Honda Took Pride in Doing Everything Itself. The Cost of Technology Made That Impossible.

The car maker outsources key tech for electric vehicles and autonomous driving to fight high R&D costs

Aug. 5, 2018 12:00 p.m. ET

TOKYO—A semiautonomous Honda SUV was traveling down a test track at 20 miles an hour in March last year when a child-size test dummy moved into the middle of the road. Oblivious, the Honda mowed it down.

It was part of a brutal day of Japanese government testing for Honda Motor Co. HMC 1.81% , whose vehicle was equipped with a camera and sensors that were supposed to detect obstacles and apply brakes to avoid a collision. The SUV scored 0.2 out of a possible 25 points in the pedestrian portion of the test, the worst among tested vehicles.

With its long heritage of technical prowess, Honda was determined to do better—and it did. But Honda engineering didn’t get it there. The car maker turned to an off-the-shelf sensing kit from Robert Bosch GmbH, the companies said. With the Bosch technology, the new Honda Civic took the same test in November and scored 24.4 out of 25.

Honda’s decision to go shopping points to a radical culture change at one of Japan’s proudest companies, where founder Soichiro Honda in the 1960s said, “We refuse to depend on anyone else.” The struggle at the entrepreneurial success story cuts deep into Japan’s sense of itself as a global leader in technology.

Honda once used staff technicians to design new technologies ranging from engines to the shape of the suspension arms. Today, Honda believes rapid shifts in technology mean it can no longer afford to keep pace working solely on its own.

That is raising hackles among some within the company who complain about “PowerPoint engineering”—where engineers assemble slides showing how they will patch together others’ technology rather than build it themselves.

“Honda is changing things that Honda should not change,” said Hideaki Tsuru, who worked in Honda’s R&D arm for 20 years until retiring in 2016. He said making unique products is “Honda’s soul.”

Car makers around the world are under stress from the huge investments needed to develop new technologies used in electric vehicles and autonomous driving. To trim costs, most are leaning on megasuppliers such as Bosch, Continental AG and Denso Corp. , as well as smaller companies with cutting-edge technology such as Intel Corp. subsidiary Mobileye.

“We want to work with those that possess the best technology, regardless of whether they are Japanese suppliers or American ones or European ones,” said Honda’s chief executive, Takahiro Hachigo, in an interview.

Honda has announced deals with Chinese search giant Baidu Inc. to develop mapping technology for autonomous vehicles, and with Chinese startup SenseTime Co. to build camera software for self-driving vehicles. The company has a deal with SoftBank Corp. for artificial intelligence that SoftBank says will be able to read a driver’s emotions, so that in the future cars can perform tasks such as suggesting music based on your mood.

Honda, which prides itself above all on its engines, is farming out the development of an electric motor. Hitachi Ltd.’s auto-parts division has the majority stake in a joint venture with Honda that will make electric motors for Honda cars by March 2021. By 2030, two-thirds of its cars will be partially or fully electric, Mr. Hachigo said. In June, Honda also said it would buy electric-car batteries from General Motors Co.

For Honda, whose official name translates as Honda Technical Research Industry, the shift to outsourcing is forcing it to rethink its identity as a creator of unique auto technologies. Some of its most famous products include a navigation system that pre-dated civilian use of GPS, and the CVCC engine, which used less fuel and cut emissions. At the time of the engine’s unveiling in 1972, Honda’s then-head of engine research, Shizuo Yagi, trumpeted: “We at Honda did everything on our own.”

For many Japanese, Honda reflected the originality and self-confidence that turned the country into an industrial powerhouse after World War II. Today, Japanese manufacturers’ lead in quality over upstarts in South Korea and China is narrowing, and Japan’s car industry has fallen behind Silicon Valley and Europe on the software development needed to build complex self-driving vehicles.

In recent years, the challenges of competing with bigger companies with higher profits—in particular Toyota Motor Corp. —have dogged Honda. Bigger companies have an advantage in absorbing the high cost of developing technology. Honda’s R&D budget was about 5% of revenue last year, compared with Toyota’s 3.5% of revenue.

Toyota, which makes about 10 million cars a year, twice Honda’s number, has said it would spend billions of dollars on in-house research into self-driving cars. The company took full ownership of Daihatsu in 2016 and owns stakes in Mazda Motor Corp. and Subaru Corp. The companies work together on next-generation technologies, helping lower Toyota’s costs.

The alliance of Renault SA, Nissan Motor Co. and Mitsubishi Motor Corp. aims to sell 14 million cars by 2022. Fiat Chrysler Automobiles NV’s late CEO Sergio Marchionne once called for a merger to create a car maker that could sell 15 million vehicles a year, in part to achieve greater savings, although he later said the company could survive on its own. It shipped 4.7 million cars last year.

Mr. Hachigo has said Honda isn’t interested in merging with another car maker.

The company was founded in 1946 by Soichiro Honda, a tinkerer who loved to battle the giants with his own innovations. He and a dozen workers took engines intended for small electric generators and attached them to bicycles, the first Honda product. Within 15 years, a Honda motorcycle was beating European rivals at the Isle of Man motorcycle race.

Around that time, Mr. Honda rushed out a prototype automobile despite having almost no experience in building them, in defiance of a planned Japanese law that would have restricted entry in the market.

Today, Honda employs more than 200,000 people around the world. As it grew, the company started to prioritize profits over innovation, a cost-cutting strategy that lowered quality and led to a backlash from fans and hurt sales, former Honda executives said.

The global financial crisis in 2008 and floods in Thailand in 2011, which disrupted the supply of parts, hammered Honda’s profits. The chief executive at the time, Takanobu Ito, sought to overhaul the company to make it leaner and bigger, fearing Honda would be left behind if it didn’t pursue Toyota-like scale.

In 2012, Mr. Ito said Honda would double car sales to six million by 2017 by concentrating on sales in emerging markets like China and India. Key to that strategy was an updated Fit hatchback that would be of high-enough quality to be sold in the U.S. and Japan, but inexpensive enough for India and China. Mr. Hachigo, in the interview, said that idea was impractical because of the vast differences in the markets.

Mr. Ito sought to rein in the independence of Honda’s powerful research and development arm in an effort to trim spending on projects with no obvious commercial benefit—a past project had researchers studying the cockroach nervous system, according to former engineers and executives. The group still operates with its own parallel management structure, but research projects need the approval of headquarters, one of the former executives said.

The rush for size combined with efforts to cut costs caused disarray. Honda’s ninth-generation Civic, which went on sale in 2011, was panned for its poor-quality materials. Critics pointed to poor handling and a cheap interior, which were uncharacteristic of past Hondas. The Fit, which shared many components with the Civic, had to be recalled five times in the year following its introduction in 2013.

By the end of his term, Mr. Ito was already reversing course, dropping his sales target and allowing engineers more leeway in designing the 10th generation Civic, which got favorable reviews.

Mr. Hachigo, a Honda lifer who had helped build the China business, took over in 2015. Echoing his predecessor’s own self-criticism, Mr. Hachigo said the company spread itself too thin chasing growth.

The new tone was clear in the announcement last year on the deal with Hitachi for electric motors. “Rather than one company doing everything, it is important to gather the best parts and assemble them into one vehicle,” Mr. Hachigo said.

Potential tariffs or revisions to the North American Free Trade Agreement could complicate Honda’s business. The car maker assembles about three-quarters of the vehicles it sells in the U.S. at American factories. But it has expanded in Mexico, where its latest plant, in Celaya, can produce 200,000 cars and SUVs, over half of which are exported to the U.S.

Honda’s changed strategy emerged in the back-and-forth over Honda Sensing, its semiautonomous driving system. Earlier versions of the system were co-developed by Honda and a subsidiary, called Honda Elesys, which was sold in 2013. One person who worked on it said that by 2014 Honda was talking to Bosch about supplying a new system because the Elesys system couldn’t reliably distinguish pedestrians from other objects—Honda warned on its Japanese website the camera might not properly identify objects smaller than 1 meter or taller than 2 meters.

The car maker had hoped to persuade Bosch to build something unique for it but eventually decided to buy an off-the-shelf system after the German company, which deals with practically every major auto maker, said it was impractical, the person said.

Spokespeople at both companies confirmed that Honda uses Bosch equipment for Honda Sensing but declined to discuss the decision-making process. Honda Sensing, which is meant to assist the driver on tasks such as maintaining a constant distance behind another vehicle or in sudden braking to avoid an accident, is now standard on many models.

The company’s next challenge is to develop cars with fuller self-driving abilities. Honda has said it plans to sell a vehicle that can drive autonomously on highways by 2020.

Its peers have more ambitious schedules: Nissan has said its vehicles will be able to drive themselves on city streets by 2020, while GM has said it aims to run a large-scale fleet of driverless cars in big U.S. cities by 2019.

Honda said it wants to combine in-house research with the fruits of tie-ups such as the one with SenseTime, the Chinese company that builds software to identify people and objects seen through a car’s cameras.

In a demonstration for journalists last summer, Honda’s self-driving prototype rolled through a stop sign without halting. A Honda spokesman said the vehicle was an early prototype and that its performance is now much improved as a result of collaboration with SenseTime.

Honda’s eventual self-driving system will likely have only a fraction of its software written by Honda engineers, said Yuji Yasui, chief engineer for autonomous vehicles.

“Car makers focus on developing some things, suppliers on others,” he said. “We haven’t changed. What changed is that it is inefficient for Honda to do everything ourselves.”