Remarks by Rick Schostek, Senior Vice President, Honda North America, Inc. at the CAR Management Briefing Seminars (Traverse City, Mich.)
Thank you, Jay. And good morning everyone.
This is my first chance to participate in the Management Briefing Seminar. But I’m no stranger to the important role CAR has played within our industry over the past decade. So, congratulations to you Jay … and to your entire team … on your 10th anniversary.
Like all of you here today … I’ve followed the news that has emanated from this gathering each summer … and the perspectives shared by the industry leaders who have spoken here … including a number of our own leaders at Honda. So, it’s an honor to join their ranks.
Before I begin, I’d like to take a moment to express my and Honda’s sympathies on the passing of an industry icon, Dick Dauch. American Axle is an important member of Honda’s supply base. I’ve served on the board of the National Association of Manufacturers for the past 10 years … as a result of that, I had the honor to be in Dick’s company a couple of times a year. My brother-in-law is also a friend of the Dauch family, having attended college with one of Dick’s boys. NAM’s President Jay Timmons called Dick a “true lion of manufacturing.” That says it all. Our deepest sympathies to the Dauch and American Axle families.
I’ve enjoyed listening to all of the presentations this morning. Reflecting on our theme … there are many ways to look at the issue of mobility and sustainability. For Honda, of course, these terms conjure up our deep interest in environmental sustainability … and our leading commitment to reduce CO2 emissions. This is something that drives the direction of every Honda and Acura product, be it automobile, motorcycle, power equipment, or jet airplane. And not only the products themselves, but also the plants that build them … the trucks, trains and ships that move them … and the dealers who sell and service them.
But when you look at this theme in terms of the hyper-competitive nature of our business today … you could argue that sustainability is simply survival. Hyper-competition is defined as “a rapid and dynamic competition characterized by an unsustainable advantage” … where companies introduce products, features, or sales strategies to disrupt the market in an effort gain a temporary advantage. In some ways, you could say that this has been the recent reality of the auto industry.
Our industry has never been more competitive. But at Honda, we’ve never believed that challenging competition makes success and leadership unsustainable. It has always been our goal to create long-term business strategies that keep us focused on our customers … and off the roller coaster ride created by short-term factors such as economic conditions, exchange rates, and immediate competitive pressures.
Here’s our take on this morning’s theme: To prosper over the long run requires the ability to build and sustain strong relationships with two key groups: (1) the customers who buy our products, and (2) the people who work for our company. This is our central focus, both globally and here in North America.
That doesn’t mean we approach our business with the attitude “if it ain’t broke don’t fix it”. To the contrary, we have recently initiated some of the most significant organizational changes in our history … designed to further advance the speed and efficiency of our new model development … and to fulfill the larger role our North American operations now play within global Honda.
These changes to our decision making structure are anchored in the solid foundations of Honda’s commitment to continued innovation and value creation … the same core values that have driven our business since its earliest days and that are fueling the great market momentum we are enjoying today.
Here again, I’m talking about real momentum based on the strength of products sold by our dealers one car and one customer at a time. Through the first six months of this year, four Honda models … Accord, Civic, CR-V and Odyssey … rank number one in retail sales in their respective segments. We’ve introduced all-new versions of each of these models in the last couple of years … so you could say we’re 4-for-4 with these mainstay Hondas.
Our focus on retail sales is a key part of our strategy to sustain strong customer relationships. Sales tactics like large-volume corporate fleet sales might create the appearance of market momentum. But they can negatively impact the future value of a vehicle … and for the customer who actually buys at retail … fleet sales can hit them where it hurts the most … when they go to trade in their car.
During the first half of this year Honda topped all mainstream automakers with more than 98 percent of our sales going to individual customers. We believe our commitment to selling one car and one customer at a time plays a critical role in why customers have remained so loyal to the Honda and Acura brand at industry-leading levels … according to ALG, KBB and Edmunds.
Of course, the best way to maintain loyalty from your customers is to continue creating innovative and exciting products that they want to own. And we are doing our best in North America to deliver on that promise and fuel our momentum. Last year, we launched the all-new Accord. And two months ago, we launched the all-new Acura MDX … a U.S.-developed and manufactured luxury SUV that is being built for the first time in our Alabama plant … after moving from our plant in Canada. And next spring we’ll begin to launch a new lineup of sub-compact vehicles … starting with the 2015 Honda Fit … that will go into production for the first time in North America at our newest plant in Celaya, Mexico.
All these models incorporate new Earth Dreams Technology that underpins our effort to advance both the joy of driving and our commitment to greater fuel efficiency and lower CO2 emissions. The success of the ‘13 Accord first demonstrated the promise of Earth Dreams Technology. The new CVT in the four-cylinder Accord Sedan and Coupe has earned exceptional reviews for its sporty performance. And the Accord’s direct-injected 4-cylinder and V-6 engine both made the Wards list of 10Best engines for 2013.
The Earth Dreams Technology series of powertrains also includes three new hybrid systems. And the all-new 2014 Accord Hybrid we will launch this fall will feature Honda’s first-ever 2-motor hybrid system. We previously announced our expectation that the Accord Hybrid will achieve an EPA-certified 49 miles per gallon city … but we have a feeling our engineers might just beat that number when final testing is complete.
Our Acura brand also will introduce a new 3-motor Sport Hybrid system on the RLX later this year … which is expected to achieve 370 horsepower and fuel economy of at least 30-30-30 city, highway, combined. Again, these are preliminary numbers that we hope to improve on before we come to market. In a different configuration, this new Sport Hybrid all-wheel drive system will power the next-generation Acura NSX supercar that we will begin producing at our new Performance Manufacturing Center in Marysville, Ohio, within two years.
So, our new Earth Dreams Technology is another part of our effort to create new value for the customer and society … and to accelerate our market momentum in the years ahead. And as part of the new, lead role our North American operations are playing in global Honda, we are making many of these Earth Dreams technologies at our engine and transmission plants in North America.
Last year, we revealed that our R&D and manufacturing team in North America is taking on greater responsibility … not only developing and launching global models like the next generation Honda Civic for North America and the Acura NSX … but also developing the production know-how and processes for those models and then sharing it with other Honda plants around the globe.
This lead responsibility, which we refer to internally as the ‘global mother’ role, also means a greater responsibility for Honda in North America as an exporter of products and parts to other regions. For our current fiscal year, ending in March 2014, we expect to be a net exporter of automobiles from North America … meaning we will export more vehicles from this region than we import from Japan and other countries.
This new responsibility for Honda in North America is leveraging the manufacturing operations we established in this region over the past three decades … and that we’ve continued to grow with recent major investments in North America.
Following the global recession and during the natural disasters of 2011, the natural tendency would have been to retrench … but we took the opposite approach. We’ve invested more than $2.5 billion dollars in the future of our North American operations just over the last three years.
This includes the new $70 million dollar Performance Manufacturing Center for the NSX I just mentioned… the start-up of Accord Hybrid production at our Marysville Auto Plant … the production of new Earth Dreams Technology engines and transmissions in Ohio, Canada, and Alabama … the capacity expansions and innovation at our plants in Alabama, Indiana and Ohio … and the establishment of a new sub-compact car capability for the first time in North America, at our new plant under construction in Celaya, Mexico.
That’s quite a list … and trust me … we have many other ongoing projects that I didn’t mention. Which brings me to this: In light of our three-decades-long track record of investing in our North American manufacturing operations … I’m scratching my head as to why anyone in our industry would make an issue of exchange rates and the value of the Japanese yen.
It’s certainly not an unfair competitive advantage for Honda. We’ve basically taken it out of the equation. We have seven auto plants in North America with two more under construction. This will increase our base annual auto production capacity to more than 1.92 million units when the new Fit comes on line next year. And it will mean that more than 95 percent of the vehicles we sell in the region are made here … up from 90 percent last year … which is what is driving our ability to become a net exporter from North America.
Year after year … Honda’s story in North America has been one of continued reinvestment in our existing facilities … regardless of exchange rates … to keep our operations on the leading edge of quality, efficiency and flexibility.
Our investments in North America also have paved the way for the introduction of new transmission and precision parts technologies in our plants in Ohio and Georgia.
As just the latest example, today, I am happy to announce new investment of nearly a quarter-billion dollars in our Ohio operations. This includes new aluminum die casting and other technologies to be introduced at our engine plant in Anna, Ohio, including for production of the new Acura NSX powertrain … as well as two new training centers to help prepare our associates to meet the challenges of new technologies and production processes for the future.
We’re excited that one of the training facilities also will house a new heritage center, highlighting our more than 30-year history of manufacturing in North America. So, the new Honda facility will represent an important link between our past achievements and our future of increased responsibilities that require advanced manufacturing skills and technologies.
For the 21st century of manufacturing, we believe our success will be defined by the successful interaction between our associates and technology. A good example is when we started production of the new Earth Dreams direct injection engines last year at our Anna Engine Plant. This required our associates to learn how to operate new equipment … and how to measure the achievement of the highest quality levels with these new processes.
This latest investment also brings to more than $500 million dollars the amount we have invested in the Anna Engine Plant alone in just the past 3 years. Just to give you some perspective … a few years ago, our associates at the Anna Plant built four basic engine types. Soon they will produce twelve.
In addition to facilitating the introduction of direct injection engines … the new investments have enabled us to add advanced pulley components needed to localize production of our outstanding new CVT transmissions. Producing these high-precision pulleys requires a series of processes … and represents a big challenge for our associates to learn a new technology … and then ramp up production very quickly. Mastering this process will represent yet another advancement of their skills … and will enable us to become more autonomous within this region … and create new value for the customer.
Toward more of these kinds of challenges in the future, we are establishing two technical training centers in Ohio … a new training center for powertrains will be constructed at our engine plant in Anna, Ohio. And a training center for auto production will be located near our Marysville Auto Plant. These centers will provide our engineers, equipment service technicians, and line-side associates with unique opportunities to develop skills that will refine their current technical know-how in a hands-on environment.
So, as we introduce more sophisticated technologies in our products and in our plants, we are working to ensure that our associates are equipped with the skills required for the manufacturing requirements of the future.
We view this investment in Honda people as critical to our future.
A driving force behind our technical training efforts at Honda is the North American Engineering Center we established about four years ago in Marysville, Ohio. This center is staffed by expert Honda engineers who have spent the past 30 years in key roles in our North American plants. They now serve as something of a think tank for the development of new processes and technologies, as well as the curriculum we’ll use to advance the next generation of technicians.
Their efforts include both incremental and game-changing types of ideas that will be implemented at our plants in the coming years … as we strengthen Honda’s manufacturing foundation in North America for both today and tomorrow.
A great example of their work is the new Performance Manufacturing Center in Ohio, where we’re breaking the mold in terms of how to create a new kind of small-volume production facility. During the study phase, our experts at the North American Engineering Center evaluated potential production locations and came up with the core technical concepts for weld, paint and assembly that we’ll use to build NSX. These concepts are also being studied for their potential application in a larger-scale production environment. In this sense, the new Performance Manufacturing Center will serve as both a state-of-the-art production facility and a laboratory for future innovation in all of our plants.
I don’t mind telling you that we’re very proud of our manufacturing capability … it’s long been one of our core strengths. We have the equipment, the systems, and most importantly the people to safely and efficiently produce high-quality vehicles.
Looking back, it’s probably fair to characterize our past efforts as focusing on how to produce similar things in a flexible manner. Looking to the future, you could say we’re focused on how to produce dissimilar things in a flexible manner.
This includes accelerating the introduction of dissimilar powertrain components, such as gasoline engines and hybrid technologies … and use of dissimilar materials such as steel and aluminum to advance light weighting.
You probably noticed the display of a cut body of the 2014 Acura MDX outside this room. Developed and built exclusively in the U.S., the seven-passenger MDX has the lightest curb weight of any all-wheel drive vehicle in its segment … even when compared with some significantly smaller, five passenger models.
It features the world’s first hot-stamped one-piece door ring … and a cast magnesium steering hangar beam … to help cut 275 pounds from the previous MDX … while achieving even more robust crashworthiness. These are two prime examples of technology applications developed with our suppliers.
And I want to take just a minute to speak directly to the many suppliers here today. Your companies supply a great number of new components and technologies that are being introduced by OEMs like Honda. And I don’t see Honda’s challenge as so different from what virtually every one of you will face in the coming months and years.
Your ability to ensure that your components and technologies are produced to the highest quality standards … and in the most efficient and flexible manner … will hinge on the skills of your people. Their ability to meet this challenge is paramount to your own sustainability.
The lead role we are playing within global Honda has profound implications throughout our supply chain. For our suppliers, it’s the dawn of a new era. We’ve asked our suppliers in North America to provide strong regional leadership in both design and production … sharing know-how deeply within their own network. This means not only planning for and meeting new model targets for quality, cost and volume … but showing global leadership to support the needs of other regions, which increasingly will follow our launch schedule in North America.
One tangible result of this enhanced supplier activity is exports. Supplier products exported in our North American produced vehicles, of course. But also parts exported as components for Honda plants in other regions.
Let me conclude by discussing our recent organization changes.
The enhanced supply chain collaboration for the development of future products … along with the challenges presented by the hyper-competitive marketplace I mentioned earlier … are what led to a new organizational strategy we began implementing this past April. These changes are aimed at further advancing the speed and efficiency of our new model development efforts. Achieving these objectives is not simply an issue of advanced technology. This is a people issue.
Our new organizational strategy is focused around an even higher level of teamwork and collaboration across the core functions of sales (S) … manufacturing (E) … R&D (D) … and purchasing or buying (B) that are critical to bringing new models to market.
The idea of teamwork and collaboration in new model development isn’t new to Honda. In fact, I can recall early in my career when some of our competitors visited our operations to better understand what we call our S-E-D-B system. But to ensure that our development efforts respond to the needs of our customers with even greater speed and affordability, we initiated a series of organizational changes on a global basis … including here in North America.
In April, we centralized regional management to improve strategic planning across sales, manufacturing, R&D and purchasing. We based these leadership and strategic planning functions in Ohio … because it is already the center point of our engineering capabilities in North America that are critical to new model development. This includes R&D … our North American Purchasing group … the North American Engineering Center and other key functions.
In addition to bringing top management together in one place, we created a new executive coordinating position called the Business Managing Officer, or BMO … who has the responsibility to coordinate across each functional area to increase speed, efficiency and quality.
One simple new approach is a monthly auto business strategy meeting led by our BMO … with the leadership of S-E-D-B in one room.
We’re able to tackle a diverse range of topics … all of which were worked on before, but by each functional area … which would sometimes result in competing proposals and time-consuming correlation at a later stage. This could not only slow things down … but result in higher costs. Another way to look at this is that we were at risk of wasting the valuable efforts of our talented associates by dragging out decisions unnecessarily.
Now we can't escape or put off collaboration. And with the greater responsibility and regional autonomy now vested in our North American operations, the BMO and our regional management lead the effort to discuss and resolve issues quickly with an eye toward what is best for our customers in North America.
Fifty years ago, the Pulitzer Prize-winning historian Alfred Chandler theorized that “structure, follows strategy.” We are working every day to create a smarter and more efficient organizational structure guided by our very clear business strategies.
By continuing to invest in our North American operations … and by empowering our people with the advanced skills to create products that give joy to our customers … we hope to reach a higher level of speed and efficiency that will lead to sustainable success and leadership for decades to come.
Thank you for your attention … and now I look forward to your questions.
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