Flex Appeal

If you want to buy a Honda Civic or Fit in the US, you’ll probably go on a list and pay full price. With such success you might be surprised to learn that Honda has decreased its US Fit allocation and reduced Civic production at their East Liberty Ohio plant. Honda’s also changing over one line in its Canada plant to make Civics and moved part of their Pilot production to their minivan plant in Alabama. All this shuffling seems more like three-card-Monte than modern manufacturing. But there are trade-offs. Honda is willing to trade basic efficiency for manufacturing flexibility, which keeps plants running steadily, which ultimately leads to greater efficiency.

It’s a basic fact of life that the automobile industry is always fighting against the corrosive effects of excess production capacity. Auto manufacturing doesn’t reach cost efficiency until you can run at about 80 to 85% of your capacity. Run below that level and you either need to charge premium prices (if you can) or watch underused machinery and workers kill your profit margins. The specter of idle machines and workers is so awful that Chrysler recently decided to re-introduce the reviled “sales bank”: a pool of cars built without dealer orders. (The practice is a bit like buying lottery tickets on a credit card.) One of the main reasons for the The Big Two Point Five’s collective death spiral is their need to keep moving the metal—no matter what.

Flexible manufacturing is the usual antidote for overcapacity. Automakers who can build more than one model on the same production line (preferably using the same machinery and workers) have a much greater ability to respond to variations in market demand for a given model, and keep the factory humming. All automobile manufacturers use flexible manufacturing to some extent; Europe and Asia’s fragmented markets practically require the capability.

While The Big Two Point Five’s flex-ability still lags behind the foreign competitions’, they’ve improved from the nadir of the ‘70’s to early ‘80’s, where one plant could not even build its badge-engineered “cousins.” There are two reasons for the lag: union contracts (and fixed job descriptions therein) and cost. Vehicles that can be built on standardized equipment also cost more to develop. Machinery that can produce many types of vehicles costs more than single-use equipment. The Big Two Point Five has traditionally opted for greater amounts of cheaper production capacity.

While Honda has two large US factories for their mass-market sellers, both also contain “niche” production capacity. Marysville builds most US-spec Accord sedans and all Accord Coupes and Acura TLs. The company has also converted a plant in Japan to build up to 80k more Accords to satisfy potential demand in the upper end of the home market and “take up the slack” if more TLs are required abroad. Similarly, East Liberty makes Civics, the Element and RDX (with the CRV on the way). This set-up limits the number of the Civics the factory can make. While several of Honda’s Japanese plants can pitch in, that production must “come out” of their Fit/Jazz production.

The short-term solution: shift some Pilot production onto the Odyssey plant to free one line to build Civics. The long-term fix: build another assembly plant in Indiana to increase Civic and Fit production. But that’s a couple years away. (Honda’s bigger problem is they can’t grow their capacity quickly enough to match sales increases; a problem Detroit would dearly love to face.)

All this juggling has three positive results for Honda. First, all their factories are working all the time, even if demand patterns shift. Second, they can keep their mass-market production in tune with demand. Matching supply to demand minimizes the need for margin-killing incentives and “fire sales” that knock down prices and increase depreciation (which further erodes sales and prices). Lastly, niche vehicles can be “soft launched” and take time to find their market share. It’s much less damaging to have 10k extra Civics or Pilots than 10k too many Ridgelines.

Clearly, The Big Two Point Five need to ramp-up their flexibility even further and— equally important— find a way to get the unions to ease working restrictions. More critically, they need to integrate their flexibility in ways that make market sense, building mass-market and “niche” vehicles in the same plants. Price and sales targets need to be set and stuck to. Development needs to be streamlined so that “niche” vehicles don’t need to punch above their weight.

At the same time, The Big Two Point Five needs to develop a realistic market picture. Traditionally, Detroit swings for the fences, aiming to build hot-selling blockbusters. The problem is that by aiming so high, they ensure that any failure will be self-reinforcing. It’s time to get flexible, and sell one profitable car at a time.