The Battle Between Asian Rivals

Honda and Toyota have fallen down in three areas: New Product Development, Total Quality Management, and Supply Chain Management. As a result, they have lost market share to their Korean competitors: Hyundai and Kia. Honda’s profits dropped by 56% for the quarter ended Sept. 30, according to an article in yesterday’s Wall Street Journal. Also, their U.S. market share has declined by 1% over the past year. Since 2008, Toyota has lost 4.5 percentage points in U.S. market share. In contrast, Hyundai’s (and Kia’s) U.S. market share has increased, from 1% in 1999 to approximately 9% in 2011.

Once, Honda and Toyota were both considered the gold standard in terms of automotive excellence. In the case of the latter company, U.S. executives traveled to Japan in order to understand the secrets of its highly touted, Toyota Production System. But no more.

In the following three sections, I will describe how Japan’s formidable competitors have lost ground to their Korean adversaries.

1. New Product Development

Since Apple ranked #1 in the Boston Consulting Group’s 2010 survey of the worlds most innovative companies, let’s examine Apple’s formula for success. A sleek look and feel—in addition to ease of use—is what distinguishes the company’s products. Steve Jobs indicated that beauty—not novelty—was the highest value. Design, as it were, is an intangible and emotional subject. So, let me share with you my personal experience relating to Honda’s automotive designs.

Our family currently owns two Honda’s: a 1999 Odyssey, and a 2007 Accord. In addition, my wife has owned several Toyotas. We are big Honda and Toyota fans. This fall we were in the market for a new car, so I test-drove Honda’s small SUV: the CRV.

It felt solid and sturdy, but the styling was boxy and dowdy. Immediately afterwards, I drove a Hyundai Tucson.

Not only was the styling beautiful, but also the interior of the Hyundai was contemporary and ergonomic. Although Honda is introducing a new 2012 version of the CRV in the near future, I wondered how could Honda’s management allow the company to become a design follower rather than the design leader?

 Incidentally, I test-drove a Kia (sister company to Hyundai) family SUV: the Sorento. In contrast to the Honda CRV, driving the Sorento was delightful. Several years ago, Kia hired Peter Schreyer, formerly Audi’s top design engineer. The Sorento’s Germanic solidness and craftsmanship showed during the test drive. The price was right as well. Ultimately, my positive emotional experience resulted in my buying a Sorento.

Another example of Honda design issues relates to last months introduction of the new, 2012 Honda Civic, which was widely panned in the press. Dan Neil, the Wall Street Journal’s auto writer, said it all: “The redesigned 2012 Honda Civic…is a dud. A Sham. A shud. Massive fail, LOL.” A salesperson at a local Honda dealer said this:  “I could not believe it. The 2012 Honda Civic lacked basic features such as Bluetooth.” As a result of the criticisms received, Honda is responding by rushing a mid-cycle, re-design of the Civic to the market.

In the past, Korean car designs were neutral. It was difficult to tell the difference between one model and the equivalent Japanese car. Now, Hyundai’s design prowess is leaving the two largest Japanese producers in the dust.

Superior design is one of the reasons why Hyundai and Kia have increased their  U.S. market share at the expense of their Japanese competitors. Honda needs to restructure its design group, beginning by bringing in a new design czar, who will oversee the creation of products that delight customers.

2.    Total Quality Management

Akio Toyoda, CEO and grandson of Toyota’s founder, has acknowledged that his firm chased market share over quality during the last decade. The result has been a car wreck: from 2008-2010 Toyota recalled over 10 million cars.  Although Toyota has taken measures to shore-up its quality shortcomings, quality is all-about perception. And the chickens are now coming home to roost: During the last three years, Toyota’s U.S. market share has declined from 16.5% to 12.5% (2011). 

In contrast, the Koreans’ quality has risen substantially. This year, Hyundai and Kia ousted mainstays Honda and Toyota to take the #1 spot in customer loyalty. The Sonata–Hyundai’s newly designed mid-sized sedan–won Road & Track magazine’s 2011 International Car of the Year award. In addition, Hyundai and Kia provide a standard 5 year/60,000 mile bumper-to-bumper warranty, whereas Toyota and Honda offer only  a 3 year/36,000 mile bumper to bumper warranty,  There is a new sheriff in town.

3.      Supply Chain Management

Toyota’s and Honda’s supply chain network needs to be re-evaluated and reengineered. There are two primary reasons for this.

First, the appreciation of the yen vis-à-vis the U.S. dollar has penalized production in Japan. Profitable automobile manufacturing there has become difficult at best, impossible at worst. There are several ways of dealing with the fluctuating exchange rates as well as with the appreciation of the yen:

a)    Develop robust forecasting models for predicting short term and long-term exchange
rates.

b)    Hedge currencies to neutralize the effect of fluctuations.

c)    Offshore assembly/production of automobiles to lower cost countries and/or to countries
where the currency is depreciating. For example, Kia now produces its Sorrento in Georgia, U.S.

d)    Outsource components to suppliers in lower cost countries.

e)    Create excess, flexible capacity so that production can be shifted in response to
intermediate term changes in foreign exchange rates.

Second, as advocated in a recent blog post, all automobile manufacturers must evaluate and re-think their supply chain networks to mitigate against the risk from natural disasters. Honda had 113 suppliers that were located in areas that were affected by Japan’s March, 2011 earthquake and tsunami. Shortly after the earthquake, the company was unable to establish contact with more than 40 of them. (Source: Autoweek). Currently, the introduction of the 2012 Honda CRV may be delayed due to the flooding of Honda’s auto plant in Thailand.

Although Just-in-time (JIT) inventory control—or lean operations—has been a dominant global operations strategy, some of its precepts need to be challenged. For example, some automotive companies have reduced the number of suppliers for critical components to a single-source. But when natural disasters cripple the component supplier, final assembly plants must curtail production; in some cases, they are forced to shutdown their operation.

This is exactly what happened during the Sept. 30 quarter. Due to supplier shortages of components and sub-assemblies, both Toyota and Honda had to curtail production. When shopping for cars this summer, a sales manager told me that a major Toyota dealer in the western suburbs of Chicago parked their cars diagonally, because they wanted to hide the fact that their inventory of new autos was less than 50% of what it should have been.

Unlike the Japanese, the Korean auto companies are less reliant on suppliers in Japan and Thailand. Thus, during the quarter ended Sept. 30, Hyundai and Kia did not experience component shortages due to the recent natural disasters.

In summary, there is a saying: “You cannot sell oranges from an empty cart.” If product is unavailable, regaining market share becomes impossible, and achieving acceptable levels of profitability amounts to a fiction.

Toyota and Honda can do a better job of evaluating—and modifying—their supplier networks in order to minimize risks. There are many risks that can affect the smooth functioning of a supply chain. The main threats that need to be dealt with immediately relate to natural disasters and currency fluctuations.

Conclusion

Honda and Toyota are both great companies. However, they have stumbled badly, and need to regain their footing. To right their teetering ships, they must radically reshape processes in three areas: New Product Development, Total Quality Management, and Supply Chain Management.

What other factors do you think account for Toyota’s and Honda’s misfortunes? What do they have to do to recover?