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HondaYamaha War

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The Case Study Honda Yamaha War
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  cose I8 The Hondc-Ycrnohc War (A)* Yamctha has not only steppecl on the raiL the earth. Yamaha wo tsubusu [Crush. s latLg ht e r, de s rolt Yatnaha l of a tiger, it has ground it into break, srnash, squash, bucher, -Battle,7 iss,ed by Honda's prcsident Kawashima, Januat-v I9g2.lWhat had Yamaha done that caused such a violent reacrion from Honda's president Kawashinla? The explanation begins in the early 1950s when there were 50 competitors tighting for position in the Japanese motorcycle marker. Demand was growing ,t udily otover 40Vc per year. Honda was the number two competitor with a market share of 207r. Its ,.,Irh.rnrry was Tohatsu, the number one mororcycre manufacturer with a 22 percent mar- (, ket share. By most rneasures, Tohatsu', like the Shoguns whose military might allowed them to rule supretne, dominated the .Iapanese motorcycle landscape, Tohatsu's after-tax profits were 8Vc ol sales compared with Honda's 3.4Vo.It's debt-to-equity ratio was 1.5 to 1, whiie Honda's was 6 to l.In 1955, the widely held view of tire compeiitors rn Japan's financial community was: Tohatsu: With Honda. one of tire two largest motorcycle manufhcturers. However, it is considerirbly more profitabre anci its frnancial condition is superior.Honda: Hish growth contributed to Honda's market share, but overexpansion deteri- orated its flnancial condition because of excess borrowings.2 'rThis case *'as preparerl by Research Assisrant, Sonali Krishn::r, under: the dir.ection olAssociate professor J. Stew- lrt Black. as rhe basis fbr class discussion. I Richard wirrger' Fast Means Tough in the 90s. Tlrc E.rec'ur ive Speake r r,ol. I I , no. ,3 (March I 990): LlKuirhu-Yoron (Conrpany Handbook) (Tokyo: Diamond, March I 956), 2 I 2- I 3. 306  The Honda-Yamaha War iA) 307However, in the space of five short years, Honda emerged as the undisputed leader of the Japanese motorcycle industry. Tohatsu took a more conservative approach to the com-petitive battles in Japan and grew at a slow and controlled rate. From 1955 to 1960, it didnot significantly increase production capacity. Honda, on the other hand, fought aggres- sively and grew at 66Vo per year in a market growing al42Vo pef yeal. In dorng so, Honda established a winner's competitive cycle. High growth 1ed to greater sales revenues and decreased costs through economies of scale. With increased revenues and decreased costscame increased profitability and financial strength. More cash was available inlernally and from external sources to fund growth. This cash was reinvested in the business in ways that yielded further increases in market share and a replay of the winner's competitive cycle. To wage this aggressive battle Honda borrowed heavily. Although these borowings canied high interest rate penalties, they were critical to Honda's expansion and growth. As complacent competitors such as Tohatsu lost ground, Honda's protits increased and it became even more aggressive. Tohatsu's market share dropped to less than 47o while Honda's soared to 44Vo.In 1960, Honda reponed an after-tax profit of 10.37c of sales while Tohatsu registered losses of almost 87o of sales. Honda's balance sheet had strengthenedand the company had a debt-to-equity ratio of I to l. Tohatsu's balance sheet deteriorated with a debt-to-equity ratio of 7 to I as it borrowed to offset losses. With market growlh slowing to 9% per year, this new competitive positioning appeared to be permanent.The financial community in Japan. somewhat belatedly, reassessed its opinion of the two companies:Honda: It has the largest production capacity for motorcycies in the world, and is still aggressively expanding production at its Suzuki plant. Rapid growth is expected in both domestic and overseas markets.Tohatsu: Business has been deteriorating because of intense cotnpetition. The com- pany is currently being restructured with the support of Fuji Electric.3Final1y. in Februar-v 1964, Honda's enemy was destroyed. Tohatsu filed fbr bank-ruptcy. Its saies had decreased sharply, its funds were exhausted, and its bilis were unpaid.Tohatsu had fallen from number one position to bankruptcy in less than 10 years. And it was not the only casualty; other motorcycle manufacturers aiso went bankrupt or exited the industry. The srcinal 50 manutacturers had shrunk to 30 by 1960, 8 by 1965, and by 1965 to four-Honda, Yamaha, Suzuki, and Kawasaki.Honda's battle for market share is a ciassic example of aggressive kaisha or Japanese corporate racrics. Like Shogun generals.of the past, kaisha executives battle ferociously for territory and the right to proclaim themselves iclziban or number one in the country. The winners seemed to be those kaisha that, like Honda, get the winner's cycle going lor thern-seives by boosting their share of the market faster than their Livals. To lose in this battleoften meant corporate deatir, and this was the fate Tohatsu suffbred. Hence, in this coir- mercial equivalent of jungle warfare. kaishc executives sharpen their strategic thinking and competitive skiils. Over the next ten years, as a sharply growing number of Japanese became more inter- ested in purchasing luxury goods over durable goods, growth in the Japanese motorcycleindustry sio$'ed: Honoring the rule of the kaisha to never rest on your laureis, Honda diver- sified into auromobiles. To reduce the risk of failure, the company deployed its strongest fbrces in the automobile venture. This meant that all available cash and tecirnical capabili- ties, along rvith the best troops, had to be directed toward the automobile business. Honda'shigh tevel of investment in the auto industr,v had to be supported by the resources and cash 3 Koirho-Yo rnu tCompany Handbook). 233-34.  308 chapter 14 / competitive strategy and the rnternationar Business Environment generated from its motorcycle business. At the end of the 60s, Honda,s share of the Japan_se motorcycle market had reached 657o. Despite efforts by the powerf'ul Ministry of Inter-ational rrade and industry to persuade Honda to get out of tire automobile business or erge with one of the much larger car makers ,uJh u, toyota or Nissan. the company ignored this administrative guid*ance and, by I975,was obtainii autos than from motorcycres. profits continued to soar and its 1g more revenues from strengthened throughout the 1970s. trnueq to soar and its balance sheet steadily, As Honda began focusing on the automobire front, yamaha attack and take terriiory in the riotorcycte market. However, .urrr.r,TJ;:#Tff:lt ,i: out direct assault on Honda's motorcycre troops. yamaha borrowed a chapter from the ncient Ninia warrtors and decided to launch a_sneak attack. It began by q'ietly increasing its motorcycle production capacity in Japan. yamaha took advaitage of the fact that its nemy's attention was tbcused on its automobiie business, and began gnawing away at onda's market share' Honda's production share declined from rtrl * of 65vo to 40vo by981' In contrast' Yamaha increased its share from less than l0 p .in, in the mid- 1960s to l?Hjr:t_il::::, by te8l. Basically, rhe territory that Honia tosr wenr directty inro By the end of r9gl, yamaha and Honda had nearry equai shares ofthe Japanese motorcycle landscape' Honda's domestic market share in n-to..y t , had declined to 3gvo hileYamaha's had risen to 3Tvo.yamahawas within-reach of loppting Honda as Japan,s arket leader and proclaiming itself ichibctn the worrd's nu*u r-o* motorcvcle producer.The sentiments of yamaha'r top g.n .ui are reflected in the folrowing quotes: At Honda' saies attention is focused on four-wheel vehicles. Most of their best peo- le in motorcycles have been transferred rinto carsl. compa. J to u., ,n, our specialty at yamaha is mainly mororcycle production. -yamaha's president Koike, 1979. If only we had enough capacity, we could beat Honda. -Yamaha's presidenr Koike. 19g1.4 During this period, yamaha's proritabirity compared i-avorabry with Honda,s. Borhompanies had operating profits of about lvo to 10vo of sales in thglate 1960s and about70 oisales in rhe earr.v I9sOs- Hondr's p. nr^niii,v;;;r;r; in pan by its hea'y nvestments in R&D for its young uuto buriness. Its R&D expenditures increased steadily from approximately 2va of saresin 1970 to 5vo in 1983. yamaha spent slightly more than 7o of sales on R&D throughout the endre period. Yamaha was abre to push into Honda's territory and capture market share by focus- ng all of its resources on motorcycles and relatecl products. The first phase ofyamaha,s bat-le plan, the Ninja-rike-sneak attack of quietly inc.easing capaciry una u ing able to suppryealers v','ith more prociuct quicker thun gonio, had been ,u...rrtul. The seconci phase of amaha's strategy invorved a rnore direct- frontai attack. In the earry i970s, yamaha had bout 18 different products in its product rine cornpared to Honda,s :s. ey r9gr. yamaha off'ered 60 moders compared to Honda,s 63. Arthough, in the early 1970s, Honda had inrro_uced fwo new modeis on the market fbr every one introduced by yamaha, in rgg r. yamahaintroduced l8 modeis to Honda's 17. Indift'erent to this clirect attack by Yamaha on the motorcycle front, Honda conrinuedto exhibit a preoccupatlon wi{r autos as it began investing in iarge-scar. auromobire pro_ ducrion in the Unired States. By l979,Honctihad more than gl billion invested in auro_ mobile and motorcycle production facilities in Marysville, oH. Most of its prodLrction wasevoted to buiiding the Honda Accord bur some capacity was also direcred toward manu_ facturing large cc motorcycles. lNihon Kei:ai Shintbrut.Julv 28. 1979, pp. 7.  The Honda-yamaha War (A) 309Despite yamaha's massing of troops on the motorcycle front,.Honda did noi seem ro e significantry redeproying itJtroopr;;;;.r ro p.o, ., ii,i r;^t* . flank. yamaha nterpreted this as an unexpecred chance to strike ani gain . ;;;;;.;round on Honda. As   resurt' in Iggr, totaily disregarding the aiuut or . ,r , p*rru r. ..ono*r,,,yamaha embarked on a breakneck productionipree - - In August 19g 1, yamaha announced plans to construct a new motorcycre facrory with n annual capaciry of one million units. This fu.to.y wourd increase irs totar capacity to fourillion unirs' exceed'ig_T 10, 'r l p. .i,v Lv]00,000 units. If the n * tu ,o.y,, torar pro_ uction were sold in Japan, yamaha's aor.rii. market rr,ur. *ouia approach 607o.The pening of the new factory wourd shift the balance of power and make yamaha the worrd,s argest motorcycle manufacturer, trr pr.rtigio* position that Honda had won from Tohatsu nd held for alrlost 20 years. The difference berween us and Honda is in our abirity to supply. As primariry ;ffiH?J.Sproducer' you cannot expect us to remain in our present number rwo -yamaha's president Koike announcing new facrory plans. Augusr rggl. il;:J:i:-e w'i be the domestic reader, And in rwo vears, we will be number one -yamaha's president Koike at a shareholders,meeting, January rgg2.5 with these words, president Hisao Koike raid down the charenge and pubricry aunched Yamaha on a heady campaign , t .i r, H.o|da. Koike anticipared a quick. deci- ive victory' yamaha n o,::{ r:o tr.. rp ir^Jirrard fought uunr , uni rrad seen irs sares ncrease z,vo in 1982 to vsie oiiiion.;;;.;;^^ profits aiso hit a record high of nearry   y t5 bil]ion. i , *1'i$1i.1:,Tx:Tffi :ffi l;:lk J;:::#lJffi u*.ff [.*t i [fr LT;H: repared to invest heavily in motorcycles. Bur yamaha invested u, u iur tar higher than itsntemar cash generation could,rpp*. A; ;;;;;;;;;;;;;; ;;# to,'.,ur up rhe dir_-erence' its debt burden increasc iteadiiy. Arthough ir was as proi-itable as Honda, yamaha ;:i#:,f,'l:T:,:::lif,:fi had a debt io-;;l;; ratio oralmost 3 ro 1. wh'e the Honda 0i-1'f.T*. #rT-:1:Tr;r,Ti;i:F,::lTiil:Tff ff :ff t ff :n:lil ong as I am president of this to*puny r *iii ,uo.nd , our number one spor lin motor-yclesl to no one' rn 1979, ne aomined, Fr; ;he late r960s until recentty we have con- entrated our eiTorts on product development oiiou.-rt.r..r vehicies. The tact that another motorcycle] maker coulcl. puti so crose'to ;; ;;; unavoidable siruation.,, But when the words of Koike's ,ro,.,n.n,, at the yamaha sharehorders, meedngeached the ears of Honda,s presiclent, fr. ,or in. nr O. Yamaha iras not only stepped on the tail of a dger, ir has -eround it into the earrh. Iffi:i:,i'' tsLrbttsut' fCrush, break, smash, squash, burcher, sraughter, destroy -Bartre cry issued by Honda's presidenr Kawashima, January Igg2.6 ::: Tjdi{T:::?J:ii:iTiqi:i;,fi ::il::,,:il::r'i,:: iilJ::::,i:T; percent while Yamaha's decreased iiom 35 percent to 27 percent. Honda gained more 5 Sttukan Trlto Keizai, July Zg. 1979. pp. .t . 6Richarcr winger' 'Fasr iVleans Tough in rhe g0s.:' Trrc E-racurive Speaker,vor. |. no.3 (March lggo): r.
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