Mini-case
Honda and Hybrid Electric Vehicles
Honda was founded in Hamamatsu, Japan, by Soichiro Honda in 1946 as the Honda Technical Research Institute. The
company began as a developer of engines for bicycles, but by 1949 it had produced its first motorcycle, called the
Dream. In 1959, Honda entered the U.S. automobile and motorcycle market by opening the American Honda Motor
Company. A few years later, in 1963, Honda released its first sports car, the S500, in Japan. Honda Motor Co. Inc. grew
rapidly to become one of the largest automobile companies in the world. Its “glocalization” strategy of building factories
around the world that would meet the needs of local customers had resulted in a total worldwide presence of more than
100 factories in 33 countries. Furthermore, while other auto manufacturers engaged in a frenzy of merger and acquisition
activities in the late 1990s, Honda steadfastly maintained its independence. Honda has grown into one of the world’s
largest automobile manufacturers and has also evolved into one of the most respected global brands.
In 1997, Honda Motor Company introduced to Japan a two-door gas/electric hybrid vehicle called the Insight. The
Insight’s fuel efficiency was rated at 61 miles per gallon in the city, and 68 miles per gallon on the highway, and its
battery did not need to be plugged into an electrical outlet for recharging. By 1999, Honda was selling the Insight in the
United States, and winning accolades from environmental groups. In 2000 the Sierra Club gave Honda its Award for
Excellence in Environmental Engineering, and in 2002 the Environmental Protection Agency rated the Insight the most
fuel-efficient vehicle sold in the United States for the 2003 model year. By August 2005, Honda had sold its 100,000th
hybrid to retail customers.
Developing environmentally friendly automobiles was not a new strategy for Honda. In fact, Honda work on developing
cleaner transportation alternatives had begun decades earlier. Honda had achieved remarkable technological successes
in its development of solar cars and electric cars and was an acknowledged leader in the development of hybrid cars.
Gaining mass-market acceptance of such alternatives, however, had proved more challenging. Despite apparent
enthusiasm over environment friendly vehicles market adoption of environmentally friendly vehicles had been
relatively slow, making it difficult for automakers to achieve the economies of scale and learning curve effects that would
enable efficient mass production. Some industry participants felt that the market was not ready for a mass-market hybrid;
Honda and Toyota were betting otherwise, and hoping that their gamble would pay off in the form of leadership in the
next generation of automobiles.
Hybrid Electric Vehicles
Hybrid electric vehicles (HEVs) have several advantages over gasoline vehicles, such as regenerative braking capability,
reduced engine weight, lower overall vehicle weight, and increased fuel efficiency and decreased emissions. First, the
regenerative braking capability of HEVs helps to minimize energy loss and recover the energy used to slow down
or stop a vehicle. Given this fact, engines can also be sized to accommodate average loads instead of peak loads,
significantly reducing the engine weight for HEVs. Additionally the special lightweight materials that are used for the
manufacture of HEVs further reduce the overall vehicle weight of the vehicle. Finally, both the lower vehicle weight and
the dual power system greatly increase the HEV’s fuel efficiency and reduce its emissions. As of 2004, gas-electric
hybrid engines were delivering, on average, fuel economy gains of about 25 percent over regular combustion engines.
Honda’s Hybrid Engine
While Toyota was the first to market hybrid cars (Prius debuted in Japan in 1997), Honda was the first to market hybrids
in the U.S. The Insight was released in 1999 and quickly won accolades. Though both vehicles use a combination of
electricity and gasoline for powers they do not use identical hybrid designs. Honda’s hybrid models are designed for fuel
efficiency, in contrast to Toyota’s hybrid vehicles, which are designed for reduced emissions. These differences in design
goals translate into very different hybrid engine architectures. The Honda Insight was designed as a “parallel” hybrid
system, where the electrical power system and the gasoline power system run in parallel to simultaneously turn the
transmission, and the transmission then turns the wheels. The electric motor in the Insight aids the gas engine by
providing extra power while accelerating or climbing, and supplements braking power. The electric motor can also start
the engine, obviating the need for a traditional starter component. The Insight’s electric engine is not powerful enough
alone to propel the car; therefore, the gas engine must be running simultaneously. The Insight mileage ratings were 61
mp in cities and 70 mpg on highways, with 60 miles per hour acceleration in approximately 11 seconds. At lower speeds
the electrical components provide the extra horsepower to propel the car, reducing the gas engines effort and thus
saving fuel. The batteries are regenerated by capturing energy during braking or slowing and through standard electricity
generation provided by the traditional generator component in a standard car engine. Therefore, one does not
have to plug in the Insight, or any of Honda’s hybrids, to recharge the batteries.
In contrast to the parallel system configuration, a “series” hybrid system is designed to have a gas-powered engine turn a
generator, which in turn powers an electric motor that rotates the transmission or recharges the batteries, the gaspowered engine does not directly power the vehicle. The Toyota Prius was designed to reduce emissions during urban
driving, and its design incorporates both parallel and series system elements, To reduce emissions, the Prius utilizes a
power-train design in which the car runs at its most efficient speed by virtue of a “power split device” that links the gas
engine and electric motor through the generator with a parallel system design, but allows the car to run exclusively on
electrical power at lower speeds, like to a “pure”•series system design. Consequently no gas is burned and emissions
are negligible under these conditions. Thus, for low-speed urban traffic, the Prius meets its engine design goal of
reduced emissions, with better mileage ratings than the heavier Honda lnsight. In addition, unlike the Insight, the Prius is
a four-door midsize sedan with back seats for extra passengers, something that the original two-door Honda Insight
lacked, but was later offered on hybrid Civic and Accord models.
Obstacles to the Adoption of Hybrids
Though the hybrid market had exhibited rapid growth (see table 3.1), the numbers of hybrid vehicles sold were still very
small compared to traditional automobiles, Adoption of hybrid designs by consumers and by U.S. auto manufacturers
had been slow because of uncertainty about the direction engine design would go in the next few years. Would one
hybrid design rise to dominate the others? Would hybrids be quickly displaced by other alternative fuel technologies such
as fuel cells or hydrogen combustion? Many people believed that hybrids would be a short-lived phenomenon, quickly
replaced by fuel-cell-powered vehicles. Daimler Chrysler, for example, commented in one of its recent SC filings that
its managers’ regard hybrid vehicles as an intermediate step, as a bridge between the combustion engine and the fuel
cell. Sales of hybrids were further hindered by consumer ignorance regarding hybrid technology: as of 2004, 50 percent
of U.S. consumers still believed that hybrid cars require battery regeneration via electric plug.
Hybrid cars were also expensive to produce relative to traditional automobiles. While Honda charged a sales price for the
Insight that was comparable to its non- hybrid counterparts- around $20,000, depending on options it was estimated that
Honda lost as much as $8,000 per car when the hybrids were originally launched, as a result of insufficient volume to
achieve economies of scale.
Total Hybrid Electric Passenger Vehicle Sales in United Sates, 2000-2008
Year
Unit sales
2000
9,367
2001
20,287
2002
35,691
2003
47,525
2004
83,153
2005
2006
2007
2008
209,711
246,642
324,318
315,688
Strategy at Honda
At Honda, being an environmental leader means never uttering the words “It can’t be done.” That’s why for more than
two decades Honda has led the way in balancing what consumers want with what the environment needs. “Technologies
change over time but our commitment to the environment never will.” (Honda Corporate Web Site, August 2003)
Honda’s strategy had consistently emphasized innovation, independence and environmental friendliness. In 1972, Honda
introduced the Civic, which became an immediate success, ranking first in U.S. fuel-economy tests for four consecutive
years starting in 1974. Through the 1980s and 1990s, Honda made a number of advances in environmentally friendly
transportation. In 1986, it developed the first mass-produced four-cylinder car that could break the 50 miles per gallon
barrier, the Civic CRX-HF. In 1989, it became the first auto manufacturer in the US to use solvent-free paint in its mass
production facilities. In 1996, Honda introduced a record-breaking soIar-powered car (a prototype not designed for
commercial production) and in 1998 it introduced a completely electric vehicle. Though the electric car was not a
commercial success, developing the electric vehicle built a foundation of expertise that Honda would later employ in its
development of fuel cell technology. Fuel cells were considered to offer great potential for the eventual replacement of
combustion engines (DOE, January 2002). In Honda’s research and development of its hybrid engine systems
management decided to keep collaboration to a minimum, essentially “going solo” with a risky but potentially profitable
strategy to change basic automotive power design for the first time in a century.
Honda’s decision to not collaborate stood in stark contrast to the licensing and joint venture strategies pursued by
Toyota. Toyota had aggressively pursued collaboration agreements for its hybrid technology and had accrued over 1000
patents on hybrid-related technology as of 2006. Toyota also promoted its hybrid technology design by licensing the
technology to Ford and Nissan. While some industry observers were perplexed by Honda’s decision to avoid
collaboration, others pointed out that Honda’s independence both gave it more control over its technological direction
and ensured that the accumulated learning remained in-house. Consistent with this, Honda’s management insisted
that keeping development exclusively in-house compelled Honda to understand all aspects of a technology, from its
strengths to its weaknesses, This in-house know-how could lead to sources of competitive advantage that were difficult
for competitors to imitate.
2005 Honda and Toyota U.S. Hybrld Sales
Honda Hybrid Models
Toyota Hybrid Models
Honda Accord 16,826
Toyota Prius 107,897
Honda Civic 25,864
Toyota Highlander 17,989
Honda Insight 666
Lexus RX 400h 20,674
By the end of 2005, Toyota’s hybrids were outselling Honda’s hybrids by about three-to-one, causing many analysts to
question Honda’s staunch position on pursuing a different hybrid technology from Toyota and its decision to not
collaborate or license with other auto producers.
The Future of Hybrids
By the end of 2005, hybrid electric vehicles were widely believed to have the potential to allow continued growth in the
automotive sector, while also reducing critical resource consumption, dependence on foreign oil, air pollution, and traffic
congestion The success of hybrids, however was far from assured, While the technology’s capabilities held great
promise, the widespread penetration of hybrids hinged on the economics of producing a complex hybrid power system.
The hybrid’s complexity, and the fact that some of the necessary complementary technologies (such as storage and
conversion systems) still had room for improvement, caused opinions to be mixed on the hybrids’ ultimate impact in the
marketplace. Some industry analysts believed that the success of hybrids would require convergence on a single hybrid
standard that could gain economies of scale through production by multiple producers. Others felt that automakers
should not bother with hybrid technology at all: it was a diversion of R&D funds away from better long-term alternatives
such as fuel cells or hydrogen combustion engines.
Hydrogen Fuel Cell and Hydrogen Combustion
Hydrogen is the most abundant resource on earth and its combustion produces only water vapor as an emission. Many
environmentalists and industry participants thus believed that the auto industry should focus its investment on
technologies that utilized hydrogen as the fuel source. The two primary technologies under consideration were fuel cells
and hydrogen combustion. Fuel cells convert fuel to electricity that is stored in a large battery. By converting chemical
energy directly into electrical energy, fuel cells had been known to achieve a conversion efficiency of better than 50
percent, twice the efficiency of internal combustion engines. Hydrogen combustion works much like traditional
engines except that hydrogen is used instead of gasoline in an internal combustion engine. Either method results in only
water vapor being produced as an emission.
However, the development and commercialization of fuel-cell powered vehicles have been significantly hindered by the
state of battery technology. Furthermore, widespread adoption of either alternative would first require building an almost
entirely new fuel infrastructure. There was also speculation that fuel cell or hydrogen combustion vehicles would be
dangerous since the hydrogen fuel (a highly combustible substance) would have to be stored under great pressure.
Honda had developed fuel cell vehicles in parallel with its hybrid development. In July 2002, Honda succeeded in
manufacturing the first fuel cell vehicle to receive certification by the U.S. Environmental Protection Agency (EPA) and
the California Air Resources Board (CARB) by meeting all applicable standards. This new fuel cell vehicle called the FCX
was certified as a Zero Emission Vehicle and by the EPA as a tier-2 Bin 1 National Low Emission Vehicle (NLEV) the
lowest national emission rating. In 2005, Honda’s FCX became the very first fuel cell vehicle in the world to be sold to an
individual consumer (a family in southern California). While Honda claimed that its work in hybrids helped it create
internal knowledge of component design arid manufacture that improved its options with respect to fuel cell technologies,
some questioned whether it made sense to invest simultaneously in both technologies. Did it make sense for Honda to
abandon fuel cell development in favor of spending more on promoting hybrids? Alternatively should Honda abandon its
hybrids to focus solely on fuel cells? Or is it important for Honda to pursue synergies (and preserve its options) by
developing and promoting both?
Discussion Questions
Are hybrid electrical vehicles a radical innovation or an incremental innovation?
Are they competence enhancing or competence destroying, and from whose perspective?
How would you answer these questions for fuel cell vehicles?
What factors do you think will influence the rate at which hybrid electric vehicles are adopted by consumers?
What would be the advantages or disadvantages of Honda and Toyota using the same engine standard?
Is Honda’s strategy of producing a different engine standard than Toyota and not collaborating or licensing to other
automakers a good one? What would you recommend?
Why do you think Honda is simultaneously developing both hybrid vehicles and fuel cell vehicles?
Source: Schilling, 2006