Honda

9-899-223
REV: NOVEMBER 6, 2001

ASHISH NANDA JAMES K. SEBENIUS RON S. FORTGANG

Honda-Rover (A): Crafting an Alliance
On January 27, 1994, British Aerospace CEO George Simpson wrestled with a thorny dilemma. Faced with vexing financial challenges, British Aerospace (BAe) was determined to restructure and shed its noncore businesses, including its loss-making automobile subsidiary, Rover.Negotiating with the British government in 1988, BAe had acquired Rover in the “deal of the decade.” Under BAe ownership, Rover’s collaborative relationship with Honda blossomed and in 1989, Honda and Rover swapped equity stakes to cement their alliance. Though BAe actively sought to sell Rover, the Japanese carmaker was reluctant to increase its stake in its partner. BMW, meanwhile, had offeredSimpson a confidential bid to buy BAe’s full equity stake in Rover. Breaking up the long-time strategic alliance, however, could impose significant financial and political costs. Simpson deliberated his next steps as he prepared to fly to Tokyo to negotiate with Honda executives.

The Global Automobile Industry
In 1900, roughly a decade after it had originated, the automobile industry wasproducing 10,000 units per year. Production rose rapidly, reaching one million units in 1915, a figure not surpassed until the end of World War II due to the recession in the 1930s. After diverting its resources to the war effort for most of the 1940s, the industry flourished during the 1950s and 1960s, often described as the decades of the automobile (see Exhibit 1.). World production of automobilesgrew from three million in 1946 to 12.8 million by 1960. Driven by a desire to access foreign markets and share the cost of producing components, acquisitions and alliances mushroomed, first on a regional and later a global basis (see Exhibit 2). Although production continued to expand, from 30 million units in 1973 to 50 million in the early 1990s, growth was accompanied by over-capacity. Inresponse, the industry periodically attempted to consolidate to achieve economies of scale in marketing, distribution, research and development, and production.

The Rise and Decline of the U.K. Auto Industry, 1940-19801
At the end of the 1940s, the auto industry was among Britain’s five largest, accounting for between 2 4.5% and 6.8% of net manufacturing output. War damage to competitor nationsassured U.S. and U.K. hegemony in the industry from the 1940s until the mid-1950s. Limited competition made
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Research Associate Ron S. Fortgang prepared this case from published sources under the supervison of Professors Ashish Nanda and James K. Sebenius. HBS cases are developed solelyas the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 1999 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go tohttp://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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Honda-Rover (A): Crafting an Alliance

automobiles Britain’s foremost manufacturing industry during the 1950s and 1960s.The British government, attracted by the industry’s export potential, encouraged growth with significant investment incentives. By 1975 the industry accounted for 10%-15% of U.K. GDP growth and 3 employed 5% of the British workforce. Domestic production contracted in the 1970s due to under-investment, relatively low worker productivity, small plant sizes, tumultuous labor relations (see Exhibit...