Honda Gets Its Mojo Back

2013 Honda civic: The company rushed the current model into production to reverse corner-cutting measures it had made with the previous year's car.

Miimo, a robotic lawn mower, is hard at work on a patch of grass at Honda's California office campus south of Los Angeles. About the size of a throw pillow, the electric-powered device scurries about in a random pattern, quietly cutting the grass with no human operator in sight. The boundaries of its activity are delimited by a buried cable. Miimo is said to be able to trim a lawn half the size of a football field, periodically looping back to its docking station to recharge its battery.

Miimo is a creation of R&D engineers at Honda. The company has 14 R&D facilities in North America that develop automobiles as well as motorcycles and other kinds of vehicles; one of them is just steps away from the lawn-mowing demonstration. Here, some 1,100 engineers work in passkey-protected offices closed to other Honda employees, designing and engineering new vehicles.

To understand Honda, one must understand that R&D is its heart and soul. The company is best known for its mastery of small-displacement engines, but feats of engineering like self-controlling lawn mowers -- not to mention animatronic robots and small jet planes -- are emblems of a powerful corporate culture. Honda has put up a long line of engineering firsts, from the low-emission CVCC engine of the 1970s and the first hybrid gas-electric powertrain in 1999 to precision all-wheel steering on the 2014 Acura RLX. The global expansion of its R&D has enabled Honda to become the first automaker to create new models in the foreign markets where they are sold. Its engineers have been so proficient that Hondas -- since at least 1982, when the Accord became the best-selling Japanese model in America -- have been known as the cars that sell themselves, renowned for efficient packaging, intuitive ergonomics, build quality, and reliability.

But Honda's success has had a downside. With the cars selling themselves, there was little need to develop other commercial attributes, such as memorable designs or clever marketing that created an emotional bond with the customer. Left in the hands of a single agency for more than two decades, Honda's advertising stagnated. Marketing seemed to consist mainly of supporting racing teams. Acura, Honda's premium brand, never connected with luxury buyers in search of intangible attributes like prestige. In Honda's engineering culture, technology was the answer to every question.

At the same time, the automaker grew larger and more complex. Starting with one manufacturing facility in Marysville, Ohio, in 1984, Honda expanded its North American operations to seven engine, transmission, and assembly plants and a dozen more parts facilities. Today they churn out 1.9 million vehicles a year. Fiefdoms inevitably sprang up, and coordination suffered. Honda began to display the symptoms of what the Japanese call "big-company disease" as it became the second-largest automaker in Japan and the sixth-largest globally. By the close of its 2013 fiscal year on March 31, its revenues were $119 billion.

Cracks in Honda's corporate façade appeared during the 2008 economic crisis, when auto sales cratered and Honda started slashing budgets. It reversed a decision to move the Acura line upscale with V-8 and V-10 engines and rear-drive platforms. It pulled out of Formula 1 racing and canceled a redesign of the flagship $90,000 NSX sports car. And in a move that was to have devastating repercussions, it delayed the launch of the 2012 Civic, its hugely popular compact, so that it could "de-content" the car, as they say in the auto business, replacing existing parts with cheaper ones to sell it for less. At the same time, Hyundai and Kia began a sales push that caught Honda unawares.

Then came the natural disasters. The Great East Japan Earthquake in March 2011 knocked out production at a half-dozen Honda plants, while floods in Thailand a month later disrupted suppliers. Honda was flat on its back. Tetsuo Iwamura, president and CEO of American Honda, later recalled, "While we struggled with disaster, our competitors, including Japanese, took a portion of the market that belonged to us. It was a big handicap." Honda would not be able to resume full production for six months.

Honda's decline in the U.S. was sharp. Market share for the Honda brand and Acura, which had peaked at 11.1% in 2009, slid to 10.7% in 2010 and to 9% in the earthquake year. Sales of niche vehicles like the unibody Ridgeline pickup and Crosstour wagon shrank to nearly zero, and Honda was forced to discontinue the Element van. As its cars began to drop from buyers' consideration lists, the buzz began to build in automotive circles: Had the company that for so long had its finger on the pulse of the car-buying public lost its ability to develop appealing vehicles? Had Honda lost its mojo?

Damage from the 2011 earthquake was widespread in the Tochigi area, 80 miles north of Tokyo, where Honda has a number of facilities. One man was killed at the R&D center, and more than 30 people were injured. Wanting to inspect the damage two days after the quake, Takanobu Ito, Honda's president and CEO, found that normal transportation was disrupted. So the 57-year-old engineer climbed astride the 1,100cc Honda CB1100 motorcycle he uses for commuting and made the trip by himself. Insiders would later describe Ito's ride as marking a turning point in the company's fortunes.

By training and experience, Ito is like all six predecessors in the top job: an engineer who rose through R&D. But along with his technical expertise -- he helped develop the first NSX -- Ito has become Honda's most forceful and visible leader since the charismatic Nobuhiko Kawamoto retired in 1998. Since taking office in June 2009, Ito has speeded up new-model development and improved regional decision-making by better coordinating R&D with sales, manufacturing, and procurement. He also created the position of business management officer for each of Honda's six global regions to supervise all development, production, and purchasing. As Ito explained to Fortune, "It used to be that for every minor model change, R&D would first conduct a preliminary review, then automobile operations would give formal approval, and then development instructions would be issued before getting around to the actual development work. Now sales, manufacturing, R&D, and purchasing associates work as a single team and quickly make decisions on their own."

A year ago Ito announced an ambitious target: global sales of 6 million units by 2017, nearly double the number sold in 2012. "In principle Honda wants to provide products that are fun,