Toyota may be the biggest
automaker in the world, but a smaller rival and sometimes
partner has at times generated more buzz. Honda. A company that got its
start putting engines on bicycles, became the biggest
engine maker in the world.

Today, it makes nearly every
kind it is sold over 400 million motorcycles, supplied
some of the most successful Formula One racing teams, and
made sports cars that have rocked the automotive world
for a generation of fans. It was one of the most
innovative and interesting

companies in the heyday of
Japanese sports cars. I remember the 80s and the 90s
when Honda was really on top, and it was really an exciting
company. But today it confronts a
totally different industry,

one where tech is changing
and new powers are rising. The engines that Honda built,
perhaps better than anyone else, are losing favor. As Honda, walking away from
one of their most appealing traits to benefit their brand
or not, we're going to find

out the answer to that one
way or another. It's doing very badly in
China and is not so far making the transition to electric
vehicles quickly enough. And it's hard to kind of
figure out what Honda offers that a Mazda isn't going to
offer you, or Toyota is not

going to offer you, or a
Hyundai is not going to offer you. So now the company has a plan
to carry it forward, but it could be a hard slog for even
a legendary name. Honda sells about 4 million 
vehicles globally, making it

the seventh largest automaker
in the world. But what many may not know is
that it makes a whole lot of other things. For the fiscal
year ending March 31st, the company sold 26.74
million units of cars, 

motorcycles, planes, boats,
generators, yard equipment, and so on. The vast majority of
these products come equipped with engines, and that, in
many ways, is what Honda is really best at, perhaps even
the best in the world. 

Some will say that Honda is an
engine company beyond all else, not really even a car
company, but an engine company and making just stellar
engines. But really, I think they're a
powertrain company. Honda founder Soichiro Honda
made the company's first 

product by attaching an
engine to a bicycle. The other characteristic that
defines Honda was Soichiro's passion for motorsports
racing. Specifically, about 12 years
after it made its first engines, Honda began building
Japan's first fully paved full 

scale racetrack. It also entered the Isle of
Man TT, one of the most famous and dangerous motorcycle
races in the world. By 1961, it dominated the
race, sweeping the top spots in two different classes. The motorcycle wins kept
coming. 

Honda was racing cars almost
as soon as it began making them. Just one year after it
had debuted its first concept, it was already entering
Formula One. The year after that, it won
an F1 race in Mexico. Its engines have powered many
winning drivers and teams, 

including Ayrton Senna, Jenson Button, and Max
Verstappen. Soichiro Honda's idea was
that the tight constraints and extreme competition of racing
would forge superior engineers. Honda engineers
produced crazy, wild, and

influential inventions. They came up with
technologies like VTEC that extracted more horsepower out
of small engines without the need for turbochargers. When you look at the cars that
Honda was producing in the 90s, they were so ahead of
their time, the precision, the

enjoyment. I mean, if you've
driven a stick shift variable valve timing engine, the VTEC
that they had, it was like nothing else. No other
vehicle could kind of match that in terms of that
precision.

A few models have been
especially iconic. The 80s and 90s were a kind
of golden age for Japanese sports cars, with Honda right
at the center. The Honda S2000, a four
cylinder, two-seat roadster,

became a collector's
favorite. The 2009 S2000 CR, a top trim level, was
originally priced at about $39,000 in 2022. One was auctioned off with
123 miles for $200,000.

Even base S2000s have sold in
recent years for far more than their original MSRP. There were competitors that
rode better, that were quieter, that were roomier. It was just this powertrain
that was just so incredible

that you were okay with giving
everything else up, because it just made the car so
enjoyable to drive. I mean, they captured the
enthusiast market. Absolutely. I mean, there
was, you know, this whole

import scene that almost
stemmed from, you know, people modifying their Civics and
their Acura Integras, that just no one else did. You know, I mean, you look at
Mazda, who has always been

sporty, never took off like
that as the Honda's did. Perhaps the most famous of
Honda's high performance cars was the Honda NSX, branded as
an Acura in some markets. A supercar, many would say,
better built than a lot of the

big names for a fraction of
the price. It essentially reset the bar
for performance in a category that most people would have
never even thought Honda could, let alone would
compete in. The Acura NSX. It's what happens when you
chase a dream instead of the

competition. I always joked, I said you
could almost hear frustration in the engineering rooms
across Europe. We got to go back to the
drawing board and start all over again. They had not been
challenged like that in

decades, and then all of a
sudden, they had to all go back and reevaluate what it
took to produce a capable sports car, because the NSX
kind of blew up everything they'd made up until that
point.

The Acura NSX, which was
really kind of the poster child for really what Honda
could produce. Absolutely amazing. No one else really could
touch them. It was this engineering and
skill, along with reasonable prices and a reputation for
reliability, that propelled

Honda. Production peaked at
5.4 million cars in 2018. As of 2023, the Honda CR-V
was the fifth best-selling car in the US and the third
globally. Four of the world's 25 best
selling vehicles were Hondas.

In 2024, Honda was polled as
the seventh most recognizable brand. If you look at Car and Driver
and Motor Trend and all these mainstream auto magazines,
they've always ranked their cars very highly, often
higher than Toyota or at least

equal. So I think engines are
the heart of it. But it's not just that they
have good transmissions, they have good handling. They produce good cars
overall. I think in the American
market, which is probably their most important market
from an auto perspective.

They're a company with
excellent brand equity, particularly on the Honda
side, known for high quality, reliability and good fuel
economy and names like Accord, Civic Pilot and of course
CR-V have done very well.

2023, as it was for many
others, was a year of record profits. Despite this, Honda
faces a suite of challenges. So I would say Honda is really
kind of over the last couple of decades, is kind of
searching to kind of find

themselves. In 2017, Honda's CEO admitted
the company lost its mojo. At the time, it was burdened
by a spate of large recalls and a drastic drop in key
industry rankings, such as J.D. Power's Initial Quality
Study.

Management realized the
company had been trying too hard to compete with bigger
Japanese rival Toyota, rather than focus on the R&D that
made Honda great. In 2024, some of Honda's
biggest worries are rather new. China, once a cash cow
for global automakers, has

become a much tougher market,
especially for foreign brands. But about a third of Honda's
total volume is threatened so far in 2024, sales in the
country have dropped by nearly 30%. Sales are cratering in China. They've been forced to close
factories.

Other troubles are similar to
those Honda battled nearly a decade ago. Recalls, for example,
including one for 1.7 million vehicles over steering
defects. Perhaps its biggest challenge
is still recapturing that engineering mojo executives
were talking about in 2017,

and finding ways to stand out
in a crowded and competitive field. When it comes to just the most
reliable kind of conservative vehicles, that's Toyota. Toyota owns that. Now when it comes to, we want
to make reliable vehicles and

they're responsible, but also
kind of like stylish and whatnot, we've got Hyundai
really a serious competitor in there. So I think it's been
really kind of hard for Honda to really figure out who they
are. What I think was Honda's
really kind of unique

characteristic for years, decades was what I call the FTD, the "fun to drive" factor. And now you drive the modern Toyota, and you drive it back to back with the equivalent Honda model and it's like,

these things are about the same. It's pretty much a razor thin advantage now. And so that's hurt Honda's kind of one strong, you know, consistent claim that I think it had for decades on Toyota. Acura. I think it's a good brand and good product.

But I think it's been a bit more stuck in the mud of you're not quite luxury, but you're not really volume or mass market either. I felt like Acura was supposed to be kind of the more driver-oriented brand for Honda and the more kind of

personality driven, and I think that worked to some extent. But I think one of the problems is that there just wasn't enough differentiation. In an era where all eyes are turning toward EVs, it does less good to be one of the world's best makers of

something the world wants less and less of. Now, the problem with Honda is that these incredible manual transmissions that were so smooth and enjoyable to drive, well, not many people are buying manual transmissions anymore. And when you look at these incredibly efficient,

high-revving engines that were very reliable. Well, look what's going on in terms of powertrain. How much more efficiency can you get out of an ICE vehicle? These are very marginal improvements. So you have to meet current demand, which means you have

to keep investing, but you can't really anticipate major advances in productivity or function. So that's a real burden for everybody, including for Honda. But if your biggest strength is engines, then that is a bit daunting.

It seems kind of tragic for what many consider to be one of the best engine builders on the planet, and one of the best engineering companies on the planet to walk away from what is such a strong identity for Honda and an appealing identity for Honda.

And I think maybe the leadership thinks this is like the only choice they've got. In EVs, it's trailing rivals. It was an early innovator, releasing an EV in 1988. In 2017, it came out with an electric version of its

Clarity sedan. But that model could only get 89 miles on a charge and was only available in California and Oregon. For comparison, the Tesla Model 3 had a range of 220 to 310 miles, depending on the trim.

As of 2024, Honda sold six EV models around the world. The first was rolled out in China in 2022. Toyota takes and arguably deserves the credit for mainstreaming the hybrid vehicle, starting with its

Prius. But Honda was technically the first company to introduce hybrids to North America, and it remains the second biggest seller of them today. Hybrid sales have been booming as of late. The Toyota-Honda camp believed that it would rely on hybrid

vehicles now and hydrogen
vehicles in the future, whereas the Nissan and
Mitsubishi camp believed that we were going to be able to
make a transition to battery electric vehicles that, as
you know, has turned out to be a rather ambiguous outcome.

Honda wasn't really poised to
go and jump into that area of electrification and
technology, because they were really this back to the
basics. Amazing high-revving
powertrain engines and great transmissions, and it just
hasn't really translated

because of how the market has
moved. But even if the world is
somewhat going to be at some rate of speed, sometimes when
everyone zigs, do you want to be the one who zags? Maybe what you do is you keep
producing really fuel

efficient engines and or
hybrid drivetrains and offer that as an alternative to
this EV direction, because I still think there are plenty
of consumers who are not ready to jump on the bandwagon, not
ready today, and may not be

ready for another 10 or 15
years. The company has relied on
partnerships to catch up its first high-volume EV for the
North American market. The Prologue wasn't released
until 2024. That product, along with a
higher-end similar SUV called

the Acura RDX, were built by
General Motors on GM's Ultium platform. Then the two
companies broke up about a year and a half after
partnering, scrapping a plan to make a cheaper EV
altogether.

Since then, Honda has thrown
itself into more partnerships to develop EVs, software and
whatever else. There is a broad deal with
Nissan and Mitsubishi. An alliance with Sony has
produced a prototype of a very tech-heavy EV called the
Aphylla.

Sony is not the Sony of 25
years ago. Its brand is tarnished
compared to Samsung and even to Chinese brands now, so
they're not as glittering and powerful as they would have
been 15 years ago.

And again, they're moving too
slowly. Nissan is not a strong
partner and Mitsubishi is even weaker. So is this going to
be a help or a hindrance? To be clear, Honda does have
an in-house EV strategy.

Its first of a new crop of
models will be in Acura, which it will produce in
Marysville, Ohio, in late 2025. It also plans a line of
EVs under the Honda name, the Zero series. Production on the flagship
model.

The saloon is scheduled for
its Ohio factories in 2026. The saloon does promise some
true innovation: an ultra-thin battery pack and compact
powertrain components, along with other features, give the
car a low-slung design and a

low center of gravity, which
improves handling and performance. And while still
giving a lot of interior room, tech borrowed from Honda's F1
and hybrid programs, reduces weight by about 100kg. On the manufacturing side,
Honda is investing $65 billion

in electrification and
software, up from an earlier $40 billion commitment in
North America. The company and its joint
venture partners are spending $11 billion to build up EV
facilities in Ontario, Canada. In Ohio, Honda is spending
$3.5 billion on a battery

plant with partner LG Energy
Solutions, with more to come. It's also forking over $700
million to retool three Ohio Honda plants for battery pack
production and EV assembly, and another $124 million is
going to a testing facility

with a wind tunnel for
aerodynamics and noise reduction. There's a lot going on with
Honda on EVs now. I mean, if you were to look
back a few years ago, you say, well, they started too late.

And for a while that looked
bad. But then EV demand right now is has slowed
considerably compared to a few years ago. I don't think people quite
acknowledge how rapidly prices are coming down. Charging speeds are improving
and range is extending.

That's going to be a huge
transformation. The EV revolution is coming. It's not coming quite as fast
as people had hoped, but it is coming. So it's not clear to
me that they can keep up with that.

Honda did not grant an
interview to CNBC in time for this piece, but said that
though it's committed to EVs, the balanced approach to
offering ICE, hybrid, electric and battery electric vehicles
is the strategy we have

pursued from the start and
reflects our view that this race is a marathon, not a
sprint.

How Honda Is Trying To Be Cool Again

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Honda's humble beginnings with bicycle engines and rise to a major engine manufacturer.

Honda's diverse product range including motorcycles, involvement in Formula 1, and iconic sports cars.

Honda's success in the 80s and 90s contrasted with the challenges of a changing automotive industry.

Honda's origins with engine-powered bicycles and Soichiro Honda's passion for motorsports.

Honda's early successes in motorcycle racing, including dominance at the Isle of Man TT.

Honda's early and significant impact in Formula 1 racing, working with legendary drivers.

The popularity and collector value of the Honda S2000, highlighting its powerful engine.

The impact of Honda's high-performance cars, especially the NSX, on the automotive industry.

Honda's high production numbers and strong sales of models like the CR-V.

High rankings of Honda cars in automotive magazines, emphasizing their overall quality.

Honda's Current Challenges and Future Plans

Honda's recent struggles and the company's search for its identity in the modern market.

The challenges posed by the changing Chinese market and the impact on Honda's sales.

The need to recapture its engineering prowess and differentiate itself from competitors.

The diminishing 'fun-to-drive' factor compared to competitors like Toyota.

Acura's struggles with brand positioning and lack of differentiation.

The challenges of transitioning from internal combustion engines (ICE) to electric vehicles (EVs).

Honda's past attempts at EVs and their limitations compared to competitors like Tesla.

Honda's role in hybrid technology and its current position in the hybrid market.

Honda's partnerships with General Motors and others in EV development.

Honda's plans for new EV models and its investments in EV infrastructure.

Assessment of Honda's late entry into the EV market and the changing EV landscape.

Honda's statement on its commitment to a balanced approach to various vehicle types.