Honda: Case Study in Exploiting and then Losing its Unique "Unfair Advantage"

With all the talk about "green" investing, and partially in celebration of Al Gore, Nobel prize winner, now becoming a venture capitalist at the preeminent firm of Kleiner, Perkins, Caufield and Byers, I was reflecting today about Honda Motors and its greatest success, and more recent failure.

Few seem to remember the origins of the CVCC engine, which happened during the 70s gas crisis, and propelled Honda from being a motorcycle vendor into a major auto manufacturer and technology firm, which is now attempting to even sell jet aircraft. They attempted to reprise this success with Hybrid cars, and lost out to Toyota. Read more ...

Honda founder Soichiro Honda didn't plan to succeed as a "green" auto provider - but he did.

In the 1970's, between the 73 gas crisis and the push to reduce smog by cleaning up car emissions, it was a hard time to be a car manufacturer. Worse yet, the growth in the market was all in the low end (Ford pushing it's Maverick for $1995). Certainly not the time for a foreign upstart to move into the American market - but this was when Honda made its move.

American car manufacturers fought against fueld economy and emissions controls - their cars required expensive catalytic converters, which were only beginning to enter the market at this time (many required a platinum catalyst), and got poorer gas mileage. Honda's CVCC (Compound Vortex-Controlled Combustion) engine required none. And got better gas mileage.

Honda advanced a technology called Stratified Charge that Ford had developed on military Jeeps for the government post war, and abandoned (at Cal, we studied this as a part of Engineering 161 - Alternative Energy Systems). It seems that the military had become impressed with the lengths that Germany had gone to in WWII to stretch meager fuel resources, and had been strategically interested in how far this could be pushed. How ironic that in post-war Japan, a far thinker, outside mainstream Japanese business, would develop such a grand success off an abandoned American effort.

So it was no surprise when Honda chose to do electrical and hybrid vehicles too - it was in their blood. Both Honda and Toyota did hybrids - Honda again was first with the aptly named "Insight".

But it is very, very hard to compete with Toyota in Japan - number 1 brand for more than 50 years, with number 2 being so distant as to be meaningless. By this time, the driving founder had passed away, and the focus of Japanese auto businesses was foreign partnerships, not technology, in which Honda made some very good moves. However, Honda abandoned Hybrids to Toyota and its vast resources, as a sacrifice to the bottom line in doing so.

It is clear to see the coldly rational decision here. With SUV's selling fantastically well, an arrogant US demanding its oil addiction be maintained by the world, how could you recover your considerable and continuing investment off selling a vehicle that miserly sips gas when the most popular ones glug it without regard. Toyota did, and earned the rewards off their Prius - almost all of which are outside of Japan.

I might add that most conservatives of this conservative time were in loud agreement in ridiculing both Hybrids and the global warming that got Al his prize. Honda's management only saw Hybrids as a short-term pointless drain, not a strategic technology asset that might yield long-term gains - the same mindset that allowed Soichiro Honda his greatest success.

Meanwhile, Honda has announced this year it will return to field Hybrids yet again. But Toyota, having both an established reputation and product, will command the market, not unlike Honda once did in the US.

Never abandon your technology core - you might never get it back!