Miimo, a robotic lawn mower, is hard at work on a patch of grass at Honda’s California office campus south of Los Angeles. About the size of a throw pillow, the electric-powered device scurries about in a random pattern, quietly cutting the grass with no human operator in sight. The boundaries of its activity are delimited by a buried cable. Miimo is said to be able to trim a lawn half the size of a football field, periodically looping back to its docking station to recharge its battery.
Miimo is a creation of R&D engineers at Honda. The company has 14 R&D facilities in North America that develop automobiles as well as motorcycles and other kinds of vehicles; one of them is just steps away from the lawn-mowing demonstration. Here, some 1,100 engineers work in passkey-protected offices closed to other Honda employees, designing and engineering new vehicles.
To understand Honda, one must understand that R&D is its heart and soul. The company is best known for its mastery of small-displacement engines, but feats of engineering like self-controlling lawn mowers — not to mention animatronic robots and small jet planes — are emblems of a powerful corporate culture. Honda has put up a long line of engineering firsts, from the low-emission CVCC engine of the 1970s and the first hybrid gas-electric powertrain in 1999 to precision all-wheel steering on the 2014 Acura RLX. The global expansion of its R&D has enabled Honda to become the first automaker to create new models in the foreign markets where they are sold. Its engineers have been so proficient that Hondas — since at least 1982, when the Accord became the best-selling Japanese model in America — have been known as the cars that sell themselves, renowned for efficient packaging, intuitive ergonomics, build quality, and reliability.
But Honda’s success has had a downside. With the cars selling themselves, there was little need to develop other commercial attributes, such as memorable designs or clever marketing that created an emotional bond with the customer. Left in the hands of a single agency for more than two decades, Honda’s advertising stagnated. Marketing seemed to consist mainly of supporting racing teams. Acura, Honda’s premium brand, never connected with luxury buyers in search of intangible attributes like prestige. In Honda’s engineering culture, technology was the answer to every question.
At the same time, the automaker grew larger and more complex. Starting with one manufacturing facility in Marysville, Ohio, in 1984, Honda expanded its North American operations to seven engine, transmission, and assembly plants and a dozen more parts facilities. Today they churn out 1.9 million vehicles a year. Fiefdoms inevitably sprang up, and coordination suffered. Honda began to display the symptoms of what the Japanese call “big-company disease” as it became the second-largest automaker in Japan and the sixth-largest globally. By the close of its 2013 fiscal year on March 31, its revenues were $119 billion.
Cracks in Honda’s corporate façade appeared during the 2008 economic crisis, when auto sales cratered and Honda started slashing budgets. It reversed a decision to move the Acura line upscale with V-8 and V-10 engines and rear-drive platforms. It pulled out of Formula 1 racing and canceled a redesign of the flagship $90,000 NSX sports car. And in a move that was to have devastating repercussions, it delayed the launch of the 2012 Civic, its hugely popular compact, so that it could “de-content” the car, as they say in the auto business, replacing existing parts with cheaper ones to sell it for less. At the same time, Hyundai and Kia began a sales push that caught Honda unawares.
Then came the natural disasters. The Great East Japan Earthquake in March 2011 knocked out production at a half-dozen Honda plants, while floods in Thailand a month later disrupted suppliers. Honda was flat on its back. Tetsuo Iwamura, president and CEO of American Honda, later recalled, “While we struggled with disaster, our competitors, including Japanese, took a portion of the market that belonged to us. It was a big handicap.” Honda would not be able to resume full production for six months.
Honda’s decline in the U.S. was sharp. Market share for the Honda brand and Acura, which had peaked at 11.1% in 2009, slid to 10.7% in 2010 and to 9% in the earthquake year. Sales of niche vehicles like the unibody Ridgeline pickup and Crosstour wagon shrank to nearly zero, and Honda was forced to discontinue the Element van. As its cars began to drop from buyers’ consideration lists, the buzz began to build in automotive circles: Had the company that for so long had its finger on the pulse of the car-buying public lost its ability to develop appealing vehicles? Had Honda lost its mojo?
Damage from the 2011 earthquake was widespread in the Tochigi area, 80 miles north of Tokyo, where Honda has a number of facilities. One man was killed at the R&D center, and more than 30 people were injured. Wanting to inspect the damage two days after the quake, Takanobu Ito, Honda’s president and CEO, found that normal transportation was disrupted. So the 57-year-old engineer climbed astride the 1,100cc Honda CB1100 motorcycle he uses for commuting and made the trip by himself. Insiders would later describe Ito’s ride as marking a turning point in the company’s fortunes.
By training and experience, Ito is like all six predecessors in the top job: an engineer who rose through R&D. But along with his technical expertise — he helped develop the first NSX — Ito has become Honda’s most forceful and visible leader since the charismatic Nobuhiko Kawamoto retired in 1998. Since taking office in June 2009, Ito has speeded up new-model development and improved regional decision-making by better coordinating R&D with sales, manufacturing, and procurement. He also created the position of business management officer for each of Honda’s six global regions to supervise all development, production, and purchasing. As Ito explained to Fortune, “It used to be that for every minor model change, R&D would first conduct a preliminary review, then automobile operations would give formal approval, and then development instructions would be issued before getting around to the actual development work. Now sales, manufacturing, R&D, and purchasing associates work as a single team and quickly make decisions on their own.”
A year ago Ito announced an ambitious target: global sales of 6 million units by 2017, nearly double the number sold in 2012. “In principle Honda wants to provide products that are fun, and if we can do so, our sales volume will increase,” he told me. “But without clear targets, we cannot move.”
In May, Ito announced the return of Honda to Formula 1 as an engine supplier to the McLaren team in 2015. It’s an enormous commitment, involving hundreds of engineers in a hugely expensive sport where teams spend more than $10 million per race, but Ito said he could sense the emotional connection that racing created between Honda and its customers.
Below the radar, Ito has been building additional ties to customers. “Times have changed,” he says. “Honda products have a great reputation for quality, reliability, and value. But our customers don’t buy our products only for rational reasons. Now we must also communicate how good our products are. It is egocentric to say good products will sell themselves.”
That remarkably candid appraisal alone sets Ito apart from his predecessors. Even more unusual is the direction he turned for help: two American car guys. The first is Eric Berkman, whom Ito named president of Honda R&D Americas last year, the first American ever to head that organization. The outspoken Berkman is a Honda lifer who joined the company at its plant in Marysville in 1982 and spent nine years there before joining R&D, where he oversaw the design and engineering of eight new models, including the popular Acura MDX crossover. He told me in an interview, “We’re trying to have a clearer vision about Honda and Acura. Before the tailspin, we were pretty modest about the capabilities of our products, and our marketing reflected that. We hadn’t gone beyond reliability, and people weren’t willing to pay for it.”
Ito has given Berkman the responsibility of executing Honda’s new small-car strategy. For years Honda’s exceptional small car, the Fit, has been effectively on allotment in the U.S. because it was built in Japan and volume was limited to around 60,000 cars a year. Consumers loved it, but dealers couldn’t keep up with demand. Now Honda is building a plant in Mexico, where it will assemble the Fit and a new small crossover in quantities up to 200,000 a year beginning in 2014. “We’re getting out of the penalty box on Fit,” says Berkman. “It is going to be impressive.”
Berkman’s counterpart on the sales and marketing side is Mike Accavitti, a Honda newbie who joined the company in 2011 as its top marketer. Honda almost never recruits outsiders, especially refugees from the Detroit Three. But when its shortcomings became glaring, it went after Accavitti, who had risen at Chrysler to run the Dodge brand — with its no-holds-barred attitude and testosterone-laced TV commercials, the opposite of Honda. After less than two years he has been promoted to senior vice president of automobile operations, with product planning, logistics, sales and production planning, distribution, quality assurance, and market research added to his already crowded list of responsibilities. Even in a flat organization like Honda’s, that’s a bulging portfolio, and Accavitti’s ascendancy speaks to Honda’s desire to change old ways.
Like Berkman, Accavitti doesn’t mind being a squeaky wheel. As chief marketing officer, he did something very un-Honda-like: He put its $900 million annual ad budget up for review. When the dust settled, he had shattered a 26-year relationship with RPA (formerly Rubin Postaer & Associates) by stripping it of the Acura account as well as the lucrative media-buying business. (RPA hung on to Honda brand advertising.) “Our products were so good that we relied on their reputation to do the heavy lifting,” Accavitti says. “We all understand that this is something that has to change.”
To further speed decision-making, Ito dispatched his No. 2 executive, chief operating officer Tetsuo Iwamura, to Los Angeles, where he oversees North American operations. Iwamura has become as candid about Honda’s missteps as his American colleagues. There is near-unanimous agreement that Honda, which once ranked with Toyota as a hybrid innovator, missed the boat when it bet on a mild one-motor system that never caught on. “It was hard to expand the one-motor system from small cars like Fit and Civic,” Iwamura acknowledges. “It was not suited for larger cars like Accord.”
If anything proves that Honda has changed, it is the saga of the 2012 Civic and its rapid-response replacement by a 2013 version. The story begins in 2009. The development of the 2012 Civic had almost reached design freeze when executives, reeling from “Lehman shock,” decided the car would be too costly for an entry-level offering. Ito ordered that a less expensive version be created and delayed the scheduled fall 2010 launch by six months. Most of the cost cutting hit the interior, where cheaper and glossier plastics were used and the dashboard was inexpensively put together in pieces.
Honda managers realized that the de-contenting had gone too far, but it was too late to reverse the changes. Instead top executives decided to move up the Civic’s mid-cycle improvements scheduled for spring 2014 by 18 months, to fall 2012 — a more or less unheard-of action because of the complexity of building a product with some 10,000 parts.
When the 2012 Civic was launched, it was badly received. At the Tokyo Auto Show in November 2011, Ito publicly took the blame, saying, “The ultimate responsibility rests with me.”
The redesigned 2013 Civic was introduced at the Los Angeles Auto Show one year later, to positive reviews. The chassis had been stiffened, the sheet metal brightened, and the interior trim upgraded. The changes weren’t cheap — Automotive News estimates that Honda added more than $500 of new content while raising the price by only $160 — but customers approved. The Civic ranked as the most popular car in its segment and the fourth-best-selling passenger car of any size in June.
To prevent such mistakes in the future, Honda has set up a seven-member North American regional operating board to speed decision-making on new models and shorten time to market. Board member Berkman speaks for many at Honda when he says, “We were content with the pace of change. Now, with more competition, we have to learn how to scrap for every sale.”
For his part, Ito has shown his confidence in North American R&D by giving it the job of developing the next NSX supercar. When it makes its debut in late 2014, the hybrid six-cylinder-powered coupe will be the fastest, most expensive ($100,000-plus), sexiest Honda yet. Note that last adjective: Honda is determined to prove it has its mojo back. Just don’t expect to find a Miimo in the trunk.
This story is from the August 12, 2013 issue of Fortune.