Honda in USA

Honda in USA

Why set up a plant in US by a Japanese firm (like Honda did) – As import barriers by US for Japanese goods went up (Voluntary restraint agreement) because Japanese cars were fuel efficient as big 3 local manufacturers like Ford, GM were concerned. As the oil prices went up (after middle-east conflict and fight in early 70s), the customer in US now wanted fuel efficient cars. Honda was taking away the market from them as their engine was best in the world and vehicles had high fuel efficiency.

Hence, as per voluntary restriction, only 1.6 billion cars could be exported to US by Japan in a year in proportion of local car market share in Japan by exporting companies. In that, Honda was 5^th and had a low share in local market. Hence, its export to US was hit by this policy. (1-Toyota, 2-Nissan, 3-Mazda, 4-Dietsu, 5- Honda).

Main reason for FDI –

· When import barriers go up – FDI happens for incentives

· Political reasons – FDI happens for political reasons (US making FDI of 10 billion USD as against 2 billion USD in Philippines after the dictator ship was abolished and new government which came was against them. US used Philippines to fuel their jets to keep a check on China taking over Taiwan)

· FDI happens to take control of local company and runs management of that company (Michelin buying local plant in US called Firestone as exporting tires to US was getting costly and Toyota, their biggest client was hence, moving away from them. But Michelin didn’t introduce its manufacturing technology even after getting the management control, till they raised their stake from 10% to 23% to be assured that no one else can take over the company and hence, their newly introduced manufacturing technology – When the largest customer of yours goes to a foreign nation, follow them).

Analysis – Sumantra Ghosal (Crossing International Frontiers)

X – Axis = Level of Strategic importance of local environment	BLACK HOLE (Suck technology of Dell, IBM, Compaq, HP – Acer in US in early 80s at the height of silicon valley boom and just opens a miniature replica rather than a big plant which could cater to high demand in US. Acer went there to steal technology – Industrial Espionage)
	Y-Axis = Level of usage of local resources

Why Honda took Ohio, USA as manufacturing place – Ohio in mid-west bordering Canada and there is a lake in Ohio. Why not go to Michigan, where there is a big car ancillary. Even cost is not a factor because going south, Miami till Mexico, labor cost is lowest. Export to Canada was also not the reason as US usage of cars is 4-5 times than Canada (Every US family owns 3-4 cars average), so US itself is a big market to be captured.

Real Story – Governor of Ohio heard some big car company from Japan was coming to US. He flew down to Japan to find out which company by talking to all the Japanese car manufacturers there. Honda replied as they were coming. He invited them to choose any piece of land in Ohio by travelling in his private jet. The governor was actually wooing the Honda company to do FDI in Ohio to make it a successful car manufacturing hub of US (Increase Sales tax for Government and employment for people of Ohio).

Initial investment of Honda was 1.1 billion USD. The governor gave them 600 million USD as soft loan. Also, he gave Honda tax holidays. He drenched the LAKE in Ohio to facilitate bringing in spare parts from Ontario. There is a highway (Callaway no -13) which he made 8 laner. Governor did all this at the expense of state of Ohio.

Even to cut costs further for Honda via JIT, the governor bought all the Japanese suppliers of Honda to Ohio and gave them soft loans and tax holidays.

USP of Honda –

1. Best engines in the world (V-Tek engine)

2. Switch assembly line – where diff model cars can be prepared on one assembly line(less downtime to switch the product on same assembly line – produce Civic – switch – produce CRV – switch – Go to Accord). Economies of scale of different types of vehicles is achieved.

3. Honda was the 1^st of the few foreign car companies who complied with the CLEAN AIR ACT in US.