Guangzhou Honda Realizes Honda Dream of Local Automobile
Production with Accord
Basic agreement on the Guangzhou passenger car project signed at Honda head office in Japan (November 1997).
Honda suddenly accelerated its move toward the production of complete automobiles in China in 1996. As Peugeot withdrew from the joint project with Guangzhou Automobile Co., Ltd. (Guangzhou Automobile), one of the three automobile companies created to produce small-size vehicles, Honda was asked to take over the partner role.
Honda took the opportunity and proposed the production of the Accord to the Guangzhou side. Producing the Accord locally would have a positive impact on the market, as the imported Accord already had a well-established reputation as a luxury model. The Accord would also meet the growing demand for luxury cars among individual customers in China, and Honda believed that it would be a viable business even under the initial production limit of 30,000 units.
After a series of tough negotiations, a basic agreement for the Guangzhou Passenger Car Project was signed in November 1997. In the end, the parties agreed to make maximum use of the existing Guangzhou Peugeot buildings, manufacturing facilities, and employees, and that complete vehicles would be produced by a joint venture between Honda and Guangzhou Automobile, and engines by a joint venture between Honda and Dongfeng Motor. In 1998, two joint venture companies were established at the same time: Guangzhou Honda Automobile Co., Ltd. (Guangzhou Honda, later renamed GAC Honda Automobile Co., Ltd.) for automobile production and Dongfeng Honda Engine Co., Ltd. (Dongfeng Honda Engine) for production of engines to be supplied to automobile production plants.
When Guangzhou Honda took over the Guangzhou Peugeot plant, it found equipment that was left unused and nonfunctional, as well as equipment that was completely different from those used by Honda plants inside and outside Japan, presenting an extremely difficult task to remodel the production line to make the most of the facilities.
Under such circumstances, Guangzhou Honda and Dongfeng Honda Engine provided training programs for former Guangzhou Peugeot associates to learn Honda Philosophy and corporate history. The main aim of those programs was to help those associates understand and like Honda, while also learning the importance of quality control through quality training. They were also sent to the Wuyang-Honda motorcycle production plant to have hands-on training of production work at the Honda plant. These training programs successfully changed the attitudes of Chinese associates.
Masayoshi Kurebayashi, former general manager of Guangzhou Honda, said: “When discussions at improvement proposal committee meetings reached a stalemate, a Chinese manager said, ‘There’s no point talking here. Let's go to the factory!’ I was very pleased, and I felt things were changing.”
Guangzhou Honda and Dongfeng Honda Engine established in 1998.
“Honda-ism” gradually permeated the company, and as a result of the concerted efforts of everyone working at Guangzhou Honda, the long-awaited first Accord rolled off the production line in March 1999. The Accord, the first locally produced model, started with annual production volume of 10,000 units, then quickly reached annual sales volume of 114,000 units by 2005. As a best-seller in the mid- to high-end class, it became a huge hit in the Chinese market and built a solid foundation for the Honda automobile joint ventures in China.
Guangzhou Honda Accord achieved local content of 40 % from the beginning.
Guangzhou Honda assembly line for complete automobiles.
Four-in-One Sales Network Brings Innovation
to China's Auto Distribution Industry
One of the reasons the Guangzhou Honda Accord was well received in China was that it was a world-class car that incorporated the latest technologies. Honda has the Fundamental Beliefs that includes “The Three Joys.” Honda does not compromise on product specifications or quality anywhere in the world including emerging countries. There was a strong desire of Honda to offer the world-class model to please customers in China.
Another reason for the success of Accord was the establishment of the “four-in-one” sales and service network to support its customers. Despite the introduction of a market economy, the production, sales, and service of automobiles in China at that time remained vertically divided, and it was far from a customer-centric service structure. Even in such an environment, Honda provided after-sales service for Honda automobiles from 1994, even before the start of local production, by operating Honda Authorized Service Stores (HASS).
Atsuyoshi Hyogo, former Chief Operating Officer for Regional Operations (China), said: “For China, where sales and service were conducted separately, this may have been revolutionary, but for Honda, it had always been a natural thing to support customers who have bought our products to the end."
Furthermore, with the establishment of Guangzhou Honda, the fourth item, information (customer feedback and customer management), was added to sales, service, and parts supply roles played by the Honda sales network – the four-in-one sales network.
By having a system to feed back information obtained from customers, such information can be utilized not only to build a sales network, but also for product development and service improvement. Honda persistently persuaded the government departments in charge of passenger car sales and service that the success of the project depended on the ability of customers to use the vehicle for a long time with peace of mind, and obtained special approval for to build the Honda four-in-one dealership system after a final decision was made by the central government, which made a comprehensive decision on each of the automobile dealership functions, including sales, service and parts supply.
As soon as Honda announced that it was recruiting new dealers, applications flooded in. In the selection process, car sales experience was deliberately omitted as a selection criterion, and in narrowing down the candidates, priority was given to the applicant’s ability to take actions and their challenging spirit as managers. Even so, there was a gap in the perception of “service.”
Hironori Kanayama, former Guangzhou Honda sales manager, said: “We had a hard time convincing the Chinese managers of the significance of not just selling cars but providing services. We often had long heated discussions.”
Guangzhou Honda “four-in-one” dealership (2004).
After all the hard work, owners of newly contracted dealerships started expressing their understanding, and some commented that they fully understood the four-in-one concept, and wanted to build a dealership where customers would want to buy their cars. Guangzhou Honda instilled Honda Philosophy throughout its operations, from its production operations to its sales and service associates and proceeded to expand its business nationwide. The four-in-one sales network, an innovative approach in China at the time, was later adopted by other automakers, and has now become the standard in the Chinese automobile industry.
Realizing Automobile Production with Long-time Partner,
Dongfeng Motor
CR-V rolls off the line. Production of complete vehicles was realized through a joint venture with longtime partner, Dongfeng Motor.
In addition to its mainstay Accord, Guangzhou Honda began production of the Odyssey in 2002 and the Fit Saloon in 2003, achieving rapid growth. At the same time, Dongfeng Motor and Honda were still searching for a way to realize their dream of someday producing complete automobiles in China.
Honda seized the opportunity to acquire a second base for production and sales of complete vehicles in China when Wuhan Wantong Motor Corp., a Dongfeng Motor Group company, was considering a change in its foreign partner. At the time, Wuhan Wantong was manufacturing small commercial vehicles. Honda had a plan to establish a new company while utilizing the existing land, buildings, and employees, and negotiated with Dongfeng Motor.
In 2003, Dongfeng Honda Automobile (Wuhan) Co., Ltd. (Dongfeng Honda) was established. Honda finally realized the production of complete vehicles with Dongfeng Motor through the long-time partnership that began with the production of parts and grew into a deeper relationship.
Dongfeng Honda quickly proceeded to work toward the start of operations, including remodeling the plant, preparing production, and establishing a sales network, and was able to begin production only about six months after the founding. Dongfeng Honda also trained its production associates in The Honda Way of manufacturing, with particular emphasis on The Three Reality Principle.
Nobuhiro Sekiya, former manager of the Painting Section at Dongfeng Honda, said: “Whenever a defect was found, associates would gather at the production site and discuss what had gone wrong. Through their work, they learned the importance of going to the real spot and understanding the real situation.”
Wang Kang, former deputy manager of the Painting Section at Dongfeng Honda, said: “The Honda Three Reality Principle is a very good management method. Instead of asking others, we always check the real situation by ourselves. If we work with this kind of mindset, we can increase speed and efficiency rapidly.”
In 2004, the CR-V, which was produced based on The Three Reality Principle, sold more than 10,000 units in the first six months, and quickly became the best-selling model in the mid- to high-end SUV market that year.
Following the success of CR-V, the decision was then made to produce the Civic; however, in order to produce a sufficient number of units, production capacity needed to be expanded. A new plant was built and the existing plant was remodeled.
In order not to interrupt the production of the CR-V, construction was carried out in three 8-hour shifts per day while the existing plant was kept in operation.
Mitsuru Ozaki, former Dongfeng Honda General Manager, said: “In China, there have been many people waiting for the Civic for a long time, so we wanted to deliver it to our customers as soon as possible. In addition, the automobile business in China is highly regulated, and laws and regulations are constantly changing, therefore, we always need to act quickly.”
Construction that had begun in early 2005 was completed at the end of the year, several months quicker than the construction period of the average Honda plant. With this, Honda production capacity quickly expanded from 30,000 units to 120,000 units.
Around the same time, Honda established Honda Automobile (China) Co., Ltd. (Honda China) in the Export Processing Zone of the Guangzhou Economic & Technological Development Zone as the first dedicated export plant in the Chinese automobile industry, in order to contribute to the Chinese economy through exports. Since the objective was to export 100% of the products it produced, the company obtained a special exception to the restrictions in the automobile industry policy on the ratio of foreign capital investment, enabling Honda to hold a 65% stake whereas its Chinese partner held 35%. It became the first joint venture automotive company where foreign capital held the majority stake. Honda China began mass production of the Jazz, a compact passenger car based on the Fit Saloon, for the European market in April 2005. Honda achieved the export of complete vehicles and pioneered the export of Chinese-made passenger cars throughout the world.
China's Accession to the WTO Intensified International
Competition in the Chinese Automobile Marke
In 2001, the Chinese market which had been growing through economic policies, experienced a major turning point when it joined the WTO. Import tariffs on complete automobiles and parts were lowered in stages over several years, and trade barriers such as import licensing were abolished.
Taking advantage of this change, more and more foreign manufacturers established joint ventures with Chinese partners. Among major Japanese automakers, Nissan Motor Co., Ltd. established Dongfeng Motor Company Limited (commonly known as Dongfeng Nissan) in 2003, and Toyota Motor Corporation established Guangzhou Toyota Motor Co., Ltd. in 2004. On the Chinese side, Guangzhou Automobile established a joint venture with Fiat, following its joint ventures with Honda and Toyota. The number of automobile companies and models entering the market increased rapidly, and China has become the most competitive automobile market in the world.
Honda also established Honda Motor (China) Investment Co., Ltd. [Honda (China) Investment] as a wholly-owned subsidiary and began operations in April 2004 in order to smoothly conduct business in China, where competition was quickly intensifying. Honda (China) Investment has been responsible for developing comprehensive business strategies in China, conducting government and industrial relations activities, public relations, and intellectual property management operations, and acting as the regional headquarters for the comprehensive operation of motorcycle, automobile, and power products businesses by Honda joint ventures and subsidiaries in China.
Since its establishment, the auto industry policy of the Chinese government, which has been reviewed many times, has shifted to a policy that calls for strengthening not only production but product development capabilities, including starting up independent development and the establishment of original brands by each joint venture company. In 2007, Honda established Guangzhou Honda Automobile Research & Development Co. (Guangzhou Honda R&D), which built an automobile R&D facility with a full-scale high-speed test course.
The automobile market in China had been growing rapidly, and in 2009 it finally became the world's largest market with sales of 13.64 million units, up 46% from the previous year.
In line with the rapid expansion of the market, GAC Honda Automobile Co., Ltd. (GAC Honda) *4 and Dongfeng Honda both increased their sales year after year. However, their market shares would decline with the rise in competition. In 2001, the two Honda joint ventures had a 36% share of the market among Japanese-affiliated joint ventures engaged in local production and sales in China, but by 2009 had fallen to 19%, and in 2016 was down to 16%. In the past, Honda maintained its advantage in the Chinese market by introducing all-new models while other companies sold older models, but other companies had begun selling new models as well. The advantage that Honda gained by entering the market ahead of its competitors was no longer there.
- In June 2009, Guangzhou Honda Automobile Co., Ltd. was renamed GAC Honda Automobile Co., Ltd.
In 2006, Dongfeng Honda expanded its annual production capacity to 120,000 units.
Making Strong Comeback:
Recovering Market Share with the Sibling Model Strategy
GAC Honda and Dongfeng Honda struggled largely because they were unable to expand their product lineups in response to the market demand for original brands and new models. Both GAC Honda and Dongfeng Honda were putting resources in the development activities, but naturally, they were developing different models under different original brands. Honda decided to pursue the “sibling model strategy,” because by taking advantage of having two Honda joint ventures in one country, it would be able to reduce costs, speed up development, and increase the competitiveness of each product.
If the two companies would develop two different models based on the same platform and differentiate them by the interior and exterior designs, both companies could quickly expand their product lineups while reducing development costs. Seiji Kuraishi, who assumed the position of Chief Operating Officer of Regional Operations (China) in 2010, thought that in order to realize this sibling model strategy, it would be necessary to develop locally at least the body design, and interior and exterior specifications.
Kuraishi said: “In order to conduct business in China, while maintaining the Honda approach of placing the customer first, our basic stance is to have local Chinese associates, as a member of the local community, to take the lead in developing products and customers that will please people in China. We were falling behind of other companies in marketing and speed, so we thoroughly researched what our customers wanted and urged our local teams to develop faster than the competition.”
In November 2013, Honda established Honda Motor China Technology Co., Ltd. The company was tasked with automotive product planning, R&D, and production planning. It was expected to quickly capture changes in the Chinese market, delve deeply into the needs of Chinese users, and conduct planning and development unique to the local market.
In 2014, as the first sibling model, Dongfeng Honda launched the XR-V based on the Vezel, a middle-class SUV introduced by GAC Honda, with a more pronounced bumper section and other design changes. In the following year, in 2015, Dongfeng Honda launched the Greiz based on the Honda City of GAC Honda, and other new models were introduced in rapid succession. Local R&D capabilities were utilized in the development of these models.
The strategy was a success, and the number of models the two Honda joint venture companies sold rose from nine in 2010 to 16 in 2017. Their combined sales volume in 2016 was 1.25 million units, up nearly 80% from 2013 before Honda adopted the sibling model strategy. Honda was ranked 4th in market share among all automakers, and recovered 1st place among Japanese joint ventures.
Kuraishi said: “Around 2000, local Chinese manufacturers started selling automobiles, but within 10 years, customers were no longer satisfied with Chinese brads and began to demand higher-end brands, and Honda models met their needs. I believe that the market was revitalized by the entry of other companies, which was a positive factor for the sibling model strategy and has led to the success of Honda to date.”
In the Chinese automobile market, where customer needs are rapidly diversifying, it is important to further highlight the respective individuality of GAC Honda and Dongfeng Honda, and they will continue to further differentiate each model by further advancing their product strategies.
The GAC Honda Vezel and Dongfeng Honda XR-V originated from the sibling model strategy.
The e:N, new EV Brand Created for the New Era
GAC Honda dedicated EV plant.
Dongfeng Honda dedicated EV plant.
With China's rapid economic growth, addressing air pollution and reducing CO2 emissions have become key national policies, and the country has been tightening its emissions regulations since their introduction in 1991. In 2010, China introduced incentives for purchasing New Energy Vehicles (NEVs) such as electric vehicles (EVs) and plug-in hybrid vehicles (PHEVs) and, in 2012, set targets for NEV sales expansion and technological revolution by 2020. In 2015, China ranked first in the world in terms of the number of NEVs manufactured and sold, and further growth in demand was expected due to increased demand in cities with number plate registration regulations and the increased introduction of commercial vehicles in the public transportation sector.
To expand its NEV lineup, Honda introduced hybrid versions of popular models, such as Accord Hybrid from GAC Honda in 2016, followed by the CR-V Hybrid equipped with a two-motor hybrid system introduced from Dongfeng Honda in 2017.
In October 2021, Honda held a briefing on its comprehensive electrification strategy in China and announced that Honda will no longer introduce any new gasoline-powered models in China after 2030 and will electrify all new models coming to market, such as HEVs and EVs. Honda also announced plans to launch the first set of Honda-brand EVs in China, the e:N Series models, by Dongfeng Honda and GAC Honda in spring 2022, and held the world premiere of concept models under development, making a major declaration of its electrification initiatives.
As planned, Dongfeng Honda launched the e:NS1 in April 2022, and GAC Honda launched the e:NP1 in June 2022. Honda is now building dedicated EV plans for both GAC Honda and Dongfeng Honda, aiming to start operations in 2024. The two plants, each with an annual production capacity of 120,000 units, will be the EV production hub in China.
e:NS1
e:NP1
Honda Continues to Work with Speed and Innovation Together
with People in China
Looking back over how Honda business in China has evolved over the 42 years since 1981, Honda has developed its business with local partners in response to the government policies and market trends of each era, but the key to success has always been speed and innovation.
China's remarkable economic growth has transformed the country into the world's largest automobile market, but now China has set a next target to become the true “automobile powerhouse," and the New Energy Vehicle policies will constitute the bedrock of this direction.
Based on its assessment of the future of the Chinese automobile industry and market, Honda has set a goal to increase the ratio of EVs and FCVs within overall unit sales to 100% by 2040 to realize carbon neutrality by 2050.
Honda will continue to work together with all of its partners and stakeholders involved in the Honda business in China and make a unified effort with associates in all areas of SEDBA*5 to achieve a breakthrough to strongly drive the electrification of its business in China.
- SEDBA: Sales, Engineering (Manufacturing), Development, Buying (Purchasing), Administration
