China eclipses U.S. in Honda's world view

WUHAN, China — American customers and U.S. dealers long have been the tail that wags the dog at Honda Motor Co., despite Honda's roots as a Japanese company.

When Honda rushed out a major midcycle update of its previous-generation Civic, the brand's most iconic global nameplate, it was the negative feedback from American drivers, not those in Japan or Europe, that ultimately sway-ed the top brass into making improvements.

But America's pre-eminence in Honda's empire is fading.

China, the world's largest auto market, is on pace to replace the U.S. as Honda's biggest and possibly most profitable sales center. The sea change has far-reaching implications for Honda's U.S. and global lineups and the company's worldwide outlay of r&d and production resources.

Honda is hardly alone in embracing a shift that's influencing carmakers from Wolfsburg to Detroit as companies increasingly kowtow to the almighty Chinese buyer.

Customers browse at a store outside Guangzhou. Honda supports 972 dealers in China. Photo credit: HANS GREIMEL

The rapid expansion of Honda's footprint in China shows a reordering of priorities for a global manufacturer that long has prided itself on its tight bonds with America but now sees bigger growth opportunities elsewhere.

China's rise has complex ramifications. Chinese tastes and trends increasingly will flavor models sold worldwide. More vehicles will be developed for China first before being sold in the United States and other markets.

For Honda's Acura luxury line, meanwhile, the rise of China could be a saving grace, supporting the global build-out of a second-tier brand that largely has been confined to American shores.

China also could emerge as an export hub. Honda has a China factory dedicated to shipping its City compact sedan to Mexico. But exporting to the U.S. increasingly enters the realm of possibilities, as underscored by Ford Motor Co.'s plan to import a China-made Focus to the U.S. and moves by General Motors and Volvo to send models built in China stateside.

No one says Honda is lessening its commitment to the U.S., which is the world's No. 2 auto market. But China's rise is giving that country a bigger voice in corralling limited resources from Honda's headquarters in everything from r&d and product planning to factory investment and retailing build-out.

"China has a high priority, and I think we will likely put more emphasis on listening to Chinese customer voices going forward," said Kotaru Shimizu, general manager for sales at Dongfeng Honda Automobile Co., one of Honda's two joint ventures in China.

New cash cow?

In Honda's world, China is nipping at America's heels by almost every measure, including production, sales, dealership count and employee tally.

Most importantly, China is challenging North America's traditional position as Honda's cash cow. North America and Asia each notched comparable operating profits in the fiscal year that ended March 31. But Asia's regional operating profit margin was 9.6 percent, almost double North America's 4.9 percent.

In the U.S., Honda can churn out 1.27 million vehicles a year. That outstrips its China capacity of 1.16 million vehicles by 110,000 vehicles. Yet China has expanded much faster.

Honda has been building vehicles in the U.S. since 1982 and today has five plants there. Honda started assembling vehicles in China a full decade later and already has six. Moreover, it has broken ground here on a seventh plant to open in 2019 with initial capacity for 12,000 more vehicles annually.

The U.S. still beats China in raw sales volume. Last year, American Honda sold 1.64 million vehicles in the U.S., compared with Honda's 1.26 million sales in China. But growth in China has been astronomical.

In 2016, Honda's sales surged 24 percent in China. U.S. sales, by contrast, grew just 3.2 percent.

Honda forecasts China sales to jump to 1.34 million vehicles this year. But in the U.S., the carmaker is merely hoping to eke out the slightest gain. Its U.S. sales slid 0.2 percent through July in an overall market that's down 2.9 percent and widely believed to be past its peak.

Dongfeng Honda, one of Honda's joint ventures, makes and sells the Civic. Photo credit: HANS GREIMEL

In China, Honda supports 972 dealers, just shy of the 1,048 in the U.S. But it employs some 22,400 people in China vs. 16,100 in the United States.

"The rise of China does throw the conventional wisdom of global resource allocation to the wind," said James Chao, managing director for the Asia Pacific region at IHS Markit, "especially for global automakers who are only now experiencing the success of the China market and who have traditionally centered their strategic product decisions out of the U.S."

Courting China

Honda's newfound fixation with China starts at the top, with CEO Takahiro Hachigo and his top lieutenant, Executive Vice President Seiji Kuraishi.

Both did the obligatory stints in the United States, notching more than a decade there combined. But Hachigo and Kuraishi cut their teeth in China during its heady, go-go days just a few years back.

Hachigo was vice president of overall operations, leading purchasing, production and r&d. Kuraishi racked up several years​ with different stints and eventually was tapped as boss of all of Honda's business in China from 2013 to 2016.

The duo's exploits in China have assumed near-legendary proportions at Honda, from their marathon drinking sessions to their fondness for classical Chinese literature.

Such bonds count in Japan and China — nations that share deep cultural ties and a custom of personalized business relationships. When asked, Hachigo waxes nostalgic about his China days.

"It wasn't much of a surprise, but I surely did drink a lot," Hachigo recalled of the evening rituals with Chinese business partners. "I had drinks with them over and over again. Then I started getting along with them. ... They got drunk and hugged me."

Hachigo insists the U.S. still sits atop Honda's hierarchy. For starters, it is one of the few mature markets worldwide where an increasing population helps ensure rising demand.

"How long do I think it will take for China to overtake the U.S. market? It won't be so easy," Hachigo told reporters after a June tour of Honda's factories, r&d center, design studio and retail network in China. "It remains an important market to us. ... Just because China grows more doesn't necessarily mean that North American models will decline."

Guangqi Honda's assembly plant in Guangzhou is part of Honda's rapidly expanding production footprint in China. Photo credit: HANS GREIMEL

Civic showdown

Clearly, though, China has begun to throw its weight around.

It shows in Honda's development of China-only vehicles, such as the Acura CDX and Honda Avancier, two popular crossovers designed for and sold only in China. Engineering such vehicles saps resources that could have been channeled into building a better Accord or Pilot.

It matters because Chinese and Americans want different things in cars.

"American customers value practicality," said Dongfeng Honda's Shimizu, who spent several years working in the U.S. "They drive to work every day. So cars are an essential tool for American people."

Chinese consumers, on the other hand, still see cars as an important status symbol. They're drawn to vehicles such as the Avancier, with fake hood vents and wild fender creasing, whose designs might be considered overwrought and gaudy by American standards.

"Chinese customers are firstly trend-conscious," Shimizu said. "Automobiles are still seen as an asset, not as a tool. They'd like to show off something."

Hachigo likened Honda's strategy to serving up ramen noodles that have the same basic ingredients but using recipes tweaked to local tastes.

"We tell them to use this kind of noodle and let them decide the flavor," he said.

Yet as different as Chinese tastes are, Chinese appetites are getting a bigger voice in determining the flavor of global cars such as the Accord or Civic. In fact, Chinese and American viewpoints butted heads when Honda developed the current-generation Civic.

Market research showed that Chinese buyers wanted a traditional three-box, sedan-shaped Civic, Shimizu said. Americans, however, wanted a fastback, coupe-styled silhouette.

Product planners argued back and forth about which way to turn.

In the end, American tastes prevailed, as seen in the sleek profile that debuted in 2015. But as China's sales grow, its market will have the volume to make ever-stronger demands.

Bigger Chinese voice

Chinese are laser-focused on global trends and often demand better features and quality than Americans, says Atsushi Fujimoto, president of Dongfeng Honda.

"They assume that foreign carmakers sell lower-quality models in China than those sold in North America," Fujimoto says. "On the contrary, we tell them that we spend more money on making cars for China than those North American models."

Chinese, for example, demand better soundproofing and smartphone connectivity, he says.

But looking ahead, Chinese trends likely will have bigger knock-on effects.

China's swing to compact crossovers and its deep dive into electrified vehicles are two shifts affecting product-planning dynamics worldwide, including those in the U.S.

Consider the Acura CDX subcompact crossover or the Honda UR-V and Avancier, crossover siblings designed as successors to the Honda Crosstour.

Honda says it has no plans to bring these nameplates to the U.S., despite their popularity in China. But the entries overlap with hot spots in U.S. demand. And it is conceivable these offerings could make their way to America as imports.

Fujimoto points to the origins of the CR-V crossover as a potential model.

The CR-V was developed as a Japan-only vehicle first but soon gained a foothold in the United States. Today, it is mainly a U.S. and China vehicle that's not even sold in the home market anymore.

"We may be making a China-only model, but if this sells well in other regions, we should do so," Fujimoto said. "Our cars will spread globally instead of saying U.S.-only or China-only models."

Honda's r&d hub in Guangzhou oversees development for local market vehicles. Photo credit: HANS GREIMEL

China could even become a global center for compact crossover development, analysts say.

"Smaller SUVs, and perhaps even sedans, could be led by designers in China," IHS's Chao said. "If Honda feels that the small SUV segment has a lot more growth potential in China — it does, I think — then they will allocate more resources towards this effort."

China also is leading the charge toward electrification.

In fact, Honda is developing an electric vehicle for China that it will start selling next year.​ Executives say an aggressive Chinese EV mandate could influence global lineup decisions, pushing Honda to leverage the technology and spread costs through scale.

In June, Hachigo said his company would launch more EVs in other markets. It will unveil one car at an auto show this fall that possibly targets North America.

But again, the impetus came from China.

"I think electrification will likely get moving faster here than in the U.S.," said Mitsuru Horikoshi, head of Honda's China r&d center in Guangzhou, which oversees product development and design for both of Honda's local joint ventures. "We are working on it now."

Horikoshi's unit spearheaded development of the China-market EV due next year. That car will be made at an existing plant in China. But in a sign of Honda's expectation for surging EV demand, a new plant slated to open in 2019 will be capable of handling EVs from the start.

While Honda's r&d footprint in China is huge, it still trails its U.S. counterpart in terms of capability. The U.S. can handle some powertrain development, for instance, that China can't.

Honda is building its seventh assembly plant in China near Wuhan and plans to open it in 2019. Photo credit: HANS GREIMEL

Honda's U.S. r&d center dates to 1975, while China's is just 4 years old. And despite the U.S. head start, Horikoshi's expansion plans speak volumes about Honda's ambitions here.

"The U.S. r&d center already has a long history. They are several times bigger than us," he said, before casually adding: "It will take [us] five to six years to catch up."

Naoto Okamura contributed to this report.

Source: China eclipses U.S. in Honda's world view