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Minyi Huang prepared this case under the supervision of Professor Ali Farhoomand for class discussion.

This case is not
intended to show effective or ineffective handling of decision or business processes.
© 2010 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the
internet)—without the permission of The University of Hong Kong.
Ref. 09/404C









ALI FARHOOMAND


HONDA: INNOVATION THE CHINESE WAY

Do not imitate others.
- Soichiro Honda, founder of the Honda Motor Group

Honda Motor Group (Honda) had always regarded innovation as the key to success. On 19
July 2007, Guangzhou Honda, a joint venture between Honda and Guangzhou Automobile,
developed Guangzhou Honda’s Research and Development Co. Ltd (“GHRD”). Unlike other
automobile research and development (“R&D”) institutions started by multinational auto
companies in China, GHRD aimed to develop and build up the technological capabilities to
produce a completely new car from the ground up. GHRD would be responsible not only for
the styling but also the technologies employed in the new car, including core technologies that
had previously been owned solely by the foreign partners of auto joint ventures in China.
While Honda Motor in Japan would provide technological support, the core technologies
would be owned solely by Guangzhou Honda. This arrangement differed from the traditional
R&D management at Honda, which, despite the existence of R&D centres around the globe,
used to retain its core technologies at its R&D centre in Japan. In May 2008, Guangzhou
Honda announced Li Nian as the brand name for its new car series. Given that Li Nian was
primarily manufactured for the Chinese market, should Honda change the way R&D was
managed in China? If so, how should GHRD be managed?
ecch the case for learning
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09/404C Honda: Innovation The Chinese Way


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The Automobile Industry in China
Market Potentials
The automobile industry was booming in China and had great market potentials. According to
Xu Changming of the Chinese State Information Centre, the Chinese automobile industry was
characterised by rapid increases in internal demand, vehicle production, exports and imports.
1


The automobile industry was a pillar industry in the Chinese economy. In 1994, the Chinese
State Planning Commission issued the first industry policy to encourage the transfer of
technology and management skills from foreign automakers to local automakers. However,
there were quite a few restrictions. For example, equity participation by foreign automakers
was restricted to 50%. It also required separate sales channels for vehicles made in China
from those imported from overseas, and that vehicles made by joint ventures with their own
technology account for more than 50% of the total autos sold in China. In 2004, the new
Automotive Industry Development Policy released by the Chinese State Development and
Reform Commission had relaxed some of the rules, with the only exception being equity
participation. In order to raise the industry’s entry barriers, however, the commission set the
minimum investment in new auto projects to about US$292 million,
2
including an R&D
organisation with input of no less than US$73 million.
3
In 2006, in accordance with China’s
accession to the World Trade Organisation in 2001, China removed most tariff and non-tariff
barriers for the automotive industry.

In the same year, China overtook Japan to become the second-largest automobile market in
the world, with 7.2 million vehicles sold annually.
4
Car sales in China grew 21.68% in 2007
to reach 6.3 million units, following a 30.02% rise in 2006 and a 21.4% rise in 2005.
5
In the
first half of 2008, both the production and sales of vehicles exceeded 5 million, an increase of
16.71% and 18.52%, respectively.
6
According to the Chinese State Information Centre, it was
estimated that China could become both the largest automobile consumer market and the
largest vehicle manufacturer in the world by 2010.
7

The Consumer
With rising disposable incomes and favourable government policies, the average Chinese
household had replaced state-owned enterprises and government organisations as the driving
force behind the auto purchasing spree that had begun in the late 1990s.
8



1
ChinaReviewNews (9 February 2008) “China Becomes the Largest Automobile Manufacturer in 2010”,
http://zhaojun.net/doc/1005/6/5/3/100565318.html?coluid=10&kindid=259&docid=100565318&mdate=0209090244
(accessed 17 July 2008). [¹],|]¦¦ (2008) “2010 +¹]j¹;¸,,"'´]”.]
2
The minimum requirement was Rmb 2 billion. Rmb 1 = US$0.146023 on 7 August 2008.
3
The minimum requirement was Rmb 500 million. Rmb 1 = US$0.146023 on 7 August 2008.
4
Auto China (2008) “China Is a Booming Market for International Investors”, http://autochina.auto-
fairs.com/en/leftnavigation/market (accessed 16 July 2008).
5
Taylor, S. (11 July 2008) “Toyota’s China Sales rise 34 pct in First Half”, Reuters,
http://www.boston.com/business/articles/2008/07/12/toyotas_china_sales_rise_34_pct_in_first_half/ (accessed 21 July 2008).
6
Information Department of China Association of Automobile Manufacturers (2008) “Brief on Automobile Industry Production
and Sales Situations in the First Half of 2008”, http://caam.org.cn/caam/caam.web/Detail.asp?id=3997 (accessed 15 August
2008). [¡¸j_¸___¸ (2008) 2008 ¸_¸¸¡¸¸_,j±¸¡|,
http://caam.org.cn/caam/caam.web/Detail.asp?id=3997.]
7
ChinaReviewNews (9 February 2008) “China Becomes the Largest Automobile Manufacturer in 2010”,
http://zhaojun.net/doc/1005/6/5/3/100565318.html?coluid=10&kindid=259&docid=100565318&mdate=0209090244
(accessed 17 July 2008). [¹],|]¦¦ (2008) “2010 +¹]j¹;¸,,"'´]”.]
8
Adapted from Farhoomand, A., Tao, Z., Wang, I. and Lu, Y. (2005) “Shanghai Volkswagen: Time for a Radical Shift of Gears”,
Asia Case Research Centre, The University of Hong Kong.
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09/404C Honda: Innovation The Chinese Way


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However, the Chinese market was highly fragmented. With 80% of Chinese auto buyers
owning an automobile for the first time, their shopping habits were very different from those
in more mature automobile markets. Automobile buyers in tier-one cities such as Shanghai
and Beijing preferred sporty hatchbacks, while those living in inland, regional cities had a
more traditional preference for branded automobiles.
9
Experts believed the key to success was
to make an automobile that appealed not only to buyers with traditional brand associations,
but also to modern consumers looking for individuality in their cars.
10


Chinese consumers’ attitudes towards purchasing automobiles were also changing. Speaking
at the Economist’s China Automotive Industry Leaders Roundtable in Shanghai in March
2008, Chen Anning of Ford China identified what he believed were three broad shifts in
consumer attitudes over the previous decade.

Ten years ago, Chinese car buyers were generally of the attitude that “any
car will do”, … Over the past few years, consumers stopped looking for just
any old car; they wanted a good car. Nowadays, especially in the big cities,
people are not just looking for a good car, they’re looking for “my car”,
something that reflects their identity.
11

- Chen Anning, director of vehicle programmes at Ford China

This emerging automobile culture was shaped by the younger generation’s desire to use more
convenient transportation in fitting with a new lifestyle.
12
Their preferences were based on
emotional factors and intangible attributes rather than tangible attributes such as fuel
efficiency or engine quality. Though they had not formed brand loyalties, they were
extremely brand-conscious and placed great importance on industry leadership.

As with most developing markets, word-of-mouth was important in decision-making.
According to research by Taylor Nelson Sofres (TNS), a market research firm,
recommendation by friends and family was the single most important factor influencing car-
buying decisions in China in 2007. Moreover, word-of-mouth among Chinese car buyers
overwhelmingly took place on the internet.
13
Sina.com, one of China’s most popular internet
portals, contained very active internet car forums. Sina.com’s auto channel had 26 million
page views per day, with a thriving message-board community where users could discuss
everything from fuel efficiency to whether or not real patriots should buy only Chinese cars.
14

The internet was considered a trusted source of information and, according to TNS, almost
25% of Chinese consumers believed that online information was “credible”,
15
while
traditional advertising and car dealers were much less trusted.

Moreover, Chinese consumers exhibited relatively high price consciousness. Those who
considered low-end, less-expensive Chinese brands were three times more likely to make a
purchase than those who considered foreign, more-expensive brands. For example, for
Beijing-based taxi driver Yao Shenfu, fuel consumption and price were decisive factors in his
decision to purchase a modest Hyundai Elantra.
16


9
Plowright, M. and Tsang, C. (14 April 2008) “Wooing China’s Car Buyers”, China International Business.
10
Ibid.
11
GM China (21 January 2008) “General Motors Tops List of Companies Contributing to China”,
http://www.gmchina.com/english/ctl?action=press_body&press_id=516 (accessed 18 July 2008).
12
This paragraph was adapted from Farhoomand, A., Tao, Z., Wang, I. and Lu, Y. (2005) “Shanghai Volkswagen: Time for a
Radical Shift of Gears”, Asia Case Research Centre, The University of Hong Kong.
13
GM China (21 January 2008) “General Motors Tops List of Companies Contributing to China”,
http://www.gmchina.com/english/ctl?action=press_body&press_id=516 (accessed 18 July 2008).
14
Ibid.
15
Ibid.
16
Ibid.
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09/404C Honda: Innovation The Chinese Way


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Nevertheless, according to Volkswagen, Chinese automobile buyers were willing to spend
double their annual salaries on cars.
17
There were two main reasons for China’s newfound
love affair with higher-end automobiles. First, thanks to the Chinese government’s subsidies,
fuel prices in China were low by global standards, making thirstier luxury cars much more
affordable. Second, there was a strong cultural link between automobiles and social status.
Rising incomes among the upwardly mobile “urban elite” in China’s major cities spurred
demand for top-quality goods.
18
Therefore, unlike in developed countries, these “urban elites”
purchased their automobiles in cash rather than through auto finance deals.
19


If I were just choosing a car for myself, I probably would have gone with
yellow or blue, a more eye-catching color, maybe a two-door coupe. But I
went for a black, four-door model, one that can pass for a car that might sell
for RMB 70,000 (US$9,800). I’m young, and I work at a state owned
company. If I owned a coupe, people might just think I was a playboy or
something. It would be bad for business.
- Mr Li, a Chinese consumer
20

The Competition
In 2008, the Chinese auto manufacturing industry was composed of two main groups of
competitors. One group consisted of joint ventures between Chinese companies and
internationally recognised automakers producing under international brands. The other group
consisted of local automakers producing proprietary branded cars [see Exhibit 1 for the top
ten brands in the first half of 2008].

As the Chinese market grew, competition intensified. Even back in 2003, all of the top 10
global automakers had already entered China.
21
The subsequent expansion of the Chinese auto
market afforded these top global automakers room to expand rapidly. The top three global
automakers [see Exhibit 2], Toyota, GM and Volkswagen, were also the top three automobile
sellers in China [see Exhibit 3]. They were also Honda’s main international competitors in
China.

Volkswagen was the top-selling automaker in China in 2007. Successful development of
suppliers was one of the reasons for the success of its joint ventures in China.
22
In 2008,
Volkswagen initiated the establishment of 160 joint ventures between foreign and Chinese
suppliers, approximately 100 licenses and know-how agreements, and 250 tools and
equipment agreements. Volkswagen’s imported product dealers covered over 25 provinces
and municipal cities. Its product mix of not only traditional models like the Jetta and the
Santana but also modern models coming onto the market catered to the entire spectrum of
consumers.
23



17
Burnick, M. (28 January 2008) “China’s Car Buyers Want to Ride in Style!”,
http://burnickblog.sovereignsociety.com/2008/01/chinas-car-buye.html (accessed 9 September 2008).
18
Ibid.
19
Adapted from Farhoomand, A., Tao, Z., Wang, I. and Lu, Y. (2005) “Shanghai Volkswagen: Time for a Radical Shift of
Gears”, Asia Case Research Centre, The University of Hong Kong.
20
GM China (21 January 2008) “General Motors Tops List of Companies Contributing to China”,
http://www.gmchina.com/english/ctl?action=press_body&press_id=516 (accessed 18 July 2008).
21
The top ten automakers in China in 2003 were GM, Ford, Toyota, Rensalt-Nissan, Volkswagen, DaimlerChryster, PSA,
Hyundai and Toyota.
22
Volkswagen China (8 July 2008) “Volkswagen Group China Sells 531,612 New Cars in the First Half of 2008, an Increase of
23.3”, http://www.vw.com.cn/cds/?menu_uid=634&con_id=2235 (accessed 18 July 2008). [,],"¸[(¹]) (2008) “,
],"¸[¹]·¸¨+]"|¦¸¸531,612 |],+]¿¸|23.3%”.]
23
Plowright, M. and Tsang, C. (14 April 2008) “Wooing China’s Car Buyers”, China International Business.
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09/404C Honda: Innovation The Chinese Way


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Meanwhile, local automakers received a big boost from the Chinese government’s “11th
Five-Year Auto Industry Development Plan”, a target of which was for proprietary brands to
occupy at least 50% of China’s auto market by 2010. The leading local automakers in China
were Chery, Xiali and Geely [see Exhibits 1 and 4].

Chery was the largest proprietary-brand automaker and the fourth-largest passenger vehicle
manufacturer in China, an indication that Chery could successfully compete in a Chinese
market traditionally dominated by joint-venture automakers. Chery also consolidated its
leading position among independently owned, domestic automotive companies in China.
24


Xiali was one of the brands developed by Tianjin FAW XIALI Motor Co., Ltd (“Tianjin
FAW”) of the China FAW Group. Tianjin FAW focused on producing economical passenger
cars and creating “the core competitive power of developing, manufacturing and selling the
economical passenger cars of the highest quality with the most economical methods and the
quickest speed”.
25


After entering the automobile manufacturing industry in 1996, Geely rapidly grew into a key
brand through its flexible operation mechanism and continuous concept innovation [see
Exhibit 5 for sales of different branded cars produced by Volkswagen, Toyota, GM, Chery,
Xiali and Geely in the first half of 2008].
Honda
Company Background
Honda Motor Co., Ltd was established in 1948 with its headquarters in Tokyo, Japan.
Motocycles, automobiles and power products were its chief products [see Exhibit 6 for unit
sales in 2006 and 2007, and Exhibit 7 for its financial performance].

Honda’s basic principles were “Respect for the Individual” and the “Three Joys” (the joy of
buying, the joy of selling and the joy of creating). ”Respect for the Individual” meant that
everyone working for Honda would be trusted and treated equally, while the “Three Joys”
indicated that interaction with Honda should be a happy experience for all the stakeholders,
including employees, suppliers and consumers.

Honda entered the Japanese automotive industry in 1963. Since then, its car models, such as
Civic and Accord, had become popular both in Japan and worldwide. Honda set up its sales
networks, R&D centres and manufacturing facilities in different regions around the world in
order to meet the specific needs of local customers. Each region had set up a regional
headquarters, which was led by a general manager from the board of directors or an operating
officer. The executive council and regional operating councils deliberated important global
and regional management matters, respectively [see Exhibit 8 for details on Honda’s
corporate governance]. The central role of Honda’s Japanese operations was to bring new
technologies, products and lifestyles to customers worldwide.

Honda had distinctive capabilities in dealer management. Honda had developed operating
procedures and policies for merchandising, selling, floor-planning and service management,

24
Chery (2008) “Profile of Chery Automobile Co., Ltd”, http://www.cheryglobal.com/about_chery.jsp (accessed 21 July 2008).
25
Tianjin FAW XIALI Motor Co., Ltd (2008) “Introduction of Tianjin FAW XIALI Motor Co., Ltd”,
http://en.tjfaw.com/about/index.html (accessed 21 July 2008).
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09/404C Honda: Innovation The Chinese Way


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which were used to train and support its dealer network.
26
These were first developed for its
motorcycle business and were later replicated in each new business Honda entered. Honda
managed its dealers to ensure that they could become successful businesspeople. A
computerised dealer-management information system was also developed to provide support
and competitive advantages to its dealers.

Honda was also strong in product development. In 2006, its automotive products captured
five out of 10 number-one spots in Consumer Reports rankings.
27
The Civic, Accord and the
Acura TL, for example, were the winners of the under-US$20,000 sedan category, the
US$20,000–30,000 sedan category and the US$30,000–40,000 sedan category, respectively.
Honda’s product development originated with the company’s founder, Soichiro Honda. Both
individual ideas and routines were emphasised. Honda not only valued individual ideas and
gave opportunities for them to develop, but also emphasised contextual details. Employees
were encouraged to step into the shoes of their customers to understand products from the
customers’ perspectives. Honda had a “Three Reality Principle”:
28

• Go to gemba, the actual place where things happen.
• Know the actual situation by gaining tacit knowledge through touching, seeing and being
in contact with both human and technical agencies.
• Be realistic by using gained knowledge to solve practical problems realistically.

In Honda, product development routines provided a collective framework to make sure that
employees respected sound theory, made good use of time, and were mindful of the value of
research results [see Exhibit 9]. At the initial stage of product development, Honda had
routine waigaya meetings, in which employees were able to exchange ideas, share and discuss
new ideas, and challenge existing practices equally and openly, regardless of organisational
ranking. During product development, Honda did not separate planning, proving and
executing into three sequential activities as they were in traditional product development.
Instead, planning and proving were ongoing, parallel processes, though separated from
execution. The execution cycle was highly disciplined, with major production revisions made
every four years and minor revisions every two years. When facing problems in product
development, “A”, “A0” and “A00” questions were used to guide the solutions. “A” questions
were about product specification, “A0” questions were about the concept and “A00”
questions were about the rationale behind the existence of the products. All these questions
were used to help employees think carefully about the fundamentals of the products they
created.
Honda’s Joint Ventures in China
China had become a very important market for Honda. In 2007, Honda’s sales decreased by
11% in Japan and increased only 3% in North America, two traditionally major markets [see
Exhibit 10]. Overall sales in China, however, reached 428,000 units, an increase of 31%.
Thanks to market development in China and other emerging countries, Honda’s sales, profits
before tax and per-share earnings were able to reach historical highs in 2007.
29


Consequently, Honda sought to expand and strengthen its business in China. By the second
half of 2006, through expanding the plant at Dongfeng Honda Automobile Co., Ltd
(Dongfeng Honda) and setting up a second plant at Guangzhou Honda Automobile Co., Ltd

26
Stalk, G., Evans, P. and Shulman, L.E. (March/April 1992) “Competing on Capabilities: The New Rules of Corporate
Strategy”, Harvard Business Review, 70(2), pp. 54–66.
27
Meyer, M.H. (2008) “Perspective: How Honda Innovates”, The Journal of Product Innovation Management, 25, pp. 261–271.
28
Peltokorpi, V. (2008) “Synthesising the Paradox of Organisational Routine Flexibility and Stability: A Processual View”,
International Journal of Technology Management, 41(1/2), pp. 7–21.
29
Chen, Y. (2008) “Honda China, Winner Re-Planning”, Car People, http://auto.sohu.com/20080604/n257280587.shtml
(accessed 16 September 2008). [|)2008·7!¹]¡¸|¹) ,"¸.]
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(Guangzhou Honda), Honda increased its annual production capacity in China to 530,000
vehicles. By the end of 2008, Honda had already introduced five models—Accord, Odyssey,
Fit, Civic and Civic Hybrid—to the Chinese market through its joint ventures, including
Guangzhou Honda and Dongfeng Honda. Honda was also planning to introduce the Acura
brand into the luxury vehicle sector in China.

In order to power product development, Honda began manufacturing electric generators and
general-purpose engines both for export and domestic use. To co-ordinate the rapid expansion
of Honda’s businesses in China, Honda Motor (China) Investment Co., Ltd was established in
2004. In 2006, it had already become Honda’s business centre in China.
R&D at Honda in China
Honda’s R&D
Invention and new-product development was central to Honda’s culture. Honda purposefully
did not cap its spending on R&D. In 2007, almost 5% of global revenue was budgeted for
R&D.
30


Honda R&D Co., Ltd (“Honda R&D”) was founded in July 1960 and had since been operated
as a separate organisation. Takeo Fujisawa, co-founder of Honda, recognised that Honda
could not rely completely on the genius of Soichiro Honda and that the true sources of
Honda’s competitiveness were technology and innovation. Therefore, he thought it necessary
to secure independent financing for R&D activities.

We cannot be assured of continued corporate activity unless we have not just
one, but many Soichiro Hondas. We must foster experts in various fields.
- Takeo Fujisawa, co-founder of Honda
31


With the slogan “all engineers are equal in the presence of technology”, everyone at Honda
R&D wore the same white uniform to symbolise this equality. Honda allowed engineers to
choose and register a research theme and define the areas of their responsibility with the
objective of utilising their skills, ambitions and abilities to the fullest extent. The ultimate
objective of Honda R&D was that “research must have merit”.
32


The Element Project, a project to expand its light truck portfolio beyond the popular CR-V,
Pilot sport utility vehicle, and the Odyssey minivan, was a good example of how Honda
segmented its markets for growth.
33
The aim of the project was to target first-time car-buying
males, eliciting their awareness of the Honda brand and keeping them loyal as they grew
older and more affluent. Honda formed the Element concept-development team in 1998 in the
US to create a compelling design that reflected the core values and beliefs of the target users
with an affordable price. The team used observations at the X Games
34
to supplement
traditional market research to produce a coherent profile of the target users, whose traits

30
Paluch, F. (2007) “Honda, Company Presentation”, 2007 Management Briefing Seminar, Traverse City, Michigan,
http://www.managementbriefingseminars.org/mbs2006/documents/PaluchFrank_000.pdf (accessed 16 September 2008).
31
Honda (2008) “Honda Philosophy: Honda’s Basic Principles and Polices”, http://world.honda.com/profile/philosophy/
(accessed 1 August 2008).
32
Paluch, F. (2007) “Honda, Company Presentation”, 2007 Management Briefing Seminar, Traverse City, Michigan,
http://www.managementbriefingseminars.org/mbs2006/documents/PaluchFrank_000.pdf (accessed 16 September 2008).
33
Peltokorpi, V. (2008) “Synthesising the Paradox of Organisational Routine Flexibility and Stability: A Processual View”,
International Journal of Technology Management, 41(1/2), pp. 7–21.
34
The X Games was held annually with a focus on extreme action sports, such as dirt-course motorcycle racing and “hot dog”
skiing and snowboarding.
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included strong cohort identification, highly social behaviour and support for social and
environmental causes. These observations were then translated into the designs and features
of the Element. The new product was tested among potential users, which helped to develop
the themes of the Element and fix the market segment. Driving performance, safety and
value—three overarching themes common among Honda’s automotive products—were added
to the themes generated through user research. Based on these themes, concepts were created
to deliver each theme and translated into key subsystems. Some subsystems were already
available within Honda’s arsenal of technologies, while most other technical solutions could
be adapted from existing Honda products. Only a few had to be developed from scratch, such
as the exterior styling to meet the new attitude and expression requirement. Many versions of
the Element were created, first as sketches and then as physical prototypes. Target users were
invited to test the new product. Finally, when the new product was ready, the team used
presentations and target-user testing to obtain approval from senior management.

To meet the needs of local customers, Honda set up regional R&D centres and operations in
various regions around the world. These worldwide initiatives were co-ordinated by the
headquarters in Japan, which was also responsible for developing advanced technologies.
Honda encouraged the regional operations to localise production using the expertise available
in local factories.

By the end of 2007, Honda had already established R&D facilities in five key regions outside
Japan, including North America, South America, Europe, Asia (except China) and China. The
regional R&D facilities aimed to develop technologies and products that could meet local
needs while reflecting common values such as environmental preservation and regional
economic development.

Honda R&D also set up Honda Strategic Venture (“HSV”), a global strategic venture
investment arm. HSV invested in technology venture companies that would create synergy
with Honda’s long-term R&D strategy.
Innovation in China’s Automobile Industry
Since China’s economic development in the 1980s, joint ventures and wholly owned
companies had represented two conflicting strategies in the Chinese auto manufacturing
industry. Joint ventures distributed power between Chinese and foreign partners and had a
high degree of dependence on foreign capital for branding and technology, while whole
ownership provided full control over R&D and allowed for the production of proprietary
brands, albeit at the cost of less recognition.

These two routes were visible in the developmental history of the global auto manufacturing
industry. Some countries such as Japan and South Korea had refused the joint-venture model
and completely relied on their own R&D and proprietary brands. Some Latin American
countries, however, had faithfully followed the joint-venture route, resulting in complete
reliance on foreign capital and absence of local core technologies, talents and brands.

After allowing joint ventures in the Chinese auto manufacturing industry for more than 20
years, the Chinese government decided to encourage the self-innovation of joint ventures.

With all the top global automakers having entered the Chinese market, the competition began
to shift toward R&D resources in China. Top automakers such as Volkswagen, GM and Ford
had built up R&D research laboratories with higher-education institutions in China. In 2006,
according to the China Auto Talents Society, the shortfall of R&D talents in China would
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reach 500,000 by 2011. While R&D staff made up around 30% of the total auto industry
workforce in developed countries, this figure was merely 8% in China in 2008.
35


GM was the apparent leader among global automakers in establishing an R&D presence in
China. According to the Chinese education ministry’s Science and Technology Development
Centre, 26 higher-education institutions and seven key state laboratories had already built co-
operative relationships with GM on 112 projects.
36
On 4 March 2008, seeing the huge
potential of the Chinese market, GM announced a US$4 million investment over the next five
years to develop a vehicle research institute with Shanghai Jiao Tong University. The institute
would focus on manufacturing and lightweight materials R&D. This would be GM’s first
joint laboratory in China and its 12th laboratory worldwide.

However, nearly all the R&D facilities developed by international automakers so far had
focused on either improving specific technologies (as opposed to core technologies) or
tailoring existing international models to the Chinese market. For example, Toyota’s R&D
centre in Shanghai lacked R&D facilities and was in fact little more than a car service centre
and occasional staff-training centre.
37

GHRD
Honda established China’s first dedicated automobile dealer network with integrated sales,
service, service parts supply and customer service. Moreover, Honda Automobile (China) Co.
Ltd was the first to produce passenger vehicles that were exclusively for export. With the
establishment of GHRD and the introduction of Li Nian-branded products, Honda became the
first foreign automaker to develop products under an original brand through a joint venture in
China.
Guangzhou Honda Automobile
Guangzhou Honda Automobile (“Guangzhou Honda”) was one of the top ten car
manufacturers in China [see Exhibit 4].

Guagnzhou Honda was founded on 1 July 1998, five years before the establishment of Honda
Automobile of China on 8 September 2003. Guangzhou Honda was managed jointly by
Guangzhou Automobile and Honda to produce Accord and Fit cars, with each party having a
50% share. The contract would last 30 years. By 2008, Guangzhou Honda had two factories:
one established in 1998 in Huangpu, the Guangzhou Economic and Technological
Development Zone; and the other established in 2006 in Zhengcheng Industrial Zone.

35
China Auto Newspaper (18 July 2008) “China Auto R&D Talents Lack 0.5 Million”,
http://auto.enorth.com.cn/system/2008/07/18/003563005.shtml (accessed 16 September 2008). ¸¹],"|?008·¹]
,"{¿¸_[¹|¸¯0 ].|
36
JinYang Network (6 March 2008) “GM Speeds Up Car R&D in China”, http://www.ycwb.com/big5/ycwb/2008-
03/06/content_1816592.htm (accessed 16 September 2008). [¸¨¦ (2008) j))¿¹)¹],"{¿.]
37
Gao, W. (8 July 2008) “Toyota Shanghai R&D Centre Changes Face, Empty Promise of Using Technologies to Exchange for
Market”, Everyday Economic News, http://auto.sohu.com/20080708/n258011398.shtml (accessed 17 September 2008). [¸¿
(2008) ¸¦_¸¡¸¸_¸] ]¡___,_, ¡j¸¸¡¡.]
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Since Guangzhou Honda was established ten years ago, we have been
repeating simple manufacturing. We continue to first introduce a new model,
then manufacture and sell the new product. But, this has enabled us to
accumulate some experiences, train some specialists, develop some brand
awareness, as well as gain some profits.
- Shoujie Fu, executive vice-president of Guangzhou Honda
38


In addition to Guangzhou Honda, there were five other Honda affiliates located in Guangzhou,
including Honda Engineering China (manufacture production equipment), Dongfeng Honda
Engine (produce passenger car engines), Wuyang-Honda Motors (produce motorcycles),
Honda Automobile (produce passenger cars for export) and Honda Motor. Honda’s Japanese
suppliers, including Sanoh Industrial (supply brake tubes), Stanley Electric (supply lamps)
and Mitsuba Corporation (supply motors), also opened their businesses in Guangzhou. From
2001 to 2004, an additional 11 Honda-related firms opened factories around Guangzhou. As a
result, Honda was able to procure most of the main components of its cars in and around
Guangzhou.

Guangzhou was a key locale in implementing industrial cluster policy [see Exhibit 11], and
Honda was satisfied with the city’s infrastructural support.
39
Back in 1992, Honda began to
produce motorcycles in Guangzhou after buying a local Peugeot factory. Even though the
Peugeot factory did not fit with Honda’s traditional factory design, Honda bought it because
local authorities had reacted favourably to Honda’s requests. The local authorities were
committed to developing Guangzhou’s infrastructure and commercial landscape through
building roads and railways, implementing institutional tax reforms, raising wages, resolving
the shortage of interpreters, and increasing electricity production.

The development of Honda Guangzhou followed the principle of “less input, faster output,
and rolling development”. Since 2004, Guangzhou Honda’s Huangpu plant had been
producing as many as 1,000 cars per day and had an annual output of 240,000. With the
Zengcheng plant going into operation in late 2006, Guangzhou Honda had upped its annual
production to 360,000 cars [see Exhibit 12 for the production and sales of Guangzhou Honda
over the years].
Establishment of GHRD
On 19 July 2007, Guangzhou Honda developed GHRD, the first automobile R&D institution
developed and owned by a joint venture as an independent juridical entity in China.

For Honda, the reason behind the R&D company’s independent legal entity was to create a
favourable R&D environment that was unaffected by daily production and sales activities or
time and space limitations. It was hoped to become an inspiring, free, energetic and open
research environment.

GHRD occupied 6 million square kilometres and covered all relevant R&D areas, ranging
from product planning to design and prototyping to testing. As the chief executive of
Guangzhou Honda commented, the purpose of GHRD was to become a whole-car R&D
centre in the real sense, not only capable of completing the whole-car R&D process

38
Chen, Z. (28 April 2008) “From Li Nian to Honda’s Strategic Innovation”, China Auto News. [|||2008·) T
¸`(¹|7![p|]]¨¹],"|.]
39
Kuchiki, A. (2008) “The Flowchart Model of Cluster Policy: The Automobile Industry Clusters in China”, International
Journal of Human Resource Development & Management, 8(1/2), p. 8.
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independently, but also capable of using the most advanced technologies in the world to
design leading products.
40


In China, there was also rising public interest in the automobile industry developing
proprietary brands. To improve competitiveness, many foreign automobile manufacturers had
pledged support for the development of proprietary brands. Some of them had developed
sizable R&D centres, such as Shanghai GM and Shanghai Volkswagen. As a result, a number
of models were improved and manufactured in China, including Buick’s Regal ((¡),
Shanghai VW’s Lavida (|¿), Buick’s New Excelle (]|j), Citroen’s C2 and Shanghai
GM’s Cadillac SLS (]¡). However, core technologies were tightly controlled by the foreign
automobile manufacturers rather than the Chinese partners. The Chinese partners and R&D
centres only possessed non-core technologies. GHRD was thus a pioneer in China because it
was the first R&D centre with the technological capabilities to develop a whole new model.

The registered capital of GHRD was US$26 million,
41
with an initial investment of US$290
million.
42
All the capital investment was made by Guangzhou Honda. In addition to other
standard R&D infrastructure, GHRD was equipped with a full-scale high-speed test course,
collision testing lab and compatible electromagnetism lab.

GHRD had two R&D systems: technological research and product development.
Technological research served the objective of realising product development. The focus was
placed on long-term research and evaluation of basic functions such as reliability and
durability in order to develop the specialised technologies most suitable for the Chinese
market. In terms of product development, starting with product planning, R&D staff would
step into the shoes of the Chinese customer and examine development trends, lifestyles and
special preferences to determine the automobile requirements of the market. Based on these
requirements, GHRD would work on the styling of the new branded automobiles for
Guangzhou Honda, followed by prototyping and testing. Finally, the plan for mass production
would be submitted. The technological research system and the product development system
were integrated and complementary to each other, rather than existing independently.
Through these R&D activities, the objective of GHRD was to meet and satisfy the needs and
expectations of the Chinese local market.
43


GHRD planned to recruit talents in China and overseas in order to create advanced
automobile technologies and products tailored to the needs of Chinese society and
consumers.
44
Its plan was to build up a complete training system, encouraging the staff to take
the initiative to acquire new knowledge and technologies. Meanwhile, an environment
characterised by open and free discussion was encouraged in order to develop high-quality
and creative products. In order to facilitate effective communication among its staff and

40
Guangzhou Honda (19 July 2008) “Guangzhou Honda Establishes Own R&D Company and Produces Proprietary Cars in
2010”, Soho Car, http://auto.sohu.com/20070717/n251113169.shtml (accessed 9 September 2008). [¹{__]_¡¸__
]_¸2010 ¸_,.]
41
Rmb 1 = US$0.146239 on 10 September 2008.
42
Rmb 1 = US$0.146239 on 10 September 2008.
43
People Net (17 July 2007) “Guangzhou Honda’s Vehicle Technology Dream Factory—Guangzhou Honda Vehicle Research
and Development Limited”, http://auto.people.com.cn/GB/25959/50030/50031/5999389.html (accessed 16 September 2008).
[¸[¦2007·¹|7![,"|¸\¯)==¹|7!,"{¸;¿||,).]
44
Guangzhou Honda (19 July 2008) “Guangzhou Honda Establishes Own R&D Company and Produces Proprietary Cars in
2010”, Soho Car, http://auto.sohu.com/20070717/n251113169.shtml (accessed 9 September 2008). [¹{__]_¡¸__
]_¸2010 ¸_,.]
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enrich their lives, the company also planned to build entertainment facilities for the leisure of
the staff.
45

Li Nian ({_)
On 20 April 2008, at the Beijing International Automobile Exhibition, Shoujie Fu, executive
vice-president of Guangzhou Honda, announced that the proprietary brand of Guangzhou
Honda was named “Li Nian”. Li Nian represented “a brand that will continue to pursuing
lofty ideals with a challenging spirit”.
46
Similar to the Chinese meaning of li nian, the Li Nian
Concept represented “the image of a dynamic, stylish, and high-quality life for a new
generation”.
47
Li Nian products were devoted to meeting the specific needs of Chinese
customers.

GHRD was responsible for developing Li Nian products with help from Honda Motor in
Japan. The core technologies of Li Nian products would belong to Guangzhou Honda, and Li
Nian products would be sold through Guangzhou Honda’s sales network. This arrangement
was in contrast with the conventional practice of other foreign automobile manufacturers in
China by retaining all ownership rights of their core technologies, as well as with Honda’s
past practice of selling all the products of its joint ventures in China under the Honda brand
name.

Even though Li Nian targeted Chinese customers, the ultimate goal of Li Nian was to become
a top international automobile brand. Li Nian would be rooted in Chinese values and culture,
and the development of Li Nian products would rely on the R&D, manufacturing and
marketing capabilities of Guangzhou Honda.

The first Li Nian automobile debuted at the Beijing International Automobile Exhibition in
2008 and became the star of the event. The model’s design emphasised the concepts of
“future” and “dream” to reflect Li Nian as a youth-oriented brand. The production of Li Nian
automobiles was scheduled to begin in 2010 by Guangzhou Honda.

Li Nian would be supported by Honda’s most advanced technologies and would meet the
high quality standards set by Honda. It was hoped that Li Nian would be developed as a brand
associated with advanced technologies and reliability.
The Way Forward
The development of GHRD was an ambitious move by Honda. However, this experiment was
also full of challenges and risks. Traditionally, the core technologies of manufacturing were
tightly controlled by the headquarters in Japan, and Honda’s regional R&D facilities were
only responsible for improving some non-core technologies and making small changes to
existing car models to suit local markets. However, GHRD seemed to be different. GHRD
was said to capture and own all its technologies, including core technologies. If GHRD was
allowed to own the core technologies, Honda would have to change the way it managed
regional R&D centres. Would the core technologies of Li Nian developed by GHRD be the
same as those used in Honda-branded products? To what extent should Honda R&D Co. in
Japan offer technical support to GHRD in China? How could the R&D staff communicate and

45
People Net (17 July 2007) “Guangzhou Honda’s Vehicle Technology Dream Factory—Guangzhou Honda Vehicle Research
and Development Limited”, http://auto.people.com.cn/GB/25959/50030/50031/5999389.html (accessed 16 September 2008).
[¸[¦2007·¹|7![,"|¸\¯)==¹|7!,"{¸;¿||,).]
46
Honda (2008) “Guangzhou Honda Reveals New Proprietary Brand— T¸ (Li Nian)”,
http://world.honda.com/news/2008/4080421Guangzhou-New-Proprietary-Brand/ (accessed 16 June 2008).
47
Ibid.
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exchange information between GHRD and Honda R&D Co.? If the core technologies used for
Li Nian and Honda were the same, then what should be done about property rights? If there
were to be a difference in technologies, which one would be superior—Li Nian or Honda?

The payoff of developing GHRD was also unclear. If GHRD owned the property rights of all
the core technologies it developed, Honda would become the first foreign automaker to
conduct R&D in this way. Considering the risks and challenges, what could be the payoffs for
Honda’s innovative move in R&D in China?
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EXHIBIT 1: SALES OF TOP TEN CAR BRANDS IN THE FIRST HALF OF 2008

Ranking Brand Joint Venture or Local Firm
1 Volkswagen Santana Joint Venture with Volkswagen
2 Jetta Joint Venture with Volkswagen
3 Buick Excelle Joint Venture with GM
4 Toyota Corolla Joint Venture with Toyota
5 QQ Chery
6 Toyota Camry Joint Venture with Toyota
7 Honda Accord Joint Venture with Honda
8 Hyundai Elantra Joint Venture with Hyundai
9 Xiali Xiali
10 Chevrolet Lova Joint Venture with GM

Source: Information Department of the China Association of Automobile Manufacturers (14 July
2008) “Ranking of the Top Ten Car Brands in Terms of Sales Volumes in the First Half of 2008”,
http://caam.org.cn/caam/caam.web/Detail.asp?id=3999 (accessed 21 July 2008).






EXHIBIT 2: WORLD’S TOP TEN AUTOMAKERS IN GLOBAL SALES IN 2007

Ranking Automaker Sales Units
1 Toyota 9,366,000
2 GM 8.902,252
3 Volkswagen 6,191,618
4 Ford 5,964,000
5 Hyundai-Kia 3,961,629
6 Honda 3,831,000
7 Nissan 3,675,574
8 PSA/Peugeot 3,428,400
9 Chrysler 2,676,268
10 Fiat 2,620,864

Source: Automotive News (2008) “Global Data Book”.
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EXHIBIT 3: TOP TEN CAR SALES IN THE FIRST HALF OF 2008

Rank Manufacturer Sales Production
1 FAW Volkswagen 268,640 268,685
2 Shanghai Volkswagen 264,992 272,009
3 Shanghai GM 223,520 248,799
4 FAW Toyota 190,638 200,194
5 Chery 174,282 208,465
6 Dongfeng Nissan 145,813 144,770
7 Beijing Hyundai 137,856 150,591
8 Guangzhou Toyota 126,590 130,577
9 Geely 121,690 120,801
10 Changan Ford 114,544 122,692

Source: Information Department of the China Association of Automobile Manufacturers (14 July
2008) “Ranking of the Top Ten Car Brands in Terms of Sales Volumes in the First Half of 2008”,
http://caam.org.cn/caam/caam.web/Detail.asp?id=3999 (accessed 21 July 2008).





EXHIBIT 4: TOP TEN CAR MANUFACTURERS IN CHINA IN THE FIRST HALF OF 2008

Ranking Car Manufacturer
1 Shanghai Volkswagen
2 FAW Volkswagen
3 FAW Toyota
4 Chery
5 Shanghai GM
6 Beijing Hyundai
7 Dongfeng Nissan
8 Geely
9 Guangzhou Honda
10 Chang’an Ford

Source: Information Department of the China Association of Automobile Manufacturers (14 July
2008) “Ranking of the Top Ten Car Brands in Terms of Sales Volumes in the First Half of 2008”,
http://caam.org.cn/caam/caam.web/Detail.asp?id=3999 (accessed 21 July 2008).

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09/404C Honda: Innovation The Chinese Way


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EXHIBIT 5: CAR SALES OF SELECTED BRANDS IN CHINA IN THE FIRST HALF OF
2008

Auto Group Brand Number of Vehicles Sold Comparison with the
Same Period in 2007
Volkswagen
Volkswagen 439,218 (5,797 from
import)
15.7%
Audi 60,509 (6,721 from import) 23.1%
Skoda 31,566 N/A
Bentley 275 N/A
Lamborghini 44 N/A
GM
Chevrolet 199,131 34.6%
Buick 146,321 N/A
Wuling 329,842 17.9%
Toyota
Toyota 285,000 34%
Luxes N/A N/A
Chery Chery 174,282
48
-1%
Xiali Xiali 66,578 N/A
Geely Geely 121,690 11.8%

Sources: Compiled from
1
Volkswagen China (8 July 2008) “Volkswagen Group China Sells 531,612
New Cars in the First Half of 2008, an Increase of 23.3”,
http://www.vw.com.cn/cds/?menu_uid=634&con_id=2235 (accessed 18 July 2008). [,],"¸[
(¹]) (2008) “,],"¸[¹]·¸¨+]"|¦¸¸531,612 |],+]¿¸|
23.3%”.]; Zhang, W. (11 July 2008) “The Sales of GM Vehicles Reached New High in the First
Half Year”, Vehicle Weekly, http://www.autoweekly.com.cn/show.asp?ArticleID=30143 (accessed 18
July 2008). [__ (2008) _¸¸_¡¡¸_'j__¡¸, ¡¸¸_.| Taylor, S. (11 July 2008)
“Toyota’s China Sales Rise 34 pct in First Half”, Reuters,
http://www.boston.com/business/articles/2008/07/12/toyotas_china_sales_rise_34_pct_in_first_half/
(accessed 21 July 2008); Le, G. (11 July 2008) “Sales Review for the First Half Year: Lowest
Annual Increase since 2004”, Nanfang Daily. [;]¸¸¨+")|¸¸) ]0+ +]]¸|
|]¨¡¸¦|.]; Car Exploration (7 August 2008) “Turning Point of Auto Market: Ranking of
Different Car Models in the First Half of 2008”,
http://auto.people.com.cn/BIG5/25959/27602/30203/7626854.html (accessed 18 August 2008). [,"
|¸2008·")|)·2008 ¸¨+¸,¸"¸|¸|||.]; Zhu, Y., Kui, X. and Yin, W. (14
July 2008) “Sluggish Sales Continued, Middle and High Class Car Sales Lowered More Than
15% in June”, Xin Jing Newspaper,
http://big5.xinhuanet.com/gate/big5/news.xinhuanet.com/auto/2008-07/14/content_8540085.htm
(accessed 21 July 2008). [ ¨|¸¸¸¸¯¸ 2008·,"|¸|¸]¿¹],"6 )|
¸¯¡]15%,];|.].
.

48
This included sales in the domestic market only.
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EXHIBIT 6: HONDA’S UNIT SALES REGIONAL BREAKDOWN

Sales by Financial Year Ending 31 March:

Unit Sales
(Thousands)
Motorcycles Automobiles Power Products
2006 2007 2006 2007 2006 2007
Japan 368 337 696 672 487 527
North America 615 503 1,682 1,788 2,827 3,103
Europe 353 329 291 324 1,477 1,625
Asia 7,907 7,895 521 620 717 760
Other Regions 1,028 1,305 201 248 368 406
Total 10,271 10,369 3,391 3,652 5,876 6,421

Source: Honda (2008) “Financial Highlights: Overview of Honda’s Financial
Information”, http://world.honda.com/profile/financial/ (accessed 1 August 2008).





EXHIBIT 7: HONDA’S MAJOR FINANCIALS

Sales and Profits
(US$ million)
2003 2004 2005 2006 2007
Sales 65,340 72,235 80,094 87,681 94,762
Profit before Tax 4,998 5,681 6,082 7,209 6,777
Net Profit 3,792 4,109 4,502 5,283 5,063
R&D 3,581 3,973 4,331 4,517 4,717
Number of Employees 126,900 131,600 137,827 144,785 167,231

Source: Honda’s website: http://www.honda.com.cn/about/main.html (accessed 17 September
2008).

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EXHIBIT 8: HONDA’S CORPORATE GOVERNANCE



Source: Honda (2008) “Corporate Governance”, http://world.honda.com/profile/governance/
(accessed 10 July 2008).

Board of Directors
Executive Council Business Ethics Committee
Regional
Operations
(Asia and
Oceania)
Regional
Operations
(Europe, the
Middle and
Near East,
and Africa)
Regional
Operations
(Latin
America)

Regional
Operations
(Japan)
Regional
Operations
(North
America)

Regional
Operating
Board
(Japan)
Regional
Operating
Board
(North
America)
Regional
Operating
Board
(Latin
America)
Regional
Operating
Board
(Europe, the
Middle and
Near East,
and Africa)
Regional
Operating
Board
(Asia and
Oceania)
Motorcycle Operations
Automobile Operations
Power Products Operations
Customer Service Operations
Production Operations
Purchasing Operations
Business Support Operations
Business Management Operations
Regional
Operations
(China)
Regional
Operating
Board
(China)
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09/404C Honda: Innovation The Chinese Way


19



EXHIBIT 9: HONDA OPEN INNOVATION



Source: Honda Motor Group (2008) “Introduction to Honda Strategic Venturing”,
http://www.researchvalley.org/UserFiles/File/docs/Cummings_HondaStrategicVenturing.pdf
(accessed 16 September 2008).


Research Phase (Technology Specific)

Idea


Theme Setting


Project Authorisation


Prototyping


Evaluation
Development Phase (Model Specific)


Development Order


Product Planning


Prototype


Testing
Completion of new technology
Product
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09/404C Honda: Innovation The Chinese Way


20



EXHIBIT 10: HONDA’S WORLDWIDE SALES BY GEOGRAPHY

North America
54%
Japan
15%
Europe
11%
Asia (excl.
Japan)
12%
Other
8%


Source: Honda Motor Group (2008) “Introduction to Honda Strategic Venturing”,
http://www.researchvalley.org/UserFiles/File/docs/Cummings_HondaStrategicVenturing.pdf
(accessed 16 September 2008).

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09/404C Honda: Innovation The Chinese Way


21



EXHIBIT 11: GUANGZHOU’S AUTOMOBILE INDUSTRY CLUSTER

Name of Joint
Venture
Guangzhou Honda
Automobile Co., Ltd
Guangzhou Toyota
Motor Co., Ltd
Dongfeng Nissan
Motor Company
Year of
Establishment
1998 September 2004,
May 2006
May 2004
Joint Venture
Partner
Guangzhou Automobile,
Dongfeng Automobile
(engines)
Guangzhou
Automobile
Dongfeng
Automobile
Main Products Accord
Fit
Camry Sunny, Teana
Production
Capacity
530,000 300,000 150,000
Location of
Headquarters
Guangzhou Economic
Development Zone
(City Centre)
Nansha District
(Southern Coast of
the City)
Huadu District
(North of the City)

Source: Kuchiki, A. (2008) “The Flowchart Model of Cluster Policy: The Automobile Industry
Clusters in China”, International Journal of Human Resource Development & Management,
8(1/2), p. 8.





EXHIBIT 12: GUANGZHOU HONDA’S PRODUCTION AND SALES SUMMARY

Year Production (million units) Sales (million units)
1999 1.0 1.0
2000 3.2 3.2
2001 5.1 5.1
2002 5.9 5.9
2003 11.7 11.7
2004 20.2 20.2
2005 23.1 23.1
2006 26.0 26.0

Source: Sina Auto’s website: http://auto.sina.com.cn/photo/GHRD/190410.shtml (accessed 10
September 2008).


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