Honda's midlife crisis: CEO Fukui hopes to engineer a new start with a race-forward attack strategy.

For a while after becoming president and chief executive of Honda Motor in June 2003, Takeo Fukui, an avid golfer who claims to be the best player at Honda, let his scores slip for lack of practice. But the compact, athletic engineer fought back against the time pressures of the job. In August 2004, Fukui showed off his agility in another sport by driving a Formula 1 race car at over 180 mph at the company's Tochigi test course, drawing wows from crowds of journalists. And this past summer, he claims to have recovered his golf form, consistently scoring between 70 to 72 with a handicap of 11. "It's much better than before," he crows.

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Now more than two years into the job, Fukui, at 60, is trying to inject his keen sense of competitiveness throughout the world's seventh largest automaker, including its regular automotive products and racing program as well as its management practices and business strategies.

The reason he sees rejuvenation as necessary is that Honda, a company long known for its youthful drive and ambition, has gotten a little flabby around the midsection. In Japan, Honda's once red-hot image has visibly dimmed. Over the past two years, year-to-year sales have languished, contracting nearly 20 percent in 2003 and barely recovering year-before levels in 2004 as Honda's domestic market share fell to as low as 11.8 percent in the first half of 2005. It held 15.6 percent in 2002.

Honda also is struggling in the U.S. market, where it sells more than half its total global production. Sales of the Accord, its flagship sedan, and the Civic Compact have been muted--something Honda hopes to reverse with the recent launch of a newly sporty Civic that attempts to recapture the car's glory days of the 1990s when it dominated U.S. customer satisfaction surveys.

"Our brand image is very similar to Toyota's in the U.S.," acknowledges Fukui. That's bad because Honda sees Toyota as being too established and too big, without much emotional spark. And Europe remains a Kafkaesque house of mirrors for Honda, which has little to show for years of trying--only 1 percent of the market. A European auto executive describes the current public image of Honda as "increasingly looking like a Sony."

Part of the problem is that Honda's culture grew too comfortable. After founding the company as a tiny machinery shop in 1946, Soichiro Honda was obsessed by the ambition of becoming No. 1 in everything it did. In fact, the company has a remarkably broad series of achievements in motorcycle and Formula 1 auto racing, motorcycle production, and development of the first clean-air engine to meet U.S. auto emissions standards in the 1970s.

But as time passed, top managers seemed to lose some of their original drive. "In the past, we would spend time talking about how to be happy, make people happy and reduce traffic accidents, or not being afraid of making errors, or how to avoid copying or compromising when designing new products," says a former Honda executive who, not surprisingly, doesn't fit in any longer with the culture that Fukui is creating. "'Since Fukui-san became president, Honda has come to emphasize technologies, F1, sales and profits, and other corporate activities."

Which is precisely the point. To sharpen the company's focus and avoid going the way of the dinosaur, this past summer Fukui streamlined the Honda executive suite by downsizing the number of board members from 36 to 21 and making it a group of top-level leaders who can strategize about the company's future and cope with potential crises. "We were hit by so-called management crises a number of times in the past," Fukui recalls. "It will happen to us again for sure in the future. Whether we can manage a crisis depends on human resources."

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Also to inject urgency, Fukui declared publicly that Honda will join "the 4 million club" within three years (up from 3.2 million units sold in 2004) to buoy automobile sales to a plateau that's been achieved by only a handful of global automakers. Given the pace of Honda's global manufacturing expansion, it looks like a foregone conclusion that the motorcycle-turned-auto maker can achieve that level--and then some. "We are by no means becoming conservative in plotting our future growth targets," Fukui says. "If that number looks conservative, it is because we are going to pay much greater attention to improving quality and enhancing the attractiveness of our products."

It's a multipronged strategy, featuring both an emphasis on fuel-efficient vehicles at the same time that Honda pushes on the higher end of performance. For example, it's working on new engine technologies to improve its average fuel efficiency by 11 percent over the next three years. And over the next 10 years, Honda also plans to rival its competitors in sales of hybrid vehicles that combine an internal combustion engine with an electric engine, such as the Insight, Civic and Accord models that are now available in the U.S. If gasoline prices remain at near-record highs, Honda will be well-positioned. Significantly, Fukui doesn't think vehicles that operate only on fuel cell batteries will ever be practical. (See interview, page 50.)

At the same time, Fukui sees opportunity in other areas. Beyond the automotive sector, the CEO is pushing his designers and engineers to come up with robots that can assist humans and with an engine that will crack the aviation business.

There is also room, he figures, at the luxury end of the market for higher-performance cars. He vows to complete and launch a V10 sports car within three to four years. Honda certainly knows how to make cars with robust performance, judging from the sportiness of its S2000 hot rod in the U.S. The Acura RL also is attracting the attention of American car aficionados for its one-of-a-kind four-wheel drive, which allows the rear wheels to rotate at different speeds when turning. Right now, the RL has only a six-cylinder engine, and equipping it with a V8 engine is one of the things Fukui is considering.

For a long time Honda resisted such moves due to the cost of upgrading existing plants, but capacity expansion gives Honda new opportunities. It's not the only factor, however. "Simply making [the RL] a V8 won't make it sell," he says. "We have to get the pricing, design, ride feel, marketing and everything else just right. The Acura RL class is where we really want to grow."

That's where Fukui sees the sweet spot in the auto market--cars that are more powerful, yet more fuel efficient, and safer and smarter. There's little doubt that Fukui is racing at Fl speed on all fronts.

RELATED ARTICLE: Q & A

Fukui's Desire: Rev Up Passion In Honda

Q: As Honda grows in size, how will it avoid becoming an elephant that moves too slowly?

In the global auto industry, there are many auto manufacturers that have failed to grow when unit sales reach 4 million. When we were manufacturing toward 3 million units, we had the Civic and Accord and made them all new every three years or so. Our management put enormous energy into this with the thinking that if the model changes fail, the company will get into trouble. Over the years, we added more models such as light trucks, Fit (subcompact), CR-V (crossover), and so on, and these additions have given us the conviction that we can achieve 4 million.

Another issue is human resources. As we grow in size and as each employee's face becomes more difficult to recognize, there's a perception that even if you do not do anything productive, the company will go along as usual. That kind of [static] thinking is of great concern to me. Companies and industries experience up and down cycles. Honda is no exception.

The reason we are doing Fl and other motor racing is precisely for this objective: giving opportunities to employees to experience battles on the front lines when the company as a whole is shrouded in a sense of peace and prosperity.

It would be ideal if Honda can grow with the small-company mentality of our founding period, but since we have grown and changed so much, we cannot continue applying that management philosophy. So in some parts of our corporate activity, like Fl, Honda workers participate in it directly. Our Fl activity effectively is a small company inside Honda that requires workers to work overnight for results. By launching such projects, I want to foster people's passion about Honda. Even though it may be a costly expenditure in the short run, it will give them and us a lot of benefits in the long term.

Q: How are you managing the expanding overseas operation? Do you prefer managing from the center or delegating to local executives?

Our management philosophy is to transfer management authority to regions where we operate. There are now six regional hubs, and instead of managing those as part of global Honda, we entrust the regional hubs to make decisions. We send support staff from Japan but management belongs to each region. Our policy is that each regional operation should be self-supporting and autonomous, except that core technology on engines, drivetrains and other vital components will continue to be developed in Asaka [R & D lab in Japan], while the regions will be in charge of product development.

Q: What are the key technologies that will shape the future? Will the internal combustion engine survive?

Internal combustion engines will continue improving. In addition, hybrid systems are gaining and should become more popular in coming years. Ultimately, though, I believe in carbon dioxide-free fuel cell technology in 10 years or so. Honda will lead in fuel cell technology. We will not be outranked by any other makers in the world on this technology.

Battery-powered cars are not realistic. When you power a car with batteries, the weight becomes a problem. In small motorcycles, battery-driven can be a possibility.

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