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Sarah Reinhardt
OGL260, Final Project
03/01/2020
Honda Motor Co., Ltd Final Project

In this paper, I examine Honda Motor Co., Ltd.’s value creation process, how it
approaches its relationship with its stakeholders, and how Honda continues to develop
revolutionary products, both visually and technologically. Financial analysis will be focused on
Honda Motor Co., Ltd, while the focus on human, relationship, and natural capital will center
closer to home with the division of Honda called American Honda Motor Co. Inc whenever
possible.

I am very interested in how Honda does business, particularly how they design their
vehicles. I was drawn to investigate Honda when I needed to find a new car because my own car
of fourteen years was quickly fading. I was interested in one vehicle that kept catching my eye
during my daily commute because of how the rear of the car was shaped. I wasn’t just
interested; I was practically obsessed with figuring out what vehicle this was that I kept seeing. I
had no idea what type of car it was, but I assumed it was a luxury vehicle, which would have
been out of my price range. I tried to find it online, I asked people if they have seen something
similar, and watched every vehicle commercial with rapt attention. I found myself trying to
follow similar vehicles on my drive home so that I could see the logo. I am not a traditional “car
person”, so for the body style of a car to capture my imagination like this was rather
extraordinary. One day, I finally saw the vehicle in question parked and I was able to determine
that it was a Honda Civic. While I did my due diligence to research other similar cars while
making my decision on my own next vehicle, I always went back to the Honda Civic because of
its sleek lines. I have leased a 2017 Honda Civic for the last three years and I am currently
considering my next lease agreement with them. My current Honda Civic was the first car I
owned that was manufactured by an automobile company that was not based in the United
States, having previously owned Ford and Oldsmobile vehicles.
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Company Introduction, Corporate and Governance Information

Honda Motor Co., Ltd is a public multinational conglomerate that creates automobiles,
motorcycles, and power equipment. The company was founded in Japan by Soichiro Honda and
Takeo Fujisawa in 1946 and incorporated in 1948. Honda Motor Co., Ltd has its headquarters in
Minato, Tokyo, Japan while the American Honda Motor Company is headquartered in Torrance,
California. Honda Motor Co., Ltd includes 435 companies across the world under the Honda
group umbrella with over 219,000 employees and capital of 86 billion yen.

The report that I am analyzing for this paper is titled “Honda Sustainability Report 2019”
and was prepared in accordance with GRI Standards, comprehensive option. Honda is now a
member of the GRI Community. The Honda Sustainability Report also indicates that the
accounting standards included in the report for data up to financial year 2014 followed United
States generally accepted accounting principles and switched to International Financial
Reporting (IFRS) standard for the 2015 financial year (Honda Sustainability Report 2019).
Deloitte Tohmatsu provided the independent practitioners assurance report for the environment
data included in the Honda Sustainability Report 2019. KPMG AZSA LLC. was responsible for
the auditing of financial statements included in the Honda Sustainability Report 2019. Honda
has adopted “a company with an Audit and Supervisory Committee system with the aim of
reinforcing the supervisory function of the Board of Directors and ensuring prompt decision
making” (Honda Sustainability Report 2019).

The Honda Philosophy includes the Fundamental Beliefs of Respect for the Individual
and The Three Joys as well as the Company Principle and Management Policies. This
philosophy was handed down by Honda’s founders Soichiro Honda and Takeo Fujisawa.
Respect for the Individual is inclusive of initiative, equality, and trust. The Three Joys are the
joy of buying, the joy of selling, and the joy of creating. The Honda Company Principle is
“maintaining a global viewpoint, we are dedicated to supplying products of the highest quality
yet at a reasonable price for worldwide customer satisfaction” (Honda Sustainability Report
2019). Honda has identified their 21st century focus to be “aiming to be a “company that society
wants to exist” (Honda Sustainability Report 2019) and they are doing that through creation and
expansion of the joys, and ensuring the joys for subsequent generations (Honda Sustainability
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Report 2019). Honda’s 2030 vision references the “joy of expanding their life’s potential” and
ties that back to their own sustainability through meeting “stakeholders’ expectations and needs
by providing value through is products and services (Honda Sustainability Report 2019).

Value Creation Process

Honda was created by two individuals that were very interested in Honda’s value creation
process is deeply embedded in their forecasting of where they are now, where they want to be in
the short term, and where they want the company to be in the long term. Honda’s Three Joys
identify how they create value for their customers and employees. Starting with the Joy of
Buying, Honda is focused on providing their customers with products and services that exceed
their needs and expectations. Honda does this by focusing on the user experience with their
products, how their employees sell their products, and how their products are developed or
innovated. Honda is focused on creative ways to provide mobility to its customers. They have
also focused on robotics and energy products to help make customers lives better. Each of
Honda’s value creation streams focuses on delivering “joy” to its stakeholders in one way or
another. In truth their value creation comes out in the development of products and services that
“fulfill societies’ expectations and meet individual needs” (Honda Sustainability Report 2019).

Throughout the approximately seventy-four years that Honda has been in business, they
have continued to align their products with the ever changing economic and social landscape.
From the 1958 launch of the “super club” bike to the launch of the Honda Insight in the United
States in 1999, the first hybrid car in the United States, Honda has provided innovative products
that have made their customers lives better. The same can be said for the value that they create
for their employees, from the introduction of a human resources qualification system in 1960 to
the introduction of flextime/childcare leave systems in 1990. When reviewing the Honda value
creation history, an overview of the value created by Honda since it’s inception, it is easy to see
the evolution of their innovative products (Honda Sustainability Report 2019).

Honda doesn’t do a great job of marketing itself and its products through their
sustainability reporting, and that’s probably because it’s a huge focus. But when thinking about
value creation, Honda has hit some milestones that are worth mentioning that are not included in
their reporting. The first is from 1974 when the Honda Civic became the first vehicle to hit the
United States’ very stringent Clean Air Act emissions standards (Rothfeder, 2014), which the
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United States had yet to reach itself with its automobiles. This is an amazing feat given that
Honda was less than thirty years old at the time and had started as a motorcycle company.
Another point that Rothfeder references in his article is something called a “flexible factory” that
allows Honda to “seamlessly produce multiple autos on a single assembly line, one after another,
and switch a line over to a newly designed vehicle within hours” (2014). I did not realize this
was an impressive feat but Rothfeder mentions that Honda’s competitors can “take months” to
make this type of shift (2014). While that may seem like an innovation that is purely functional
and focused on making money, it also seems to me that this is a great value add for the consumer
since it would allow Honda to quickly make a variety of car models in one factory and it’s just a
great example of Honda’s focus on 120% quality.

Honda Resources:

Honda has an astonishing amount of resources, primarily because of the size of the
company and it is a world-wide entity. Honda’s sustainability reports, website, and other
resources do a good job of highlighting financial capital, natural capital, and many aspects of
their human capital.

Financial Capital

Honda discusses its financial capital in it’s sustainability reports by providing a financial
summary in the 2019 report that covers previous ten years and is broken down by 2009 to 2015
and 2014 to 2019. This segmentation represents the shift in 2015 from U.S. GAAP reporting to
following IFRS. They also provide an overall breakdown of sales revenue, operating costs and
expenses, operating profit, profit before income taxes, and income tax expense. Financial data is
also broken out by division with results for motorcycle, automobile, financial services, and
power products and other businesses. Because Honda is a global company, they also segment
their financial reporting into regions covering Japan, North America, Europe, Asia, and Other
Regions. Having this financial analysis broken down by these divisions reminded me that I am a
customer of Honda’s in a couple of ways. I have a lease through Honda Financial for a Honda
Civic which also has a Honda Service agreement. I pay my lease bill through the Honda
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Financial website and my car is serviced through the Honda Service agreement at my local
Honda dealership.

Manufactured Capital

Manufacturing is a large part of Honda’s business, since it manufactures several physical

products such as cars and motorcycles, among other things. Honda discusses its property, plants,
and equipment in its financial statements, which are incorporated into their sustainability
reporting, as non-current assets. I had to look this term up because I wasn’t familiar with it.
Non-current assets reference assets that represent a longer-term investment and cannot be
quickly converted to cash (Non-current assets, 2018). They also outline proceeds from sale of
property, payments for additional property and equipment. They didn’t identify the number of
offices, or plants that are owned in this reporting, which I found very interesting. There is no
discussion of their buildings, facilities, or the plants they use to manufacture all their products
outside of the financial numbers reported. I did find some additional information on United
States manufacturing plants in another report that Honda produces for the United States which
identifies twelve manufacturing plants in the United States. Honda also discusses its
manufacturing process, along with remanufacturing, as well as it’s plants and warehouses further
in its environmental reporting. I focused on the 2019 North American Environmental Report in
my analysis and will discuss this report further under natural capital. It doesn’t appear that my
Honda Civic was made in the United States.

Honda has focused a lot of energy and human resources on its relationship with nature
and the impact its manufacturing has on the environment. In the Honda Sustainability Report
2019 they make the point that they had already defined and implemented measures that were
subsequently included in the Paris Agreement and United Nations Sustainable Development
Goals. They are also focused on achieving a “carbon-free society” by setting the target to
“electrify two-thirds of our global automobile unit sales by 2030” (Honda Sustainability Report
2019). They are also focused on making improvements in environmental, social, and governance
issues in the upcoming years. As an automobile and motorcycle manufacturer, Honda has
already recognized that they need to be on the forefront of technology and processes that help to
reduce their impact on the environment overall. They are focused on both a carbon-free and
collision-free mobile society, as described in their 2019 Sustainability Report. The carbon-free
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aspect of this makes sense to me but the collision-free aspect of their goal was something I
hadn’t considered. Creating a collision-free society would have wonderful ramifications on their
social capital as it could save lives and protect individuals in ways that we don’t consider
currently. This would fall more under relationship capital, but it is mentioned under their
environmental and safety focuses. Another aspect of their vision or focus is a change to quality
over quantity. This focus would indicate a reduction in consumption of natural resources,
potentially having a significant impact on the environment. It would also have an impact on the
overall value they bring to their customers since a higher quality product should last longer.
Reducing energy consumption and the impact on the planet is a big deal for me personally. I
chose my Honda Civic partially because of it’s looks but I also heavily weighed the gas
consumption of my model against several other vehicles. While I would like to see the rating
increase further, or for Honda to extend it’s electric and hybrid vehicles to more locations, I am
happy with the gas mileage ranking that Civic receives. Honda’s focus on lower gas
consumption is a savings for owners as well since less money is spent on gas. I’ve always
thought of Honda as a quality vehicle, but that is probably because I have heard so many stories
about Honda’s with high mileage numbers. The addition of a component called “Honda
Sensing”, which is part of their focus on safety and reducing collisions, has added value for their
customers and is in line with Honda’s overall focus on a collision-free society. It includes things
like lane assist, to keep you in your lane, as well as additional cameras and visibility options. It
also includes road departure and enhanced braking options. As a customer, I am happy to hear
that they are focused on delivering quality over quantity and it’s great to receive these added
benefits within all models of Honda cars, rather than only the highest models. For me, that is a
huge advancement in value.

Honda did an analysis to determine what they needed to address environmentally, and
they have incorporated the results of this analysis into a “materiality matrix” (Figure 1) that
combines the things that are important to Honda and its global stakeholders. These items were
ranked to ensure that the resulting matrix revealed the highest priority elements such as
responding to climate change, ensuring clean air, and advancing powertrain electrification.
Overall, I am impressed by the amount of focus that Honda has placed on their sustainability
planning and how this has been incorporated into their manufacturing and innovation plans.
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Figure 1: Materiality matrix, page 17 of the 2019 Honda Sustainability report.

The 2019 North American Environment Report highlights the results of the work they
have done to reduce Honda’s impact on the environment. As an example, they identified that
they increased fuel economy in Honda’s U.S. fleet (average) by 1.3 percent or 0.5mpg. That
doesn’t sound like a lot but that increase makes Honda 18% better than the industry average. I
think the automobile industry overall still has a long way to go in improving fuel economy,
overall emissions, and environmental impact, but it is good to see Honda make such incremental
improvements year over year. This aligns well with their “triple zero” (Figure 2) initiatives that
highlight zeroing energy risks, zeroing resource and disposal risk, and zeroing CO2 emissions.
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Figure 2: Triple Zero, page 45 of the 2019 Honda Sustainability report.

Human Capital

Honda’s human capital is documented under the section titled “Human Resources” in the
2019 Honda Sustainability Report and they broke their approach to this data down into three
sections: global management, human resources initiatives, human resources data. Honda has
adopted a focus that starts with “Respect for the Individual”. This is broken down into three
elements: initiative, equality, and trust. Honda calls the individuals under their employment
associates, which is a more positive identifier than just “employee” since the word associate
implies some level of connection or unity.

As global company, Honda has selected English as their official company language for
“interregional business operations” (Honda Sustainability Report 2019). They have also
implemented training programs to help individuals learn or improve their English skills.
Honda has developed a variety of employee training programs that are available locally and
regionally, including programs for leadership. Training programs such as Honda’s on the job
and off the job training programs indicate an understanding of the value of the associates
employed with Honda and a desire to provide associates with programs to improve themselves
and their position.

Honda identifies their associate engagement survey results in their yearly sustainability
report and is targeting average results of 3.5 or more on a scale of 1 to 5. The combined average
engagement score for 2019 was 3.46 with 96.2% response rate. The questions included in the
survey ask about open-minded workplace, rewarding tasks, environment that makes hard work
worthwhile and is pleasant, being proud to work at Honda, and having trustworthy management.

Honda has a diversity initiative to increase employment of women, people with

disabilities, and the LGBT community. The programs they have started that are focused on
expanding women’s participation in the workforce are especially interesting to me because they
are working on increasing systems to help women balance child or nursing care as well
increasing the number of women in management. Honda shared a metric indicating that they had
increased the number of female associates from 5% to 7.6% over a fourteen-year time frame.
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This doesn’t seem like a great number to highlight; this seems like a failure to me. Upon further
analysis, it appears that most Honda’s employees are in Japan, which appears to have a lower
number of women participating in employment at Honda. Thankfully, Honda included some
human resource data in their sustainability report that allowed me to dig into these seemingly
low numbers. Thankfully the number of female employees in North America is over 24%. The
female leadership numbers for Honda are not great. Japan, which has a ratio of 1.90 for fiscal
year 2019, is the lowest and China, North America, and Asia & Oceania had around 15% each.

Symbolic Capital

One of the foundational or “fundamental beliefs” of Honda is “respect for the individual”
which includes trust and “sharing our knowledge” (Honda Sustainability Report 2019). Honda
also discusses a variety of different roles which carry significant knowledge or experience
relative to the law or industry. I struggled to find anything that truly defined their symbolic
capital until I located something titled the Quality Innovation Center Tochigi, which is a facility
that houses or collects product quality data on all the different Honda products. This is robust
center of knowledge for Honda, allowing them to develop processes which support the
investigation of product issues, general research, and to promote improvements in the future.
The Innovation Center is a hub of activity and analysis for Honda regions across the globe,
sending in quality issues for analysis and assistance.

Honda has a robust knowledge of the historical quality of their products, which they
leverage for future designs. In addition to the Innovation Center, Honda also has an exhibit hall
where they display examples of critical quality failures. This is effectively a museum that is
dedicated to sharing knowledge on quality issues in a visual manner, rather than in dry prose.
This exhibit hall is used for training and is also visited when new products are being designed.
This is a fantastic example of intellectual capital for which it would be difficult to measure a
concrete value. It’s also a great way to both showcase product innovation and to highlight things
that haven’t worked in educational manner.

Structural Capital

Organizationally, Honda is a very hierarchical and stratified organization. They have

identified clear reporting structures both globally and regionally for each business unit. They
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identify the structure as a matrix structure, aligned by business unit and function across each of
the regions. Based on their hierarchy, it is obvious that the power and authority comes from the
top down with individuals that are a part of the board and executive council, as well as the audit
and supervisory committee. Given the size, age, and global footprint of the company, I
understand that this level of hierarchy is necessary to control overall operations. I have never
seen a structure for corporate governance laid out this like this and it is rather impressive. Honda
has even identified, within their corporate governance report, an outline of the process flow for
internal systems of timely disclosure (Honda Corporate Governance Report). This governance
process includes both internal and external directors on the board of directors (Figure 3). They
have thirteen total directors on the board, of which five come from outside the company. The
outside directors are appointed based on experience, insight, and independence from the
organization itself (Honda Sustainability Report 2019). This appointment aligns well with
Honda’s desire to be “a company that society wants to exist” (Honda Sustainability Report 2019)
as it supports strengthening their relationships with external stakeholders who have mandated
Honda “achieve sustainable growth” (Honda Sustainability Report 2019) while also supporting
the appropriate level of governance, decision making, and risk management.

Figure 3: Corporate Governance Structure, page 25 of the 2019 Honda Sustainability report.

Stakeholders, Relationship accountability

Honda has done a good job of overcoming several significant issues and risks that wee
found in the deployment of its airbags, sourced from another manufacturer, as well as several
other recalls over the last couple of years. They have done this by fostering strong
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communication amongst internal and external stakeholders and by incorporating quality into
their strategic vision. Honda identifies twelve subsets of stakeholders with which they engage
and need to develop communication cycles: customers, shareholders and investors, national and
local governments, economic and industry organizations, business partners, research institutes,
media, suppliers, dealers, local communities, and associates (Honda Sustainability Report 2019).

Figure 4: Stakeholder engagement, page 19 of the 2019 Honda Sustainability report.

Honda has identified that communication with all these stakeholders is critically
important to their potential for sustainable growth in the future. Their 2019 sustainability report
does a good job of outlining the work they have done with external organizations and to
highlight external evaluations that have been done of Honda These external evaluations include
selection to the Dow Jones Sustainability World Index, RoboSAM Sustainability Index, and
being highly rated on the Japan 500 Climate Change Report in 2018.

The section of their report that highlights research and development also provide some
insight into Honda’s perspective on how they are accountable to their consumers. They have
identified that through research and development they are not researching only new technologies
but also researching “people’s values” which was expressed by Soichiro Honda (Honda
Sustainability Report 2019). To ensure that Honda can support innovation in research and
design and to reach their goal of providing new value in the future, they realigned the
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organization to bring Research and Development back under each individual business line. This
will also each business line, such as automobiles and motorcycles, to understand their direct
competition and focus on creating new products and driving value for customers. Honda holds
themselves accountable to creating value for their customers through research and development
innovation. Honda also holds themselves accountable to be an environmentally friendly
organization. They utilized internal assessments, as well as findings from corporate governance
rating agencies and NGOs, to create their materiality matrix. This matrix identifies the most
critical issues that were exposed. I will discuss this further in the natural capital section of my
paper as most of the items are environmental.

Honda covers another aspect of value creation and accountability to stakeholders in the
safety and quality sections of their annual report. Safety and quality of goods are something that
all stakeholders consider important, regardless of the type of stakeholder. Honda has focused a
large amount of research and development on creating safety features for their vehicles, which
include things such as Honda sensing. Honda sensing is an advanced technology that will
eventually lead to driver-less technologies but currently includes things such as lane assist and
collision avoidance (Honda Sensing. (n.d). One feature that I have in my Honda Civic is a
camera that displays the view to the right of the car whenever I turn on my right blinker. This
camera view allows a direct view of the blind spot over my right shoulder. There is also a back
up camera in my vehicle. This feature is something that I now consider indispensable, but that
took some time to get used to when I first got my vehicle. I know that right turns as well as
backing up are two areas that are very challenging for drivers and I feel bother features
contribute greatly to the safety of my vehicle and my overall satisfaction. I know I feel a
tremendous amount of satisfaction in being able to back into a parking space or avoid drivers
handing out in my blind spot on Atlanta’s crazy freeways.

I do not see any mention in this portion of the report on their communication with one of
their most important stakeholders, associates, nor does it contain anything regarding how they
are accountable to their associates. They do touch on associate communication, including
workplace satisfaction surveys, in the human resources section of their report which I have also
addressed in the human capital are of my report.

Risks and Externalities

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Honda has identified several risks and externalities that have also been highlighted
through a variety of different industry sources, ESGs, and NGOs and those include things like air
pollution from both manufacturing and use of their products, traffic fatalities, sustainable supply
chains, preserving biodiversity, and conserving water resources. Honda has addressed the
negative externalities impacting the environment in a variety of ways including their triple zero
initiative, which addresses CO2 emissions, energy risks, and resource and disposal risks, which it
defines as “the need for the efficient utilization of resources” (Honda Sustainability Report 2019)
across the product lifecycle. Many of these risks and externalities are identified in the natural
capital section of this report.

Honda has also sought to contribute positively to the communities in which it does
business through a variety of programs that result in positive externalities. They focus on
supporting the future of our youth, addressing local community needs, protecting the
environment globally, and promoting traffic safety. Honda developed a global system for social
contribution activities that tracks and coordinates communication on a regional basis. Some of
the different programs that have come out of this focus are beach cleanup initiatives in Japan and
the Eagle Rock School in the United States which focuses on education for students using non-
traditional methods. The Honda Sustainability Report for 2019 also identifies the monetary,
time, management, and in-kind contributions made for these programs across the world which
totals to over 8.8 million yen.

Recommendations

Honda is doing a great job in their environmental or natural capital resource management.
I would love to see additional electric cars available and I would like to see greater production of
smaller vehicles with better gas mileage in the United States. This would potentially help to
offset additional environmental impacts caused by shipping cars from Japan to the United States.
It also may give consumers additional options to consider outside of the standard SUV,
especially now that some American auto makers are retiring many of their sedans.

Honda has a lot of room to improve in their overall human capital resource management.
I understand that they are a large company that has locations across the globe, but when I read
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the information they shared on their human capital, it seems stiff and stale. The amount of
hierarchy in management, which is never referenced as leadership, is astonishing. I understand
that some level of hierarchy is warranted in a company of this size, but it would be good for them
to make the structure of the management less hierarchical and with a bit more freedom for
employees and more overall reciprocity.

The number of hours spent training associates of Honda seems very low to me. The
Honda Sustainability Report for 2019 indicates the annual training for employees in North
America was eleven hours. As someone who is about to spend three business days in training
from 8 am to 5pm, for the second time this year, that number seems low.

The number of female associates is low at Honda and I hope that they can make some
real improvements here soon. As a global corporation, they need to have more women in the
company to put themselves on pace with other large companies. I am not sure how to compare
the technology industry that I work in with the automobile industry, but I would assume the
numbers should be close. Honda should also focus on their attrition rates for women. Their
sustainability report indicates that female attrition rates were 70% higher than those of their male
counterparts in 2019.

References

Honda History. (n.d.). In Wikipedia. Retrieved March 1st, 2020, from

https://en.wikipedia.org/wiki/Honda#History

Honda. (2019). 2019 Sustainability Report. Retrieved from

https://global.honda/about/sustainability/report.html

Honda. (2019). 2019 North American Environmental Report. Retrieved from

https://csr.honda.com/environment/na-environmental-report/
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Honda. (2019). Corporate Governance Honda Motor CO., LTD. Retrieved from

https://global.honda/content/dam/site/global/investors/cq_img/policy/governance/20190627_corpora
te_governance_report_e_2.pdf

Sebkuhnert. (2018). Current assets/Non-Current assets. Retrieved from

https://news.tradimo.com/glossary/current-assets-non-current-assets/

Honda Sensing. (n.d). Retrieved from https://automobiles.honda.com/fit?#hondasensing

Rothfeder, J. (2014). 5 Brilliant Strategies That Make Honda One of The World's Most Innovative
Companies. Retrieved from https://www.businessinsider.com/strategies-that-make-honda-innovative-
2014-7