(FORTUNE Magazine) – AN ELECTRIC SIGN on the tenth floor of worldwide headquarters in Tokyo symbolizes Honda's long, widely admired tradition of making decisions by consensus. It flags the location of each of 32 top executives with a system of lights: Red says he's in the building, green signals a nearby conference room, and white means the man is practically underfoot. Lately, however, most of the lights have been dark. The new boss has shooed Honda's executives out of the office to get closer to employees, dealers, and suppliers. Breaking up the cozy tenth-floor circle is just one of the drastic changes that President Nobuhiko Kawamoto, 55, has made since he took charge in June 1990. So radical are Kawamoto's moves that they constitute a repudiation of the management principles of the company's legendary founder, Soichiro Honda, who died at 84 in August. At a time when executives all over the world are debating how the corporation of the future should look, Kawamoto is replacing Japanese-style consensus management with American-looking organization charts. Kawamoto explained recently to FORTUNE: ''I had to revitalize and reorganize ! our people. The world's auto markets are full of cars. The Nineties are going to be very difficult, and we have to find out if we can adapt.'' Reorganizing a giant company like Honda, with 87,000 employees and manufacturing operations in 38 countries, is like watching two elephants make love: The process is messy, and you don't see any results for a long time. But communications have already improved, and decisions are getting made faster. Says Koichi Amemiya, 51, president of Honda's North American operations, which account for about half of Honda sales: ''There's a much shorter distance between American Honda and the head office than before. If something is wrong, now I can call Kawamoto directly.'' The Kawamoto shakeup came at a critical moment for both Honda and the global auto industry. Demand for cars is slipping in Japan, and the U.S. market remains mired in a three-year slump. Growing trade friction between the two countries means that politics increasingly intrudes on business decisions. Development of future models is burdened by growing social concerns: fuel economy, safety, clean air, recycling, traffic congestion. Honda, which builds 1.9 million cars annually, is Japan's third-largest automaker (behind Toyota and Nissan). This year both it and Toyota passed Chrysler in U.S. car sales; Honda now ranks No. 3 (see chart). Known for its engineering skills, Honda is also a manufacturing leader. Its new Suzuka assembly plant, which makes the 1992 Civic, is one of the world's most efficient. Production of the Civic began simultaneously at the Honda plant in East Liberty, Ohio; no other company has managed the feat of starting manufacture of the same new model on two continents at once. Honda is also the world's biggest maker of motorcycles and a growing presence in small engines -- lawn mowers, outboard motors, and portable generators. Honda's efficiency, combined with a loyal customer base, is helping it ride out the world auto doldrums better than most of its rivals. While profits fell 14.8% for the 12 months ended September 30, the company expects to report a small gain for the 1992 fiscal year that ends March 31. It has picked up more market share in the U.S. this year than any of its major competitors -- and gained share modestly in Japan while Toyota, Nissan, and No. 4 Mazda have lost. Since it started producing cars in 1963, Honda has grown faster than any other automaker on the planet. It led a blessed existence until recently. The first danger signal appeared a year ago with the launch of an uncharacteristically conservative redesign of the Accord sedan, Honda's biggest-selling car. The Accord disappointed car magazine writers in the U.S. and turned off buyers in Japan. Succeeding models -- the Acura Legend and Vigor, the Honda Prelude -- also got lukewarm receptions because of bland design. To make things worse, Honda, which prides itself on being a global good neighbor, became embroiled in a dispute over the amount of American-made parts in its cars. The U.S. Customs Service is investigating possible evasion by Honda of $20 million in duties on cars made in Canada. American and European journalists pounced. Last winter, during the Gulf war, it was national news when unsold U.S. Accords temporarily piled up outside the Marysville, Ohio, factory that makes them. Slack sales of the $60,000 Acura NSX sports car and the Accord station wagon further fueled the critics. Honda steers a bumpy road, U.S.A. Today declared in February. The Financial Times pronounced: wunderkind humbled. Concluded the Economist: Honda loses its way. Entirely overlooked in the clamor of criticism was Honda's rock-solid foundation, which hasn't eroded. It begins with a consistent focus on superior products. In 1972, Honda established a design standard for front-wheel-drive small cars when it put the engine in the Civic sideways, creating more room for passengers. Last October a Formula 1 race car powered by a Honda V-12 engine won the world championship for the sixth year in a row. Honda introduced its lean-burning VTEC-E engine in the 1992 Civic, which gets 48 mpg in town and 55 mpg on the highway -- the best gas mileage of any four-cylinder car in the U.S. (To meet California's tough emission standards, Honda has to tinker with the engine, slightly raising its fuel consumption.) Although Honda was slow to catch on to rising U.S. demand for safer cars, it recovered quickly and now claims leadership on several fronts. Honda's studies show that the Acura Legend sedan survives a head-on collision at 30 mph better than the heavier Mercedes 300E. By 1994, Honda will install driver- and passenger-side air bags in all its cars, ahead of its mass-market competitors. Squeezed by Japan's growing labor shortage, Honda is increasing the level of automation in its plants. On its newest assembly line in Suzuka, robots do 100% of the body shop welding and install such bulky parts as spare tires, * batteries, seats -- even engines. In one operation, a giant automated jig welds six separate body pieces, including roof, floor, and side panels. Soon 30% of the jobs on the final trim line will be automated -- about the highest proportion anywhere. SUZUKA TURNS OUT 1,000 Civics a day on two eight-hour shifts with just 1,363 workers. That works out to 10.9 hours of direct labor per car. By comparison, Ford, the most efficient U.S. manufacturer, expends about 16 worker-hours on each Escort; GM averages more than 30 hours to assemble a car. Automation alone doesn't account for the difference. New workers get intensive training not only in such basic skills as welding but also in ''Honda Way'' methods of trouble-shooting and quality control. Working conditions are superior. Suzuka is spacious, spick-and-span, and quiet enough for normal conversation -- impossible in the din of most auto factories. Partially built cars move along the assembly line on $40,000 electronically controlled conveyors that replace clanky chain drives.

Another Honda strong point: customer loyalty. Honda's eight million U.S. owners keep coming back, even though Honda, alone among major automakers, resolutely refuses to offer cash rebates from manufacturer to customers or sell cars to rental fleets at wholesale prices. U.S. Honda buyers forked over an average of $14,300 for their cars in the 1991 model year, according to the J.D. Power & Associates marketing and consulting firm, vs. Toyota's $13,000, Nissan's $12,300, and Ford's $11,840. By not selling cars on price, Honda can consistently promote them on value. Honda's print ads have changed little in 15 years. Typically, they feature a big picture of the car and a block of copy explaining its virtues. Honda spends only 55% as much as Toyota on television advertising, according to Advertising Age -- apparently with little adverse effect. The Accord has been the best-selling single model in the U.S. for three years in a row. In the 1991 model year it beat out the No. 2 Ford Taurus by more than 110,000 units. So the challenge for Kawamoto is to revitalize Honda without killing any of the qualities that have made it so successful. A careful, precise man, he takes pains to analyze problems and identify goals clearly -- and disarms subordinates with a laugh and a smile. He was trained as a mechanical engineer and spent 25 years working in R&D. To Honda people that is the soul of the company, since they pride themselves on engineering innovation. Radiating self-confidence, Kawamoto engages strangers easily. On the eve of Japan's Formula 1 race, held at Honda's Suzuka track in October, he spent more than an hour at a crowded reception, bantering with journalists in both Japanese and English. No public relations operatives stood guard at his side. Wholly unpretentious, Kawamoto flies commercial and travels alone or with only a secretary -- as he did in November to visit Honda facilities in the U.S. and speak to MBA students at Stanford and Harvard. Kawamoto cooked up his reorganization after touring facilities employing 70% of Honda workers. He also visited suppliers and dealers to see how they thought Honda was doing. Before long, he concluded that in its rapid growth, Honda had contracted ''big company disease'' and had lost touch with its customers. He put most of the blame on middle managers, who were no longer taking much initiative. After 20 or 30 years of racing to keep up with Honda's growth, he found, they had slowed down and were devoting more time to their personal lives. Most un-Japanese. In a speech last April to managers at American Honda headquarters in Torrance, California, Kawamoto spelled out his diagnosis: ''Unfortunately, in Japan Honda Motor has become too large an organization. It takes too much time to make decisions, there are 'walls' within our organization, there seem to be too many complex procedures, and so on.'' But tightening up the company meant putting aside the principles that Honda had followed since they were laid down by Soichiro Honda. For example, the patriarch was fond of saying, ''First, there are people, then there is work, and a minimum necessary organization follows so the people and work are efficiently managed. An organization exists to serve its members or people, not the other way around.'' That wouldn't do for Kawamoto, who wanted to create a strong new structure. Said he: ''We had to tell our people that what we do from now on will not be restrained by anybody else, even Mr. Honda.'' As a courtesy, Kawamoto visited the elderly founder in his Tokyo office in February and explained the changes he had in mind. Kawamoto says he took the news well: ''Not many people criticize Mr. Honda. But I told him, 'I'm sorry to say it, but not everything you said is correct now.' At the instant that I said that, he was a little grim, but soon afterward he became very calm and said, 'Okay, you can make those changes.' '' The official announcement of the reorganization on March 14 pointed up Kawamoto's decision to run automobile operations personally. But the changes he imposed went much broader and deeper:

-- FASTER DECISION-MAKING. All 32 of Honda's Japan-based board members (roughly equivalent to vice president and above) shared the same tenth- floor office. Astoundingly, only 12 had specific responsibilities. Neat and clubby when Honda was small, the tenth-floor office had become a roadblock. Specific issues tended to gravitate to executives with experience in those areas, but there were no formal reporting relationships. When a problem arose, the board members tended to thrash it out among themselves until they reached agreement. Kawamoto's organization chart gives everyone on the floor a specific responsibility, such as quality or purchasing. When a decision is required, it's made by the lone executive affected.

-- BETTER MARKET INTELLIGENCE. An axiom at Honda has it that to make good decisions, you must be in the right place at the right time. With the breakup of the tenth-floor logjam, executives can spend more time out in the operating divisions -- and be there when decisions are required. They can also talk more with dealers, suppliers, and customers. One of Kawamoto's innovations illustrates the importance he attaches to ''right place, right time.'' He created an automobile planning board to report to him on future strategic directions. Five functions are represented: product planning, marketing and sales, manufacturing, cost control, and quality. Rather than create a new staff, with its attendant bureaucracy, Kawamoto filled the board with the line executives in charge of those functions. Decisions get made -- and carried out -- quickly. As Kawamoto explained in his speech at Stanford, ''Once a plan is approved, each member of this board assumes responsibility for implementation in his area. The speed of the entire process increases our flexibility.''

-- TIGHTER CONTROL. On his inaugural tour, Kawamoto gained new respect for the zeal and energy of workers at the lowest level of the company. But he became convinced that middle-level managers weren't giving them sufficient direction. So he ordered reassignments. Some managers were put on shorter leashes ''to hold them responsible for minimum levels of achievement,'' says Kawamoto. Others were assigned to specialist positions where they would no longer ^ function as supervisors. Nobody was fired, though Kawamoto suggests that in the future nonperformers might be in jeopardy. Traditionally, tight control is anathema to Honda. Another Soichiro Honda principle: ''If you succeed 1% of the time, 99% failure is acceptable.'' But Kawamoto believes global competition as well as growing social pressures on automakers makes that kind of luxury obsolete. Still, he has pledged to ease up -- a little -- after a three-year transition.

-- CLOSER COORDINATION. The entire reorganization is aimed at one central purpose: better cars. Kawamoto is no longer interested in machines that are merely faster, bigger, and more luxurious. New models will have to be safe as well as fun, economical but still lively. In producing them, high-quality manufacturing and marketing will become at least as important as Honda's vaunted R&D. To address these issues, Kawamoto created a new position of super-engineer to take control of both R&D and manufacturing. He named Shoichiro Irimajiri, 51, to fill it. Irimajiri studied aeronautical engineering in college and spent four years running Honda's Marysville plant. He was a leading candidate for the presidency in 1990 and is now Kawamoto's heir apparent. In a company that overworks almost everyone, Irimajiri may be the most severely taxed. He has embraced his new job nonetheless. Says he: ''We felt R& D had gone too far, so we pulled it back. I have to be a bridge so that we can have good communication and understanding among the factory, dealers, and the market.'' The changes won't mean any letup in product development schedules, however. Honda has traditionally revamped its cars every four years. Other Japanese manufacturers wait longer to redesign some models; American automakers let eight years or more go by between major changes. Despite complaints that the four-year cycle burdens engineers and costs too much, Irimajiri says Honda won't slow down because short design cycles are essential to the timely introduction of new technology. Since Honda needs three years to conceive and engineer new models (vs. four years or more, generally, for Detroit), the first sheet-metal evidence of Kawamoto's reorganization won't appear until the 1993 cars arrive late next year. But there is already talk of a ''design renaissance'' at Honda's high- security Tochigi R&D center. One sign of that renewal: For the first time in its history, Honda showed two not-for-production concept cars at the Tokyo Motor Show in October -- an ultra-high-mileage commuter car and a big luxury sedan. Another equally creative design is already a big hit with Japanese buyers: the Beat, a two-seat roadster little bigger than a shoebox with a tiny 660-cc engine positioned behind the front seat. The $10,000 vehicle could be adapted for the U.S. with a larger engine and a frame strengthened to meet federal crash test standards.

Irimajiri's counterpart as head of sales and marketing, the third man in Honda's ruling troika, is Yoshihide Munekuni, 53. Munekuni, who favors Italian-cut suits with broad shoulders, was called ''Moon'' by U.S. associates (after the first syllable of his last name) during a ten-year stint as head of sales at American Honda. He is driving the effort to make socially acceptable cars that people will actually want to buy. Says he: ''We have to make a smaller, cleaner, more efficient car, but our customers don't require it yet. The balance between the more appealing aspects of the car and environmental safeguards is very important.'' One of Munekuni's key goals is strengthening Honda's presence in its home market, where it has not been nearly so successful as in the U.S. Honda began selling cars in Japan only 28 years ago. Other manufacturers had already taken most of the prime sites for dealerships in the land-scarce nation, and in tradition-minded Japan its image remains that of an upstart. Today it has only 10.5% of the car market, vs. 35.6% for Toyota and 20.5% for Nissan. MOST CAR SALES in Japan are repeat business done by salesmen making house calls on previous customers. Toyota and Nissan dominate that business because they got there first. To shift the battlefield, Honda is refurbishing its showrooms, many of which date from the time it sold only motorcycles. It has developed an on-line computer system filled with customer data. When a salesman sees a prospect drive up, he need only key in the license number to call up a profile that includes the prospect's present car, personal background, and credit history. All beginning salespeople get as much as six months of instruction, including four weeks at Honda's central training facility, before they are allowed any customer contact. A telling touch: Service bays are spotless. Cars are washed before they are driven into repair areas as a sign of respect to the mechanics, Honda says. Honda is researching new models for the sales force to sell. Since the Accord accounts for 50% of its U.S. business, the company is vulnerable to any falloff in the popularity of its meal ticket. Kawamoto has ordered a design study of a new small car aimed at entry-level buyers. Now that the once rudimentary Civic sedan starts at $10,000, it's too pricey for them. The company is also developing a hybrid people carrier aimed at a hot segment of the U.S. market. Kawamoto describes it as a sport utility vehicle based on a car chassis -- unlike the Nissan Pathfinder and Ford Explorer, for example, which are built on truck frames. Others in the company say it will be more like a minivan. Honda designers have expressed a preference for a one-box design, along the lines of Toyota's Previa minivan, that blurs the distinctions among engine bay, passenger compartment, and trunk. Honda's ultimate goal is to design and engineer cars for the American market in the U.S. It already modifies for the U.S. basic designs developed in Japan. The Accord station wagon introduced earlier this year was the first such effort. By the mid-1990s, Honda expects to employ 500 engineers at its U.S. design and R&D centers, up from 360 today. Says Irimajiri: ''To American consumers the passenger car is a tool. Comfort, economy, and reliability are the major elements. In Japan the car is also a way for customers to express themselves. Image is more important. It's almost impossible to successfully combine both elements in one car.'' Some industry watchers think that's why the sensible Accord succeeded in the U.S. -- and flopped in Japan, where it doesn't look flashy enough. IN ITS U.S. manufacturing operations, Honda is gradually transferring management from Japanese to Americans. Some 50 engineers and managers from the Ohio plant are spending two to three years in Japan getting firsthand exposure to Honda's engineering methods. The idea is that when they go back home, they will be not only more proficient at their jobs but also able to communicate better with the Japanese in the home office. Although its culture is Japanese, Honda's investments abroad are making it a multinational corporation. One-third of its employees are foreign. How international does it want to become? How international will protectionist politics in its major markets force it to become? For his part, Kawamoto is ambivalent about capitalizing Honda's U.S. operations by selling shares to the public. For one thing, it would require this close-mouthed company to divulge ; the financial results of its U.S. operations. But he is willing to entertain other ideas -- even the notion of transplanting Honda's headquarters. Says he: ''It is not necessary for us to be in Tokyo, and we should not just speak to the Japanese race. We could move our head office to Hawaii.'' Few other Japanese companies would contemplate such a move for a second. What makes Honda so fascinating -- and so fearsome a competitor -- is precisely that willingness to consider new things. Despite the legacy of a legendary founder, and a record of remarkable success, it refuses to be bound by the past. Not all companies thrive on change. Honda's challenge now is to do what good ice hockey teams do: Make substitutions on the fly without interrupting an all-out offense.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCES: WARD'S AUTOMOTIVE REPORT, JAPAN AUTOMOBILE MANUFACTURERS ASSOCIATION CAPTION: THE TOP SIX IN TWO MARKETS Honda made the Big Three after just 21 years in the U.S. market, while at home it's holding its own as Toyota and Nissan slowly lose market share. Honda passes Chrysler in the U.S. . . . . . .but it's no big deal in Japan

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: HONDA MOTOR