questions were about the concept and “A00”questions were about the rationale behind the existence of the products. All these questionswere used to help employees think carefully about the fundamentals of the products theycreated.

Honda’s Joint Ventures in China

China had become a very important market for Honda. In 2007, Honda’s sales decreased by11% in Japan and increased only 3% in North America, two traditionally major markets [seeExhibit 10]. Overall sales in China, however, reached 428,000 units, an increase of 31%.

Thanks to market development in China and other emerging countries, Honda’s sales, profits before tax and per-share earnings were able to reach historical highs in 2007.29

Consequently, Honda sought to expand and strengthen its business in China. By the secondhalf of 2006, through expanding the plant at Dongfeng Honda Automobile Co., Ltd(Dongfeng Honda) and setting up a second plant at Guangzhou Honda Automobile Co., Ltd

26 Stalk, G., Evans, P. and Shulman, L.E. (March/April 1992) “Competing on Capabilities: The New Rules of CorporateStrategy”, Harvard Business Review, 70(2), pp. 54–66.

27 Meyer, M.H. (2008) “Perspective: How Honda Innovates”, The Journal of Product Innovation Management , 25, pp. 261–271.

28 Peltokorpi, V. (2008) “Synthesising the Paradox of Organisational Routine Flexibility and Stability: A Processual View”,

International Journal of Technology Management , 41(1/2), pp. 7–21.29

Chen, Y. (2008) “Honda China, Winner Re-Planning”, Car People, http://auto.sohu.com/20080604/n257280587.shtml

(accessed 16 September 2008). [2008 .]

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(Guangzhou Honda), Honda increased its annual production capacity in China to 530,000vehicles. By the end of 2008, Honda had already introduced five models—Accord, Odyssey,Fit, Civic and Civic Hybrid—to the Chinese market through its joint ventures, includingGuangzhou Honda and Dongfeng Honda. Honda was also planning to introduce the Acura

brand into the luxury vehicle sector in China.

In order to power product development, Honda began manufacturing electric generators andgeneral-purpose engines both for export and domestic use. To co-ordinate the rapid expansionof Honda’s businesses in China, Honda Motor (China) Investment Co., Ltd was established in2004. In 2006, it had already become Honda’s business centre in China.

R&D at Honda in China

Honda’s R&D

Invention and new-product development was central to Honda’s culture. Honda purposefully

did not cap its spending on R&D. In 2007, almost 5% of global revenue was budgeted forR&D.30

Honda R&D Co., Ltd (“Honda R&D”) was founded in July 1960 and had since been operatedas a separate organisation. Takeo Fujisawa, co-founder of Honda, recognised that Hondacould not rely completely on the genius of Soichiro Honda and that the true sources ofHonda’s competitiveness were technology and innovation. Therefore, he thought it necessaryto secure independent financing for R&D activities.

We cannot be assured of continued corporate activity unless we have not justone, but many Soichiro Hondas. We must foster experts in various fields.

- Takeo Fujisawa, co-founder of Honda31

With the slogan “all engineers are equal in the presence of technology”, everyone at HondaR&D wore the same white uniform to symbolise this equality. Honda allowed engineers tochoose and register a research theme and define the areas of their responsibility with theobjective of utilising their skills, ambitions and abilities to the fullest extent. The ultimateobjective of Honda R&D was that “research must have merit”.32

The Element Project, a project to expand its light truck portfolio beyond the popular CR-V,Pilot sport utility vehicle, and the Odyssey minivan, was a good example of how Hondasegmented its markets for growth.33 The aim of the project was to target first-time car-buyingmales, eliciting their awareness of the Honda brand and keeping them loyal as they grew

older and more affluent. Honda formed the Element concept-development team in 1998 in theUS to create a compelling design that reflected the core values and beliefs of the target userswith an affordable price. The team used observations at the X Games 34 to supplementtraditional market research to produce a coherent profile of the target users, whose traits

30 Paluch, F. (2007) “Honda, Company Presentation”, 2007 Management Briefing Seminar, Traverse City, Michigan,http://www.managementbriefingseminars.org/mbs2006/documents/PaluchFrank_000.pdf (accessed 16 September 2008).

31 Honda (2008) “Honda Philosophy: Honda’s Basic Principles and Polices”, http://world.honda.com/profile/philosophy/

(accessed 1 August 2008). 32

Paluch, F. (2007) “Honda, Company Presentation”, 2007 Management Briefing Seminar, Traverse City, Michigan,

http://www.managementbriefingseminars.org/mbs2006/documents/PaluchFrank_000.pdf (accessed 16 September 2008).33

Peltokorpi, V. (2008) “Synthesising the Paradox of Organisational Routine Flexibility and Stability: A Processual View”,

International Journal of Technology Management , 41(1/2), pp. 7–21.34

The X Games was held annually with a focus on extreme action sports, such as dirt-course motorcycle racing and “hot dog”

skiing and snowboarding.

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included strong cohort identification, highly social behaviour and support for social andenvironmental causes. These observations were then translated into the designs and featuresof the Element. The new product was tested among potential users, which helped to developthe themes of the Element and fix the market segment. Driving performance, safety andvalue—three overarching themes common among Honda’s automotive products—were addedto the themes generated through user research. Based on these themes, concepts were createdto deliver each theme and translated into key subsystems. Some subsystems were alreadyavailable within Honda’s arsenal of technologies, while most other technical solutions could

be adapted from existing Honda products. Only a few had to be developed from scratch, suchas the exterior styling to meet the new attitude and expression requirement. Many versions ofthe Element were created, first as sketches and then as physical prototypes. Target users wereinvited to test the new product. Finally, when the new product was ready, the team used

presentations and target-user testing to obtain approval from senior management.

To meet the needs of local customers, Honda set up regional R&D centres and operations invarious regions around the world. These worldwide initiatives were co-ordinated by theheadquarters in Japan, which was also responsible for developing advanced technologies.

Honda encouraged the regional operations to localise production using the expertise availablein local factories.

By the end of 2007, Honda had already established R&D facilities in five key regions outsideJapan, including North America, South America, Europe, Asia (except China) and China. Theregional R&D facilities aimed to develop technologies and products that could meet localneeds while reflecting common values such as environmental preservation and regionaleconomic development.

Honda R&D also set up Honda Strategic Venture (“HSV”), a global strategic ventureinvestment arm. HSV invested in technology venture companies that would create synergywith Honda’s long-term R&D strategy.

Innovation in China’s Automobile Industry

Since China’s economic development in the 1980s, joint ventures and wholly ownedcompanies had represented two conflicting strategies in the Chinese auto manufacturingindustry. Joint ventures distributed power between Chinese and foreign partners and had ahigh degree of dependence on foreign capital for branding and technology, while wholeownership provided full control over R&D and allowed for the production of proprietary

brands, albeit at the cost of less recognition.

These two routes were visible in the developmental history of the global auto manufacturingindustry. Some countries such as Japan and South Korea had refused the joint-venture model

and completely relied on their own R&D and proprietary brands. Some Latin Americancountries, however, had faithfully followed the joint-venture route, resulting in completereliance on foreign capital and absence of local core technologies, talents and brands.

After allowing joint ventures in the Chinese auto manufacturing industry for more than 20years, the Chinese government decided to encourage the self-innovation of joint ventures.

With all the top global automakers having entered the Chinese market, the competition beganto shift toward R&D resources in China. Top automakers such as Volkswagen, GM and Fordhad built up R&D research laboratories with higher-education institutions in China. In 2006,according to the China Auto Talents Society, the shortfall of R&D talents in China would

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reach 500,000 by 2011. While R&D staff made up around 30% of the total auto industryworkforce in developed countries, this figure was merely 8% in China in 2008.35

GM was the apparent leader among global automakers in establishing an R&D presence inChina. According to the Chinese education ministry’s Science and Technology DevelopmentCentre, 26 higher-education institutions and seven key state laboratories had already built co-operative relationships with GM on 112 projects. 36 On 4 March 2008, seeing the huge

potential of the Chinese market, GM announced a US$4 million investment over the next fiveyears to develop a vehicle research institute with Shanghai Jiao Tong University. The institutewould focus on manufacturing and lightweight materials R&D. This would be GM’s first

joint laboratory in China and its 12th laboratory worldwide.

However, nearly all the R&D facilities developed by international automakers so far hadfocused on either improving specific technologies (as opposed to core technologies) ortailoring existing international models to the Chinese market. For example, Toyota’s R&Dcentre in Shanghai lacked R&D facilities and was in fact little more than a car service centreand occasional staff-training centre.37

GHRD

Honda established China’s first dedicated automobile dealer network with integrated sales,service, service parts supply and customer service. Moreover, Honda Automobile (China) Co.Ltd was the first to produce passenger vehicles that were exclusively for export. With theestablishment of GHRD and the introduction of Li Nian-branded products, Honda became thefirst foreign automaker to develop products under an original brand through a joint venture inChina.

Guangzhou Honda Automobile

Guangzhou Honda Automobile (“Guangzhou Honda”) was one of the top ten car

manufacturers in China [see Exhibit 4].

Guagnzhou Honda was founded on 1 July 1998, five years before the establishment of HondaAutomobile of China on 8 September 2003. Guangzhou Honda was managed jointly byGuangzhou Automobile and Honda to produce Accord and Fit cars, with each party having a50% share. The contract would last 30 years. By 2008, Guangzhou Honda had two factories:one established in 1998 in Huangpu, the Guangzhou Economic and TechnologicalDevelopment Zone; and the other established in 2006 in Zhengcheng Industrial Zone.

35 China Auto Newspaper (18 July 2008) “China Auto R&D Talents Lack 0.5 Million”,

http://auto.enorth.com.cn/system/2008/07/18/003563005.shtml (accessed 16 September 2008).

36

JinYang Network (6 March 2008) “GM Speeds Up Car R&D in China”, http://www.ycwb.com/big5/ycwb/2008-

03/06/content_1816592.htm (accessed 16 September 2008). [ (2008) .]37

Gao, W. (8 July 2008) “Toyota Shanghai R&D Centre Changes Face, Empty Promise of Using Technologies to Exchange for

Market”, Everyday Economic News, http://auto.sohu.com/20080708/n258011398.shtml (accessed 17 September 2008). [

(2008) , .]

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Since Guangzhou Honda was established ten years ago, we have beenrepeating simple manufacturing. We continue to first introduce a new model,then manufacture and sell the new product. But, this has enabled us toaccumulate some experiences, train some specialists, develop some brandawareness, as well as gain some profits.

- Shoujie Fu, executive vice-president of Guangzhou Honda38

In addition to Guangzhou Honda, there were five other Honda affiliates located in Guangzhou,including Honda Engineering China (manufacture production equipment), Dongfeng HondaEngine (produce passenger car engines), Wuyang-Honda Motors (produce motorcycles),Honda Automobile (produce passenger cars for export) and Honda Motor. Honda’s Japanesesuppliers, including Sanoh Industrial (supply brake tubes), Stanley Electric (supply lamps)and Mitsuba Corporation (supply motors), also opened their businesses in Guangzhou. From2001 to 2004, an additional 11 Honda-related firms opened factories around Guangzhou. As aresult, Honda was able to procure most of the main components of its cars in and aroundGuangzhou.

Guangzhou was a key locale in implementing industrial cluster policy [see Exhibit 11], andHonda was satisfied with the city’s infrastructural support.39 Back in 1992, Honda began to

produce motorcycles in Guangzhou after buying a local Peugeot factory. Even though thePeugeot factory did not fit with Honda’s traditional factory design, Honda bought it becauselocal authorities had reacted favourably to Honda’s requests. The local authorities werecommitted to developing Guangzhou’s infrastructure and commercial landscape through

building roads and railways, implementing institutional tax reforms, raising wages, resolvingthe shortage of interpreters, and increasing electricity production.

The development of Honda Guangzhou followed the principle of “less input, faster output,and rolling development”. Since 2004, Guangzhou Honda’s Huangpu plant had been

producing as many as 1,000 cars per day and had an annual output of 240,000. With the

Zengcheng plant going into operation in late 2006, Guangzhou Honda had upped its annual production to 360,000 cars [see Exhibit 12 for the production and sales of Guangzhou Hondaover the years].

Establishment of GHRD

On 19 July 2007, Guangzhou Honda developed GHRD, the first automobile R&D institutiondeveloped and owned by a joint venture as an independent juridical entity in China.

For Honda, the reason behind the R&D company’s independent legal entity was to create afavourable R&D environment that was unaffected by daily production and sales activities ortime and space limitations. It was hoped to become an inspiring, free, energetic and open

research environment.

GHRD occupied 6 million square kilometres and covered all relevant R&D areas, rangingfrom product planning to design and prototyping to testing. As the chief executive ofGuangzhou Honda commented, the purpose of GHRD was to become a whole-car R&Dcentre in the real sense, not only capable of completing the whole-car R&D process

38 Chen, Z. (28 April 2008) “From Li Nian to Honda’s Strategic Innovation”, China Auto News. [2008

.]39

Kuchiki, A. (2008) “The Flowchart Model of Cluster Policy: The Automobile Industry Clusters in China”, International

Journal of Human Resource Development & Management , 8(1/2), p. 8.

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independently, but also capable of using the most advanced technologies in the world todesign leading products.40

In China, there was also rising public interest in the automobile industry developing proprietary brands. To improve competitiveness, many foreign automobile manufacturers had pledged support for the development of proprietary brands. Some of them had developedsizable R&D centres, such as Shanghai GM and Shanghai Volkswagen. As a result, a number

of models were improved and manufactured in China, including Buick’s Regal ( ),

Shanghai VW’s Lavida (), Buick’s New Excelle (), Citroen’s C2 and Shanghai

GM’s Cadillac SLS (). However, core technologies were tightly controlled by the foreign

automobile manufacturers rather than the Chinese partners. The Chinese partners and R&Dcentres only possessed non-core technologies. GHRD was thus a pioneer in China because itwas the first R&D centre with the technological capabilities to develop a whole new model.

The registered capital of GHRD was US$26 million,41 with an initial investment of US$290million.42 All the capital investment was made by Guangzhou Honda. In addition to otherstandard R&D infrastructure, GHRD was equipped with a full-scale high-speed test course,

collision testing lab and compatible electromagnetism lab.

GHRD had two R&D systems: technological research and product development.Technological research served the objective of realising product development. The focus was

placed on long-term research and evaluation of basic functions such as reliability anddurability in order to develop the specialised technologies most suitable for the Chinesemarket. In terms of product development, starting with product planning, R&D staff wouldstep into the shoes of the Chinese customer and examine development trends, lifestyles andspecial preferences to determine the automobile requirements of the market. Based on theserequirements, GHRD would work on the styling of the new branded automobiles forGuangzhou Honda, followed by prototyping and testing. Finally, the plan for mass productionwould be submitted. The technological research system and the product development systemwere integrated and complementary to each other, rather than existing independently.Through these R&D activities, the objective of GHRD was to meet and satisfy the needs andexpectations of the Chinese local market.43

GHRD planned to recruit talents in China and overseas in order to create advancedautomobile technologies and products tailored to the needs of Chinese society andconsumers.44 Its plan was to build up a complete training system, encouraging the staff to takethe initiative to acquire new knowledge and technologies. Meanwhile, an environmentcharacterised by open and free discussion was encouraged in order to develop high-qualityand creative products. In order to facilitate effective communication among its staff and

40 Guangzhou Honda (19 July 2008) “Guangzhou Honda Establishes Own R&D Company and Produces Proprietary Cars in

2010”, Soho Car , http://auto.sohu.com/20070717/n251113169.shtml (accessed 9 September 2008). [

2010.]41

Rmb 1 = US$0.146239 on 10 September 2008.42

Rmb 1 = US$0.146239 on 10 September 2008.43

People Net (17 July 2007) “Guangzhou Honda’s Vehicle Technology Dream Factory—Guangzhou Honda Vehicle Research

and Development Limited”, http://auto.people.com.cn/GB/25959/50030/50031/5999389.html (accessed 16 September 2008).

[2007.]44

Guangzhou Honda (19 July 2008) “Guangzhou Honda Establishes Own R&D Company and Produces Proprietary Cars in

2010”, Soho Car , http://auto.sohu.com/20070717/n251113169.shtml (accessed 9 September 2008). [

2010.]

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enrich their lives, the company also planned to build entertainment facilities for the leisure ofthe staff.45

Li Nian ( )

On 20 April 2008, at the Beijing International Automobile Exhibition, Shoujie Fu, executive

vice-president of Guangzhou Honda, announced that the proprietary brand of GuangzhouHonda was named “Li Nian”. Li Nian represented “a brand that will continue to pursuinglofty ideals with a challenging spirit”.46 Similar to the Chinese meaning of li nian, the Li NianConcept represented “the image of a dynamic, stylish, and high-quality life for a newgeneration”. 47 Li Nian products were devoted to meeting the specific needs of Chinesecustomers.

GHRD was responsible for developing Li Nian products with help from Honda Motor inJapan. The core technologies of Li Nian products would belong to Guangzhou Honda, and Li

Nian products would be sold through Guangzhou Honda’s sales network. This arrangementwas in contrast with the conventional practice of other foreign automobile manufacturers inChina by retaining all ownership rights of their core technologies, as well as with Honda’s

past practice of selling all the products of its joint ventures in China under the Honda brandname.

Even though Li Nian targeted Chinese customers, the ultimate goal of Li Nian was to becomea top international automobile brand. Li Nian would be rooted in Chinese values and culture,and the development of Li Nian products would rely on the R&D, manufacturing andmarketing capabilities of Guangzhou Honda.

The first Li Nian automobile debuted at the Beijing International Automobile Exhibition in2008 and became the star of the event. The model’s design emphasised the concepts of“future” and “dream” to reflect Li Nian as a youth-oriented brand. The production of Li Nianautomobiles was scheduled to begin in 2010 by Guangzhou Honda.

Li Nian would be supported by Honda’s most advanced technologies and would meet thehigh quality standards set by Honda. It was hoped that Li Nian would be developed as a brandassociated with advanced technologies and reliability.

The Way Forward

The development of GHRD was an ambitious move by Honda. However, this experiment wasalso full of challenges and risks. Traditionally, the core technologies of manufacturing weretightly controlled by the headquarters in Japan, and Honda’s regional R&D facilities wereonly responsible for improving some non-core technologies and making small changes to

existing car models to suit local markets. However, GHRD seemed to be different. GHRDwas said to capture and own all its technologies, including core technologies. If GHRD wasallowed to own the core technologies, Honda would have to change the way it managedregional R&D centres. Would the core technologies of Li Nian developed by GHRD be thesame as those used in Honda-branded products? To what extent should Honda R&D Co. inJapan offer technical support to GHRD in China? How could the R&D staff communicate and

45 People Net (17 July 2007) “Guangzhou Honda’s Vehicle Technology Dream Factory—Guangzhou Honda Vehicle Research

and Development Limited”, http://auto.people.com.cn/GB/25959/50030/50031/5999389.html (accessed 16 September 2008).

[2007.]46

Honda (2008) “Guangzhou Honda Reveals New Proprietary Brand— (Li Nian)”,

http://world.honda.com/news/2008/4080421Guangzhou-New-Proprietary-Brand/ (accessed 16 June 2008).47

Ibid.

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exchange information between GHRD and Honda R&D Co.? If the core technologies used forLi Nian and Honda were the same, then what should be done about property rights? If therewere to be a difference in technologies, which one would be superior—Li Nian or Honda?

The payoff of developing GHRD was also unclear. If GHRD owned the property rights of allthe core technologies it developed, Honda would become the first foreign automaker toconduct R&D in this way. Considering the risks and challenges, what could be the payoffs forHonda’s innovative move in R&D in China?

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EXHIBIT 1: SALES OF TOP TEN CAR BRANDS IN THE FIRST HALF OF 2008

Ranking Brand Joint Venture or Local Firm

1 Volkswagen Santana Joint Venture with Volkswagen

2 Jetta Joint Venture with Volkswagen3 Buick Excelle Joint Venture with GM

4 Toyota Corolla Joint Venture with Toyota

5 QQ Chery

6 Toyota Camry Joint Venture with Toyota

7 Honda Accord Joint Venture with Honda

8 Hyundai Elantra Joint Venture with Hyundai

9 Xiali Xiali

10 Chevrolet Lova Joint Venture with GM

Source: Information Department of the China Association of Automobile Manufacturers (14 July

2008) “Ranking of the Top Ten Car Brands in Terms of Sales Volumes in the First Half of 2008”,

http://caam.org.cn/caam/caam.web/Detail.asp?id=3999 (accessed 21 July 2008).

EXHIBIT 2: WORLD’S TOP TEN AUTOMAKERS IN GLOBAL SALES IN 2007

Ranking Automaker Sales Units

1 Toyota 9,366,000

2 GM 8.902,252

3 Volkswagen 6,191,618

4 Ford 5,964,000

5 Hyundai-Kia 3,961,629

6 Honda 3,831,000

7 Nissan 3,675,574

8 PSA/Peugeot 3,428,400

9 Chrysler 2,676,268

10 Fiat 2,620,864

Source: Automotive News (2008) “Global Data Book”.

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EXHIBIT 3: TOP TEN CAR SALES IN THE FIRST HALF OF 2008

Rank Manufacturer Sales Production

1 FAW Volkswagen 268,640 268,685

2 Shanghai Volkswagen 264,992 272,009

3 Shanghai GM 223,520 248,799

4 FAW Toyota 190,638 200,194

5 Chery 174,282 208,465

6 Dongfeng Nissan 145,813 144,770

7 Beijing Hyundai 137,856 150,591

8 Guangzhou Toyota 126,590 130,577

9 Geely 121,690 120,801

10 Changan Ford 114,544 122,692




EXHIBIT 4: TOP TEN CAR MANUFACTURERS IN CHINA IN THE FIRST HALF OF 2008

Ranking Car Manufacturer

1 Shanghai Volkswagen

2 FAW Volkswagen

3 FAW Toyota

4 Chery

5 Shanghai GM

6 Beijing Hyundai

7 Dongfeng Nissan

8 Geely

9 Guangzhou Honda

10 Chang’an Ford




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EXHIBIT 5: CAR SALES OF SELECTED BRANDS IN CHINA IN THE FIRST HALF OF2008

Auto Group Brand Number of Vehicles Sold Comparison with theSame Period in 2007

Volkswagen

Volkswagen 439,218 (5,797 fromimport)

15.7%

Audi 60,509 (6,721 from import) 23.1%

Skoda 31,566 N/A

Bentley 275 N/A

Lamborghini 44 N/A

GM

Chevrolet 199,131 34.6%

Buick 146,321 N/A

Wuling 329,842 17.9%

ToyotaToyota 285,000 34%

Luxes N/A N/A

Chery Chery 174,28248 -1%

Xiali Xiali 66,578 N/AGeely Geely 121,690 11.8%

Sources: Compiled from1 Volkswagen China (8 July 2008) “Volkswagen Group China Sells 531,612

New Cars in the First Half of 2008, an Increase of 23.3”,

http://www.vw.com.cn/cds/?menu_uid=634&con_id=2235 (accessed 18 July 2008). [

() (2008) “ 531,612

23.3%”.]; Zhang, W. (11 July 2008) “The Sales of GM Vehicles Reached New High in the First

Half Year”, Vehicle Weekly, http://www.autoweekly.com.cn/show.asp?ArticleID=30143 (accessed 18

July 2008). [ (2008) , . Taylor, S. (11 July 2008)

“Toyota’s China Sales Rise 34 pct in First Half”, Reuters,http://www.boston.com/business/articles/2008/07/12/toyotas_china_sales_rise_34_pct_in_first_half/

(accessed 21 July 2008); Le, G. (11 July 2008) “Sales Review for the First Half Year: Lowest

Annual Increase since 2004”, Nanfang Daily. [

]; Car Exploration (7 August 2008) “Turning Point of Auto Market: Ranking of

Different Car Models in the First Half of 2008”,

http://auto.people.com.cn/BIG5/25959/27602/30203/7626854.html (accessed 18 August 2008). [

20082008 .]; Zhu, Y., Kui, X. and Yin, W. (14

July 2008) “Sluggish Sales Continued, Middle and High Class Car Sales Lowered More Than

15% in June”, Xin Jing Newspaper ,

http://big5.xinhuanet.com/gate/big5/news.xinhuanet.com/auto/2008-07/14/content_8540085.htm

(accessed 21 July 2008). [ 2008 6

15%, .].

.

48

This included sales in the domestic market only.

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EXHIBIT 6: HONDA’S UNIT SALES REGIONAL BREAKDOWN

Sales by Financial Year Ending 31 March:

Unit Sales

(Thousands)

Motorcycles Automobiles Power Products

2006 2007 2006 2007 2006 2007

Japan 368 337 696 672 487 527

North America 615 503 1,682 1,788 2,827 3,103

Europe 353 329 291 324 1,477 1,625

Asia 7,907 7,895 521 620 717 760

Other Regions 1,028 1,305 201 248 368 406

Total 10,271 10,369 3,391 3,652 5,876 6,421

Source: Honda (2008) “Financial Highlights: Overview of Honda’s FinancialInformation”, http://world.honda.com/profile/financial/ (accessed 1 August 2008).

EXHIBIT 7: HONDA’S MAJOR FINANCIALS

Sales and Profits(US$ million)

2003 2004 2005 2006 2007

Sales 65,340 72,235 80,094 87,681 94,762

Profit before Tax 4,998 5,681 6,082 7,209 6,777 Net Profit 3,792 4,109 4,502 5,283 5,063

R&D 3,581 3,973 4,331 4,517 4,717

Number of Employees 126,900 131,600 137,827 144,785 167,231

Source: Honda’s website: http://www.honda.com.cn/about/main.html (accessed 17 September

2008).

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EXHIBIT 8: HONDA’S CORPORATE GOVERNANCE

Source: Honda (2008) “Corporate Governance”, http://world.honda.com/profile/governance/

(accessed 10 July 2008).

Board of Directors

Executive CouncilBusiness Ethics Committee

RegionalOperations(Asia and

Oceania)

RegionalOperations(Europe, theMiddle and Near East,

and Africa)

RegionalOperations(LatinAmerica)

RegionalOperations

(Japan)

RegionalOperations(NorthAmerica)

RegionalOperatingBoard

(Japan)

RegionalOperatingBoard(North

America)

RegionalOperatingBoard(Latin

America)

RegionalOperatingBoard(Europe, theMiddle and Near East,

and Africa)

RegionalOperatingBoard(Asia and

Oceania)

Motorcycle Operations

Automobile Operations

Power Products Operations

Customer Service Operations

Production Operations

Purchasing Operations

Business Support Operations

Business Management Operations

RegionalOperations

(China)

RegionalOperatingBoard

(China)

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EXHIBIT 9: HONDA OPEN INNOVATION

Source: Honda Motor Group (2008) “Introduction to Honda Strategic Venturing”,

http://www.researchvalley.org/UserFiles/File/docs/Cummings_HondaStrategicVenturing.pdf

(accessed 16 September 2008).

Research Phase (Technology Specific)

Idea

Theme Setting

Project Authorisation

Prototyping

Evaluation

Development Phase (Model Specific)

Development Order

Product Planning

Prototype

Testing

Completion of new technology

Product

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EXHIBIT 10: HONDA’S WORLDWIDE SALES BY GEOGRAPHY

North America

54%

Japan

15%

Europe

11%

Asia (excl.

Japan)

12%

Other

8%

Source: Honda Motor Group (2008) “Introduction to Honda Strategic Venturing”,

http://www.researchvalley.org/UserFiles/File/docs/Cummings_HondaStrategicVenturing.pdf

(accessed 16 September 2008).

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EXHIBIT 11: GUANGZHOU’S AUTOMOBILE INDUSTRY CLUSTER

Name of JointVenture

Guangzhou HondaAutomobile Co., Ltd

Guangzhou ToyotaMotor Co., Ltd

Dongfeng NissanMotor Company

Year of Establishment

1998 September 2004,May 2006

May 2004

Joint Venture Partner

Guangzhou Automobile,Dongfeng Automobile

(engines)

GuangzhouAutomobile

DongfengAutomobile

Main Products AccordFit

Camry Sunny, Teana

ProductionCapacity

530,000 300,000 150,000

Location of Headquarters

Guangzhou EconomicDevelopment Zone

(City Centre)

Nansha District(Southern Coast ofthe City)

Huadu District(North of the City)

Source: Kuchiki, A. (2008) “The Flowchart Model of Cluster Policy: The Automobile Industry

Clusters in China”, International Journal of Human Resource Development & Management,

8(1/2), p. 8.

EXHIBIT 12: GUANGZHOU HONDA’S PRODUCTION AND SALES SUMMARY

Year Production (million units) Sales (million units)

1999 1.0 1.0

2000 3.2 3.2

2001 5.1 5.1

2002 5.9 5.9

2003 11.7 11.7

2004 20.2 20.2

2005 23.1 23.1

2006 26.0 26.0

Source: Sina Auto’s website: http://auto.sina.com.cn/photo/GHRD/190410.shtml (accessed 10

September 2008).

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MBA Strategic Management 24H Case Study - Honda - Jan 12

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MBA Strategic Management 24H Case Study - Honda - Jan 12