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 ofengines for bicycles, but by 1949 it had produced its first motorcycle,called the Dream. In 1959, Honda entered the U.S. automobile andmotorcycle market by opening the American Honda Motor Company. A fewyears later, in 1963, Honda released its first sports car, the S500, inJapan. Honda Motor Co. Inc. grew rapidly to become one of the largestautomobile companies in the world. Its “glocalization” strategy ofbuilding factories around the world that would meet the needs of localcustomers had resulted in a total worldwide presence of more than 100factories in 33 countries. Furthermore, while other auto manufacturersengaged in a frenzy of merger and acquisition activities in the late1990s, Honda steadfastly maintained its independence. Honda has grown into one of the world’s largest automobile manufacturers and has alsoevolved into one of the most respected global brands.
In 1997, Honda Motor Company introduced to Japan a two-door gas/electrichybrid vehicle called the Insight. The Insight’s fuel efficiency wasrated at 61 miles per gallon in the city, and 68 miles per gallon on thehighway, and its battery did not need to be plugged into an electricaloutlet for recharging. By 1999, Honda was selling the Insight in the
United States, and winning accolades from environmental groups. In 2000the Sierra Club gave Honda its Award for Excellence in EnvironmentalEngineering, and in 2002 the Environmental Protection Agency rated theInsight the most fuel-efficient vehicle sold in the United States forthe 2003 model year. By August 2005, Honda had sold its 100,000th hybridto retail customers.
Developing environmentally friendly automobiles was not a new strategyfor Honda. In fact, Honda work on developing cleaner transportationalternatives had begun decades earlier. Honda had achieved remarkabletechnological successes in its development of solar cars and electriccars and was an acknowledged leader in the development of hybrid cars.
Gaining mass-market acceptance of such alternatives, however, had provedmore challenging. Despite apparent enthusiasm over environment friendlyvehicles market adoption of environmentally friendly vehicles had been
relatively slow, making it difficult for automakers to achieve theeconomies of scale and learning curve effects that would enableefficient mass production. Some industry participants felt that themarket was not ready for a mass-market hybrid; Honda and Toyota werebetting otherwise, and hoping that their gamble would pay off in theform of leadership in the next generation of automobiles.
Hybrid Electric Vehicles
Hybrid electric vehicles (HEVs) have several advantages over gasolinevehicles, such as regenerative braking capability, reduced engineweight, lower overall vehicle weight, and increased fuel efficiency anddecreased emissions. First, the regenerative braking capability of HEVshelps to minimize energy loss and recover the energy used to slow down
or stop a vehicle. Given this fact, engines can also be sized toaccommodate average loads instead of peak loads, significantly reducingthe engine weight for HEVs. Additionally the special lightweightmaterials that are used for the manufacture of HEVs further reduce theoverall vehicle weight of the vehicle. Finally, both the lower vehicleweight and the dual power system greatly increase the HEV’s fuelefficiency and reduce its emissions. As of 2004, gas-electric hybridengines were delivering, on average, fuel economy gains of about 25percent over regular combustion engines.
Honda’s Hybrid Engine
While Toyota was the first to market hybrid cars (Prius debuted in Japanin 1997), Honda was the first to market hybrids in the U.S. The Insightwas released in 1999 and quickly won accolades. Though both vehicles usea combination of electricity and gasoline for powers they do not useidentical hybrid designs. Honda’s hybrid models are designed for fuel
efficiency, in contrast to Toyota’s hybrid vehicles, which aredesigned for reduced emissions. These differences in design goalstranslate into very different hybrid engine architectures.The Honda Insight was designed as a “parallel” hybrid system, wherethe electrical power system and the gasoline power system run inparallel to simultaneously turn the transmission, and the transmissionthen turns the wheels. The electric motor in the Insight aids the gasengine by providing extra power while accelerating or climbing, andsupplements braking power. The electric motor can also start the engine,obviating the need for a traditional starter component. The Insight’selectric engine is not powerful enough alone to propel the car;therefore, the gas engine must be running simultaneously. The Insightmileage ratings were 61 mp in cities and 70 mpg on highways, with 60miles per hour acceleration in approximately 11 seconds. At lower speeds
the electrical components provide the extra horsepower to propel thecar, reducing the gas engines effort and thus saving fuel. The batteriesare regenerated by capturing energy during braking or slowing andthrough standard electricity generation provided by the traditionalgenerator component in a standard car engine. Therefore, one does not
have to plug in the Insight, or any of Honda’s hybrids, to rechargethe batteries.
In contrast to the parallel system configuration, a “series” hybridsystem is designed to have a gas-powered engine turn a generator, whichin turn powersan electric motor that rotates the transmission or recharges thebatteries, the gas-powered 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, Toreduce emissions, the Prius utilizes a power-train design in which thecar runs at its most efficient speed by virtue of a “power splitdevice” that links the gas engine and electric motor through thegenerator with a parallel system design, but allows the car to runexclusively on electrical power at lower speeds, like to a “pure” series system design. Consequently no gas is burned and emissions arenegligible under these conditions. Thus, for low-speed urban traffic,the Prius meets its engine design goal of reduced emissions, with bettermileage ratings than the heavier Honda lnsight. In addition, unlike theInsight, the Prius is a four-door midsize sedan with back seats forextra 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), thenumbers of hybrid vehicles sold were still very small compared totraditional automobiles, Adoption of hybrid designs by consumers and byU.S. auto manufacturers had been slow because of uncertainty about thedirection engine design would go in the next few years. Would one hybriddesign rise to dominate the others? Would hybrids be quickly displacedby other alternative fuel technologies such as fuel cells or hydrogencombustion? Many people believed that hybrids would be a short-livedphenomenon, quickly replaced by fuel-cell-powered vehicles. DaimlerChrysler, for example, commented in one of its recent SC filings that
its managers’ regard hybrid vehicles as an intermediate step, as abridge between the combustion engine and the fuel cell. Sales of hybridswere further hindered by consumer ignorance regarding hybrid technology:as of 2004, 50 percent of U.S. consumers still believed that hybrid carsrequire battery regeneration via electric plug.
Hybrid cars were also expensive to produce relative to traditionalautomobiles. While Honda charged a sales price for the Insight that wascomparable to its non- hybrid counterparts-around $20,000, depending on options it was estimated that Honda lost as much as $8,000 per carwhen the hybrids were originally launched, as a result of insufficientvolume 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 209,711
2006246,642
2007324,318
2008315,688
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 Hondahas led the way in balancing what consumers want with what theenvironment needs. “Technologies change over time but our commitment tothe environment never will.” (Honda Corporate Web Site, August 2003)
Honda’s strategy had consistently emphasized innovation, independenceand environmental friendliness. In 1972, Honda introduced the Civic,which became an immediate success, ranking first in U.S. fuel-economytests for four consecutive years starting in 1974. Through the 1980s and1990s, Honda made a number of advances in environmentally friendly
transportation. In 1986, it developed the first mass-producedfour-cylinder car that could break the 50 miles per gallon barrier, theCivic CRX-HF. In 1989, it became the first auto manufacturer in the USto use solvent-free paint in its mass production facilities. In 1996,Honda introduced a record-breaking soIar-powered car (a prototype notdesigned for commercial production) and in 1998 it introduced acompletely electric vehicle. Though the electric car was not a
commercial success, developing the electric vehicle built a foundationof expertise that Honda would later employ in its development of fuelcell technology. Fuel cells were considered to offer great potential forthe eventual replacement of combustion engines (DOE, January 2002).In Honda’s research and development of its hybrid engine systemsmanagement decided to keep collaboration to a minimum, essentially “going solo” with a risky but potentially profitable strategy tochange basic automotive power design for the first time in a century.
Honda’s decision to not collaborate stood in stark contrast to thelicensing and joint venture strategies pursued by Toyota. Toyota hadaggressively pursued collaboration agreements for its hybrid technologyand had accrued over 1000 patents on hybrid-related technology as of2006. Toyota also promoted its hybrid technology design by licensing the
technology to Ford and Nissan. While some industry observers wereperplexed by Honda’s decision to avoid collaboration, others pointedout that Honda’s independence both gave it more control over itstechnological direction and ensured that the accumulated learningremained in-house. Consistent with this, Honda’s management insisted
that keeping development exclusively in-house compelled Honda tounderstand all aspects of a technology, from its strengths to itsweaknesses, This in-house know-how could lead to sources of competitiveadvantage that were difficult for competitors to imitate.
2005 Honda and Toyota U.S. Hybrld Sales
Honda Hybrid ModelsToyota 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 hybridsby about three-to-one, causing many analysts to question Honda’sstaunch position on pursuing a different hybrid technology from Toyotaand its decision to not collaborate or license with other autoproducers.
The Future of Hybrids
By the end of 2005, hybrid electric vehicles were widely believed tohave the potential to allow continued growth in the automotive sector,while also reducing critical resource consumption, dependence on foreignoil, air pollution, and traffic congestion The success of hybrids,however was far from assured, While the technology’s capabilities heldgreat promise, the widespread penetration of hybrids hinged on theeconomics of producing a complex hybrid power system. The hybrid’scomplexity, and the fact that some of the necessary complementarytechnologies (such as storage and conversion systems) still had room forimprovement, caused opinions to be mixed on the hybrids’ ultimateimpact in the marketplace. Some industry analysts believed that thesuccess of hybrids would require convergence on a single hybrid standardthat could gain economies of scale through production by multipleproducers. Others felt that automakers should not bother with hybridtechnology at all: it was a diversion of R&D funds away from betterlong-term alternatives such as fuel cells or hydrogen combustionengines.
Hydrogen Fuel Cell and Hydrogen Combustion
Hydrogen is the most abundant resource on earth and its combustionproduces only water vapor as an emission. Many environmentalists andindustry participants thus believed that the auto industry should focusits investment on technologies that utilized hydrogen as the fuelsource. The two primary technologies under consideration were fuel cells
and hydrogen combustion. Fuel cells convert fuel to electricity that isstored in a large battery. By converting chemical energy directly intoelectrical energy, fuel cells had been known to achieve a conversionefficiency of better than 50 percent, twice the efficiency of internalcombustion engines. Hydrogen combustion works much like traditional
engines except that hydrogen is used instead of gasoline in an internalcombustion engine. Either method results in only water vapor beingproduced as an emission.
However, the development and commercializationof fuel-cell powered vehicles have been significantly hindered by thestate of battery technology. Furthermore, widespread adoption of eitheralternative would first require building an almost entirely new fuelinfrastructure. There was also speculation that fuel cell or hydrogencombustion vehicles would be dangerous since the hydrogen fuel (a highlycombustible substance) would have to be stored under great pressure.Honda had developed fuel cell vehicles in parallel with its hybriddevelopment. In July 2002, Honda succeeded in manufacturing the firstfuel cell vehicle to receive certification by the U.S. EnvironmentalProtection Agency (EPA) and the California Air Resources Board (CARB) bymeeting all applicable standards. This new fuel cell vehicle called theFCX was certified as a Zero Emission Vehicle and by the EPA as a tier-2Bin 1 National Low Emission Vehicle (NLEV) the lowest national emissionrating. In 2005, Honda’s FCX became the very first fuel cell vehiclein the world to be sold to an individual consumer (a family in southernCalifornia).While Honda claimed that its work in hybrids helped it create internalknowledge of component design arid manufacture that improved its optionswith respect to fuel cell technologies, some questioned whether it madesense to invest simultaneously in both technologies. Did it make sensefor Honda to abandon fuel cell development in favor of spending more onpromoting hybrids? Alternatively should Honda abandon its hybrids tofocus solely on fuel cells? Or is it important for Honda to pursuesynergies (and preserve its options) by developing and promoting both?
Discussion Questions
Are hybrid electrical vehicles a radical innovation or an incrementalinnovation?
Are they competence enhancing or competence destroying, andfrom whose perspective?
How would you answer these questions for fuelcell vehicles?
What factors do you think will influence the rate at which hybridelectric vehicles are adopted by consumers?
What would be the advantages or disadvantages of Honda and Toyota usingthe same engine standard?
Is Honda’s strategy of producing a different engine standard thanToyota and not collaborating or licensing to other automakers a goodone? What would you recommend?
Why do you think Honda is simultaneously developing both hybrid vehiclesand fuel cell vehicles?
Source: Schilling, 2006