C.A.R.S. Management Briefing Seminar - John Mendel, Senior Vice President, American Honda Motor Looks Forward

August 9, 2006 -- Traverse City, Michigan -- We are all members of the same global auto industry. And I think that is one of the great things about this conference... it brings us all together each year to address issues of common concern... and common responsibility.

This viewpoint also suggests, as the theme Dave Cole has crafted for us implies... that from a competitive standpoint the world is flat. Driven by the speed and capabilities of technology and ready access to information and data... our world is smaller and flatter than ever.

Even small and midsize firms can gain access to scale they couldn't obtain in the past - through the focused application of technology. And a relatively small company like Honda has long been living proof of that. What's changed is the speed in which any company can become competitive. Media used to write about the auto industry's rush to invest in China. Now, within just 2 to 3 years of that, we see the first efforts of Chinese automakers to invest in this market.

Importantly, while we are global companies, our customers are local. And we need to tailor our products and our operations to meet their needs. Failure to accept this reality... or the attempt to erect barriers against it... only distracts from the creativity and energy that we all need to focus on the key challenges we face. What is critical - the key point really - is technology... and what we use it to achieve. Yes, the competitive world is flat... but the real world... as Christopher Columbus discovered... is round.

We all breathe the same air that goes around and around... and we all benefit from the same ozone layer that shelters Mother Earth. So, we... the auto industry... must do our best to protect the environment recognizing that what we produce today, we must live with tomorrow. But I want to emphasize right from the outset that, in our view, success does not require making tradeoffs - for instance, selling clean cars versus those that our customers want to drive. At Honda, our goal is to create new value for the customer... through the development of original technology that creates unique products that people want to buy... and to do so in a way that reduces our environmental footprint.

For Honda, these goals are not mutually exclusive. They are part of the foundation of our business and the core philosophy that guides our efforts. Today, the price of gas is about $3 per gallon... and fuel efficiency is making a comeback as a key consumer purchase consideration. But nearly four decades ago, when oil was still $3 a barrel - the commitment to reduce emissions and fuel consumption was part of Honda's vision to create "Blue skies for our children."

In the end, this kind of belief system is what enables us to achieve environmental leadership... not mergers, or government funding of technology... but rather a focus on the fundamental beliefs that guide our investment in and development of technology... and lead to the products we produce. Now... I don't want to make the challenge sound easy. Meeting the needs of our customers and protecting the environment is a never-ending challenge. It kind of reminds me of that famous New Yorker magazine cartoon... where two guys are climbing a mountain... and take great satisfaction that they are on the verge of reaching the very peak. But what readers see - is that there are more, even higher mountains on the other side. And that's what meeting the environmental challenge is all about. It is a never-ending challenge.

In Honda's view, the energy and environmental challenge involves three critical issues requiring unique technological approaches. We must continue to reduce air pollution with conventional engine technology. We have to further advance the fuel efficiency of the internal combustion engine, including hybrid and diesel technologies. And we must develop alternative fuel technologies - both vehicle and infrastructure - to address energy sustainability, reduce our dependency on foreign oil, and work toward a mode of transportation with zero mobile source CO2 emissions. Each one of these is a daunting, daunting challenge.

Think about it - air pollution was once the paramount social concern. Now, you could say it is on its way to becoming a declining issue because of the tremendous advances that have been made in low emission technology. Ten years ago, the 1996 Civic was the industry's first Low Emission Vehicle. Today, even Honda's first truck, the Ridgeline, is a LEV-2 Ultra Low Emission Vehicle - which means it's cleaner than a lot of the new cars being sold today.

With progress like this in reducing air emissions... coupled with increased concern over global warming... today, the primary focus of environmental technology has shifted toward fuel efficiency as a means to reduce greenhouse gas emissions... or CO2. But higher gas prices have added a strong consumer voice to this issue. And sales numbers over the past two months paint a pretty clear picture of how attitudes toward fuel efficiency are changing. Last month, sales of Civic climbed 6 percent, Accord jumped another 9 percent... and we are selling the all new Fit as fast as we can get our hands on them. But I also want to emphasize that our light truck models are holding their own... in part because they already essentially meet federal fuel economy standards for the year 2011.

In fact, the only thing constraining the sales of our most fuel efficient models is capacity. A little less than two months ago, we announced our intention to address that... with plans to build a new 200-thousand unit plant in the Midwest, in Indiana, to produce fuel efficient 4-cylinder vehicles starting in 2008. And we are adding a new plant in Canada to build more 4-cylinder engines as well.

But we were focused on fuel efficiency when gas prices were relatively low. It is just what we believe. One media pundit has said that "the market has come back to Honda." And he might be right. But give us some credit, too - we stuck to our commitment - to Honda's core values of providing fuel efficient vehicles. It is strategy guided by principle... not blind luck.

Honda sells a lot more than cars. We are a mobility company with global sales of more than 20 million engines per year... including a diverse range of products that includes motorcycles, outboard motors and other power equipment. And our commitment to fuel efficiency includes all of these products. We have replaced 2-stroke engines in virtually every motorcycle worldwide with cleaner, more efficient 4-stroke engines. And we have now begun voluntarily applying fuel injection technology to motorcycles globally. Even our latest new product... HondaJet... showcases Honda's focus on fuel efficiency - it is up to 30 to 35% more fuel efficient than similar aircraft. In short, we use technology consistently across all product categories to address the environment even as we meet the needs of our customers.

We have no intention to stop pushing the efficiency envelope even from our leadership position. Earlier this year, Honda became the first automaker in the world to set global CO2 reduction goals for its products and production activities. Importantly, these are voluntary efforts... beyond what is required by law. Despite increased sales of larger vehicles such as SUVs and minivans, we are targeting a reduction in CO2 emissions from our products of 10 percent by year 2010, compared to 2000 levels. We are also focusing attention on the facilities that build our products... with plans to reduce the global average of CO2 emissions required to produce one automobile at a Honda facility in year 2010 by 10 percent compared to 2000.

For Honda, the focus is not about seeking technological loopholes that meet regulations... but do little for the environment. Our focus is on achieving a true advance in technologies... through real world experience... that can help our customers and the environment. Again, for companies that are willing to invest in technology, this is where the auto industry can be a "flat world" of opportunities.

We recognize... and are not afraid to acknowledge... that the gasoline internal combustion engine will remain the primary means of motive power for customers in North America and around the globe for at least the next 15-20 years. So, we have made a fundamental commitment to further advancements in gasoline engine efficiency across the full range of our 2006 North American product lineup.

By 2008, we will introduce a new 4-cylinder internal combustion engine in our VTEC series - with continuously variable valve control technology - to improve fuel efficiency by up to 13 percent from 2005 levels. And a V-6 engine with a new more advanced Variable Cylinder Management technology will improve basic V-6 efficiency by up to 11 percent over 2005 levels.

Beyond conventional engine technology, Honda has taken the lead in a host of advanced technologies from hybrids, to natural gas and hydrogen fuel cell. But our strategy is not about pursuing the latest fad. And I would include hybrids in that statement. Now, be careful about what you just heard... I did not say hybrids are a fad. But I want to emphasize they are just one necessary approach.

I know people have wondered about our hybrid strategy - we have been questioned repeatedly regarding why we haven't joined those companies promising to sell 250-thousand to a million hybrids by the end of the decade. The reason is simple... Honda always proceeds with a sense of urgency, but we also have a patience that is born out of experience with technology. There are multiple solutions to the environmental challenge - and we have a responsibility both to our customers and our shareholders... and the answer is not necessarily hybrids for all model types. We did introduce America's first hybrid... and America's first mass-market hybrid... and America's first V-6 hybrid. In each case... we learned a lot about real world performance requirements and the needs of the customer. This has been a great advantage.

By developing the technology ourselves, and gaining real world experience with it, we aren't guided by another company's beliefs or technology timetable... and we fundamentally understand the technology so that we can continue to advance it ourselves. The Civic has the 4th generation Honda Hybrid System with new technology that increases horsepower and torque, yet is also more efficient.

Today, hybrids mean fuel economy - and that is really their greatest value... both when it comes to addressing CO2 reduction... and giving the consumer what they want... which is higher mileage. Toward this end, earlier this year, we announced plans to introduce a new, more affordable hybrid car. This was the result of a strong request from those of us at American Honda to Honda R&D.

We explained to them the need for an affordable hybrid as a next generation people's car. As a means to improve fuel efficiency, we determined that hybrid technology is most effective in smaller displacement vehicles. With the key understanding that the success of a small hybrid is based on offering it at an affordable price. Our R&D operations have taken on this challenge... and the new small hybrid vehicle will be launched in 2009... with a projected North American sales volume of 100-thousand units.

But there are other solutions to reducing CO2. And another key strategy that has earned quite a bit of attention is our plan to introduce what could be the world's first clean diesel engine. Honda's direct injection diesel engine technology now offered in Europe has received critical acclaim for its performance, smooth operation and efficiency... and is selling well in four different vehicles.

Based on this foundation, within three years, we will introduce a new 4-cylinder diesel engine that meets the world's toughest emissions standards. With hybrid technology focused more on small cars, we believe that diesel technology is the best fuel efficient technology for larger vehicles. So, R&D is also working on the development of V6 diesel engine technology. We do not have a timetable for introducing such an engine. But it is a key development goal.

I am very confident that our diesel technology will achieve our goal of creating new value in this market. Some have suggested this will be as important a breakthrough as the Civic CVCC was in being first to meet the U.S. Clean Air Act in the early 1970s. I don't know about that. But I can say that, like the CVCC engine, we will meet our goal without add-on technology like urea. What I have found very interesting is the positive reaction we have received from this announcement of our diesel plans. With the development of this new technology, many customers and analysts are enthusiastic about what they see as the return of Honda's challenging spirit. Hey... we never stopped challenging... it's just that some of our efforts are so far out there it is more difficult to appreciate.

For instance, we are the leader in advancing natural gas and fuel cell vehicles... not only the vehicle, but the infrastructure as well. And that says a lot. We could say "Hey, we built the car, too bad there's no fueling system." That would sound like a script for an ill-informed movie about the demise of the electric car.

The reality is Honda has taken responsibility to create the infrastructure that will help these advanced vehicles hit the road... and stay there. This summer, we launched the 3rd generation Civic GX natural gas vehicle. And we offer these vehicles together with the fueling infrastructure in an effort to open up the opportunity for this outstanding alternative fuel vehicle to individual customers.

Just to refresh your memory, the first generation Civic GX was recognized by the U.S. EPA as having the cleanest internal combustion engine ever tested. And the 07 model is better in every way. Through Honda dealers in California and soon New York, we offer the Phill home refueling appliance with the lease of a Civic GX. We create most of our advanced technology independently... but we collaborate where it helps to create new value for the customer. And this is one of those areas - our marketing partner is Fuelmaker Corporation, a company based in Toronto, Canada.

This real world experience with the technology and the customer has been invaluable to Honda. Not only in advancing the performance of the Civic GX... but as a pathway to another alternative fuel vehicle... the hydrogen fuel cell.

I keep reading about how fuel cell vehicles will be here "tomorrow." And I say, without reservation, that they're here today! And I am not talking about some smoke and mirrors vehicle that has a team of engineers chasing it down the street. I am talking about the Honda FCX... powered by Honda's original fuel cell stack... that is not only capable of starting and operating in extreme hot and cold weather... it is the only fuel cell vehicle in the world that has been certified street legal by the U.S. government and the state of California. In other words, it has been crash-tested... and evaluated just like any other normal vehicle.

We now have 15 on the road in the U.S. - including the first ever FCV in the hands of an individual customer... the Spallinos... in Southern California. They have been driving the vehicle for their daily commuting and shopping needs for more than one year... and they rave about it. This, in addition to our fleet customers... including one FCX in use during the cold winters of Albany, New York... and another enduring the sweltering heat of Las Vegas, Nevada.

I know, like you, I've heard the story about waiting to introduce fuel cell vehicles until they are ready for the mass market. But these limited introductions are what get the vehicle ready for the mass market! We are developing a better understanding of both the technology and the customer based on this experience.

Based on this investment in original technology... we are in the process of developing our next generation fuel cell vehicle - right now. In a real stroke of imagination... we are calling it the FCX Concept. I can't believe we paid someone to come up with that. This next generation sedan will have a full-sized cabin, with a level of driving pleasure and roominess previously unimaginable in a fuel cell vehicle. It will be powered by Honda's new V-flow fuel cell stack that delivers more power in less space with improved efficiency, range, reliability and cold start performance. The new stack also makes possible a next-generation sedan appearance through the lowest floor ever for a fuel cell vehicle.

We showed this vehicle around the world at various auto shows. But this fall, we will begin driving opportunities with a few members of the news media... as just one more step in the advance toward its launch in about 3 years. Significantly, as with Phill and the Civic GX... Honda is not waiting around while other companies sort out the refueling infrastructure requirements that will be necessary to truly take fuel cell vehicles to the mass market.

Already in trial use at our U.S. R&D center not more than a city block from my office in California... is Honda's third generation Home Energy Station. This innovative device converts existing natural gas supplies into hydrogen for fuel cell vehicle refueling - as well as to supply hot water and electricity to the home. And, again, we are collaborating on this technology with another company - the New York-based Plug Power Corporation.

In our effort to create a truly carbon-free transportation technology, we also established one of the region's first solar-powered hydrogen refueling stations - also now based at our LA R&D center. Several years ago, this station was upgraded with next generation thin film solar cells developed by Honda. These new cells reduce CO2 emissions by using 50 percent less energy in the production process. I am not going to lecture you on something I know little about - but our thin film solar cells achieve lower costs while maintaining high photoelectric transfer efficiency - critical steps in expanding the use of solar cells. And we will begin mass production of these solar cells next year.

There is no question that the effort to meet the needs of both the environment and the customer involves multiple challenges. But I think technology has helped change this from an "or" world to an "and" world. In short, where in the past, you could be fun "or" efficient... safe "or" clean. Today, through the clever application of technology we are making cars that are sporty "and" low emission... fuel efficient "and" safe.

And when it comes to being "clean safe and fun"... the Honda Civic is one of the industry's greatest examples. In fact, Civic might just be the most important car in the history of the auto industry when it comes to advancing environmental technology in the real world. Civic was the first car to meet the emissions standards of the 1970 Clean Air Act without a catalyst. Civic earned the EPA's first-ever number one ranking for fuel economy. Ten years ago, the '96 Civic was the industry's first gasoline-powered Low Emission Vehicle. In 2000, Civic became the first car to be sold as an Ultra Low Emission Vehicle in all 50 states.

More recently, Civic was the first mass market hybrid vehicle. And, today, the Civic is the only vehicle in the world with conventional gasoline, gas-electric hybrid, diesel and natural gas powertrains. In short, Civic is a microcosm of Honda's effort to use technology to create new value. Because you cannot define an environmentally friendly car only by the numbers. It must meet the needs of the customer in other areas... and that is certainly true with Civic, the industry leader in small car safety.

Some have argued that you can't achieve top rank fuel efficiency and top rank safety in the same package. But the 2001 Civic - that's the last generation - was the first small car to earn the federal government's highest crash test rating. And the new Civic was the first small car to earn the Insurance Institute for Highway Safety "Gold - Best Pick" for its performance in frontal and side impact crash testing.

Based on Honda's Safety for Everyone initiative, the new Civic incorporates a long list of standard safety features - including Honda's Advanced Compatibility Engineering body for enhanced compatibility with other vehicles. None of this was easily achieved. To offset the increased weight associated with these features, our engineers employed a number of technologies including lighter and more rigid high strength steel in 50% of the body. This demonstrates how both safety and fuel efficiency were fundamental goals for this vehicle.

Of course, if you talk to most of our customers, you won't hear about safety, or even fuel efficiency. They'll talk about design, comfort, handling, performance and other characteristics that make their car fun to drive and fun to use. And Civic has that, too. Most vehicles in Civic's competitive set use engines in the 2.0 to 2.4-liter range. But Civic's 1.8 liter engine has the performance of a 2-liter engine, with the fuel efficiency of a conventional 1.5-liter engine. Based on this sort of accomplishment, Civic was the consensus "car of the year" for 2006. That's the point... Civic is an "and" car. Clean and safe and fun.

You would expect a car that creates new value to sell well... and you would be right. Civic sales are up 17 percent over last year. In fact, our inventory is much lower than we're comfortable with. And, while I don't have anything to announce today... we're going to have to do something about this situation down the road.

But this story takes me back to where I started today... talking about the importance of technology in creating vehicles that satisfy both our customer and society. And, in the process, helps a smaller company like Honda both compete in the flat world of the auto industry... and make an important contribution to the round world of the global environment.

You know... it's impossible to come to Traverse City and not appreciate the environment. It is beautiful up here. Maybe this would be a good spot to hold an industry summit on the environment! As an industry, we can work together... or we can view it as a competition. Either way, the goal should be the same. To meet the environmental challenge, even as we meet the challenge of satisfying our customers. Thank you. And I look forward to your questions.