What the ‘Honda effect’ could mean for you

At the highest levels of the Treasury and the Bank of England, they are talking about the “Honda Effect”.

As luck would have it, yesterday I went to visit the Honda factory in Swindon. The fact that it was in the final fortnight of a four-month production shutdown was as tangible an example of the Honda effect as can be imagined.

It’s all about a superfast, agile response to changing demand conditions, and was identified by the late McKinseyite Richard Pascale.

The Governor of the Bank of England, Mervyn King, recently referred to it as a reason to believe that recovery could occur:

“… the Honda effect; that is, you stop production altogether for a period but you still keep selling out of stocks. But then you have to resume production – maybe at a lower rate, but you resume production – and that itself will guarantee some pick-up in the rate of growth of output.”

At the Honda factory they are beginning to unwind the four-month production stop.

The crucial point here is that stock levels that had shot up to over 80,000 cars are now back down again to around 20,000.

Production will now restart at about half the level of last year. Having reached the bottom of this stock cycle, Honda UK is now taking deliveries of steel from Wales to be pressed into the body panels for its Jazz small car.

Now here is the rub. Was the violent collapse in worldwide industrial demand last autumn a result of an extreme Honda Effect? If so, there may be some reason to suppose that the rebound could be stronger than previous recessions.

But there is a dark side to the Honda Effect. Despite 1,300 voluntary redundancies, Honda says it is overstaffed by 480 workers given current production levels.

Instead of compulsories, Honda is close to agreeing a 3 per cent pay cut for workers and 5 per cent for management. Similar deals have seen larger pay cuts across the industry.

Average earnings are dipping in the economy, mainly driven by declining banker bonuses, but what if wage falls rage across the economy? That’s why deflation rather than inflation is in the sights of authorities. And it’s why even if Honda does not affect you personally, the Honda effect may soon do.

PS: Paint is charged with a positive electric current, and the cars with a negative current, all to ensure that paint is sucked from the robot onto the body of the car, thus minimising paint wastage.

It’s kind of like the relationship between MPs and expenses, except in reverse.