The world catches up to Honda
By staying true to its principles, the Japanese automaker is making buckets of money in a tough market, says Fortune's Alex Taylor.
By Alex Taylor III, Fortune senior editor

NEW YORK (Fortune) -- For the past decade, Honda has been out of step with most of its North American competitors - sometimes defiantly so.

While other automakers rushed to beef up their pickup trucks and SUVs with stronger frames and bigger motors, Honda (Charts) stood to one side, refusing to develop either a V-8 engine or a traditional body-on-frame light truck. Likewise, when other manufacturers engaged in a horsepower race to lure consumers and take advantage of cheap gasoline, Honda held back. Staying true to its philosophy of "maximum man, minimum machine" it concentrated on smaller, more efficient four- and six-cylinder engines.

Finally, while other automakers reluctantly explored internal combustion alternatives like gas-electric hybrids and fuel cells, Honda plunged all the way in, launching research efforts into everything from clean diesels to hydrogen power.

Honda's decision to stick with what it believes in is now paying off big time. Look at what happened in July. For its first quarter, Honda reported sales up 15 percent and operating profit up 19 percent. The Honda Accord and Civic ranked as the second and fourth best selling passenger cars in America. In a U.S. market where overall sales fell 17.4 percent, Honda brand vehicles rose 6 percent.

To cap off a remarkable performance, Honda passed Chrysler Group in sales for the first time in history, coming in fourth behind General Motors (Charts), Toyota (Charts), and Ford (Charts).

Unlike richer and more powerful Toyota, which matches American producers car for car and truck for truck, Honda has succeeded by remaining very much a focused Japanese-style company. It maintains a relatively modest product line that it sells in high volume around the globe. Its concessions to American tastes, like the Element SUV and Ridgeline pickup, seem almost like afterthoughts.

Uniquely among the world's automakers, Honda thinks of itself as an engine company first, and still maintains a sizeable business in motorcycles, lawn mowers and marine motors.

As a result, Honda's percentage of light truck sales is the smallest in the industry at 42.7 percent (compared with Chrysler and Ford at around 66 percent). - a good place to be with truck sales falling. And it has the highest corporate average fuel economy and, not coincidentally, the highest median household income for buyers - $87,907. By comparison, GM checks in at $75,888.

The recent spur to Honda's success has been $3 per gallon gasoline, but this has been a case of good planning rather than good luck. With its twin corporate pillars of improving safety and sustainability, Honda has been a consistent striver after ways to limit gasoline consumption, sometimes to its embarrassment.

While it was the first company to market a hybrid-electric car, the lozenge-shaped two-seat Insight it introduced was more test-bed than consumer product and quickly lost the publicity battle to Toyota's more practical Prius. Ironically, subsequent Honda hybrids failed to make much headway either because they looked too much like conventional cars or weren't engineered to provide maximum fuel economy. But Honda has persevered and its Civic hybrid has become a big seller.

Looking ahead, Honda is planning a big worldwide expansion. It plans to boost annual sales to 4.5 million by 2010, up from 3.4 million last year. About a third of that growth will come in North America, where it will build a sixth assembly plant, this one in Indiana. Honda's new factories potentially offer around a 20 percent improvement in productivity compared with existing sites.

Coming on the product front is yet another new hybrid, this one to be smaller and more affordable than the Civic, and three new diesel-powered vehicles.

Honda still likes to do wacky engineering projects that detour it a long way from the car business. The company spent several years developing a sophisticated walking robot called Asimo that it exhibits to school groups. And it just announced plans to enter the market for small business jets by introducing one with space for up to seven passengers.

But given the company's remarkable record of anticipating customer demand, who knows? Both could turn out to be profitable ventures. Top of page

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