Image: Shane Gilbert, Honda Fit
Harry Cabluck  /  AP
Salesman Shane Gilbert prepares a Fit, a new model Honda, for a customer in Austin, Texas.
updated 7/2/2008 7:15:14 PM ET 2008-07-02T23:15:14

When consumers astonished the U.S. auto industry two months ago by quickly shunning trucks and going for gas mileage, the biggest beneficiary ended up being Honda Motor Co.

The No. 2 Japanese automaker, with the most fuel-efficient model lineup in the industry, never put both feet into the U.S. truck market, instead focusing on slow-but-steady growth with popular cars like the Civic and Accord.

It paid off in June. While its major competitors reported double-digit sales declines and burgeoning truck and sport utility vehicle inventories, Honda had a modest 1 percent sales increase. Its car sales were up almost 20 percent from the same month last year, and the Civic and Accord were among the industry’s top sellers.

"They are better positioned than anybody in terms of the products they have for this kind of environment," said Ron Harbour, a partner with the Oliver Wyman Group and author of a widely respected annual report on auto factory productivity.

But while Honda may look like it can peer into the future, the company's top U.S. executive says it is well-positioned for $4 per gallon gasoline because it always has emphasized small, fuel-efficient vehicles.

"We're not geniuses," John Mendel, the company's U.S. executive vice president, said Wednesday. "We're consistent."

Industry analysts say Honda has managed to avoid the sales crisis that has hit the Detroit Three and even Toyota Motor Corp. for two reasons. Although it makes SUVs and a small pickup, it has a strong lineup of cars that get good gas mileage. And its factories are so flexible that it can quickly make more of the vehicles that are in demand.

"We can reprogram it to make it build more Civics," Mendel said. "That's by far one of our competitive advantages."

On the opposite end of the spectrum are the Detroit Three, most with too few small car models and each caught with well over half their factories building trucks at a time when the market has shifted to 56 percent cars and 44 percent trucks. GM and Chrysler have announced plans to close truck and minivan factories, and Ford is expected to announce specific cutbacks later this month.

Executives at all three wish they could flip a switch and convert factories from cars to trucks, but Greg Gardner, an analyst with the Oliver Wyman Group, says that's difficult and costly because cars require different tooling.

"In a perfect world, this would be great," says Erich Merkle, vice president of auto industry forecasting for the consulting company IRN Inc. in Grand Rapids. "Even Honda can't do that."

To go from trucks to cars, an automaker would have to replace the factory's machines for millions of dollars at a time when losses are mounting and they're burning up cash, Gardner said.

"Now we're in a situation where because of the cash burn rate, those kind of wholesale investments may be prohibitively expensive," Gardner said.

As a result, the Detroit Three could wind up with truck factories sitting idle while they max out the capacity at small-car plants, Gardner said.

Even a short-term solution — somehow cranking up output at existing car plants — isn't easy either.

Ford Motor Co., which couldn't produce enough Focus compacts last month, is trying to add a third shift so it can run the lone factory that makes them around the clock. But logistics stand in the way because some parts of the factory can't move as quickly as others.

"In any plant you always have one area that's the bottleneck," Harbour said. "You can only run as fast as that bottleneck."

Relieving the bottleneck might take additional tooling, and that also takes time and money, Harbour said.

"It could take a year or two to get it all done and get it all cranked up," he said.

If the automakers are successful in ramping up small-car production, they shouldn't have problems getting parts because suppliers are used to making parts at higher volumes, Gardner said.

The Detroit Three say they're moving as fast as they can to bring their factories in line with car demand. GM has added shifts at plants that make its fast-selling Chevrolet Malibu and Cobalt cars. The company will refit the Cobalt plant so it can make a new fuel-efficient small car in 2010. Chrysler signed an alliance with Nissan Motor Co. to build subcompacts to sell in the U.S., and Ford is retrofitting a Mexican factory to build the Fiesta subcompact in two years.

Ford and GM say they have models in other parts of the world that will sell in the U.S., and it just will take time to get them here because U.S. safety and emissions regulations vary from those of other countries.

But analysts say they will struggle and probably have wider losses in the meantime, while Honda and Toyota will continue to grow.

At Honda, Mendel doesn't expect rapid growth. The company's history, he says, is to grow 2 to 3 percent per year in boom times as well as during downturns.

The company "narrowly" satisfied demand for Civics and Accords last month due to its flexible factories.

Its plants, Mendel said, can switch back and forth almost instantly from one model to another. For instance, a plant in Ohio that makes Accords also builds the Acura TL luxury sedan, which isn't selling well. So the company made more Accords last month and will continue to do that until TL sales rebound.

When a new small-car factory comes on line in Indiana, the company will have even more capacity to make Civic- and Accord-size vehicles, Mendel said. Honda spokesman Ed Miller said the plant will open late this year.

Honda has had trouble making enough Fit subcompacts at overseas plants to meet increased worldwide demand.

In June, Honda had 2,000 Fits in stock in the U.S. but took orders for more than 10,000, he said.

"We compete basically for Fit with the rest of the world," he said. "The recent couple of months' demand has really outstripped our ability to supply it."

Mendel sees the U.S. market slowing further this year as more and more people see trade-in values for SUVs and pickup trucks drop to the point where they can't afford to buy another vehicle.

Still, Honda is trying to be ready as long as the market is in its favor, yet not growing too fast.

"We set out to grow our business at a steady rate," Mendel says. "Our philosophy supports that."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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