Chapter 6 Outline

Closing Case Honda in North America

One of the most dramatic trends during the 1980s was the surge in Japanese direct investment in the United States. Leading this trend were the Japanese automobile companies, particularly Honda, Mazda, Nissan, and Toyota. Collectively these companies invested $5.3 billion in North American-based automobile assembly plants between 1982 and 1991. The early leader in this trend was Honda, which by 1991 had invested $1.13 billion in three North American auto assembly plants--two major plants in central Ohio and a smaller one in Ontario, Canada. Honda has invested an additional $500 million in an engine plant in Ohio that supplies its Ohio assembly plants. The company has also established major R&D and engineering facilities at its Ohio plants and has purchased an existing automotive test center--adjacent to the assembly plants--from the state of Ohio for $31 million.

As a result of these investments, Honda now employs 10,000 workers in its central Ohio plants and pumps a payroll of $7.3 million per week into the local economy. Of the 854,879 cars that Honda sold in the United States during 1990, nearly two-thirds were built at its three North American assembly plants--the vast majority of them in Ohio. Honda says the domestic content of its American-built cars is 75 percent, meaning that three-fourths of the final cost of a car is accounted for by North American labor, components, and other costs. The remaining 25 percent of the cost is accounted for by imported parts.

Honda had considered establishing auto assembly operations in North America as early as 1974 but ruled out investment then because of the high cost of North American labor. In 1977, Honda announced it had selected a site in the small town of Marysville, Ohio, for a motorcycle assembly plant. Motorcycle production would test the ground for the possible manufacture of automobiles. This experiment was deemed necessary because Honda's internal feasibility studies still predicted that high labor costs and poor productivity would make North American-based automobile production unprofitable. However, Honda quickly realized that its assumptions about US workers' poor productivity were unfounded, and in 1979 it announced plans to construct an automobile assembly plant adjacent to its Marysville motorcycle plant. Two years later, in

November 1982, the first US-built Honda was assembled, and by 1984 the plant was producing 150,000 automobiles per year.

Throughout the 1980s, Honda's direct investment in North America produced complementary investments by many of its Japanese suppliers of component parts. By 1989, at least 29 major Japanese supplier companies had established transplant manufacturing facilities in Ohio to supply Honda with component parts. In addition, 33 other Japanese firms had invested in the United States to supply Honda and several other Japanese and US automobile manufacturers. Honda required many of these companies to build their plants close to its Ohio complex so they could introduce a just-in-time production system, in which parts are delivered to the assembly plants just as they are needed. This technique virtually eliminates the need to hold in-process inventories and is regarded as a major cost savings. In addition, Honda wanted major suppliers close by so they could conveniently collaborate on the design of major components and on techniques for reducing costs and boosting quality.

A number of concerns seem to underlie Honda's decision to invest in North America. First, it is widely assumed that many Japanese firms, including Honda, did this largely to circumvent the threat of protectionist trade legislation, which seemed very real following the rapid increase in Japanese automobile exports to North America during the 1970s and early 80s. The threat of protectionism--especially the 1981 Voluntary Restraint Agreement under which Japanese companies agreed not to further increase their imports into the United States--may have accelerated Honda's late-1980s investments in Ohio. A second concern was probably the sharp rise in the value of the Japanese yen against the US dollar during 1987. This dramatically increased the cost of exporting both finished automobiles and component parts from Japan to North America. This also may have accelerated Honda's investments in the late 1980s.

However, it is also necessary to consider Honda's investment in North America in the context of its long-term corporate strategy. As a latecomer to automobile production in Japan, Honda had always struggled to be profitable in the intensely competitive Japanese auto industry. Against this background, Honda's North American assembly plants can be seen as part of a strategy designed to circumvent Toyota and Nissan and to make major inroads in the United States market ahead of its Japanese rivals. Underlying this strategy was Honda's strong belief that products need to be customized to the requirements of local markets. To paraphrase Hideo Sugiura, the former chairman of Honda, there are subtle differences, from country to country and from region to region, in the ways a product is used and what customers expect of it. If a corporation believes that simply because a product has succeeded in a certain market it will sell well throughout the world, it is likely destined for large and expensive errors or even failure. To produce products that account for local differences in customer tastes and preferences, Sugiura claimed that a company needed to establish top-to-bottom engineering, design, and production facilities in each major market in which it competed. Thus, in the late 1970s, Honda decided to invest in North America. Its success can be judged by the fact that although it was only the fourth largest automobile manufacturer in Japan in 1990 (with 9.3 percent of the market, compared to Toyota's 32.5 percent), it was the second largest Japanese automobile manufacturer in the United States (with 6.14 per

cent of the market, compared to first-place Toyota's 7.6 percent).

http://www.honda.com

Source: A. Mair, R. Florida, and M. Kenney, "The New Geography of Automobile Production: Japanese Transplants in North America," Economic Geography 64 (1988), pp. 352 - 73; H. Sugiura, "How Honda Localizes Its Global Strategy," Sloan Management Review, Fall 1990, pp. 77 - 82; S. Toy, N. Gross, and J. B. Treece, "The Americanization of Honda," Business Week, April 25, 1988, pp. 90 - 96; and P. Magnusson, J. B. Treece, and W. C. Symonds, "Honda: Is It an American Car?" Business Week, November 18, 1991, pp. 105 - 9.

Case Discussion Questions

1. Drawing on the market imperfections approach to FDI, explain why Honda chose to invest in production facilities in the United States, as opposed to contracting with an established US auto company to produce its cars under licensing in the United States?

2. Which of the theories of FDI reviewed in this chapter best explain Honda's FDI into the United States?

3. Are there aspects of Honda's investment in the United States that are not explained by the theories of FDI reviewed in this chapter? What are these aspects and how would you explain them?