Honda Motor Company (HMC)

• Article
• Discussion
• Edit
• History
• Bookmark

See all 4 Bulls Reasons Bulls: Reasons To Buy Honda is the U.S. Leader in Fuel Efficiency 100% agree Honda is the U.S. Leader in Fuel Efficiency Honda is the U.S. leader in fuel efficiency, which is becoming ever popular as oil prices rise. They claim to have come up with the first hydrogen powered car. The Honda FCX Clarity is a hydrogen powered car that claims to have twice the efficiency of traditional gas... read more View or Edit Reason 1 votes 100% agree As Fuel Prices Rise, the Honda Civic becomes the best selling car in the US for May 2008 0% agree As Fuel Prices Rise, the Honda Civic becomes the best selling car in the US for May 2008 For the first time during May 2008, the Honda Civic sold more than 50,000 units as consumers responded to record gasoline prices, making it the best selling car in America. The rapidity of the growth in demand has left Civic inventories at a mere 16 days.[1] View or Edit Reason 0 votes 0% agree Motorcycle business strong in high growth areas such as India and China 0% agree Motorcycle business strong in high growth areas such as India and China Honda's motorcycle business establishes the firm's name brand in high growth areas such as India and China. View or Edit Reason 0 votes 0% agree See all 4 Bears Reasons Bears: Reasons To Sell "Toyota, Ford and others have increased competition for fuel efficient cars" 0% agree "Toyota, Ford and others have increased competition for fuel efficient cars" Competition is increasing in Honda's fuel efficient automobile business, meaning profits could be squeezed. View or Edit Reason 0 votes 0% agree Toyota, Ford and others have increased competition for fuel efficient cars 0% agree Toyota, Ford and others have increased competition for fuel efficient cars Competition is increasing in Honda's fuel efficient automobile business, meaning profits could be squeezed. View or Edit Reason 0 votes 0% agree Looking for something bigger and faster than a Civic? 0% agree Looking for something bigger and faster than a Civic? Honda's small automobile product line (no vehicles with a V8 or higher motor) limits its growth in the U.S. market. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion my name is EDWARD TORRES e-mail eddyt1954@gmail.com anh I nave an idea for improve the driving ... more [Dismiss] [Done] Nice. Just for clarification purposes - Acura is sold under the Honda brand name in countries ot... more [Dismiss] [Done] See All Suggestions

Top Contributors James Watson J.D. Thornton Miranda Marquit Related Articles Harley-Davidson (HOG) Big Three Auto Woes Toyota Motor (TM) Ford Motor Company (F) Nissan Motor (NSANY)

Headquartered in Tokyo, Japan, Honda Motor Company (NYSE: HMC) is a leading car and motorcycle manufacturer that specializes in small, simple, fuel efficient vehicles, generating almost $95 billion in revenue in fiscal 2007. With nearly 170,000 employees worldwide, the firm operates in four main segments: Motorcycle Business, Automobile Business, Financial Services Business, and Power Product & Other Business. The United States is Honda's largest market.

A variety of factors impact Honda's earnings, ranging from U.S. legislation, the housing market, and commodities prices to exchange rates, emerging markets, and an aging Japanese population. Honda faces tough competition from Toyota Motor (TM) in the automobile business and Harley-Davidson (HOG) and Suzuki Motor (SZKMF) in the motorcycle business.

[edit] Corporate Overview

Headquartered in Tokyo, Japan, Honda Motor Company began in 1948 as a scooter and motorcycle manufacturer. The company strove to meet Japan's transportation needs after World War II left the country in total disarray. Today, Honda develops, produces, and manufactures a variety of motor products, ranging from small general-purpose engines to specialty sports cars. Approximately 20.4 million Honda engines were sold worldwide during the fiscal year ended March 31, 2007.

Deriving the majority of its sales from the United States automobile market, Honda generated almost $95 billion in revenue in 2007, making it the 37th largest company in the world by revenue. Honda is one of the largest companies in Japan, recently passing competitor Nissan Motor (NSANY) and trailing perennial leader Toyota Motor (TM). With nearly 170,000 employees worldwide, the company operates in four main segments: Motorcycle Business, Automobile Business, Financial Services Business, and Power Product & Other Business.

[edit] Business Segments

[edit] Automobile

Responsible for 80% of the company's total revenue, the Automobile Business is Honda's lifeline. Automobiles are produced by Honda at two sites in Japan: the Saitama factory and the Suzuka factory. The firm's major production sites overseas are located in Ohio (U.S.A.), Alabama (U.S.A.), Alliston (Canada), Swindon (U.K.) and Ayutthaya (Thailand).

The United States is Honda's largest automobile market; however, as the economies of the BRIC countries grow rapidly and the traditional mainstays of automobile consumption -North America, Western Europe, and Japan- remain in economic turmoil through mid-2008, Honda is increasingly relying on the third world to drive growth. Nevertheless, as gas prices climb, Americans and others are turning to Honda's cars, which are typically smaller, low-maintenance and more fuel efficient than its competitors. The company has a limited product line and focuses on low-powered vehicles, with no plans to offer a V8 or bigger engine and diminishing focus on its Acura luxury marque. The firm holds a comparative advantage in hybrid and fuel cell vehicles, such as the Civic and Accord Hybrid models both of which are helping Honda steal business from American car manufacturers. Even some of the company's non-hybrid vehicles achieve fuel efficiency greater than 30 mpg.

The Acura brand is Honda's luxury car brand and is sold only in North America and China. In 2007, Acura sales decreased in the United States, softening increases in sales of the firm's small, fuel-efficient models. Honda’s unit sales of automobiles amounted to 3.7 million units in 2007, up 7.7% from the previous fiscal year. A 3.4% decline in units sold in Japan due to the declining population and struggling Japanese economy was offset by a 10.6% jump in overseas units sold, which totaled 3.0 million units. Honda’s principal automobile products include the following vehicle models:

[edit] Alternative Fuel Vehicles

Although Honda was the first company to commercially sell hybrid vehicles in the United States (the Honda Insight), the company quickly fell behind Toyota in sales for alternative fuel vehicles. Over the last decade Toyota has sold 1.46 million hybrids while Honda has sold only 262,000. Honda has recently announced an effort to regain its preeminence in the hybrid sector by launching a series of low-cost hybrids by the end of 2009. These models will help to reduce the considerable premium hybrid buyers currently pay for hybrid technology. For example, a Toyota Camry hybrid costs about $7000 more than the non-hybrid version, and currently a civic hybrid costs $4000 more than the standard version. Honda's new hybrid models will reduce this premium from one to two thousand dollars per vehicle in a bid to recapture buyers from Toyota.

The Honda FCX Clarity is a hydrogen powered car that claims to have twice the efficiency of traditional gas and electric hybrid vehicles. And it doesn't emit greenhouse gases. Honda (HMC) is looking for a way to compete in an auto market that is increasingly focusing on green technology and decreasing dependence on rising gas prices. And with the Clarity, Honda may find itself back in the game (its own gas and electric hybrid attempts were creamed by the Toyota (TM) Prius). Honda plans to sell 200 FCX Clarity vehicles in the US and Japan between 2009 and 2011.^[1] Right now, though, only a few people can test-lease the Clarity. This is because there aren't many hydrogen fueling stations around. Honda wants to make sure the Clarity's drivers have access to fuel, so the initial offering, here in the United States, is pretty much based in certain parts of California. But if investment in this grows, and if the Clarity finds success, it may be that Honda finds its green motor stock rising.

[edit] Motorcycle

Responsible for 12% of 2007 fiscal year revenue, Honda's motorcycle business includes motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC). Honda produces a range of motorcycles, consisting of sports (including trial and moto-cross racing), business and commuter models with engines ranging from 50 cubic centimeters to 1800 cubic centimeters in cylinder displacement. Honda's motorcycles are produced at two sites in Japan, Hamamatsu and Kumamoto, as well as through subsidiaries in the United States, Italy, Spain, Brazil, Thailand, Vietnam, the Philippines and India.

In fiscal 2007, Honda sold 10.4 million motorcycle units, a 1% increase from fiscal 2006 and a 1.1% decrease from fiscal 2005. In key Asian markets, demand continued to grow for motorcycles as an essential mode of transportation. Sales in Latin America remained strong, especially in Brazil, where economic performance was stable. Motorcycle and off-road unit sales declined 4.4% in North America, primarily due to high fuel prices that affected its heavyweight motorcycle sales.

The Motorcycle Business is crucial to the company's growth in emerging markets where many cannot afford cars. In India and Indonesia, the countries with the world’s second and fourth largest populations, respectively, Honda accounts for about 50% of motorcycle sales, whereas in China, it has approximately 9% of sales. As the wealth of emerging markets increases, so does the peoples' appetite for cars and other luxury items. The company's motorcycle sales help Honda establish its name brand in emerging markets, paving the way for additional car sales in the medium to long run as emerging markets accumulate wealth.

[edit] Power Product & Other

Responsible for 4% of 2007 fiscal year revenue, Honda's Power Product & Other Business manufacturers a variety of power products, including power tillers, portable generators, general-purpose engines, grass cutters, outboard engines, water pumps and snow throwers. Its power products also include power carriers, power sprayers, lawn mowers and lawn tractors (riding lawn mowers). Like sales from the Motorcycle Business, sales from the Power Product & Other Business help establish Honda's brand name in emerging markets, giving the company a chance to convert Power Product customers into higher margin car and motorcycle customers in the medium to long run. As this division is used primarily to establish the Honda brand, margins for the Power Product division are a measly .2%.^[2]

Total unit sales of power products rose 10.9% in fiscal 2007, to 5.9 million units, primarily due to positive currency effects caused by the depreciation of the Japanese yen and higher demand for lawn mowers in Europe and power generation equipment in North America. The depreciation of the Japanese yen made product prices cheaper to Honda importers, fueling the increase in units sold. Net sales climbed climbed 11.6% in fiscal 2007, to ¥382.5 billion.

[edit] Financial Services

Responsible for 4% of 2007 fiscal year revenue, Financial Services offers a variety of financial services to its customers and dealers through finance subsidiaries in Japan and abroad, with the aim of providing sales support for its products. This segment competes against myriad options for its motor customers, including commercial banks and finance and leasing companies.

In fiscal year 2007, net sales rose 32.9% to ¥413.3 billion, due mainly to a higher loan balance accompanying the expansion of automobile business in North America, increased net sales in operating leases, as well as positive currency translation effects.

[edit] Trends & Forces

[edit] Demand for fuel efficiency good for Honda

Rising oil prices have dramatically increased market demand for fuel-efficient vehicles. This is a positive trend for Honda, which is a market leader in fuel-efficient gas engines (Honda does not offer nor does it plan to offer a vehicle with a V8 or larger engine). Honda does offer several hybrid and alternative energy technology solutions for cars, however, they recently discontinued the hybrid version of the Accord for 2008 due to weak sales; rival Toyota Motor (TM) makes a more efficient hybrid Camry than Honda's Accord. The company is considering offering a fuel efficient diesel Accord instead. In 2008, Honda will offer the Civic GX NGV, which is fueled by Compressed Natural Gas (CNG) for nearly zero emissions.

Recently, the state of Vermont won a major victory when a federal judge upheld the legality of its new fuel efficiency legislation. Similar legislation has been proposed by California and at least 11 other states are ready to adopt it. The legislation, which attempts to control greenhouse gas emissions, requires that passenger vehicles be able to travel 35 miles per gallon by 2020. Furthermore, while in the past sport utility vehicles (SUVs) over 8,500 pounds have been exempt from such leglislation, starting in 2006 this was no longer the case. SUVs are are now judged by what is called a vehicle footprint. Basically, each vehicle is has a different fuel efficiency based on its size. The auto industry will more than likely appeal the ruling, but if the legislation becomes wide spread, it could add significantly to Honda's and Toyota's competitive advantage; depending on how quickly other major automakers can adjust their product portfolios' to meet the new standards.

[edit] U.S. legislation encourages competition in hybrid technology

The U.S., government agencies on the federal, state, and municipal levels have enacted legislation encouraging the adoption of hybrid technology. Under current laws, people who buy a hybrid vehicle can qualify for a federal income tax credit of up to $3,400. Once a manufacturer sells 60,000 hybrid vehicles, however, the rebate will be reduced to 50% of the original amount for the subsequent two quarters, 25% of the original amount for the two quarters after that, and 0% from then on. Honda has sold well over 60,000 hybrid vehicles, and its federal tax rebates will have all expired by the end of 2007. This could allow competitors who entered the hybrid market late to catch up with Honda and Toyota Motor (TM), as many of their rebates have yet to expire.

[edit] U.S. car sales are tied to the housing market

The strength of the housing market is traditionally tied to car-buying, as homeowners sometimes finance new cars with second mortgages. Recently in the US, both residential real estate prices and construction starts have begun to stagnate or fall in part due to the subprime lending crisis. This could hurt Honda's U.S. sales, which account for 53% of total revenue in fiscal 2007.

[edit] Japan aging population diminishes domestic sales

Retiring Customers: A quarter of Honda’s sales are concentrated in Japan, where the population is aging: 10% of the population was 65 or older in 1990, and by 2006 that number had doubled. Aging populations tend to save less, and to spend more on luxury items, such as Toyota's popular Lexus-branded vehicles.

[edit] Japanese health care system gives Honda competitive advantage

Much of Honda's production takes place in Japan, which provides generous national health insurance. Although Honda has to pay for some of its Japanese employees' insurance in the form of higher taxes, American automakers pay for the entirety of their employees' insurance. This has become a competitive advantage to non-U.S. automakers, which have much less of a health insurance burden.

[edit] Commodities prices threaten to drive up production costs

Global commodity price trends threaten to drive up the cost of both car manufacturing and car ownership.

• Steel: One of the main ingredients in cars is steel, and its price has been on the increase over the last several months. Honda cannot use less steel to reduce its costs, unlike labor or almost any other input into car production.

• Aluminum: Aluminum is also a significant production input, accounting for around 300 pounds of a new car's weight.

[edit] Honda is positioned to weather the oil price storm

Oil prices have increased dramatically in the last four years, from $33 per barrel in 2003 to over $100 by mid-2008. Consequently, the cost of gasoline has trebled and the day-to-day cost of car ownership have gone up as well. Since consumers buy cars only infrequently, rising oil prices have only a limited impact on year-to-year car sales, but over time they cut into the industry's sales, and force companies to design more fuel-efficient fleets. Honda is one of the industry leaders in this department, however, and is well positioned to weather the oil price storm. Honda is top-ranked in fuel efficiency in the US, the market that generated over half of Honda's total revenue in fiscal 2007.

[edit] Depreciating U.S. dollar bad for Honda's earnings

As a Japanese company, Honda's profits are recorded in Japanese yen, but its sales are denominated in euros, dollars, pounds, Chinese yuan, and many other currencies. Fluctuations in the exchange rate between these currencies and the yen can lead to sometimes large fluctuations in Honda's profits. Honda hedges its exchange rate risk by arranging currency swaps and purchasing futures, but these operations are costly and threaten to cut into the bottom line. In the long run, these effects are even more exacerbated: as the dollar depreciates against the yen, American sales are worth less to Honda, and Hondas are more expensive to consumers. Thus profit per revenue and absolute revenue both fall from depreciating exchange rates. While Honda can hedge out the risk to its profit margins, it cannot easily manage the risk from falling demand. Exchange rates have become a sensitive subject among U.S. legislators, who allege that Japan has kept the yen undervalued to stimulate sales.[1]

[edit] Honda turns to India, China in wake of saturated U.S., European markets

Honda's sales have been growing roughly 10% annually, but that pace cannot continue in the saturated European, Japanese, and American markets, where many already have cars and GDP growth is slow. China's and India's economies as a whole have grown at around 10% per annum since the early 1990s, and auto sales have been growing at an even faster rate. These growth rates are unsustainable; the latter implies a doubling every 3.5 years. Honda counts China, India, Thailand, and Indonesia as part of its Asia sales network. Overall sales in Asia grew by 11.1% in fiscal 2006, and 18.2% in fiscal 2007. During fiscal 2007, production grew by 19%--a lot--to 620,000 units. The majority of the production growth occurred in China; in addition, the firm is building a large plant in India to meet rising demand there.

[edit] Competitors

Honda's greatest competitor in the automobile business is Toyota Motor (TM). In the Motorcycle business, Honda is a close second behind heavyweight motorcycle maker Harley-Davidson (HOG).

[edit] Automobile

In 2006, worldwide auto sales totaled 67.5 million vehicles, of which 7.97 million were Toyota Motor (TM) , second most behind General Motors' 9.1 million autos sold. Honda came in at 5% of world market share, a percentage that increases each year. Honda's small-car, simple, fuel efficient product line lacks much of the diversity and range of the market share leaders. If Honda is to dominate the world market, it will have to expand its product line, diverging from what it does best.

2007 Worldwide Vehicle Market Share Data^[3]

In the first quarter of 2007, Toyota Motor (TM) eclipsed General Motors (GM) as the largest automaker in the world with total sales of 2.35 million vehicles as opposed to GM's 2.26 million. In 2007, Honda surpassed Nissan Motor (NSANY) to become the #2 automaker in Japan, trailing only Toyota Motor (TM). Unlike its American peers, Honda boasts a very attractive operating margin.

• Honda figures are for Honda's Automotive segment only.
• DaimlerChrysler and Volkswagen figures assume 1 Euro = $1.3486 exchange rate.
• Toyota, Nissan, Honda figures assume 1 yen = $.008739 exchange rate.
• Sources: Company Reports

[edit] Motorcycle

Harley-Davidson maintains a large margin in its dominance in the US Heavyweight Motorcycle market as compared to Honda and others. Unlike Harley, Honda specializes in the full array of motorcycles, ranging from dinky scooters sold primarily in emerging markets to the heavyweights Harley is known for.

Harley-Davidson (HOG)'s international market share is slightly smaller. For instance, the company has a 38.4% Canadian market share and a 10.2% market share in Europe as of 2006. Notably, both of those markets are substantially smaller than the US market. Nonetheless, Harley has a dominant worldwide heavyweight market share of 33% in what is a growing industry.

Honda's successful Automobile business gives the firm greater financial resources than competitor Harley-Davidson (HOG). Furthermore, Honda's diverse motorcycle product line gives it an advantage in emerging markets where few can afford the heavyweight models.

[edit] References

1. ↑ http://www.iht.com/articles/2008/06/20/business/auto.php?page=2<
2. ↑ http://world.honda.com/investors/meeting/
3. ↑ http://oica.net/wp-content/uploads/world-ranking-2007.pdf