Honda Motor Co. Ltd. has collected plenty of accolades for its North American operations over the past 25 years.
"Honda just continues to amaze the industry," says Ron Harbour, president of Harbour Consulting in Troy, Mich., which produces the annual Harbour Report on manufacturing efficiency. "They are one of the most cost-competitive companies from a new-vehicle development standpoint in the world. That is their real advantage."
Honda's manufacturing operations are admired for their ability to change models with virtually no downtime and squeeze more production from its plants without expanding.
But the journey hasn't been free of bumps, and there are challenges on the horizon.
For example, Civic sales have dropped 9.7 percent over the past two years, and the Element SUV is appealing to more older buyers than Honda expected.
John Adams, Honda of America Manufacturing Inc.'s senior vice president for manufacturing, says the main challenge is to keep making assembly plants more flexible.
"We still have some things that have to be cleaned up," Adams says.
"In 25 years we've gone through a lot, but there is still a lot to come," he says. "The market is still fragmenting. We're looking for ways to do a lot more products in smaller volumes. That is very important."
Here are other issues facing Honda:
Keep on truckin'?
Light trucks have propelled Honda's U.S. sales growth for the past five years, starting with the debut of the 1999 Odyssey minivan. The same unibody platform also was the basis for the successful Honda Pilot and Acura MDX SUVs.
Next spring Honda will use the platform to enter the pickup market. Unlike most pickups, Honda's will be geared for personal use, not heavy-duty hauling.
That strategy follows a shift in the market away from traditional pickups and toward sport wagons, says Mike Jackson, senior manager of North American forecasting for CSM Worldwide in Farmington Hills, Mich.
Harbour says: "I'm not sure how the pickup truck will go over. It will have just a V-6 and will not be a full-sized pickup."
Meanwhile, rivals Nissan Motor Co. Ltd. and Toyota Motor Corp. are taking on the Big 3 directly in the full-sized pickup wars.
Rise of Koreans
Civic sales through August were up 0.8 percent to 219,139 units compared with the year-ago period. But sales in 2003 were down 4.3 percent from the previous year, and in 2002 they were off 5.6 percent from 2001. That is an ominous trend for Honda's entry-level car.
McAlinden says: "The Koreans have been attacking in Honda's prime segments, such as the Civic. I think they have been more affected by the Koreans than anyone."
A Civic redesign for 2006 may help reverse the trend.
Also, Honda next year is expected to introduce the Fit, a rebadged version of the Jazz minicar sold in Japan. The Fit will lower Honda's entry-level price point and compete with Toyota's Scion division.
Honda says Accord sedans will join the product mix next year at the East Liberty, Ohio, plant. The factory now makes the Civic and the Element light truck. Its flexibility allows Honda to move quickly as the market changes.
Three years ago, Honda began converting its factories to its New Manufacturing System. The goal was to quickly and easily shift vehicles among assembly plants by standardizing assembly line layout and switching to robots in the body shop.
The first real test of that flexibility comes next spring when Honda plans to add Accord production to the East Liberty, Ohio, plant. That plant builds the Civic and Element. The move will enable the Marysville, Ohio, plant to build more Acura TLs, in addition to the Accord.
That type of move would be a challenge for any automaker, even Honda, Harbour says.
But CSM's Jackson doesn't expect Honda to have much trouble making the switch. And if there are problems, "They have all the experts and expertise in that area because of the proximity of the East Liberty and Marysville plants," he says.
The New Manufacturing System is an example of Honda staying one step ahead of the rest of the industry, Jackson says. He expects other automakers to replicate the strategy.
Adams of Honda says that the automaker has switched vehicles among assembly lines in Japan, but it will be the first time it is tried here.
"We have people working hard on this," he says.
Some Accords already have been sent down the Civic assembly line to test the system and train workers, Adams says.
More retirement parties
After 25 years Honda's manufacturing operations have 600 retirees - a tiny fraction of the number of retirees from one of the Big 3. But that number may grow faster in the next few years because Honda hired from a wide spectrum of ages when it began operations.
McAlinden says that could be a benefit to the company.
"By not hiring such young people, it's a short hop from when they retire to when Medicare kicks in and picks up 80 percent of the bill," McAlinden says. "At GM they had a lot of young hires who retire after 25 or 30 years. But then it is a long time until Medicare kicks in, so GM gets hit with big costs."
Adams doesn't think the retiree issue is a big concern.
"As time passes, we'll have more retirees," he says. "The important thing is how well we prepare for that."
The Fit, which may arrive in the United States next year, could help Honda repel Korean competitors.
Over the past five years, Honda has opened two assembly plants in Lincoln, Ala., and has expanded its operations in Alliston, Ontario. But the heart of its supply base remains in Ohio - 55.6 percent of the $12.6 billion Honda spent with suppliers in 2003 was in the Buckeye State. That spending was concentrated, too. Only 175 of Honda's 620 North America suppliers are in Ohio.
McAlinden says that Honda needs "to go from being an Ohio company to a continental company."
He says doing so will require a better understanding of railroad shipping.
Also, he says the automaker needs to source more parts from Mexico to cut costs.
"They have to do that to compete in the truck market," he says.
In tune with market?
Honda was the first Japanese automaker to succeed with American-style minivans, McAlinden says. But as the third-generation Odyssey comes out this fall, it faces stiff competition from the Toyota Sienna and redesigned Chrysler group minivans, with their Stow 'n Go second- and third-row seats.
Also, Honda's Acura luxury division has been overshadowed by Toyota's Lexus division and European luxury automakers, McAlinden says.
Acura has been hurt by Honda's unwillingness to offer the brand's models with a V-8 engine, he says.
Honda also is having trouble reaching the youth market, McAlinden says.
"The average buyer of the Accord is Oldsmobile age," McAlinden says. "As far as the Element, librarians love it, not beach bums. Does that worry them?"
Mexico on menu
Honda's plant in El Salto, Mexico, makes Accord sedans for Mexico and Brazil. Annual capacity is 30,000 vehicles.
The plant could be a candidate for expansion if more North American capacity is needed.
Toyota is building a truck assembly plant in Baja California, Mexico, that will begin producing Tacoma pickups by year end.
Honda gets only a small number of components from Mexico, McAlinden says. The company will have to take better advantage of lower wage rates, he says.
Also, sales growth will prompt Honda to consider increasing engine production. Its engine plant in Anna, Ohio, has annual capacity of 1.16 million units. An engine plant at the Lincoln, Ala., assembly plant can build 300,000 engines a year, matching the assembly plant's annual capacity.
Harbour says: "The Anna plant has been expanded more times than you can count since it opened in 1985. I really think if they go any further in engine production, they need to do a second operation. How big do you make any one plant before you start to tap out the ability to hire in the area?"
Keepin' it real
When Honda started in Ohio in the late 1970s and early 1980s, it was easy to make sure those operations ran in the image of Honda's plants in Japan. But Honda is a much larger company today, with six vehicle assembly plants in North America, plus component plants and the original motorcycle factory.
"I believe for Honda and all the Japanese automakers here, the biggest challenge as they continue to grow is sustaining the discipline and keeping good people," Harbour says. "As you grow, you tap resources from Japan, and that puts a strain on the entire system."
Honda's Adams says that the automaker spends a lot of time discussing and teaching the philosophy known as the Honda Way. Employees take classes on the topic, he says.
In the early days, workers went to Japan to learn from Honda. Now workers from plants in Ohio and Canada train workers hired for the Alabama plants, Adams says.
It all adds up a number of challenges for the company that started a revolution in the U.S. auto industry 25 years ago.
Harbour says, "I'm not saying that Honda is doing a bad job. But a key question as you grow to four or five plants is how do you keep them full? It's a much more competitive market than ever before."