2008 Management Briefing Seminars - Remarks by Dick Colliver

2008 Management Briefing Seminars
Remarks by Dick Colliver, Executive Vice President, American Honda Motor Co., Inc.

Thank you, Dave. And good morning everyone. I'm really pleased to see such a good crowd today. This is annually one of the industry's largest and most important gatherings. But as I was making my way here from California ... I wondered if the economy and the difficult sales market would discourage some of you from attending.

The ability to talk to each other ... and learn from one another ... is essential to the future of our industry. So, just the fact that we're all here together is both a positive statement ... and an important step.

Having said that ... I must admit that the business conditions impacting our industry today are the most dynamic I've ever experienced. "Turbulence" doesn't begin to describe it. I've been in this business for more than 45 years. So, you might think I'm being a little too humble ... or just plain stupid ... please hold your judgment until I've finished my remarks ... but this is the first time in my career when I didn't have a clear idea about whether our efforts to stimulate sales will work.

Of course, the reason we as an industry are struggling to make sense of things ... is that our customers are struggling to make sense of it as well. They're being hit from all directions ... including a struggling economy that has made buyers more conservative ... and high gas prices that are changing what people buy and how much they drive. We don't need to go into detail on what created these challenges ... but we should spend some time talking about how we can overcome them.

Certainly we're all battling to survive. That's true for the entire industry ... automakers suppliers and dealers alike. We have our own challenges to deal with ... including rising prices for raw materials ... and higher fuel costs. And we can't pass all of these costs onto the customer. In addition to these factors ... and in part as a result of them ... the light truck market is also very challenging right now. And the combination of these factors makes for treacherous times. But no matter what your role in the industry ... in my view ... the key is not to approach survival based on short term objectives. Honda has always understood that challenging times can even present opportunity ... if your business is guided by a clear vision ... and you pursue that vision by leading your organization with a positive spirit.

None of us can control the difficult business conditions. But each of us can control the actions we take. And when we encounter rough seas and gale force headwinds ... like those we are experiencing today ... the single most important tool to ensure that you reach your ultimate destination ... is a "north star" that doesn't change with the times ... and that will help guide the way in both good times and bad.

For Honda, this "north star" is a core set of values that serve as the framework for all of our decision-making. Someone said to me recently that the market is "coming back" to Honda. But I can't agree with that view. Instead, I would suggest that our values are consistent and forward-looking ... and the market is finally catching up with us.

Honda has been receiving a lot of attention over the past few months ... because we've continued to modestly grow our sales even as the overall market is struggling. I think sometimes people believe Honda has a secret weapon that enables us to grow in these challenging times. I can assure you that we don't. Honda's success is the result of careful planning ... based on our core values ... that begins with a total focus on the customer. It's true, we've experienced slow and steady growth ... in the U.S. and globally. But the people who work for Honda think we're still a small company ... because we act like one in the way we manage details. This lean philosophy is one of our values ... and one of our strengths.

Our long-term performance trend reflects this careful approach. With few exceptions, we have maintained an annual growth rate of about 2 to 3 percent in good times and bad. For a company that likes to go fast ... in terms of the products we create ... the racing activities we love ... and the speed of change we help foster ... our business strategy is more like the tortoise than the hare.

Sure, we've taken some criticism in the past ... for not expanding into larger trucks and V8 engines. But these were strategic decisions based on our values and forward-thinking vision. I have to admit that as truck sales grew to more than 50 percent of the market ... a number of our dealers hounded us for a big V8 pickup truck and SUVs. But several months ago, one of them approached me and said ... "Hey, I'm sure glad you never listened to me about those V8s."

Rather ... we have always invested in fuel efficient technologies that make our products unique ... in manufacturing plants that provide us a measure of flexibility to build the products our customers need ... and in sales and marketing efforts that ensure our products retain their value and protect the strength of our brands. In short, we invest in the customer. But more than that ... we listen to them.

I mentioned a moment ago that I'm in my 5th decade in this business. Now that's survival! This includes the honor of working with both Chrysler and Mazda ... before joining Honda some 15 years ago. But my first job in the industry was with GMAC in the 1960s. I was the "repo king" of Kansas City. Talk about getting close to the customer! I used to sit out on the street, waiting for customers who had defaulted on their loans to come home. As soon as their front door closed, I was firing up the engine and driving away. I can remember once when I "repo-ed" three cars and a truck in the same day to the same dealer. That wasn't a pick-up truck either. I'm talking about a big tractor trailer rig with a 15-speed transmission. Try that as a getaway car. When I met the dealer on his lot he was ready to kill me. He said "Son, I can't sell 'em as fast as you're bringing 'em back."

I was doing my job ... focused on the immediate challenge ... without giving a heck of a lot of thought to the customer's relationship with the dealer or the brand. I joke about it now ... but experiences like this taught me that our entire business ... what we make and how we sell them ... must be shaped around the people who buy our products.

Today, I find that it's our industry that too often has its sights set on immediate challenges like profit ... at the expense of long-term vision. We want to return value to our shareholders just like everyone else ... but we know ... and they know ... this must be based on strengthening the customer's relationship with the brand.

In Honda, I found a company that believed in the same things that I do ... really putting the customer first in every decision. The phrase "customer satisfaction" first appeared in the Honda Company Principle in 1956 ... but it isn't some company slogan. The idea that customer satisfaction is our first priority ... and our only imperative ... is a vision that is understood throughout the company.

But really ... what is customer satisfaction? The term is used by everyone ... but I'm not sure the definition is. In our view, customer satisfaction is more than just a good sales experience ... or a free car wash when you service your car. Customer satisfaction is about a relationship with the customer that begins with developing products that fit their needs ... and forms into a bond based on their trust in those products ... and the brand. It's a relationship that is ultimately driven by loyalty that goes equally in both directions. This view of customer satisfaction is especially important now. Because in troubled times ... a strong brand gives the customer an emotional sense of security. And I think you're now seeing this factor play out in our success.

Our particular bond with the customer is based on shared values that are timeless ... things like quality and reliability ... innovation and efficiency ... that are at the heart of our ability to respond to this rapidly changing market.

Fuel efficiency is one of these core values. Small efficient vehicles are not short term strategies for Honda. They are part of a fundamental commitment that goes back to Honda's entry into the auto industry in the 1970s. I remember when Honda came on the scene with that little N600. Back then it seemed absolutely tiny ... like two motorcycles strapped together. I don't know that anyone knew enough to take the company seriously as an automaker. I didn't.

But then came the challenge of the U.S. Clean Air Act ... and the first oil shock ... with lines at the gas station that went down the block and around the corner. Almost uniquely ... Honda challenged both of these issues. And the first Honda Civic not only met the emissions standards of the Clean Air Act ... it led the U.S. EPA's first list of the vehicles with the highest fuel economy. This focus on the environment and can-do spirit helped Honda gain entry into the auto industry.

Of course, we're now facing what I guess you could call the "second oil shock." And Civic is again leading our success. But over the past 35 years what has endured within Honda is not just a product like Civic ... but the values that created it.

Over the past decade ... with cheap gas and light truck sales taking more than 50 percent of the market ... some analysts and critics questioned our strategies. But we never strayed from our commitment to small efficient vehicles. We continued to invest in original technology to advance fuel efficiency in all of our products.

Now ... our research demonstrates that there are at least three key factors driving the growing demand for more fuel efficient vehicles. First of all ... fuel efficiency is once again a pocketbook issue in America. And in that sense, we shouldn't forget that the original term ... "fuel economy" ... was coined by the federal government to help consumers find cars that could go farther on a gallon of gas. Certainly, this is a key driver of the change we are seeing in consumer behavior.

But even prior to the recent and dramatic run up in fuel prices ... the drive to increase fuel efficiency was propelled by an interest in protecting the environment ... to reduce greenhouse gas emissions that contribute to global climate change. And this concern kept Honda's focus on fuel efficiency as a priority in our vehicles.

But our research also shows that concern for the environment created a third, more psychographic component to the focus on fuel efficiency. This involves not only people who buy hybrid vehicles to make a personal statement ... but consumers who trade in their big SUVs and trucks ... because they fear friends and neighbors might ridicule them for using a big SUV just to drive back and forth to work.

The net effect of all of this ... is that people have streamlined their decision-making process. And they're moving fast. Half of the new Civic customers we talked to purchased their vehicle after being in the market for less than 4 weeks.

I'm not sure anyone can say conclusively that this shift away from light trucks is a true structural change ... or something that might trend back ... if fuel prices decline or customers grow accustomed to paying more at the pump. Most experts say the price will never go back to what it was even two years ago. But our research found people using words like hideous ... horrible ... terrible ... and insane. Clearly, this has become a very emotional issue for consumers. And we need to look at it from their perspective.

Toward that end, next spring, we will further increase the number of models we sell with high fuel efficiency with the launch of an all-new 5-door, 5-passenger dedicated hybrid car. We believe our IMA hybrid system is best suited for smaller vehicles where the fuel efficiency gains are the greatest. The challenge ... especially with small cars ... is to bring the price down to where more people can afford it. And that is our goal for this new hybrid model ... to make it affordable for a new generation of car buyers. We plan to price it below our current Civic Hybrid. And we're targeting sales of 100,000 units of this new vehicle in North America ... and we've got more hybrid vehicles on the way.

For the long term ... we continue to see the development of fuel cell vehicles as the ultimate solution. While this technology is more than a decade away from the mass market ... we know it works ... because we've been advancing it in the real world ... with real customers. In fact ... we delivered the first all-new FCX Clarity to a customer at one of my dealers in LA several weeks ago. In addition to futuristic styling ... and great performance ... this 4-door sedan gets the equivalent of 74 miles per gallon. That's nearly three-times a gasoline-powered car of the same size.

So ... sure ... the sales volumes for FCX Clarity are small right now. But we can't let the challenge of surviving today's difficult conditions distract us from our ability to survive in the future. Honda is committed to advancing real-world solutions to our world's energy and environmental concerns.

But you don't need to look to our decisions to invest in future technology to understand how much value we place on fuel efficiency at Honda. You can even see our commitment in some of the decisions we don't make. Two years ago there were some who wondered about our strategy not to add V6 power to the all-new CR-V. But we knew that fuel efficiency was one of CR-V's important values. And you can see how that vision is now in line with the direction of the market ... as CR-V became the best-selling SUV in America last year.

This commitment has earned us the highest fleet average fuel economy of any automaker over the past 15 years ... and is adding renewed strength to our product lineup. But it's too easy to explain away the success of CR-V or the increase in Civic sales as simply a result of higher gas prices. Because there are a lot of cars on the market with high fuel economy that aren't selling anywhere close to these products. The reality is that customer values are changing. And all of us need to strengthen our knowledge of who the customer is and the way they look at transportation.

I see customers starting to take a hard look at the overall cost of ownership. They're putting more value on dependability, quality and reliability ... and resale value. These are factors that help them predict the total expense of buying and owning a vehicle. So, yes, they want better gas mileage ... but they don't want to give up on all of their other needs and desires. They also want advanced safety ... and vehicles that are fun to drive. And it's all of these values together that are driving sales of the Civic. I know I sound like a salesmen ... but this is one of the important dynamics in today's market ... and everyone needs to understand what's driving this change in customer demand.

In a few months we will open a new plant, in Indiana, just the second plant we've opened in the U.S. since I joined the company in 1993. I was in Indiana two years ago ... in the town of Greensburg ... the day we announced our plan to build the plant ... and to begin with production of the Civic Sedan. I think we surprised a lot of people with that announcement back in May 2006. Considering the popularity of the Civic right now, some people may think of us as soothsayers. But I assure you that our success is a function of consistency and focus ... rather than fortune-telling.

It is a hallmark of Honda that our sales organization works closely with our production operations in North America, and on a global basis. We're always thinking ahead and planning for the future ... that's another of our core values. We make a plan ... we work the plan ... and then make adjustments as necessary.

Today, that means increasing the supply of the fuel efficient passenger cars our customers want and need. But it's a complicated issue ... because most of our light truck production is now based in North America. So, let me tell you what we've done in just the past year to manage this considerable challenge and ... as best we can ... align our business to market demand. We needed more Civics ... even before our new Indiana plant comes on line this fall. But while these changes in the market were sudden ... our ability to cope with this very difficult challenge was not.

We began introducing a new flexible manufacturing system to all of our production plants ten years ago. This system restructured our plants so they could be more flexible ... aligning our production lines with customer demand ... through reprogramming, rather than more expensive re-tooling.

Then, in late 2006 ... even before gas prices really took off ...we initiated a series of moves to produce more fuel efficient cars ... and at the same time take pressure off certain light truck models by consolidating all production of Pilot in Lincoln, Alabama. This enabled us to add production of Civic to one of our plants in Canada ... on the same line with two of our biggest vehicles ... the Ridgeline and Acura MD-X. This increased our supply of Civic by as much as 60,000 units a year. Now ... even with the added supply ... we still sold ourselves out of product. After Civic sales hit a record of more than 50-thousand in May ... we went to 40-thousand and 29-thousand the past two months ... simply due to supply.

Further, the truck market has continued to decline ... even beyond our expectation of a year ago. So ... we recently announced plans to make further adjustments. We're reducing truck production at our Alabama plant over the next three months. And early next year we will move Ridgeline production from Canada to Alabama ... while increasing Civic production a bit more in Canada and Ohio. This will help make more efficient use of our North American capacity.

Please understand ... I don't mean to suggest any of this is easy and without some pain. These changes create big challenges for the people working at our manufacturing plants and with our suppliers. It isn't often a sales guy like me gets a chance to address suppliers ... and I know some of our supplier network is out there. We don't like to move this fast ... but I want you to know we really appreciate your efforts to help us meet the needs of our customers. By attacking it with a challenging spirit ... you have helped us turn tough conditions into a positive for our customers as well as our companies. We really appreciate it.

Significantly ... this effort to manage inventory levels not only plays a critical role in responding to customer demand. It also helps us protect the value of our products in the marketplace and the value of the Honda dealerships. Because allowing inventory levels to get too high, runs the risk of closing plants temporarily ... or requiring sales tactics that would risk decreasing the value of Honda products.

At Honda, we have consistently rejected the types of short term financing deals and marketing tactics that attract customers ... but diminish the brand. We've never done fleet sales ... and that's not a brag point ... it's a strategic decision. We have higher resale value as a result.

And while market conditions have led us to use incentives more than we once did ... and certainly more than we'd like ... we have consistently maintained the lowest incentive spending in the industry. We view incentives as a tactic to help manage inventories ... not a strategy to bring people to the showroom. We have not and will not pay people to come back to our brand.

These sales strategies are cut from the same cloth as our efforts to advance fuel efficiency in our products ... and our effort to create a customer-focused production system. Our belief is that survival in good times and in bad is a function of the ability to maintain a clear focus on a long term vision ... core company values ... and the customer.

But every day, I'm reminded that we're in a never-ending struggle for survival. On June 3rd, the morning after our record May sales results were announced ... we had a meeting of top management. We had just experienced the largest sales month in our history ... with Civic as the best-selling car in the industry ... and I was feeling pretty pumped up! Then I go in to our meeting and our entire discussion was about the need to further reduce costs. So much for yesterday's news!

But this takes me back to where I began today. Because we have little control over the challenging business conditions. No matter how successful any of us are ... we all deal in our share of disappointment ... and struggles. It's easy to get down ... to become distracted. But we have to keep challenging. Earlier this year, we reminded everyone working for Honda ... and our entire dealer body ... that while we face great economic uncertainty ... we want them to approach business with a positive can-do spirit.

Now more than ever, it's important to be positive ... even when the news and sometimes the results seem headed in the wrong direction. I'm not talking about phony optimism ... or suggesting that just you smile through your tears. I am suggesting you approach your business ... no matter how difficult ... with what we at Honda call a "challenging spirit."

But perhaps it was that great icon of our industry ... the late Henry Ford ... who said it best ... "Whether you think that you can, or that you can't, you are probably right."

So ... with a strong, consistent vision serving as your "north star" to guide the way ... and with an unrelenting focus on your core values and the needs of customers ... if you approach your business with a positive can-do spirit ... I think each one of us can turn this thing around. Thank you for your attention.

  • share: