Takanobu Ito Assumes the Role as the Seventh President of
Honda at the Critical Time of a Global Recession
In 2009, in the midst of the global recession triggered by the 2008 global financial crisis, the baton of company management was passed from Takeo Fukui to the seventh president, Takanobu Ito.
Since joining Honda, Ito had been involved in automobile research and development mainly in the area of body design. In fact, Ito was deeply involved in the development of the body of the NSX, the world's first mass-production car featuring an all-aluminum monocoque body*1.
Every Honda president in the past was an engineer with a proven track record in the field of engine development, and Ito became the first president of Honda with no prior experience with engine development.
Honda had continued to develop and produce engines that made history both in the world of motorsports as well as mass-production automobiles, including the CVCC engine, the world’s first engine that cleared the standards set forth by the U.S. Clean Air Act of 1970, and high output VTEC engines, which featured the Variable Valve Timing & Lift Electric Control system. Honda breakthroughs to date had been literally driven by such original engine technologies. Ito, on the other hand, built his engineering career in the area of vehicle body design, then went on to serve several executive roles, including president and director of Honda R&D, general manager of Suzuka Factory and chief operating officer of Automobile Operations. Honda has a distinctive development system where its sales, engineering and development divisions work together in a consistent product development flow, which Honda called the SED development system. Ito’s experience with the SED system as the manager “at the spot” enabled him to see the big picture of Honda business.
Ito said in an interview*2 shortly after assuming the presidency, “Engine development has always been the engineers’ dream job. There was definitely a time when the engine determined the performance of the vehicle. However, today, customers are expecting cars not only to be fast, but to offer total performance and product value which includes features such as outstanding occupant comfort and fuel economy. I believe it is my mission to make sure that Honda further advances its comprehensive technologies and builds a solid position in the industry for the Honda brand.” These words summed up Ito’s basic stance and future vision as the president.
- Honda internal research as of 1990.
- An editor-in-chief interview featured in the October 10, 2009 issue of the Weekly Diamond magazine.
“Honda was Saved.”
Making Adversity an Opportunity to Change
After becoming the president, at a time when the global recession had a tremendous impact on each area of Honda business, Ito said: “Honda was saved.”
During the Kawamoto, Yoshino and Fukui eras, Honda faced a wide range of challenges, including Japan-U.S. trade friction, unprecedented appreciation of the Japanese yen, and the global restructuring of the automobile industry. However, despite all those difficulties, Honda business generally remained steady. Before the 2008 global financial crisis, Honda was proceeding with plans to introduce the Legend featuring a V8 engine with front-engine, rear-wheel-drive layout, the successor model to the NSX, and the Acura channel in Japan.
However, Ito, who was the chief operating officer of Automobile Operations at the time, was feeling somewhat uncomfortable with the direction Honda was heading, toward higher-end and larger models. Ito later said, “I was thinking that it would be too late for Honda to catch up with the trend toward higher-end and larger models (where other automakers were already showing some success). The trend would change with the times. If we don’t closely follow and accommodate the needs of the majority of consumers, our operations and employment in Japan would be in jeopardy. That was why I told the management that we should focus on k-cars.”
It was not easy to cancel a major project in which the company had already invested a lot of money and change the direction the company had been pursuing. Still, Ito insisted on shifting the focus to the k-car category. It was in the midst of such discussions that the 2008 global financial crisis and the subsequent global recession occurred and Honda faced the greatest business crisis in its history. Then President Takeo Fukui placed the highest priority on ensuring sound management of the company and worked with Ito, whom Fukui had already informally approached about becoming the next president, and made several critical decisions in rapid succession, including the decision to delay the start of operations of Saitama Factory’s Yorii Plant and the R&D Cener in Sakura, the cancellation of the development of the all-new NSX, as well as the termination of several Acura models planned for the North American market and the nearly finalized plan to introduce the Acura brand in Japan.
Ito looked back and said, “If we had continued our plan to focus on luxury models and delayed the structural reform that should have preceded it, Honda could have been mortally wounded.” Ito’s words, “Honda was saved,” represented the situation Honda was in and the feeling Ito had at the time.
In fact, even before the 2008 global financial crisis, the trend among Japanese people of buying a car upon reaching the age to obtain a driver's license had been fading, and a growing number of people, especially the younger generation, had begun to show an indifference toward cars. In addition, the preference toward luxury vehicles that emphasized larger body and engine sizes and more equipment started to diminish, and in people’s mind, the positioning of the car had shifted from a luxury item to a necessity in their daily lives. Ito was able to foresee these changes in people’s value system in Japan.
Adversity changes organizations and their management approach. In fact, this was not the first time Honda experienced such a situation, as Honda was founded during the period of turmoil immediately after Japan’s defeat in World War II and achieved rapid growth while the entire country was facing adversity.
After assuming the role of president in June 2009, Ito did not take an easy solution by relocating more production to factories outside Japan in response to the continuous appreciation of the yen. Instead, he chose to focus on streamlining production operations and strengthening sales in Japan to build a business structure that would withstand the appreciation of the yen. One of the measures he reconsidered was to focus on k-cars.
Reviewing the SED System to Regain the Customer Perspective and the Joy of Creating
In his inaugural address, Ito stated, “More than ever, the products and technologies we offer must be ahead of the times and the demands of our customers. In order to continue offering advanced products, we must conduct advanced research.”
To enable himself to make prompt decisions in this difficult business environment, Ito decided to concurrently serve as the President of Honda R&D Co., Ltd. for one year. This unprecedented decision was made based on his belief that Honda would not be able to overcome this predicament without closer alignment between Honda and Honda R&D.
One of the reforms initiated by Ito was the improvement of the SED system. The SED system is the unique Honda product development system, in which divisions responsible for sales (S), production/production technology (E), and product development (D) refine their respective roles such as improving sales and financial results, building more efficient production lines, and developing new technologies and products, while being organically connected to each other. This system has long been the driving force behind the progress of Honda as a manufacturing company. When the company was small, project members knew each other and had good communications. However, as times changed, the company had become much larger. In addition, globalization of Honda business was also progressing. Under such circumstances, if each of the S, E, and D divisions work independently, they would turn inward, creating invisible walls among themselves. It may be possible to achieve “partial optimization,” but “total optimization” may be lost. Moreover, coordination between different divisions was also becoming more time-consuming.
Ito was concerned that the development of new technologies and products and the improvement of sales and business performance might have become the ultimate goal in themselves. The phrase, “for worldwide customer satisfaction,” which is a part of the Honda Company Principle, indicates that the company’s ultimate purpose is to maintain a customer viewpoint and create good products that please customers. When the partial optimization of each division goes too far, the intentions and opinions of development and sales divisions tend to be expressed more strongly making it difficult for production operations, the core of a manufacturing business, to be conscious about the joys of the customers. If this were to happen, Honda would lose the “Joy of Creating,” which is one of the “Three Joys,” and as a result, the company would also lose the “Joy of Buying” and “Joy of Selling.” This was the sense of crisis Ito was feeling at the time.
In order to properly realize the “Joy of Creating” based on Honda Philosophy, the first step in the reform of the SED system should be to break down the barrier between the parts of Honda responsible for production and Honda R&D, responsible for development, and bring the two organizations closer. Such thinking Ito reached as president would come to fruition in time.
Strengthening the Six-Region Global Operation Structure
and Focusing on Cultivating Markets in Emerging Countries
In addition to strengthening Japanese operations, another pressing issue for Honda at the time was to break away from a corporate structure that was highly dependent on its North American business.
Honda business in the North American market was pioneered in the 1960s with the Super Cub, and the Civic and Accord solidified Honda's market presence. Then, it grew significantly along with the expansion of local production in the U.S. Since then, North America had been the most important market that supported the foundation of Honda business. Being somewhat concerned about such a North America-centric situation, Ito decided to proceed with further improvement of the six-region global operation structure, which was established in 2004, consisting of Japan, North America, South America, Europe, Asia/Oceania, and China regional operations.
Since the global financial crisis in 2008, Honda business had been hit hard by declining sales volume, which forced Honda to suspend operation of some plants and make adjustments to production volume. However, while the markets of Japan and other advanced nations in Europe and North America remained sluggish, the markets in emerging countries with remarkable economic growth, particularly in Asia including India and Indonesia, continued to expand, accounting for approximately 70% of global motorcycle sales and achieving an all-time record for automobile production volume in the fiscal year ended March 31, 2010.
Ito believed that one of the major reasons why Honda fell behind of competitors in the small car category and emerging markets was that Honda business had been going so strong mainly in the North American market that Honda neglected to stay ahead of the times and take on new challenges. Ito saw this unprecedented crisis facing Honda as an opportunity to sincerely address customer needs in each region and modify the six-region global operation structure to better reflect the actual situation in each region. Ito encouraged each region to be autonomous and self-sufficient and undertook the reshaping of the six-region global operation structure while adhering to the premise to “building products close to the customer.” Honda also focused its efforts on cultivating emerging countries.
Honda also needed to implement measures to mitigate the risk of fluctuating currency exchange rates, which Honda experienced in the midst of the global financial crisis. To this end, Honda strived to build an effective global operation structure where regions with large production capacities, such as Japan, the U.S., and China, would sell 70% to 80% of their products within their domestic markets to avoid foreign exchange risk, and allocate the remaining 20% to 30% for the purpose of mutually complementing product supply among Honda operations around the world. Honda also decided to clarify the product segment for each region to produce, such as small-size models in Japan and Asia and large-size models in North America and China, and began looking into the streamlining of production by discontinuing and consolidating some models. Through these initiatives, Honda made a major shift to a strategy of simultaneously strengthening business in both advanced and emerging countries, without relying heavily on one or the other.
October 2011: Construction of
Jialing-Honda’s new plant in China is completed
June 2012: Construction of a new automobile plant in Indonesia begins
July 2012: Operation of Dongfeng Honda’s second plant in China begin
July 2012: Construction of second line in automobile plant in Malaysia begins
July 2013: Construction of a new automobile plant in Thailand begins
November 2013: Construction of a new automobile plant in Brazil begins
January 2014: Operations of new automobile plant in Indonesia begin
February 2014: Operations of new automobile plant in Mexico begin
The founder, Mr. Soichiro Honda, had advocated maintaining an “international viewpoint” from the early days of the company. Then, the company proactively pursued local production, local procurement, and local employment with the aim to “glocalize” Honda operations throughout the world, steadily realizing the vision to become a company that brings the joy to society. Furthermore, during the Kawamoto and Yoshino eras, the company revised its Company Principle, adopting the phrase, “for worldwide customer satisfaction,” and changing the “international viewpoint” to “global viewpoint.”
Ito emphasized, “Now more than ever, we must work more earnestly on how to contribute to and please the people in each region from the perspective of regional optimization.” In the times of drastic change, his words reaffirmed the company’s determination to embody the spirit of a “global perspective” and the “for worldwide customer satisfaction” in its actual business.
Subsequently in April 2014, Honda initiated a further review of its business segments inside and outside Japan in order to fulfill its “2020 Vision” (see below for details). Honda had previously expanded its global operations while positioning Japan as the starting point; however, in order to better clarify the roles and responsibilities in Japan domestic business and global functions, Regional Operations (Japan) was established as a separate organization from the ones to perform global functions. The aim was to maximize the collective strength of Honda by organically linking its six regional operations, each of which would fully assume respective roles and responsibilities. All of these initiatives were taken in order to quickly accommodate customer needs in each region.
Announcing the 2020 Vision: To Provide Good Products to
Our Customers with Speed, Affordability,
and Low CO2 Emissions
In early 2010, Ito identified two major challenges that Honda must take on: “One is to establish a corporate structure that will enable Honda to continue to survive in any era, and the other is to advance our products and ‘monozukuri (art of making things)’ to embody products that customers will choose and buy.”
In light of these challenges facing Honda, in June 2010, one year after assuming the role as president, Ito announced the 2020 Vision, looking 10 years into the future – to devote ourselves to provide good products from the perspective of our customers with speed, affordability, and low CO2 emissions.
At this time, Ito said that while the Honda Philosophy would remain the same since the founding period, “the times have changed dramatically.” In particular, he identified the structural changes in the global economy triggered by the 2008 global financial crisis and growing environmental awareness as key issues to be addressed.
The manufacturing, business and service operations led by advanced countries had begun to become less viable. Honda would not be able to survive in the coming era unless it promptly understands customer needs in all countries and regions, including emerging countries, and restructure its corporate activities from a global perspective. This sense of crisis was behind the 2020 Vision. With the understanding that what was expected of mobility product manufacturers in the future was the establishment of the highest level of energy efficiency technologies and initiatives to reduce CO2 emissions, Ito aimed to reinforce manufacturing based on the Honda Philosophy while addressing the changings of the times.
Ito explained the intention of the 2020 Vision: “We apply our original technologies, ideas and ingenuity to create ‘good products’ that embody the needs of our customers in the form of attractive products. We provide such ‘good products’ with speed without making our customers wait, and at a price that makes the customers happy with their purchase. I believe that this is the way we should go. I also have a strong sense of urgency that Honda will have no future as a manufacturer of personal mobility products if we won’t significantly reduce CO2 emissions, and that is why we included the `low CO2 emissions` in our Vision.”
Ito also expressed his strong determination to pursue this vison by saying, “The next 10 years will be critical. If we cannot fulfill [the Vision], there won’t be another 10 years after that.” In launching this long-term strategy, Ito spent two months from the end of July, visiting a number of Honda operations across Japan and holding town hall meetings, called “Direct Communication” meetings. In fact, Ito met face-to-face with approximately 14,000 associates, or 30% of all Honda associates in Japan, during the 2-month period.
The main message Ito wanted to convey through face-to-face dialogue with associates was: “Let’s not take our eyes off the customer. Let’s all focus on offering good products with speed, affordability and low CO2 emissions while maintaining the customers’ viewpoint.” Ito believed that it was essential for everyone at Honda to share the same sense of urgency and work as one beyond their positions within the company to fulfill the 2020 Vision.
Going on the Counteroffensive to Get on a Growth Trajectory
Honda avoided falling into the red in the fiscal year ended March 31, 2009, even in the midst of the global financial crisis after the bankruptcy of Lehman Brothers in 2008, and then got on a steady recovery path ever since. On January 31, 2011, Honda announced financial results for the fiscal nine months, from April through December 2010, which includes operating profit of 523.6 billion yen, approximately double compared to the same period a year ago, and operating profit margin of 7.8%, which was one of the highest among automakers. Painful reform measures the company had taken, including the withdrawal from the F1TM World Championship, a significant reduction of fixed costs, and scaling back capital investment and R&D costs, contributed to such strong financial results.
In contrast to the 10th Mid-term Plan (2008-2010), during which the company’s focus was on dealing with the impact of the global recession, the 11th Mid-term Plan (2011-2013) became a turning point for Honda to go on the counteroffensive to quickly get on a growth trajectory. Under the Mid-term slogan of “strengthening Honda’s presence by achieving the transformation with a proactive and aggressive attitude,” the company decided to forge ahead with the localization of development, purchasing, and production in each region.
For automobile business, Honda announced plans to increase global unit sales to more than 6 million units by solidifying the business in advanced countries and achieving dramatic growth in emerging countries. After stepping down as the president, Ito explained this target sales of 6 million units: “It did not matter so much if we would or would not achieve this number. I thought that unless we shared the image of our goal with a specific number, the 6 million units, we would not be able to take concrete actions. And I was thinking that if we could offer the ultimate products that bring joy to our customers, the unit sales numbers would follow.”
As stated in the 2020 Vision, if each regional operation could formulate its own plans to pursue and provide good products to their respective customers with speed, affordability and low CO2 emissions, sales would naturally increase. When Honda could further strengthen its presence and further solidify its position in each region, that would lead to the continuous growth of Honda automobile business and, as a result, the sales volume will increase. This was the rationale Ito put into the 6 million-units target.
Minimizing Damage from the Great East Japan Earthquake
and Proceeding with Reform of the SED System
On March 11, 2011, shortly after Honda started moving forward on a growth trajectory, the Great East Japan Earthquake and tsunami struck Japan. Honda’s global automobile R&D hub, namely the Automobile R&D Center of Honda R&D located in Tochigi Prefecture, suffered extensive damage. Moreover, both Saitama and Suzuka Factories were also forced to temporarily suspend production.
Immediately after the earthquake occurred, a company-wide task force was formed in the global head office, Aoyama Building in Tokyo, which promptly began confirming the damage situation of each operation and the safety of dealers, suppliers, and Honda associates in the affected areas. In the meantime, all divisions, including development, purchasing, quality assurance, administration and the labor union came together and worked as one “All-Honda” team to realize the earliest possible recovery. As soon as Ito received the initial report at the head office, he rode his motorcycle to Honda operations in affected areas to confirm the situation with his own eyes. The R&D Center in Tochigi was severely affected, and Ito saw damage beyond his expectation, including a collapsed ceiling in the design room. Judging that it would take a considerable amount of time to restore its functions, Ito made an on-the-spot decision to set up a satellite office of the Tochigi R&D Center at the Suzuka Factory.
Although it was an emergency measure, the establishment of the satellite office in Suzuka brought the development and design teams closer to the teams at the production site, resulting in many learning experiences for both sides. In fact, even before the earthquake, there was an idea to relocate some of the R&D functions closer to the production site. Based on his belief that a better relationship between the production team and R&D team, which forms the basis of manufacturing, was indispensable, Ito had been elaborating the plan in his mind. He was thinking about this as part of a fundamental reform of the SED system, which was inevitable if Honda was to continue to advance as a manufacturing company. Coincidentally, the development of new k-car models, which Ito had been focusing on to provide a spark for the Japanese automobile market, was reaching a critical stage, and he was in a hurry to establish an environment that would allow close interaction among the members of Suzuka Factory, where the new model would be produced, and the development team members at the R&D Center. This also worked positively for the prompt establishment of the R&D satellite office at Suzuka Factory after the earthquake.
The partial relocation of R&D functions to the production site entailed the relocation of associates, requiring the consent of the individual, negotiating with the union, and making internal adjustments. However, as Ito later said, “Everyone was convinced, and that made it possible for us to carry out the reform quickly,” Honda turned this emergency situation of a major disaster into an opportunity to grow further as a company, instead of letting it undo the progress the company was making before the earthquake.
Honda continued to be plagued by repeated natural disasters. In October 2011, six months after the major earthquake struck Japan, heavy and repeated rainfall in the north central region of Thailand caused large-scale flooding. With the cooperation of the Thai government, Honda made a company-wide effort to restore Thai operations at a rapid pace, which enabled Honda Automobile (Thailand) Co., Ltd. (HATC) to resume its automobile production as early as on March 26, 2012. Despite such a quick restoration of production functions, overall Honda production volume declined significantly due to the impact of the flooding, which delayed the supply of exported parts for motorcycles, automobiles, and power products in other regions.
In Japan, restrictions on the use of electricity and delays in procuring parts due to the nuclear power plant accident immediately after the earthquake forced Honda to make a number of production adjustments, which put Honda under unfavorable conditions to take on challenges toward the worldwide automobile sales target of 6 million units.
