Analysis: Has Honda Fallen from Grace? Numbers Tell the Tale
Oh, how the mighty have fallen, or so it seems. This time last year as September sales numbers officially chimed in, Honda followed only Toyota in the compact segment, selling more than 18,000 Civics. Following the first-place Corolla and the silver-medal Civic were the Ford Focus, Volkswagen Jetta, and the Hyundai Elantra with just over 10,000 units to round out the top five. Of those five, all but the Corolla have undergone full redesigns. Yet, somehow, where the Elantra and Jetta have soared, the Civic is struggling to gain traction, slipping into fifth on the sales charts. The Chevrolet Cruze has taken the top spot from Toyota, and the Jetta has pushed into third with sales up almost 50 percent from last September. Hyundai is up almost as much. What’s going on here? How has the market shuffled around so much in such a short time? And what happened to Honda’s long-term dominance of the compact car segment? Critics point to the 2012 Civic’s downgraded interior as the root of the compact Honda’s woes, and at first it sounds fair. After Consumer Reports lambasted the Civic for what it had seen as the automaker taking a step back in nearly every metric, the publication distributed a lengthy press release defensively justifying its decision. No one had ever seen a Civic score so poorly in the organization’s history. But that doesn’t tell the whole story. Not by a long shot. While the factories that produce every North American Civic model but the Civic Hybrid are located in Greensburg, Ind. and Ontario, Canada, interruptions in Japanese supply schedules caused by the March 11 earthquake and tsunami made their presence known in the Western hemisphere. Production dawdled along across many of Honda’s assembly lines throughout the world until they had been restored to pre-disaster productivity levels. All of them but the Civic’s, which is coming back at full capacity this month. It’s a situation Honda spokesperson Chris Martin said makes the abundance of new-Civic bashing irrelevant. While Martin stands behind his company’s products, he says the real test of how customers respond to the redesigned Civic will come when the automaker is able to bring its production levels back to a level high enough to compete with the segment’s top competitors. “We haven’t had a level playing field to evaluate whether or not that’s the case,” Martin said. “When the Civic is back at full capacity, then we’ll see if that’s how customers perceive it. We believe we have a great product in the Civic.” And despite fighting to get its suppliers back online, Honda’s not had the easiest go of getting the Civic’s production restored. Last month, Mother Nature came at Honda with a crowbar to the kneecaps as flooding from Hurricane Irene swept through the eastern seaboard, halting train cars carrying integral parts to plants. The consequences of such natural disasters are nothing short of drastic. Despite the industry experiencing a healthy 10-percent uptick in sales for September, Honda’s sales numbers took an 8.2-percent hit during the same period. Through the first nine months, the Honda brand is off 8 percent from last year, selling 45,397 fewer vehicles—almost exactly the same number of cars Mini sold in the U.S. last year. Low supply numbers haven’t helped the Civic reach customers, either. At the beginning of last month, Honda had 13,000 Civics in its nationwide inventory. That equated to a 29-day supply, the low side of normal for most manufacturers. Last year showed Honda carried a 52-day stock of Civics during the same period. “We still have some supply, and there’s plenty of demand,” says Martin about the Civic. “It’s going to start to resolve itself over the next couple of months. Things will get better on the sales sheets.” Competition Not Standing Still Honda may not be back at 100 percent, but all indications point to the automaker planning to pick up right where it left off. But that may not be so simple. While Honda’s efforts have stalled throughout the past eight months, a strong batch of competitors has emerged to take the Civic’s unmet demand. Leading the front is the Chevrolet Cruze, easily the best compact car ever to come from General Motors. Owing largely to two years of overseas sales and development before hitting U.S. shores, the Cruze has earned praise for its quiet, refined ride and plush interior. A segment-leading EPA rating of 42 mpg highway for the Cruze Eco doesn’t hurt matters, either. With the Cruze, Chevrolet has supplanted the Volkswagen Jetta as one of the segment’s highest-priced compacts, carrying an average transaction price of more than $16,900, according to Truecar.com. But unlike its German rival, Chevrolet has created a product that customers have been willing to pay top dollar for. On the other hand, the Jetta was long considered a car that punched above its weight, a premium compact car priced like a midsizer. In 2010, the average transaction price for the upscale previous-generation Jetta was $17,092. With the redesigned 2011 model, Volkswagen broke from its traditional premium position, instead cutting costs to drive up sales. The Jetta’s average transaction price decreased to $15,264—much lower than many of its top rivals. Volkswagen reduced the number of standard features to keep costs low, but gave it a bigger back seat and trunk. Consequently, the 2011 Jetta may no longer win in magazine comparisons like its predecessor, but it picked up success where it matters: on the sales charts. “It was a change in strategy,” says Scott Vazin, vice president of Volkswagen’s communications. “The last [Jetta] was a niche product. It held a premium position but ignored most of the market. The current Jetta keeps the premium position available, but it covers a much wider swath of the product market.” Like Honda, Vazin says Volkswagen’s primary obstacle is keeping up with U.S. demand, especially with diesel-engine cars that comprise a quarter of the Jetta’s monthly sales. “We’ve been doing our best to keep up with demand,” he said. And similarly, as Korean automakers have been on the assault for market share, Hyundai finds the only thing slowing its swoopy Elantra down to be how quickly it can make them, which apparently isn’t fast enough. With 28,400 total Hyundais on-hand across the nation—Hyundai doesn’t break down its supply on a per-car basis—the brand has a 17-day supply on average, way below the accepted industry average of about 60 days. Honda's Martin says all the automakers have been forced to build better cars and build them more quickly, changing the way companies make their vehicles. Customers are moving to smaller vehicles and will continue to do so as gas becomes more expensive. In 2016, he says, the market will once again evolve into a much fiercer battle when a nine-year government bill goes in place to raise fuel economy averages almost two-fold to 54.5 mpg by 2025. If the compact car segment is a contested battlefield now, it will become a bloodbath then. “Everybody in the segment has a credible product,” Martin said. “Now even Ford and Chevrolet have credible products. And that wasn’t always the case.” Hesitating to release details about upcoming products like the next Accord, which will debut as a 2013 model, Martin says that Honda will be keeping the market in check with an all-new CR-V and revisions across the lineup. “We’re moving forward this fall with many minor model changes that help cars get better fuel economy in addition to the CR-V and 2013 Accord,” Martin said. “In terms of our products, we’re going to be in good shape.” So there you have it. Despite supply shortages, increased competition, and harsh criticism regarding its bread-and-butter compact car, Honda’s not worried about its future as an industry leader, at least not publicly. It’s not even flinching. The company is down, perhaps one of the most downtrodden of any major automaker. But you’d be damned to ever count Honda out.
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