Economy-minded Honda bucks auto-industry slump

October 13, 2008

Fueled by its line of gas-sipping economy cars, Honda is expanding in Indiana as car manufacturers almost everywhere else are shrinking. And the 2,000 jobs the Japanese automaker is promising in Greensburg by 2010 could be just the beginning.

The Greensburg plant is dedicated to making four-door Civics, but the new facility is set up to take on other lines, including hybrids and natural-gas vehicles, two areas where Honda is an innovator.

Initially, it looks like the $550 million plant will have its hands full meeting the escalating demand for the Civic. While U.S. auto sales overall have declined nearly 13 percent in the first nine months of the year, Honda has seen sales of the Civic--which started rolling off the line at the Greensburg facility Oct. 9--increase more than 12 percent over the same period a year ago. Civics account for almost 300,000 of the 1.2 million vehicles Honda has sold in the United States so far this year.

"We're seeing a shift of share in the auto industry, and Honda is in a strong position to take advantage of the current climate," said Bob Schnorbus, chief economist for J.D. Power & Associates, a California-based global marketing information and research firm. "As the economy has been squeezed and gas prices remain high, Honda's position in many ways has never been better than it is right now."

There are a number of factors leading to the trend. Price point for consumers squeezed by the economic crunch is one of the biggest. The Civic costs between $15,000 and $23,000. Sky-high gas prices bringing the cry to end foreign oil dependence is another. The Civic gets 24 miles to the gallon in the city and 36 on the highway.

"That's a pretty good one-two punch given the pressures we're under," Schnorbus said.

But that's not the only reason the Civic is the No. 3 selling car in America this year, behind the Toyota Camry and another Honda model, the Accord.

"Honda has a lot more invested in research and development in the economy car sector than most of the other automakers," said Dennis Virag, president of The Automotive Consulting Group, an Ann Arbor, Mich.-based consultant to the global automotive industry. "They were developing this line when Ford was hanging its hat on pickup truck sales and General Motors was pushing Humvees."

That, Schnorbus said, means the Hondas are better engineered and have better amenities than most competitors' economy cars. U.S. News & World Report this summer rated the Civic the No. 1 economy car out of 35 tested in North America.

"The Civic is a state-of-the-art economy car, and that reflects years and years of commitment," said Edward Miller, American Honda Motor Co.'s senior manager of corporate affairs. "Honda has long invested in the design of these vehicles and the plants that make them. Now that will continue at Greensburg."

Even Japan's top automaker, Toyota, got stung by its leap into making trucks and other larger vehicles. Production of Toyota's Tundra pickup was halted earlier this year in Princeton. Though no job cuts have been announced, Toyota has talked of reassigning some of its Indiana workers to other plants.

Less-is-more mentality

Honda, which has never manufactured an eight-cylinder engine, has long behaved as if the world truly is running out of resources--oil included. Honda's relentless focus on thrift and conservation, which seemed like a quixotic quest when the company rolled its first Civic off the assembly line in July 1972, today makes Honda the leader on environmental issues.

"People in the auto industry for years laughed at Honda for their sole focus on small passenger cars," said Fred Mannering, a Purdue University professor of civil engineering who has completed several studies on auto industry economics. "As recently as a few years ago, auto analysts were saying Honda was being left behind when Toyota began to jump into the pickup truck and larger SUV markets. The prevailing thought was, big trucks equal big profit margins. Honda never bought into that philosophy."

Honda's less-is-more mentality has thrust its vehicles ahead of some industry stalwarts this year. Since May, the Civic has been the best-selling vehicle in the United States--car or truck--and both the Civic and Accord outsold the once-invincible Ford F-150 pickup trucks.

"A decade or even five years ago, I'm not sure anyone ever would have predicted that," Schnorbus said.

Honda's Greensburg facility, which includes almost 50 acres under roof, has the capacity to crank out 200,000 Civics annually. The company expects to hit that mark by 2010. A second shift is scheduled to start sometime next year, Honda officials said.

But few believe Honda will stand pat after reaching that level.

Although there are no expansion plans yet--or at least any that have been made public--there is plenty of room to grow on the 1,700 acres Honda owns about 40 miles east of Indianapolis.

Finding more Indiana workers wouldn't be a problem. With a promised average wage of $15 to $24 an hour for the jobs at the Greensburg plant, Honda got more than 15 times the applicants it needed to staff the plant when it runs at capacity.

Flexibility matters

The Greensburg plant is Honda's 14th in North America. It is the third, along with plants in East Liberty, Ohio, and Alliston, Ontario, making the four-door Civic. But its future might involve producing different models.

Honda plants are designed to be flexible, and if the momentum for alternative fuels keeps building, production at the Greensburg plant could reach a higher gear. The plant, like several other Honda factories, is outfitted with proprietary infrastructure, including Honda-designed welding equipment so production can shift quickly to other models.

"We're always looking at where the market is," Miller said. "One year ago, when the Greensburg plant was still on the drawing board, Civic sales started to spike. Things can change pretty fast. Our infrastructure is set up to deal with that."

The Civic hybrid--a car that runs on both gas and electricity--is made in Japan and Canada. Civics powered by natural gas are made in Ohio and Canada.

"If demand for those types of vehicles increases, there's no reason to think they couldn't be made in Greensburg," Schnorbus said.

And other models are on the horizon.

Today, the Civic is the only Honda model that comes in a gas-electric hybrid, but sales of the hybrid have increased 15.8 percent this year and the manufacturer plans to add three more hybrids to its lineup by 2011.

Additional models that run on compressed natural gas are in design, and the company is developing a hydrogen fuel cell model. Miller said the natural-gas vehicles could be as easy to refuel as the standard gas grill.

Diversifying and expanding the plant would be a boon for area parts suppliers. When the Civic is in full production, Honda officials expect the plant to purchase $1.5 billion in parts annually, primarily from suppliers in Indiana, Ohio, Illinois and Kentucky.

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