STRATEGIC AUDIT

PREPARED BY: SAI SANKAR DATE: 10th MARCH 2012

Table of Contents:

An Overview of Honda and Honda Motorcycles

Their Overall Management Structure and Its Strengths and Weaknesses Strengths of the Management Structure Weaknesses of the Management Structure

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Their Current Strategy: Global made Local Their Overall Global Strategy Japan North America Europe Asia and Other Regions

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Hondas Challenges, Opportunities and Its Capacity to Handle Both The Major Global Challenges The Major Global Opportunities

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A Few Strategic Recommendations

Report Summary

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References

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An Overview of Honda and Honda Motorcycles: Honda, a pioneer in the design, engineering and manufacturing of engines and the largest engine manufacturer globally, has diversified into almost every business where the use of an engine is necessary. Having carefully understood its founder, Soichiro Hondas vision, it has been able to remain true to its core focus on engines, while expanding into nine major divisions and subdivisions ranging from Honda Automobiles and Motorcycles to their most recent venture into the business of corporate luxury aircraft. Honda currently has a market capitalization of approximately 67 billion dollars and had revenues of US $ 107 billion in the Financial Year 2011, with a net profit of US $ 6.8 billion in the same period. Honda has 4 major business divisions, Honda Automobiles, Honda Motorcycles, Power Products and Financial Services and five other smaller subdivisions: Acura, Honda Marine, Honda racing, Honda Power Equipment and Honda Jets. However, when recognizing and disclosing revenue, it chooses to divide its revenue streams into four major headings: Honda Automobiles, Honda Motorcycles, Power Products and Financial Services. The largest proportion of their global revenues comes from their automobile business, followed closely by their Motorcycle division. Honda is the largest manufacturer of engines in the world by volume and the 6th largest automobile manufacturer on the planet with assembly plants in China, the United States, Pakistan, Canada, England, Japan, Belgium, Brazil, New Zealand, Indonesia, India, Thailand, Turkey, Taiwan and Per. They are currently headquartered in Tokyo, Japan and their current CEO Takanobu Ito reports to a board of 12 directors (including 2 external directors) who work with a team of 5 additional corporate auditors. The Company has six administrative regions around the world and regional boards to make localized decisions in each of these six regions. This Strategic Audit will focus on the Honda Motorcycles division, which last year sold a little over 11 million motorcycles in almost every corner of the globe. Hondas motorcycle business, its first business venture, has upended the businesses of several well-entrenched market leaders over the years and is seen as the benchmark brand in motorcycles of almost every size and engine capacity. In fact, the name Honda itself is often used as a synonym for a motorcycle in several parts of the world, owing to their legendary performance, reliability and subsequent popularity. Soichiro Hondas passion for motorcycles, both on the race track and on the open road, combined with Hondas legendary reliability, technical prowess and massive production scale, helped transform an industry of otherwise well-entrenched players who had dominated their small, yet essential turfs. Honda, through dedicated attention to production technologies, thorough quality control and often very nimble moves to take advantage of opportunities, decimated entire motorcycle industries in certain countries, while simultaneously expanding the overall size of the global motorcycle market over a period of over four decades. They raised the bar for motorcycle performance and re-defined consumer expectations about reliability, causing stronger competitors to catch up, while leaving the remnants of the weaker ones by the wayside. Having achieved several unimaginable feats over the past six decades, Honda Motorcycles stands at a pivotal point in its existence. The world of motorcycles Honda created, isnt one with several players in niche segments, but is more a world of consolidated, established brands with significant R&D capabilities, massive production volumes and well-known brand names. In addition to competition from 3

major world players, Honda has faced severe competition from lesser-known local rivals in the two fastest-growing markets in the world: India and China. The declining financial strength of the consumer in the US and Europe are also concerns the company will need to address. And beyond all the specific concerns, the company will also have to ensure that the motorcycle remains a viable alternative in the choice of modern transportation. This report will examine Honda Motorcycles current corporate strategy, management structure, their strengths and weaknesses and will attempt to identify some possible recommendations that will propel Honda forward in its next phase of existence. The report will also divide strategy by the geographical region of business, as Honda is very cognizant of the local needs of each of its regions of customers. Honda currently divides its regions as follows: Japan, North America, Europe, Asia and other regions.

Their Overall Management Structure and Its Strengths and Weaknesses: As mentioned in the Company Overview, Hondas Management Structure comprises of the Top Management Team headed by their CEO, Takanobu Ito, and overseen by a board of twelve Directors including two external Directors. The Board of Directors is assisted by five Corporate Auditors (of whom three auditors are external auditors). The CEO is also a member of the Board of Directors currently. The board meets an average of ten to twelve times annually. Honda has six administrative regions around the world and four divisions in each region. Each division in each region is independent and develops its own products and manufacturing processes with the two major company-wide R&D units, Honda R&D Co. and Honda Engineering Co. respectively. Each division in every region is overseen by a regional board which makes decisions on localised strategic issues. In addition to the command at the regional level, Honda also often has a CEO or Vice President who handles large single-country markets within a specific region for a specific business division. For example, their automobile operations in the US and India each have specific CEOs, as each country is quite important to Hondas sales. Divisions such as the Motorcycle division have a VP of Motorcycles, who is based out of their headquarters in Japan and oversees regional managers who manage their motorcycle businesses globally. The regional boards also assist is making local decisions specific to the motorcycle division. The Company assigns an operating officer to each regional, business and functional headquarters, research and development subsidiary and any other important organization to ensure swift and optimal decisionmaking in each region and business division.

Strengths of the Management Structure: The Regional Boards and existence of an Operating Officer has led to a quicker decision-making process at a localized level and enabled Honda to take advantage of opportunities quicker. The umbrella Manufacturing and Engineering R&D organizations help bring scale to the organizations R&D operations globally and in every division. Additionally, it also enables the company to share innovations company-wide.

Weaknesses of the Management Structure: As the description of their management structure indicates, the structure is still largely complex and has several layers of decision makers involved. The management structure seems a whole lot taller than it should be, and thus decisions can be slower than other organizations, which might choose a much broader structure at the local market level. Their top executives are still mostly deputed from Japan and have very little to no field experience in specific markets and this can be a particularly big issue, as local competitors in fiercely-competitive markets like China and India compete with a better understanding of local tastes.

Their Current Strategy: Global made local The Overall Global Strategy: Hondas culture has always been one of efficiency that creates performance. And nowhere is this more evident than their focus on high-performance engines. These engine lines then power a myriad of motorcycle models globally. Their current overall global strategy is to use their global supply chains, massive scale, R&D capabilities and Honda brand name to develop a line of engines that will power every motorcycle they sell globally. To cut a long story short: use the same engines worldwide to save money, use other parts too, but try and customize the least expensive part (the motorcycle frame) to each individual geographic location. Japan: Japan has been one of the most brutally-competitive markets in the world for Honda, owing to the fact that three of the worlds largest motorcycle manufacturers are also headquartered there. Suzuki, Yamaha and Kawasaki have always been trying to capture Hondas turf in all the traditional motorcycle segments, while Harley Davidson has made substantial inroads into the niche cruiser and chopper bike market. However, with almost 5% of its total motorcycle revenue coming from this region, the market has been hard to ignore. While Honda has a substantial presence in almost every segment of the motorcycle market, Honda has identified its strategy in this market under the following specific objectives: Move to more environmentally-friendly bikes: Since Japan is a very environmentally sensitive market and is heavily regulated. They have an electric bike and lower carbon engines in the works. They are also trying to market bikes and scooters as a cleaner alternative to buying a car. More Expensive Touring Bikes: Marketing larger touring bikes that are loaded with several optional features, aimed at a more mature rider in Japan, as Japans older citizens have greater buying power than their younger compatriots and are more interested in leisure biking. The profit margins in this segment are also significantly higher.

North America: At 8% of total Motorcycle revenues, the North American region has been a large contributor to Hondas revenue and profit margins, as the bikes sold in this region usually command higher profit margins than elsewhere. However, after the recent financial crisis, bike sales in this region have suffered significantly, as buyers have less disposable incomes to spend on what has widely been considered a leisure activity. In light of these recent changes, Honda has narrowed it down to two major focus areas: Branching out into smaller, niche non-traditional sectors: the introduction of their first chopper-style bike, the Fury, and their foray into the urban commuter scooter market are two examples of such a strategy. While both markets have not proved to be blockbusters, they do compensate somewhat for their loss of revenue in other segments, with a minimal investment. Holding market share and brand image in the high-end touring bike segment: The profitable touring bike market has been a perennial profit earner at Honda. By updating its most popular bikes such as the Gold Wing, it continues to position itself as the market leader in technologically- advanced touring bikes offered to an aging demographic of wealthy buyers.

Europe: Europe, once a very important market for Honda and home to some formidable manufacturers that it vanquished, has become Hondas fastest-declining market. While Honda has held its market share in this region, the overall market has shrunk considerably, owing to reduced disposable incomes that are a result of a financial downturn and governmental fiscal austerity measures. Considering this drastic change, Honda has chosen to address the European market as follows: Offering Affordable Urban Scooters and Bikes: Expanding to the non-traditional sectors of urban biking to compete with European manufacturers such as Vespa and Chinese manufacturers that have established a beachhead. Most of the manufacturing is done in Spain and Italy to avoid higher import tariffs and currency fluctuations. Offering Higher- End Touring and Race bikes already developed for other markets: Honda imports its luxury touring bikes and sports bikes from Japan. This offers Honda the ability to offer high-end models, at healthy margins, with very little upfront investment. In fact, the model lineup in most of the wealthier countries in Europe is almost identical to the lineup in the US. The less-wealthy nations have significantly lower variety in their model lineups, but have models that are often offered and manufactured in Japan.

Asia and Other Regions: Despite their inability to penetrate the Chinese market thoroughly, their sustained growth in countries such as India, Brazil and Thailand have helped Honda improve its overall revenue and profit margins and these regions continue to provide seemingly-never-ending promise for sustained growth. Their strategy in these regions has been as follows: Rapid Capacity Expansion to Meet Booming Demand: Conventional wisdom has taught Honda that the ability to meet booming consumer demand in this region, in an affordable way, can establish the brand permanently in the minds of the consumer. Using large manufacturing hubs like India, Brazil and Thailand, Honda hopes to meet a booming demand for bikes throughout the region. Hondas scale of operation also helps to keep other local competitors in each country at bay and also helps boost profit margins further. Using Countries in these Regions to Reduce the Cost of bikes sold elsewhere: Using China, India and Thailand as major export hubs for both components and bikes, Honda hopes to reduce the cost of bikes sold in other parts of the world; Especially, in developed markets, where the costs of labor and manufacturing are much higher. They have also tried to use these manufacturing bases as means of buffering against the fluctuations of the Japanese Yen, by reducing the dependence on Japan for the export of bikes and components to developed markets.

Hondas Challenges, Opportunities and Its Capacity to Handle Both: As with their strategy, their specific challenges, opportunities and capacity to handle both these opportunities and challenges, vary by region. However, these opportunities, challenges and capacity are all functions of both internal and external factors. They will at times challenge the very existence of Honda and will probably define its success. Instead of focusing on extremely specific, region-centric issues, I have tried to focus on some of the defining issues and opportunities globally that Honda will face and the arsenal it has and does not have, to scale these heights: The Major Global Challenges: Stagnant and Declining Sales in High-margin Markets: With Japan stagnant and North American and European sales declining significantly, Honda is losing its source of high-profit margin sales. The buying power of the customers in these markets has declined significantly, the demographic is aging and the competition is as strong as it has ever been. While Hondas technical capabilities and brand image will help it largely hold market share, it will need a strong strategy to expand its market share in a quickly-declining market. Technological Relevance of Motorcycles: While safety becomes more of a priority for consumers and as consumers in emerging markets enjoy rising incomes, more and more consumers prefer cars to motorcycles. So Honda and every other motorcycle manufacturer have the challenge of convincing the consumer that their motorcycles can remain relevant in the age of increased safety-awareness. Here again, Hondas technological prowess and its technical know-how from building cars will come in handy in offering consumers a safer motorcycling alternative. However, perceptions of safety are rather hard to change, as they are very much a part of the human mind, and changing customer perception can be an expensive process. 7

The Major Global Opportunities: Meeting the Strong and Specific Demands in Emerging Economies: As increasing proportions of the worlds population rise from poverty to afford motorized transportation, Honda will need to enhance production capacity to match this surging demand. While volumes and affordable pricing are essential to making sales in the emerging world, Honda must also maintain its focus on quality, to ensure that its enviable brand image is not diluted in the process of offering up high volumes of its product. If Honda is able to produce low-cost bikes, while maintaining their legendary quality-control system, the bikes marketed by Honda will be much more appealing than those of local competitors such as Lifan (China) and Hero (India), at the same price point. Honda has always been known for its massive production scale and emphasis on quality-control and thus has the capacity and know-how to exploit this burgeoning market. In addition to volume, Honda will also need to tailor its products to specifically suit the needs of large emerging markets, instead of selling bikes that were developed for other markets. Using the Component Design, Engineering and Manufacturing Capacity of Low-Cost Destinations: In order to improve profit margins on bikes sold in developed markets, Honda will have to fully integrate its component production capacity in emerging markets. While Honda has already begun working on this, the next few years will show whether Hondas Japan-centric management team can efficiently integrate these global resources into their global component and vehicle supply chain. Additionally, Honda, which often prides itself on its Japanese R&D operations, will have to shift some of its R&D work to lower-cost destinations to reduce the developmental cost of new models, especially products for sale in emerging markets.

Projecting the Image of the Motorcycle as an Eco-friendly, Efficient Mode of Transportation: In the face of changing consumer sentiment towards environmental issues and stricter fuel economy regulations globally, Honda has the opportunity to pitch the motorcycle as a lowcarbon footprint and efficient transportation alternative. However, this might cannibalize some of the higher-margin sales of their automotive division in the short-term, while providing Honda a better brand image and potentially-enhanced revenue in the future. While Honda does seem to veer towards environmental responsibility and efficiency, it will have a very difficult time making the painful choice of possibly cannibalizing some of their own automotive sales in the short-term.

A Few Strategic Recommendations: While there are some very specific regional recommendations that can be offered for each geographic region in which they operate, I will address some of the areas in which the changes can have a global impact. My recommendations for Honda are as follows:

The World Needs Better Transportation and Not Better Motorcycles: The whole concept and basic physical structure of modern automobiles and motorcycles has been largely unchanged for little over a century. Companies either manufacture automobiles or cars and some companies like Honda manufacture both. However, no mass- market manufacturer has been able to combine the unique advantages of both into a viable transportation alternative. Honda, instead 8

of focusing on building better cars or better motorcycles, needs to focus on addressing the fundamental transportation needs of consumers globally. Statistics indicate that the largest proportion of the trips made by passenger automobiles globally, are made with an average of 12 passengers in the vehicle. While at the same time, most motorcycles today can accommodate 2 passengers. Fuel prices are soaring globally and environmental awareness is on the rise. So if Honda then were to take these consumer concerns and changing trends into consideration, it should focus on developing a vehicle that can seat 2-3 people in a safe and fuel-efficient manner. And this development would not only be limited to certain corners of the globe. In developed markets, it could be marketed as a safe, fun, fuel-efficient transportation alternative that appeals to both younger and older consumers alike. While in the emerging economies, this type of vehicle would be considered a mode of transportation that is as safe as a car and much more affordable than one. Thus, there is the unique opportunity to use a single platform to cater to multiple, convergent consumer needs. Reduce Dependence on Top Japanese Managers for Foreign Postings: Honda has traditionally had the habit of posting Japanese managers from their headquarters to manage foreign operations and has been quite rigid about this process. However, in most instances, these Japanese managers are unable to understand the local business culture and consumer tastes, owing to a lack of operational experience in the foreign market and linguistic challenges. Honda needs to find local executive talent that has a firm understanding of the local market, especially in emerging economies, and thereby help the foreign arm to develop market-specific products that cater to the very specific needs of the local customer. In the United States for example, Hondas top three executives are all managers that were deputed from Japan. Unless Honda devotes more time to finding and cultivating local executive talent, it cannot develop winning region-specific products and marketing campaigns. Significantly Reduce Dependence on Japanese Production Facilities: The Japanese Yen as a currency has been extremely volatile over the years and this has affected Hondas pricing on motorcycles it imports from Japan. While Honda manufactures a large part of its sales in emerging economies in those very emerging economies, Hondas sales in the US and Europe are largely imported from Japan. In fact, Honda in 2009 closed its only US motorcycle plant and moved the production back to Japan. This puts Honda at risk when the Yen is more volatile and when freight costs rise. Honda needs to expand its assembly capabilities in the United States and increase domestic content in its motorcycles. This can provide an extremely strong protection against the volatile Yen and against rising shipping costs. Additionally, the US can serve as an easy export hub to serve its European operations, due to its physical proximity to much of the European continent.

Report Summary: Through my research, I have a found a very disciplined and humble company in Honda. A company that believes in steady quality and perseverance to achieve what they expect. They have a fabulous brand image and solid technical know-how, combined with essential amounts of capital to keep their business running. However, some of their complex management structures and too much focus on holding market share could be a reason for their undoing in the future. Honda needs to work towards redefining products, rather than just improving existing ones. If the recent lessons of the Japanese electronics industry (at the hands of Apple) are any guide, it is critical to understand that an entire industry can be ravaged by a single company with a good feel for the pulse of what the consumer needs. Honda needs to ensure it stays ahead of any such competitor, who might be ready to change the game. References: Learning from Japan? Interpretations of Honda Motors by Strategic Management Theorists Author: Andrew Mair, Nissan Occasional Paper Series, No. 29 Date Published: 1999 Link: http://www.nissan.ox.ac.uk/__data/assets/pdf_file/0013/11812/NOPS29.pdf 2011 Annual Report Author: Honda Motor Company, Ltd. Date Published: March 31st 2011 Link: http://world.honda.com/investors/library/annual_report/2011/honda2011ar-all-e.pdf Honda Information Meeting Author: Honda Motor Company , Ltd. Date Published: May 2011 Link:http://world.honda.com/investors/library/road_show/2011/Honda_Information_meeting_May_20 11.pdf The Many Faces of Honda Author: Richard P. Rumelt Date Published: July 10th 1995 Link: http://www.anderson.ucla.edu/faculty/dick.rumelt/Docs/Papers/HONDA.pdf Notice Regarding Management Changes Author: Honda Motor Company, Ltd. Date Published: February 22nd 2011 Link: http://world.honda.com/news/2011/c110222Management-Changes/index.html Honda Corporate Governance Report 2011 Author: Honda Motor Company:, Ltd. Date Published: November 2011 Link: http://world.honda.com/CSR/report/

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