The Honda Difference
Why focusing on Toyota rather than Honda as the model for global business success and innovation was a mistake
In its broadest expression, Honda and Toyota differ the most in the relationships between corporate headquarters and the companies’ many factories and offices around the world.
When it is functioning smoothly, Toyota encourages global employees to think on their feet and recommend solutions to roadblocks, but inevitably ultimate power at Toyota resides in Japan. Local decisions must climb the chain of command and gain approval from the executive suite in Toyota City. By contrast, Honda is a decentralized organization that gets its strength from independent decision making at each of its facilities.
Or as James Womack, one of the authors of The Machine That Changed the World, explains it: “I wouldn’t call Toyota a top down organization but rather it’s sort of bottom up, top down, bottom up, top down. They have rules that must be followed and upper management wants to be involved in critical changes. Honda is more relaxed about that; it comes closest to being a bottom up organization.”
A tangible illustration of this distinction between the two companies comes from a former Toyota plant engineer who now works for Honda in Lincoln: “When I was at Toyota, I was asked to create a new assembly line at an existing factory. It was easy; my supervisors in Japan gave me the blueprint and said, ‘Here’s how we do it, follow the plan.’
“At Honda a few years later I had to oversee the setting up of the line at the Lincoln engine plant. The experience was so different. The only instruction I got was, ‘Go to the Anna engine plant in Ohio, study how they do it, talk to the workers and the managers about what they like and don’t like, what they would fix and what they would leave unchanged, and then make a better one in Lincoln.’ I took this to mean, understand what they’ve done, and then advance it.”
While Toyota is permanently coupled with lean, Honda clearly sees itself in another light — as a big manufacturer embodying the spirit of an entrepreneurial small business exemplified by these traits: questioning common beliefs, innovation springing from risk taking and examining mistakes, open lines of communication, local control, and accumulated knowledge linking the global company like a bridge.
Moreover, Honda views the factory as an elegant web of interchangeable tools and activities, rather than a series of discrete operations that can be leaned, streamlined, and automated to meet certain predetermined benchmarks that, in turn, squash the enthusiasm for creativity and contributing to improvements in the plant out of the local workers.
It’s worth noting in this regard that Honda’s factories are the least automated among carmakers, yet Honda enjoys the highest profit margins. These characteristics and the way Honda employs them are striking because they have largely gone unexamined and yet provide a valuable cultural framework for multinationals struggling with the challenges of maintaining excel lence, corporate values, localization, and continuous advances in design, development, engineering, and products throughout a far flung network of factories and R&D centers.
Certainly Honda has had slip-ups. For example, the road into China, which Honda pioneered among Japanese companies, has been thorny (as it has been for most multinationals), although Honda appears to be on the verge of succeeding, and the devastating Japanese tsunami in 2011 caught the company unawares and vulnerable to the shortage of a single but critical part. But because of its uniquely downsized corporate culture, Honda has adroitly used those failures as vehicles for continuous improvement.
The value of Honda’s unparalleled and extremely creative industrial model has taken on increased importance recently as the world’s manufacturing landscape is becoming increasingly more chaotic. After a period of unprecedented manufacturing retrenchment in the West, when one factory after another was shuttered and tens of thousands of jobs were lost each month to new plants in low-cost nations like China, Thailand, Romania, and India, the concept be hind this sweeping job migration — globalization — is losing its luster. It’s not just wage inflation in these and other countries precipitating this change of heart. Instead, multinational manufacturers — most of whom, including majors like General Electric, John Deere, and Xerox, are unprofitable in emerging economies, a fact that they prefer to not break out in their earnings reports — are learning that placing a factory in a distant country to serve other parts of the world creates a new set of problems they didn’t foresee.
For example, by establishing factories thousands of miles away from research and development centers, which are generally considered skilled facilities that should be close to headquarters, manufacturers found that the quality of their products and factory productivity suffered, as did their ability to respond quickly to a sudden shift in customer preferences. Equally troubling, multinationals discovered that products made in an Asian country could be literally lost at sea for weeks during shipments to the West, leaving the company uncertain about when and in what shape the items would arrive. If the wrong goods were shipped, which happens all too frequently, the company could face millions of dollars in mislaid inventory.
These issues and others, including the influence of state-owned companies and the strength of nationalism in many emerging nations, have put a quick end to globalization, at least as it has been defined up until now. Multinationals are hastily rethinking their factory footprints, turning away from low-cost nations to be closer to their customers and skilled workers in the West. Virtually every leading manufacturer has retrenched in this way, rejecting offshoring in favor of what is popularly known as reshoring.
The CEO of Siemens USA, the electronics giant, describes it thus. “The labor components — the need to choose where to set up manufacturing facilities based primarily on where the wages are cheapest is not the major driver anymore,” says Eric Spiegel. “Instead other factors — access to skilled labor, modern infrastructure, the ability to drive innovation with world-class R&D where the customers are, and capabilities like new manufacturing technologies — propel decisions about new factories.”
But like globalization, this strategy, too, is full of potential obstacles. This new manufacturing era, which can be called localization, requires that companies set up full-scale operations-factories, engineering sites, research facilities, suppliers, and logistics channels in key areas around the world to profitably and efficiently provide individualized products customized for each particular region. The centralized command-and-control structure that characterizes many multinationals is precisely the wrong culture for this type of global strategy, which essentially calls for separate businesses in each locale, connected to a larger corporation but relatively independent of it.
Indeed, Honda is one of the few companies prepared for localization.
For evidence, consider that over the past few years Honda has quietly remade itself from a Japanese multinational with smaller operations around the world into an automaker whose largest subsidiary is an autonomous U.S.-based producer of cars for the Americas, followed by similar operations in China, Japan, Thailand, Brazil, and numerous other places as well as separate businesses making motor cycles, power products, and new technologies like robots and alternative energy equipment. Honda’s ability to morph to a large degree seamlessly into a localized company of many different self-operating units around the globe is a testimony to the strength of its self consciously decentralized structure and its embrace of local autonomy and independent workers. All of which springs directly from the entrepreneurial, do-it-yourself roots planted firmly by company founder Soichiro Honda some sixty-plus years ago.
Excerpted from Driving Honda: Inside the World’s Most Innovative Car Company by Jeffrey Rothfeder, in agreement with Portfolio, an imprint of Penguin Random House. Copyright (c) Jeffrey Rothfeder, 2014.
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