QUESTION & ANSWER

Fukui shifts into high gear at Honda

Honda Motor Co. CEO Takeo Fukui
TOKYO -- Honda Motor Co. is on a roll. The Japanese automaker is booking record profits, building new factories worldwide and predicting higher sales in the United States this year, despite forecasts for a market meltdown.

The company is meanwhile planning to launch a new hybrid vehicle in early 2009 that it hopes will challenge rival Toyota Motor Corp. as the leader in the popular green segment.

CEO Takeo Fukui talked with Hans Greimel, Asia editor for Automotive News, on March 19 about his plans and the outlook for total U.S. volume and the plunging dollar.

J.D. Power recently cut its 2008 forecast for total U.S. volume to less than 15 million vehicles this year. What is Honda's current outlook?

At the end of last year, the market was forecast in the mid-15 million units, and it may be that they have pushed that number downward. But as far as Honda is concerned, we don't believe there are going to be any major changes.

Are you still predicting Honda will see an increase in U.S. sales this year?

As for the forecast released at the start of the year, we are forecasting a slight increase. And basically, we haven't changed that. The sales for March will more or less reach the same level as the previous year. But I do understand that the situation is getting worse, almost by the minute.

But in general, we're not anticipating any changes because the facilities in Indiana will start up by the end of the year. And regarding the recent production shift to Alabama, that was already decided before the sub-prime issue came about. We are going to start operations in Indiana. And we believe we don't have to be too expeditious about the ramp up.

Another hot topic these days is the dollar's sudden decline against the yen. How concerned is Honda, and what is your company doing to offset the impacts. Is it thinking of importing from the United States to Japan, or changing the percentage of cars made in Japan versus overseas?

It is beyond our forecast if the yen reaches 95 to the dollar, but whatever the exchange rate may be, our basic policy is to produce where the market is. It's true we have seen a recent appreciation of the yen, but basically it doesn't change our policy.

We feel that the reasonable exchange rate for the Japanese yen should be between 105 and 110 to the U.S. dollar. Thus, if we are going to see this level, which is in the high 90s, continue for sometime, then we may have to reconsider something.

If you look at the exchange rate of either 95 or 97, I don't believe this level reflects the real economy we see both in the United States and Japan.

I believe the exchange rate will settle down, and that's the time we might need to review things.

In the past we have experienced trying to increase demand here in Japan so that vehicles produced in Japan would be sold more in the Japanese market. And it may be that we may be importing some of the vehicles produced in the United States. There are various options.

But the policy is still to produce where demand is. That is not going to see any major changes.

General Motors, Toyota, Nissan and Mitsubishi, among others, are planning to use lithium ion batteries for new hybrid and electric vehicles they plan to be launching in the next couple of years. Honda hasn't so clearly voiced its lithium-ion strategy. Why is that? What kind of battery will be used in the new hybrid planned for 2009?

Lithium batteries have their good points. But in terms of reliability and durability, I must say there still remain some concerns. I don't think they are necessarily best suited for mass produced vehicles which are to be sold in large quantity.

Automobiles are different from laptop computers, for example, because these products are directly linked to the lives of people. We don't want components that can't ensure reliability.

For example, in Japan we have power-assist bicycles that use lithium ion batteries as a booster for regular pedaling. I bought one myself for use at home. But my battery malfunctioned within a year, so I had to buy a totally new battery. The bicycle itself costs 100,000 yen [$1,020], but the battery costs about 30,000 yen[$306]. This is unthinkable for an automobile.

Does this mean the hybrid for next year won't be using lithium ion batteries?

Timing wise, I would say there is no possibility we would resort to lithium ion batteries. Once we have confidence in the durability and reliability, then we can replace the batteries.

So you are engineering the cars to be able to swap out nickel-metal hydride batteries in the future, say three years down the road, when lithium- ion is ready?

Right now we are using the nickel-metal hydride battery. In two years, maybe we will shift to lithium ion batteries. But that's something we just don't know for sure at this point. This could come during a minor model change.

Honda is aiming to price the '09 hybrid below the current Civic Hybrid. What engineering tricks are you using to cut costs?

It's extremely simple light and compact, and we only have one motor, while competitors usually have two. If you compare the size of the battery, ours is about half. In the engine, we need to make full use of cylinder management. Civic hybrids are expensive because we didn't assume they would be mass produced in large quantity, but rather something that's handmade.

As for the vehicle that is being launched next year, it is a hybrid that will be sold on the mass market, at around 200,000 units a year. Therefore, we are going to simplify the structure and at the same time, have the production process fitted to making large quantities.

At the moment, we are planning to concentrate manufacturing at Suzuka. We already have a plant dedicated to producing hybrid vehicles. And we will try to improve the efficiency by enhancing the parts and components that will be produced in-house.

Tell me more about the engine for the new hybrid?

It's not a new engine, but rather a modification of existing engines. So we will be using the same type of engine as used in the Civic hybrid. As for the motors and ECU [engine control unit], these are going to be specially designed for the new vehicle.

We are making efforts to make vehicles lighter. But if we use new materials, it will make them more expensive. So there can be only limited use of new materials. But we are being innovative in the configuration of the body so that it faces less wind resistance.

Think about the Clarity image. Not the Fit. I told the styling designer to come up with something like the FCX Clarity. Technology-wise, there were some difficulties. But that's more or less the image we're striving for.

What do you think about the potential for electric vehicles? Nissan and Mitsubishi were latecomers to hybrids and are looking at EVs as a way to possibly leapfrog ahead.

If you look at EVs and battery parts, it's not really practical as of yet, based on our experience. Lithium ion batteries are still not usable from our perspective.

At the current level of performance, they're not going to give us the distance. A more fatal disadvantage is that they need so much time to recharge the battery.

But that depends on the evolution of the battery. It might be that we come up with a battery that has 10 times the performance of the existing lithium ion battery. And if that happens, maybe there will be a leapfrog to electric vehicles.

Many of your rivals have already announced dedicated partners in developing lithium ion batteries. They have their dance partners and are out on the dance floor, whereas Honda is still sitting on the sidelines. Is Honda behind? What is your strategy here?

There's a word in Japanese, "soukon," for people who decide to get married too soon. It's like marrying a girl who's only 13. You don't know how that girl will turn out as a lady.

To be more exact, it's not that we have decided on one manufacturer. It's that we have relationships with multiple companies at the moment.

I can't tell you who our partner is on the battery for the FCX Clarity. But for mass production, we have associations with Sanyo and Panasonic. Right now we have the two companies to compete against each other in quality, cost and delivery.

Miniaturization of car components and systems is a key trend in making vehicles more compact, light and fuel efficient. Where does Honda see the best potential for miniaturization?

If we think about the existing Fit, I don't think the cabin space has to be so big. And that holds true for the engine displacement. It doesn't have to be as big.

But we still need to be able to house four to five occupants.

Nissan has numerical targets for cutting average vehicle weight in the coming years. What are Honda's goals in that area?

What we need to do is make even the existing models lighter. You can do that by making vehicles smaller, by using substitute materials or by resorting to different design methods. We do have targets for fuel economy and costs, and one way of getting there is to make vehicles lighter.

Regarding cost, one specific target is making our "kei" mini cars competitive in the Japanese market. Once we are successful in doing so, we can apply that technology to our other models.

In the past we had targets, like reducing cost by 15 percent, and we really tried hard to attain that. But setting a target like that never works well. You may attain results in the short run, but on a mid- to long-term basis, it's going to come back at you with some negatives.

What engineering techniques can you take from mini cars and apply to bigger vehicles?

I don't want to divulge specifics right now because you will report on it. But assuming we're successful with the "kei" mini cars, that of course can be utilized without doubt in the Accord, Civic and other models.

Will mini cars ever be popular outside Japan?

No, I don't think so. But we can apply the technology in the A-category cars that are smaller than the Fit, which we are considering selling overseas.

The Fit was a late arrival to the United States, coming only in 2006. But since then, it has been a big success. Do you regret not bringing it Stateside closer to its world debut?

We are behind in production even for the Fit currently being shipped to the United States. It probably would have been good if we launched it a year earlier. But the Fit being shipped to the United States had to meet specific specifications like the automatic transmission, which took time to develop. Originally, we didn't think the Fit would be suited to the U.S. market. The model change for the Civic made it larger and coincided with the hike in gasoline prices. That's why there is heightened demand in the United States for compact cars like the Fit.

Some dealers at this year's NADA convention complained that Honda isn't spending enough on advertising, especially given the market down turn. What's your response?

Of course we need to respond to their concerns. I do agree advertisement is necessary, and I'm sure America Honda will respond if there are such needs. It's far better to spend money on advertising than incentives.

What's Honda's outlook for China this year?

Naturally going up. Our sales in China will see a double digit increase this year. The market is quite tough, but Honda is doing quite well. Guangzhou Honda has already launched the Accord and is planning the Fit for this year. And Dongfeng Honda has had the Civic since last year.

Any plans to increase Honda's exports from China?

We have a separate company located in Guangzhou that is dedicated to producing the Jazz to be exported to Europe, with capacity of 50,000 a year. Right now, we are planning to stick with the 50,000 units. Only that one model, the Jazz, will be shipped to Europe.

This year, we are going to have the start up of the facility in Indiana. So that means a lesser burden will be placed on Japanese plants and that they can increase exports to Europe. So exports from China don't have to work too hard for the time being.

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