Toughening Competition Means Honda Motor May Need To Innovate Faster

From Forbes

NOVI, Michigan -- Honda Motor Co.'s top U.S. auto executive says the company may have to update its models faster because the competition is getting so tough in segments where the Japanese automaker has strong sales.

John Mendel said Honda ( HMC - news - people ) will stay ahead of the pack with new technology and by introducing models in new market sectors, but he concedes it may have to update its cars more frequently as competitors keep getting better in quality, reliability and fuel economy.

"We don't have the gap that we had years ago," he said Friday just before unveiling a new Accord crossover vehicle in suburban Detroit. "There's nobody out there building junk any more."

The Accord, Honda's top-selling car and traditionally among the best sellers in the U.S., Honda's largest market, is under serious assault from prime competitors Toyota Motor Corp. ( TM - news - people ), Nissan Motor Co. ( NSANY - news - people ), Ford Motor Co. ( F - news - people ) and General Motors Co.

All four competitors have four-cylinder midsize models that have passed the Accord in highway gas mileage, and most have received good marks from independent reviewers.

Mendel, speaking before he introduced the new Accord Crosstour, said in some hotly contested market segments, Honda may have to speed up its normal two-year cycle of refreshing vehicles and roughly five-year cycles of total redesign.

Honda is scheduled to update the Accord next year and redesign the car by 2013. But Mendel says the redesign could take place before then as Honda introduces new technologies to raise fuel economy.

New four-cylinder versions of GM's Chevrolet Malibu (33 mpg highway) and Ford's Fusion (34 mpg highway) have passed the Accord's 31 mpg in highway gas mileage, even though Honda usually leads the pack. Toyota Motor Corp. updated its top-selling midsize Camry for 2010 by adding a six-speed manual transmission, boosting highway mileage to 33, and Nissan's Altima gets 32 mpg.

Both GM and Ford used six-speed automatic transmissions to raise highway mileage with taller gearing that makes engines more efficient by working less. The Accord, though, still has a five-speed automatic.

Honda, Toyota and Nissan have dominated the critical midsize car market for years as Detroit automakers spent most of their research dollars on larger vehicles, said Joe Barker, senior manager of North American vehicle sales forecasting for the CSM Worldwide consulting firm in Northville, Michigan.

But in the past two years, Ford, GM and Korean automaker Hyundai Motor Co. have invested heavily in midsize cars and improved fuel efficiency, safety, ride and performance, pulling even or ahead of Honda and Toyota, Barker said.

"The competition, especially in Honda's sweet spot, is only going to intensify in the coming years," Barker said.

Honda, Mendel said, normally waits for the redesign cycle to introduce new technologies that would boost fuel economy, but he wouldn't say specifically what the company might do with the Accord.

Honda already has developed six-speed automatic transmissions for two new models in its Acura luxury brand, the ZDX sport coupe and the MDX sport utility vehicle.

So far this year, Honda's U.S. sales are down 25 percent compared with the first nine months of last year, but its market share has grown from 11 to 11.3 percent. Overall, U.S. auto sales are down 27 percent, according to Autodata Corp.

Mendel says he is constantly thinking about how to balance keeping the company's products fresh against the cost of more frequent updates. On some models, like the Accord, leasing patterns have grown longer, so people don't trade vehicles as often. But that has to be balanced against the competition, as well as how much the company is able to do in the two or three-year refresh, he said.

A lot can be done in mid-cycle updates with new engines or transmissions and a new body style that can change a car's looks as opposed to redesigning the whole vehicle, Mendel said.

"So you get new for less than the cost of new, at least in the customer's eyes," he said.

The redesigned Accord certainly will get new engine and transmission technology as well as aerodynamic improvements, Mendel said. Stricter government fuel economy standards also may force Honda to update vehicles more frequently, he said.

The current Accord, Barker said, is still among the best cars on the road. He says Honda will catch up in fuel economy when it does the updates, but staying on top won't be as easy as in the past.

"I think that even though Honda will continue to invest in technology and continue to strive to be a segment benchmark, it has its work cut out for it," Barker said. "The competition from General Motors and from Ford and Hyundai is only getting better."