Honda CEO seizes the wheel as quality crisis hits profits

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At a two-day gathering for Honda’s providers in March, CEO Takahiro Hachigo sounded the alarm.

At the Hotel Higashinihon located in Utsunomiya, Hachigo informed them that the Japanese automaker was dealing with a crisis after a string of costly recalls and other quality blunders and it required to plot a new course, according to two people who took part in the meeting.

Since then, Hachigo has been quietly putting efforts on reforms to centralize decision-making by bringing Honda’s standalone research & development (R&D) division in-house and slashing some senior management roles.

Expected to be announced early 202, the reforms are supposed to simplify the way Honda designs vehicles and put its engineering resources to more efficient use at a time when it requires to develop cars for an electric age, the sources stated.

“Decades ago, localization … was the buzz word and our tech center independence was a major driver for innovation,” said a former Honda executive who now is the head of one of its providers. “Those days are over.”

The sources stated Hachigo was poised to integrate Honda R&D into Honda Motor so its technicians work more closely with major departments including purchasing, manufacturing, quality assurance, and sales and marketing.

“Honda thinks that strengthening the automotive business and reforming it in preparation for the arrival of next-generation mobility technologies are our most critical management tasks. This is a priority,” a Honda spokeswoman stated in response to questions regarding the plans.

In the 1980s and most of the 1990s, the name Honda struck terror into the hearts of executives at the big three U.S. automakers in Detroit because they simply couldn’t match its low-cost, efficient, well-built vehicles.

But after a number of recalls since 2014 over concerns with parts such as airbags, sliding doors and engines, Honda’s status as a benchmark for quality and performance has been seriously damaged – and the quality crisis is hitting profits.

According to five Honda insiders, quality blunders have assisted enough to squeeze the operating margin at its worldwide automotive business to 2%-3% – giving it less room for maneuver just as bigger competitors are building partnerships and overhauling their operations to become stronger.

That’s in clear contrast to Honda’s motorcycle business that has already brought its R&D division in-house and has a margin of 13.9%.

In J.D. Power’s study of vehicle dependability in the United States, one of Honda’s two major auto markets along with China, the Japanese brand dropped to 18th place this year from 5th in 2015 and 4th in 2002, its highest ranking.

“These moves we’re making today will decide our eventual fate: if we’re going to be in business as an independent player 10 to 15 years from now,” a Honda source informed Reuters.

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