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HONDA MOTOR CO LTD 20-F 2008
Annual Report
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2008

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

For the transition period from              to             

Commission file number 1-7628

 

HONDA GIKEN KOGYO KABUSHIKI KAISHA

(Exact name of Registrant as specified in its charter)

 

HONDA MOTOR CO. , LTD.

(Translation of Registrant’s name into English)

 

JAPAN

(Jurisdiction of incorporation or organization)

No. 1-1, Minami-Aoyama 2-chome, Minato-ku, Tokyo 107-8556, Japan

(Address of principal executive offices)

Taku Kitamura, American Honda Motor Co., Inc., taku_kitamura@ahm.honda.com,

(212)707-9920, 156 West 56th Street, 20th Floor, New York, NY 10019, U.S.A

(Name, Telephone, E-mail, and/or Facsimile number and Address of Company Contact Person)

 

Securities registered pursuant to Section 12(b) of the Act.

Title of each class

 

Name of each exchange on which registered

Common Stock*   New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Title of each class

 

Outstanding as of March 31, 2008

Common Stock   1,814,537,899**

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transmission report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or, a non-accelerated filer. See definition of “accelerated filer and large accelerated filer “in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x             Accelerated filer  ¨             Non-accelerated filer  ¨            

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S.GAAP  x      International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨      Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No    x

* Not for trading purposes, but only in connection with the registration of American Depositary Shares, each representing one share of Common Stock.
** Shares of Common Stock include 117,364,816 shares represented by American Depositary Shares.

 

 


Table of Contents

 

PART I

  

Item 1. Identity of Directors, Senior Management and Advisors

   1

Item 2. Offer Statistics and Expected Timetable

   1

Item 3. Key Information

   1

A. Selected Financial Data

   1

B. Capitalization and Indebtedness

   3

C. Reason for the Offer and Use of Proceeds

   3

D. Risk Factors

   3

Item 4. Information on the Company

   6

A. History and Development of the Company

   6

B. Business Overview

   7

C. Organizational Structure

   23

D. Property, Plants and Equipment

   25

Item 4A. Unresolved Staff Comments

   28

Item 5. Operating and Financial Review and Prospects

   28

A. Operating Results

   28

B. Liquidity and Capital Resources

   56

C. Research and Development

   57

D. Trend information

   59

E. Off-Balance Sheet Arrangements

   59

F. Tabular Disclosure of Contractual Obligations

   60

G. Safe Harbor

   61

Item 6. Directors, Senior Management and Employees

   61

A. Directors and Senior Management

   61

B. Compensation

   75

C. Board Practices

   75

D. Employees

   77

E. Share Ownership

   78

Item 7. Major Shareholders and Related Party Transactions

   78

A. Major Shareholders

   78

B. Related Party Transactions

   79

C. Interests of Experts and Counsel

   79

Item 8. Financial Information

   79

A. Consolidated Statements and Other Financial Information

   79

B. Significant Changes

   80

Item 9. The Offer and Listing

   80

A. Offer and Listing Details

   80

B. Plan of Distribution

   81

C. Markets

   82

D. Selling Shareholders

   82

E. Dilution

   82

F. Expenses of the Issue

   82

Item 10. Additional Information

   82

A. Share Capital

   82

B. Memorandum and Articles of Association

   82

C. Material Contracts

   89

D. Exchange Controls

   89

E. Taxation

   89


Table of Contents

F. Dividends and Paying Agents

   93

G. Statement by Experts

   93

H. Documents on Display

   93

I. Subsidiary Information

   94

Item 11. Quantitative and Qualitative Disclosure about Market Risk

   94

Item 12. Description of Securities Other than Equity Securities

   97

PART II

  

Item 13. Defaults, Dividend Arrearages and Delinquencies

   97

Item 14. Material Modifications to the Rights of Security Holders and Use Proceeds

   97

Item 15. Controls and Procedures

   97

Item 16A. Audit Committee Financial Expert

   98

Item 16B. Code of Ethics

   98

Item 16C. Principal Accountant Fees and Services

   98

Item 16D. Exemptions from the Listing Standards for Audit Committees

   99

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

   100

PART III

  

Item 17. Financial Statements

   101

Item 18. Financial Statements

   101

Item 19. Exhibits

   101


Table of Contents

PART I

 

Unless the context otherwise requires, the terms “we”, “us”, “our”, “Registrant”, “Company” and “Honda” as used in this Annual Report each refer to Honda Motor Co., Ltd. and its consolidated subsidiaries.

 

Item 1. Identity of Directors, Senior Management and Advisors

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A. Selected Financial Data:

 

The selected consolidated financial data set out below for each of the five fiscal years ended March 31, 2008 have been derived from our consolidated financial statements that were prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).

 

You should read the U.S. GAAP selected consolidated financial data set out below together with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements contained in this Annual Report.

 

    Fiscal years ended March 31,
Yen (millions)
  U.S. dollars
(millions)
    2004   2005   2006   2007   2008   2008

Income statement data:

           

Net sales and other operating revenue

  ¥ 8,162,600   ¥ 8,650,105   ¥ 9,907,996   ¥ 11,087,140   ¥ 12,002,834   $ 119,801

Research and development

    448,967     467,754     510,385     551,847     587,959     5,868

Operating income

    600,144     630,920     868,905     851,879     953,109     9,513

Income before income taxes, minority interest, and equity in income of affiliates

    653,680     668,364     829,904     792,868     895,841     8,941

Net income

    464,338     486,197     597,033     592,322     600,039     5,989

Balance sheet data:

           

Total assets

  ¥ 8,380,549   ¥ 9,368,236   ¥ 10,631,400   ¥ 12,036,500   ¥ 12,615,543   $ 125,916

Long-term debt

    1,394,612     1,559,500     1,879,000     1,905,743     1,836,652     18,332

Stockholders’ equity

    2,874,400     3,289,294     4,125,750     4,482,611     4,544,265     45,356

Common stock

    86,067     86,067     86,067     86,067     86,067     859

Depreciation and capital expenditures data:

           

Depreciation excluding property on operating leases

  ¥ 213,445   ¥ 225,752   ¥ 262,225   ¥ 361,747   ¥ 417,393   $ 4,166

Depreciation of property on operating leases

    —       —       —       9,741     101,032     1,008

Total depreciation

    213,445     225,752     262,225     371,488     518,425     5,174

Capital expenditures

    287,741     373,980     457,841     627,066     654,030     6,528

Purchase of operating lease assets

    —       —       —       366,795     839,261     8,377

Total capital expenditures

    287,741     373,980     457,841     993,861     1,493,291     14,905

 

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Weighted average number of shares outstanding

 

     (Thousands of shares)
         2004            2005            2006            2007            2008    

Weighted average number of common shares outstanding

   1,907,276    1,867,535    1,840,799    1,824,675    1,815,356

 

Net income per common share

 

     (Yen)    (US$)
         2004            2005            2006            2007            2008            2008    

Basic

   ¥ 243.45    ¥ 260.34    ¥ 324.33    ¥ 324.62    ¥ 330.54    $ 3.30

Diluted

     243.45      260.34      324.33      324.62      330.54      3.30

 

Net income per common share has been computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each year.

 

Cash dividends declared during the period per common share

 

     (Yen)    (US$)
         2004            2005            2006            2007            2008            2008    

Cash dividends declared during the period per common share

   ¥ 17.50    ¥ 25.50    ¥ 38.50    ¥ 77.00    ¥ 84.00    $ 0.84

 

Additionally, a year-end dividend of ¥22 ($0.22) per common share aggregating ¥39.9 billion ($398 million) relating to fiscal 2008 was determined by our board of directors in April 2008 and approved by our shareholders in June 2008. This dividend was paid in June 2008.

 

Stock Split

 

The Company executed a two-for-one stock split for the Company’s common stock effective July 1, 2006. All per share information has been adjusted retroactively for all periods presented to reflect this stock split.

 

Misclassification Adjustments

 

As described in Note (1) (v) and Note (2) to our consolidated financial statements, certain revisions for misclassifications have been made. Also, certain reclassifications have been made to the consolidated financial statement periods presented above to conform to the presentation used for the fiscal year ended March 31, 2008.

 

Exchange Rates

 

In this Annual Report, yen amounts have been translated into U.S. dollars for the convenience of readers. Unless otherwise noted, the rate used for these translations was ¥100.19 =$1.00, which represents the approximate exchange rate quoted on the Tokyo Foreign Exchange Market on March 31, 2008. No representation is made that yen amounts could have been, or could be, converted into U.S. dollars at that rate or any other rate on this or any other data or at all.

 

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The following table sets out information regarding the noon buying rates for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York expressed in yen per $1.00 during the periods shown. On May 30, 2008, the noon buying rate was ¥105.46 =$1.00. The average exchange rate for the period shown is the average of the month-end rates during the period.

 

     (Yen)

Years ended March 31,

   Average    Period end    High    Low

2004

   112.75    104.18    120.55    104.18

2005

   107.28    107.22    114.30    102.26

2006

   113.67    117.48    120.93    104.41

2007

   116.55    117.56    121.81    110.07

2008

   113.61    99.85    124.09    96.88

2009 (through May 30, 2008)

   105.00    105.46    105.52    100.87

Dec-2007

         114.45    109.68

Jan-2008

         109.70    105.42

Feb-2008

         108.15    104.19

Mar-2008

         103.99    96.88

Apr-2008

         104.56    100.87

May-2008

         105.52    103.01

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reason for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

You should carefully consider the risks described below before making an investment decision. If any of the risks described below actually occurs, Honda’s business, financial condition or results of operations could be adversely affected. In that event, the trading prices of Honda’s common stock and American Depositary Shares could decline, and you may lose all or part of your investment. Additional risks not currently known to Honda or that Honda now deems immaterial may also harm Honda and affect your investment.

 

Relating to Honda’s industry

 

Honda may be adversely affected by market conditions

 

Honda conducts its operations in Japan and throughout the world, including North America, Europe and Asia.

 

A continued economic slowdown, recession or sustained loss of consumer confidence in these markets, which may be caused by rising fuel prices or other factors, could trigger a decline in demand for automobiles, motorcycles and power products that may adversely affect Honda’s results of operations.

 

Prices for automobiles, motorcycles and power products can be volatile

 

Prices for automobiles, motorcycles and power products in certain markets may experience sharp changes over short periods of time.

 

This volatility is caused by many factors, including fierce competition, which is increasing, short-term fluctuations in demand from underlying economic conditions, changes in tariffs, import regulations and other

 

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taxes, shortages of certain supplies, high material prices and sales incentives by Honda or other manufacturers or dealers. There can be no assurance that such price volatility will not continue or intensify or that price volatility will not occur in markets that to date have not experienced such volatility. Overcapacity within the industry has increased and will likely continue to increase if the economic downturn continues in Honda’s major markets or worldwide, leading, potentially, to further increased price pressure. Price volatility in any or all of Honda’s markets could adversely affect Honda’s results of operations in a particular period.

 

Risks Relating Honda’s Business Generally

 

Currency and Interest Rate Risks

 

Honda’s operations are subject to currency fluctuations

 

Honda has manufacturing operations throughout the world, including Japan, and exports products and components to various countries.

 

Honda purchases materials and sells its products in foreign currencies. Therefore, currency fluctuations may affect Honda’s pricing of products sold and materials purchased. Accordingly, currency fluctuations have an effect on Honda’s results of operations and financial condition, as well as Honda’s competitiveness, which will over time affect its results.

 

Since Honda exports many products and components from Japan and generates a substantial portion of its revenues in currencies other than the Japanese yen, Honda’s results of operations would be adversely affected by an appreciation of the Japanese yen against other currencies, in particular the U.S. dollar.

 

Honda’s hedging of currency and interest rate risk exposes Honda to other risks

 

Although it is impossible to hedge against all currency or interest rate risk, Honda uses derivative financial instruments in order to reduce the substantial effects of currency fluctuations and interest rate exposure on our cash flow and financial condition.

 

These instruments include foreign currency forward contracts, currency swap agreements and currency option contracts, as well as interest rate swap agreements. Honda has entered into, and expects to continue to enter into, such hedging arrangements. As with all hedging instruments, there are risks associated with the use of such instruments.

 

While limiting to some degree our risk fluctuations in currency exchange and interest rates by utilizing such hedging instruments, Honda potentially forgoes benefits that might result from other fluctuations in currency exchange and interest rates. Honda is also exposed to the risk that its counterparties to hedging contracts will default on their obligations.

 

Honda manages exposure to counterparty credit risk by limiting the counterparties to major international banks and financial institutions meeting established credit guidelines. However, any default by such counterparties might have an adverse effect on Honda.

 

Legal and Regulatory Risks

 

The automobile, motorcycle and power product industries are subject to extensive environmental and other governmental regulation

 

Regulations regarding vehicle emission levels, fuel economy, noise and safety and noxious substances, as well as levels of pollutants from production plants, are extensive within the automobile, motorcycle and power product industries. These regulations are subject to change, and are often made more restrictive. The costs to comply with these regulations can be significant to Honda’s operations.

 

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Honda is reliant on the protection and preservation of its intellectual property

 

Honda owns or otherwise has rights in a number of patents and trademarks relating to the products it manufactures, which have been obtained over a period of years. These patents and trademarks have been of value in the growth of Honda’s business and may continue to be of value in the future. Honda does not regard any of its businesses as being dependent upon any single patent or related group of patents. However, an inability to protect this intellectual property generally, or the illegal breach of some or a large group of Honda’s intellectual property rights, would have an adverse effect on Honda’s operations.

 

Honda is subject to legal proceedings

 

Honda is subject to a number of suits, investigations and/or proceedings under relevant laws and regulations of various jurisdictions. A negative outcome in one or more of these pending legal proceedings could adversely affect Honda’s business, financial condition or results of operations.

 

Risks Relating to Honda’s Operations

 

Honda’s financial services business conducts business under highly competitive conditions in an industry with inherent risks

 

Honda’s financial services business offers various financing plans designed to increase the opportunity for sales of its products and to generate financing income. However, customers can also obtain financing for the lease or purchase of Honda’s products through a variety of other sources that compete with our financing services, including commercial banks and finance and leasing companies. The financial services offered by us also involve risks relating to residual value, credit risk and cost of capital. Competition for customers and/or these risks may affect Honda’s results of operations in the future.

 

Honda relies on various suppliers for the provision of certain raw materials and components

 

Honda purchases raw materials, and certain components and parts, from numerous external suppliers, and relies on some key suppliers for some items and the raw materials it uses in the manufacture of its products. Honda’s ability to continue to obtain these supplies in an efficient and cost-effective manner is subject to a number of factors, some of which are not within Honda’s control. These factors include the ability of its suppliers to provide a continued source of supply and Honda’s ability to compete with other users in obtaining the supplies. Loss of a key supplier in particular may affect our production and increase our costs.

 

Honda conducts its operations in various regions of the world

 

Honda conducts its businesses worldwide, and in several countries, Honda conducts businesses through joint ventures with local entities, in part due to the legal and other requirements of those countries. These businesses are subject to various regulations, including the legal and other requirements of each country. If these regulations or the business conditions or policies of these local entities change, it may have an adverse affect on Honda’s business, financial condition or results of operations.

 

Honda may be adversely affected by wars, use of force by foreign countries, terrorism, multinational conflicts, natural disasters, epidemics and labor strikes

 

Honda conducts its businesses worldwide, and its operations may variously be subject to wars, use of force by foreign countries, terrorism, multinational conflicts, natural disasters, epidemics, labor strikes and other events beyond our control which may delay or disrupt Honda’s local operations in the affected regions, including the purchase of raw materials and parts, the manufacture, sales and distribution of products and the provision of services. Delays or disruptions in one region may in turn affect our global operations. If such delay or disruption occurs and continues for a long period of time, Honda’s business, financial condition or results of operations may be adversely affected.

 

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Honda may be adversely affected by inadvertent disclosure of confidential information

 

Although Honda maintains internal controls through established procedures to keep confidential information including personal information of its customers and relating parties, such information may be inadvertently disclosed. If this occurs, Honda may be subject to, and may be adversely affected by, claims for damages from the customers or parties affected.

 

Also, inadvertent disclosure of confidential business or technical information to third parties may result in a loss of Honda’s competitiveness.

 

Cautionary statement with respect to forward looking statements in this Annual Report

 

This Annual Report includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements included in this Annual Report are based on the current assumptions and beliefs of Honda in light of the information currently available to it, and involve known and unknown risks, uncertainties, and other factors. Such risks, uncertainties and other factors may cause Honda’s actual results, performance, achievements or financial position to be materially different from any future results, performance, achievements or financial position expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors are generally set forth in Item 3.D “Risk Factors” and include, without limitation:

 

   

the political, economic and social conditions in Japan, the United States and elsewhere, including the relevant governments’ specific policies with respect to economic growth, inflation, taxation, currency conversion, imports and sources of supplies and the availability of credit, particularly to the extent such current or future conditions and policies affect the automobile, motorcycle and power product industries and markets in Japan and the United States, and the demand, sales volume and sales prices for Honda’s automobiles, motorcycles and power products;

 

   

the effects of competition in the automobile, motorcycle and power product markets on the demand, sales volume and sales prices for Honda’s automobiles, motorcycles and power products;

 

   

Honda’s ability to finance its working capital and capital expenditure requirements, including obtaining any required external debt or other financing; and

 

   

the effects of economic stagnation or recession in Honda’s principal markets and exchange rate fluctuations on the Honda’s results of operations.

 

Honda undertakes no obligation and has no intention to publicly update any forward-looking statement after the date of this Annual Report. Investors are advised to consult any further disclosures by Honda in its subsequent filings pursuant to the Securities and Exchange Act of 1934.

 

Item 4. Information on the Company

 

A. History and Development of the Company

 

Honda Motor Co., Ltd. is a limited liability, joint stock corporation incorporated on September 24, 1948 under the Commercial Code of Japan as Honda Giken Kogyo Kabushiki Kaisha. It was formed to succeed to the business of an unincorporated enterprise established in 1946 by the late Soichiro Honda to manufacture motors for motorized bicycles.

 

Honda develops, produces, and manufactures a variety of motor products, ranging from small general-purpose engines to specialty sports cars that incorporate Honda’s highly efficient internal combustion engine technology.

 

Honda’s principal executive office is located at 1-1, Minami-Aoyama 2-chome, Minato-ku, Tokyo, 107-8556, Japan. Its telephone number is 81-3-3423-1111.

 

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Principal Capital Investments

 

In the fiscal years ended March 31, 2006, 2007 and 2008, Honda’s capital expenditures were ¥457.8 billion, ¥993.8 billion, and ¥1,493.2 billion, respectively, on an accrual basis. Also, capital expenditures excluding those with respect to property on operating leases were ¥457.8 billion, ¥627.0 billion, and ¥654.0 billion, respectively, on an accrual basis. For further details of Honda’s capital expenditures during fiscal 2008, see “Property, Plants and Equipment” included as “Item 4.D” of this Annual Report.

 

B. Business Overview

 

General

 

Honda’s business segments are motorcycle business, automobile business, financial services business, and power product and other businesses.

 

Following table shows the breakdown of Honda’s revenues from external customers by category of activity and by geographical markets based on the location of the customer during the fiscal years ended March 31, 2006, 2007 and 2008:

 

     Fiscal years ended March 31,
Yen (billions)
         2006            2007            2008    

Motorcycle Business

   ¥ 1,225.8    ¥ 1,370.6    ¥ 1,558.6

Automobile Business

     8,004.6      8,889.0      9,489.3

Financial Services Business

     306.8      409.7      533.5

Power Product and Other Businesses

     370.6      417.7      421.1
                    

Total

   ¥ 9,907.9    ¥ 11,087.1    ¥ 12,002.8
                    
     Fiscal years ended March 31,
Yen (billions)
         2006            2007            2008    

Japan

   ¥ 1,694.0    ¥ 1,681.1    ¥ 1,585.7

North America

     5,463.3      5,980.8      6,068.4

Europe

     1,009.4      1,236.7      1,519.4

Asia

     1,085.4      1,283.1      1,577.2

Other Regions

     655.7      905.1      1,251.9
                    

Total

   ¥ 9,907.9    ¥ 11,087.1    ¥ 12,002.8
                    

 

Motorcycle Business

 

In 1949, Honda began mass production of motorcycles with the Dream D-Type, followed by other models such as the Benly and the Cub F-Type. By 1957, Honda became the largest motorcycle manufacturer in Japan. Honda expanded its business overseas by establishing American Honda Motor Co., Inc. in the United States in 1959. Honda’s first overseas production started in Belgium in 1963.

 

Honda produces a wide range of motorcycles, ranging from the 50cc class to the 1800cc class in cylinder displacement. Honda’s motorcycles use internal combustion engines developed by Honda that are air- or water-cooled, two or four-cycle, and single, two, four or six-cylinder. Honda’s motorcycle line consists of sports (including trial and moto-cross racing), business and commuter models. Honda also produces all-terrain vehicles (ATVs) since 1984, and personal watercraft (PWC) since 2002.

 

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The following table sets out unit sales for Honda’s motorcycle business, including motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC), and revenue from Motorcycle Business, and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2006, 2007 and 2008:

 

     Fiscal years ended March 31,  
     2006     2007     2008  
     Units    Revenue     Units    Revenue     Units    Revenue  
     (thousands)    (billions)     (thousands)    (billions)     (thousands)    (billions)  

Japan

   368    ¥ 99.0     337    ¥ 101.7     311    ¥ 93.5  

North America

   615      349.7     503      308.2     453      265.6  

Europe

   353      208.0     329      219.7     313      226.6  

Asia

   7,907      324.0     7,895      383.3     6,633      484.4  

Other Regions

   1,028      244.9     1,305      357.4     1,610      488.3  
                                       

Total

   10,271    ¥ 1,225.8     10,369    ¥ 1,370.6     9,320    ¥ 1,558.6  
                                       

Revenue as percentage of total sales revenue

        12 %        12 %        13 %

 

Honda’s motorcycles production in Japan is being consolidated to Kumamoto factory in 2008. Honda’s motorcycles are also produced by subsidiaries in countries including the United States, Italy, Spain, Thailand, Vietnam, the Philippines, India, and Brazil.

 

For further information on recent operation and financial review, see “Operating Results” in “ Item 5. Operating and Financial Review and Prospects”

 

Automobile Business

 

Honda started the automobile business in 1963 with T360 mini-truck and S500 small sports car and since then Honda launched a series of mass-produced models including Civic in 1972, Accord in 1976, which established a base for its automobile business. In 1969, production of the mini-vehicles N600 and TN600 began in Taiwan using component parts sets. In 1982, Honda became the first Japanese automaker to begin local automobile production in the United States(Accord).

 

Honda’s automobiles use gasoline engines of three, four or six-cylinder, diesel engines and gasoline-electric hybrid systems. Honda also offers alternative fuel-powered vehicles such as natural gas, ethanol, and fuel cell vehicles.

 

Honda’s principal automobile products include the following vehicle models:

 

Passenger cars:

 

Legend, Accord, Civic, City/Fit Aria, Acura RL, Acura TL, Acura TSX

 

Multi-wagons, Minivans, Sport Utility Vehicle:

 

Elysion, Odyssey, Step Wagon, Stream, Edix/FR-V, Mobilio, Airwave, Fit/Jazz, Pilot, Ridgeline, CR-V, Element, Crossroad, Acura MDX, Acura RDX

 

Mini cars:

 

Life, Zest, That’s, Vamos, Acty

 

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The following table sets out Honda’s unit sales of automobiles and revenue from Automobile Business and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2006, 2007 and 2008:

 

     Fiscal years ended March 31,  
     2006     2007     2008  
     Units    Revenue     Units    Revenue     Units    Revenue  
     (thousands)    (billions)     (thousands)    (billions)     (thousands)    (billions)  

Japan

   696    ¥ 1,447.3     672    ¥ 1,412.7     615    ¥ 1,321.0  

North America

   1,682      4,722.3     1,788      5,179.1     1,850      5,209.4  

Europe

   291      717.3     324      917.1     391      1,182.6  

Asia

   521      731.8     620      861.6     755      1,048.4  

Other Regions

   201      385.7     248      518.4     314      727.8  
                                       

Total

   3,391    ¥ 8,004.6     3,652    ¥ 8,889.0     3,925    ¥ 9,489.3  
                                       

Revenue as percentage of total sales revenue

        81 %        80 %        79 %

 

Automobiles are produced by Honda at two sites in Japan: Saitama factory and Suzuka factory. Our major production sites overseas are located in Ohio (U.S.A.), Alabama (U.S.A.), Ontario (Canada), Swindon (U.K.), Ayutthaya (Thailand), Uttar Pradesh (India) and Sao Paulo (Brazil). Yachiyo Industry Co., Ltd., one of our consolidated subsidiaries, assembles Mini cars for Japanese domestic market.

 

For further information on recent operation and financial review, see “Operating Results” in “ Item 5. Operating and Financial Review and Prospects”

 

Financial Services Business

 

Honda offers a variety of financial services to our customers and dealers through finance subsidiaries in countries including Japan, the United States, Canada, the United Kingdom, Germany, Brazil and Thailand, with the aim of providing sales support for our products. The services of these subsidiaries include retail lending, leasing to customers and other financial services, such as wholesale financing to dealers.

 

The following table sets out Honda’s revenue from Financial Services Business and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2006, 2007 and 2008:

 

     Fiscal years ended March 31,  
           2006                 2007                 2008        
     Revenue     Revenue     Revenue  
     (billions)     (billions)     (billions)  

Japan

   ¥ 21.1     ¥ 21.4     ¥ 23.4  

North America

     267.4       364.8       483.9  

Europe

     10.1       12.6       13.2  

Asia

     1.9       3.1       4.9  

Other Regions

     6.1       7.5       8.0  
                        

Total

   ¥ 306.8     ¥ 409.7     ¥ 533.5  
                        

Revenue as percentage of total sales revenue

     3 %     4 %     4 %

 

For further information on recent operation and financial review, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”

 

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Power Product and Other Businesses

 

Honda’s power product business began in 1953 with the introduction of the model “H” , its first general purpose engine. Since then Honda has been manufacturing variety of power products including power tillers, portable generators, general-purpose engines, grass cutters, outboard marine engines, water pumps, snow throwers, power carriers, power sprayers, lawn mowers and lawn tractors (riding lawn mowers). In 2003, Honda introduced a compact home-use cogeneration* unit. And further, Honda began sales of next-generation thin film solar cells made of crystalline silicon in 2007.

 

 

* Cogeneration: Cogeneration refers to the multiple applications of energy derived from a single source, such as using the heat supplied during the combustion process that drives an engine for other heating or cooling purposes.

 

The following table sets out Honda’s revenue from Power Product and Other Businesses and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2006, 2007 and 2008:

 

     Fiscal years ended March 31,  
     2006     2007     2008  
     Units    Revenue     Units    Revenue     Units    Revenue  
     (thousands)    (billions)     (thousands)    (billions)     (thousands)    (billions)  

Japan

   487    ¥ 126.5     527    ¥ 145.2     550    ¥ 147.7  

North America

   2,827      123.7     3,103      128.5     2,415      109.4  

Europe

   1,477      73.8     1,625      87.1     1,693      96.8  

Asia

   717      27.6     760      35.0     915      39.4  

Other Regions

   368      18.8     406      21.8     484      27.6  
                                       

Total

   5,876    ¥ 370.6     6,421    ¥ 417.7     6,057    ¥ 421.1  
                                       

Revenue as percentage of total sales revenue

        4 %        4 %        4 %

 

For further information on recent operation and financial review, see “Operating Results” in “ Item 5. Operating and Financial Review and Prospects”

 

Marketing and Distribution

 

Most of Honda’s products are distributed under trademarks of Honda in Japan and/or in overseas markets.

 

Sales in Japan

 

Sales of Honda motorcycles, automobiles, and power products in Japan are made through different distribution networks. Honda’s products are sold to consumers primarily by independent retail dealers throughout Japan.

 

Motorcycles are distributed through approximately 7,900 outlets, including approximately 1,000 PROS, and 100 Honda Dream authorized dealerships.

 

As for distribution network for automobiles, Honda integrated its three sales channels in Japan—Primo, Clio and Verno—into one Honda channel in March 2006. At present, 831 retail dealers operate 2,272 shops and sell Legend, Inspire, Accord, Civic, Fit Aria, Elysion, Odyssey, Step Wagon, Stream, Edix, Mobilio, Mobilio Spike, Airwave, Fit, CR-V, Crossroad, S2000, Partner, Life, Zest, That’s, Vamos, and Acty.

 

Power products are distributed in Japan to approximately 1,430 retail dealers throughout Japan, including affiliates of Honda. A number of small engines are also sold to other manufacturers for use in their products.

 

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The independent retail dealers who sell Honda’s products in Japan receive payment from customers by one of four payment methods: cash, bank loans, installment payments or financing by credit companies.

 

Service and Parts Related Operations in Japan

 

Sales of spare parts and after sales services are mainly provided through retail dealers. Lectures on service technology are provided for dealers regularly by Honda’s Automobile Sales Operations (Japan).

 

Overseas Sales

 

Approximately 96% of Honda’s overseas sales are made through its principal foreign sales subsidiaries, which distribute Honda’s products to local wholesalers and retail dealers.

 

In the United States, Honda markets its products through a sales network of approximately 1,250 independent local dealers for motorcycles, approximately 1,300 for automobiles and approximately 7,000 for power products. Many of the motorcycle dealers and some of the automobile dealers also sell Honda’s power products. In 1986, Honda opened the first Acura automobile dealerships in the United States. The Acura network in the United States totaled 269 dealerships at the end of fiscal 2008. The Acura network offers RL, TL, TSX, RSX, MDX, RDX models.

 

With regard to exports from North America, Honda is currently exporting such North American-built models as Accord, Civic, TL, Odyssey, Pilot, Ridgeline, CR-V and MDX to other markets. In fiscal 2008, Honda exported approximately 48,100 units from North America to 38 countries throughout the world.

 

In Europe, Honda’s products are distributed through approximately 2,000 independent local dealers for motorcycles, approximately 1,950 for automobiles and approximately 3,500* for power products.

 

 

* Total number represents dealers in 10 countries where Honda has foreign sales subsidiaries

 

In Asia, Honda’s products are distributed through approximately 13,100 independent local dealers for motorcycles, approximately 1,000 for automobiles and approximately 1,800* for power products.

 

 

* Total number represents dealers in 6 countries where Honda has foreign sales subsidiaries

 

The company exports motorcycle components to 14 countries, including Indonesia, Thailand, Vietnam and Brazil, where motorcycles are manufactured by its subsidiaries, joint venture firms and licensees. Some of the components used in the production of these vehicles are supplied locally.

 

The company exports automobile components to 14 countries, including the United States, Canada, Thailand, China and Brazil, where automobiles are manufactured by its subsidiaries, joint venture firms and licensees. Some of the components used in the production of these vehicles are supplied locally.

 

The company also exports power product components to seven countries, including the United States, Italy, Thailand, China, where power products are manufactured by its subsidiaries, joint venture firms and licensees. Some of the components used in the production of these products are supplied locally.

 

Service and Parts Related Operations Overseas

 

Honda provides its overseas operations, joint venture firms, independent distributors and licensees with spare parts and necessary technical information, which they in turn supply to wholesale or retail dealers, either directly or through one or more spare parts distributors.

 

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Components and Parts, Raw Materials and Sources of Supply

 

Honda manufactures the major components and parts used in its products, including engines, frames and transmissions. Other components and parts, such as shock absorbers, electrical equipment and tires, are purchased from numerous suppliers. The principal raw materials used by Honda are steel plate, aluminum, special steels, steel tubes, paints, plastics and zinc, which are purchased from several suppliers. The most important raw material purchased is steel plate, accounting for approximately 41% of Honda’s total purchases of raw materials.

 

No single supplier accounted for more than 5% of the Company’s purchases of major components and parts and principal raw materials during the fiscal year ended March 31, 2008.

 

Honda does not have and does not anticipate having any difficulty in obtaining its required materials from suppliers and considers its contracts and business relations with the suppliers to be satisfactory. The Company does not believe any of its domestic suppliers are substantially more dependent on foreign suppliers than are Japanese suppliers generally. However, it should be noted that Japanese industry in general is heavily dependent on foreign suppliers for substantially all of its raw materials.

 

Seasonality

 

Honda’s motorcycle and power product businesses have historically experienced some seasonality. However, this seasonality has not generally been material to our financial results.

 

Environmental and Safety Regulation

 

Outline of Environmental and Safety Regulation for Automobiles

 

1. Emissions

 

Japan

 

In 2005, to limit emissions into the environment, the Central Environment Council in the Ministry of Environment created new long-term targets and comprehensive requirements for gasoline and diesel vehicles which has become effective starting from 2008. New long term targets for gasoline vehicles remain unchanged except for direct injection gasoline vehicles which will be required to meet the particulate matter (PM) standard. New long-term emissions targets for diesel vehicles have been lowered by more than 50% from the current level of NOx and PM standards. Furthermore, in March 2008, to strengthen the enforcement of laws, the 2009 Exhaust Emission Standards (Post new long term regulation) was created. Post new long term targets for gasoline vehicles remain unchanged except for direct injection gasoline vehicles which will be required to meet the PM standard, too. Post new long term emissions targets for diesel vehicles have been lowered by more than 60% from the current level of NOx and PM standards.

 

The United States

 

Increasingly stringent emission regulations under the Clean Air Act have been enacted since the 1990s by the U.S. federal government. Under the Act, the Environmental Protection Agency (EPA) in February 2000 adopted more stringent vehicle emissions regulations applicable to passenger cars and light-duty trucks produced from model year 2004. Moreover, the new standard provides for gradual decreases in sulfur levels contained in fuel in the U.S. market.

 

Under the Clean Air Act, the State of California is permitted to establish its own emission control standards to the extent they are more stringent than federal standards. Pursuant to this authority, the California Air Resources Board (CARB) adopted the “California Low Emission Vehicle Program” in 1990, aiming to establish the strictest emission regulation in the world. In late 1998, the CARB strengthened its regulatory standards through the introduction of new standards, known as the “California Low Emission Vehicle Program II” (LEV II).

 

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These new standards treat most light trucks the same as passenger cars and require both types of vehicles to meet the new emissions standards of LEV II. In January 2001, the CARB approved modifications to the “Zero-Emission Vehicles” (ZEV) requirement under LEV II, permitting gasoline Super Ultra Low Emission Vehicles (SULEV), hybrid vehicles (powered by gasoline engine and/or electric motor) and compressed natural gas (CNG) vehicles to partially meet zero-emission requirements by satisfying certain additional requirements. The modified requirements also provide incentives for continued technology development.

 

In April 2004, the CARB finalized its “ZEV” requirements. Under these requirements, from the 2005 model year, 6% of vehicles sold in California by a car manufacturer must be Partial Zero Emission Vehicles (PZEV), which includes SULEV with warranties coverage up to the earlier of 15 years or 150,000 driven miles, 2% must be advanced technology PZEV and 2% must be ZEV. Required percentages will be gradually increased under the ZEV standards from the 2008 model year.

 

The CARB approved the proposed amendment to the ZEV program at board hearing in March 2008. The CARB Staff had proposed to require 2,500 Fuel Cell Vehicles (FCV) in the entire industry from 2009 to 2011, but the Board instructed to modify a part of the proposed amendment, including the number being tripled to 7,500. A final proposal will be submitted based on the instruction.

 

Currently, many states have adopted or proposed the California ZEV regulation. The ZEV mandate has been implemented in some states, and will be implemented in other states.

 

Europe

 

In 1999, the European Union adopted Euro3 and Euro4 as comprehensive emissions regulations for passenger vehicles and heavy and light commercial vehicles. Euro3 was implemented in 2000 and Euro4 was implemented in 2005.

 

In each EU country, standards, such as those providing for preferential automobile tax treatment, have been established in respect of diesel vehicles that comply with the requirements prescribed in Euro4 for which the PM emission does not exceed 5mg/km. Honda has already introduced a considerable number of Euro4-compliant diesel models in Europe.

 

In 2005, the European Union created a new emission standard (Euro5 and Euro6) and comprehensive requirements for gasoline vehicles and diesel vehicles. Euro5 will be implemented in 2009. Emission limits for gasoline vehicles and diesel vehicles will be lowered by more than the Euro4 level of HC, NOx and PM. Euro6 will be implemented in 2014. Emission limits for diesel vehicles will be lowered by more than the Euro5 level HC and NOx.

 

Additionally, Euro5 and Euro6 will add the requirement of a PM number limit for diesel vehicles. A PM mass limit will also apply to gasoline vehicles which use lean burn direct injection engines.

 

Russia

 

Euro3 regulation has been in effect from January 2008. Additionally, Euro4 regulation will be implemented in January 2010.

 

Other Regions

 

China adopted Step3 and Step4 emission regulations for light-duty vehicles in 2005.

 

These regulations are similar to Euro3 and Euro4. Step3 will be implemented in 2007 and Step4 will be implemented in 2010.

 

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In the city of Beijing, Euro3 was implemented in December 2005, and Euro4 was implemented in March 2008.

 

South Korea adopted the enforcement regulation of the Special Act on Capital Region Air Quality Improvement. Accordingly, some manufacturers shall be required to sell low emission vehicles which meet a more stringent emission standard than those meeting the national standard from January 2005.

 

In addition, other several Asian countries adopted regulations which are similar to the European regulations (such as Euro2 and Euro3).

 

In Australia, Euro4-equivalent regulations will be implemented in July 2008.

 

2. Fuel Economy / CO2

 

Japan

 

In 1998, an amendment was made to the Law Concerning Rationalization of Energy Usage that established a fuel efficiency standard based on weight class in Japan. This standard was tightened in 2005 for diesel-fueled automobiles. For gasoline automobiles, tighter standards, to be implemented in 2010, have also been established.

 

In light of the CO2 reduction targets promulgated under the Kyoto Protocol, the Japanese government issued a fuel regulation for an interim ethanol blending limit (less than 3%) which became effective in 2003. The Japanese government intends to further increase this limit until the final target of 10% is achieved within a decade.

 

In 2005, discussions about the post-2010 standard took place among the applicable ministries and industries.

 

In February 2007, the final post-2010 target, or the “2015 standard”, was announced. Fuel consumption will be reduced by 29.2% compared to the 2010 target for passenger cars.

 

Ethanol blended fuel is a “biomass fuel”. Biomass fuel is regarded as an effective countermeasure for CO2 reduction. CO2 emissions after burning ethanol fuel produced with biomass resources (such as plants or wood) are not counted as CO2 emissions under the Kyoto Protocol.

 

The United States

 

The Federal Motor Vehicle Information and Cost Savings Act requires automobile manufacturers to comply with the Corporate Average Fuel Economy (CAFE) standards. Under the CAFE standards, manufacturers are subject to substantial penalties if automobiles produced by them in any model year do not meet the average standards for each category. The CAFE standard for passenger cars has been set at 27.5 miles per gallon (mpg) starting from the 1990 model year and for light trucks at 20.7 miles per gallon standard was established for the 1996-2004 model years. The standard for light trucks increased from the 2005 model year (21.0 miles per gallon) to the 2007 model year (22.2 miles per gallon). The National Highway Traffic Safety Administration (NHTSA) reformed the CAFE standard for light trucks in 2006. The new size-based CAFE standard for light trucks will be implemented in the 2008 model year. However, on November 15, 2007, the United Stated Ninth Circuit Court of Appeals has made the decision to revoke the CAFE regulation concerning light-duty trucks that the NHTSA had adopted. Because of the fact that the NHTSA failed to (1) implement the cost conversion of CO2 emission when establishing the CAFE limit values concerning the 2008-2009 model year light-duty trucks, (2) establish the backstop requirements, (3) revise appropriately the requirements concerning the classification of passenger automobiles and light-duty trucks and (4) prescribe the fuel economy limit values for all vehicles with the Gross Vehicle Weight Rating class of 8,500 to 10,000 pounds, the court held that the CAFE regulation was arbitrary and capricious and that, furthermore, it violated the U.S. Energy Policy and Conservation Act. Besides, the U.S. President has directed relevant U.S. federal agencies to take the first steps toward regulations that would reduce gasoline consumption and Green House Gas (GHG) emissions from vehicles by 20 percent over the next 10 years. Therefore, the NHTSA has to promptly establish new limit values conforming to the pertinent policy and to apply it in the earliest possible model year. The NHTSA issued a new CAFE regulation draft which applies to passenger cars and light trucks from the 2011 model year to the 2015 model year on May 2, 2008. The proposal requires 31.6 miles per gallon for the combined CAFE standard in the 2015 model year.

 

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In August 2005, the CARB finalized its GHG regulation. Under the GHG regulation, which will become effective for the 2009 model year, automobile manufactures have to improve fuel economy from the current levels by more than 50% by the 2016 model year.

 

Many other states have adopted the GHG regulations.

 

In April 2007, the Supreme Court ruled that the EPA has the authority to regulate GHG emissions. In response to the Supreme Court’s ruling, the President has directed his agencies to take the first steps toward regulations that would reduce gasoline consumption and GHG emissions from vehicles by 20 percent over the next 10 years.

 

However, EPA decided not to grant enforcement of the GHG regulation by the State of California on December 19, 2007. Because EPA has determined that the federal unified standard can contribute to a significant reduction of GHG emitted in all states and will be more effective than the states approach.

 

Europe

 

In early 1999, the European Union reached a voluntary agreement with the European Automotive Manufacturers Association for the establishment of an average emissions target of 140 grams of carbon dioxide per kilometer for new cars offered for sale in the EU in 2008. The Japan Automobile Manufacturers Association(JAMA) and the Korean Automobile Manufacturers Association also reached a similar voluntary agreement with the European Union targeting implementation in 2009. In 2003, in an interim review, the emissions reduction efforts made by these associations were reviewed and the possibility of setting a more stringent target of above 140 grams is now being discussed. In 2003, JAMA achieved the midterm target (165-175 grams). JAMA achieved additional reduction of carbon dioxide in 2005 as compared to 2004.

 

In 2006, discussions about establishing targets for 2008 will begin among the European Commission, Member States and the automobile industry.

 

End of 2007, European Commission proposed “carbon dioxide emission performance standards for new passenger cars”. According to this communication, the European Commission will be setting a more stringent target of 130 grams of carbon dioxide per kilometer for new cars offered for sale in the EU in 2012. In addition, the proposal will provide manufacturers with the necessary incentive to reduce the CO2 emissions of their vehicles by imposing an excess emissions premium if their average emission levels are above the limit value curve. This premium will be based on the number of grams per kilometer (g/km) that an average vehicle sold by the manufacturer is above the curve, multiplied by the number of vehicles sold by the manufacturer.

 

The EU is also recommending the use of biomass fuel blends.

 

Other Regions

 

China adopted a fuel consumption regulation for passenger vehicles in 2004. Step1 of this regulation was implemented in 2005 and Step2 was implemented in 2008.

 

South Korea adopted the regulation of Corporate Average Fuel Economy for passenger vehicles in 2005. Domestic vehicles will be required to adhere to the regulations starting from 2006 and imported vehicles will need to meet the requirement from 2010.

 

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3. Recycling / End-of-Life Vehicles (ELV)

 

Japan

 

Japan enacted the Automobile Recycling Law in July 2002, which required manufacturers to take back air bags, fluorocarbon and shredder residue derived from end-of-life vehicles (ELV), which became effective on January 1, 2005. ELV processing costs are collected from owners of cars currently in use and purchasers of new cars.

 

Europe

 

In September 2000, the European Union approved a directive requiring its member states to promulgate regulations implementing the following by April 21, 2002:

 

Manufacturers must be financially responsible for taking back end-of-life vehicles offered for sale after July 1, 2002 and dismantle and recycle the vehicles. Beginning on January 1, 2007, the requirement has also been applied to all vehicles offered for sale in the European Union before July 1, 2002.

 

Manufacturers must not use specified hazardous materials in vehicles offered for sale in the European Union after July 2003, and 95% of vehicle parts in new vehicle types sold in the European Union after December 15, 2008, must be designed to be re-usable and recoverable.

 

On December 30, 2006, the European Union adopted the Regulation concerning the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), which becomes effective on June 1, 2007. From June 1, 2008, any manufacturer or importer of chemical substances is required to submit a registration to the Agency, based on annual production or import quantity levels. Also, any manufacturer or importer of chemical containers is required to submit a registration for the chemical substances contained in such containers, which is expected to be consumed. Submitting a pre-registration between June 1 and December 1, 2008 will allow the manufacturer or importer to extend the deadline for submitting the registration for existing chemical substances or containers. The list of Substance of Very High Concern (SVHC) will be announced in June 2009. On request by a consumer, the supplier of the product containing SVHC must provide the consumer with the sufficient information at least the name of the substance within 45 days.

 

Other Regions

 

Taiwan and Korea have implemented automobile recycling laws from January 1, 2008 following the regulations established by the European Union and Japan. In addition, China has a plan to implement automobile recycling laws in the near future.

 

4. Safety

 

Japan

 

In March 2005, the Ministry of Land, Infrastructure and Transport (MLIT) issued the world’s first Seat Belt Reminders standard. Pursuant to the standard, the driver’s seat in passenger vehicles must be equipped with a seat belt reminder from September 1, 2005 for new models and from September 1, 2008 for all other models.

 

In November 2007, the MLIT issued safety standard for vehicles which use high voltage electric power like an electric vehicle or hybrid electric vehicle, to avoid electric shock, when normal operation and after crash condition, from July 1, 2012 for all models.

 

In March 2008, the MLIT issued the technical standards for Event Data Recorders (EDRs). Installation of EDRs in vehicles and, if an EDR is installed, compliance with MLIT’s technical standards are both voluntary.

 

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Japan Automobile Standards Internationalization Center (JASIC), which is organized by MLIT and JAMA, among others, has started to review a proposal for the unification of Safety/Environment Standards, vehicle categories and certification in order to promote further internationalization of standards and certifications.

 

JASIC is planning to make the proposal to other contracting parties of the 58 / 98 Agreement by 2009 and aim at reaching an agreement among the contracting parties by 2015.

 

The United States

 

In December 2003, the NHTSA issued various motor vehicle safety standards, including a final rule specifying enhanced fuel system integrity requirements. For example, the rule changes the test method for rear crash impacts from a full-lap 48km/h test to an offset 80km/h test, and sets forth a phase-in compliance schedule mandating that 40% of all vehicles produced by a manufacturer meet the new safety standard by 2006, 70% by 2007, and 100% by 2008.

 

In December 2003, vehicle manufacturers, including us, presented to the public a statement on crash vehicle compatibility, “ENHANCING VEHICLE-TO-VEHICLE CRASH COMPATIBILITY: A Set of Commitments for Progress by Automobile Manufacturers.” This report describes the recommended performance criteria and research plans developed by an international group of safety experts for enhancing vehicle-to-vehicle crash compatibility in front-to-front and front-to-side crashes. By September 1, 2007, the goal is to have at least 50% of all vehicles offered in the U.S. by participating manufacturers to meet the front-to-side performance criteria, and by September 2009, for 100% of the vehicles of participating manufacturers to meet the criteria. For the front-to-front criteria, the goal is for 100% of the vehicles of participating manufacturers to meet the criteria by September 2009, with no interim goals set. We are a participating manufacturer and intend to meet these voluntary standards.

 

In August 2006, the NHTSA issued a final rule revising performance requirements for advanced airbag systems. The rule upgrades the maximum speed for frontal barrier crash tests using a belted small adult female dummy. Manufacturer must comply with the upgraded requirements for 35% of all vehicles produced by 2009, 65% by 2010, and 100% by 2011.

 

In April 2007, the NHTSA issued a final rule regarding an electronic stability control system standard for light vehicles to reduce rollover crashes. The new standard will require installation of electronic stability control system. Manufacturers must comply with the standard for 55% of all vehicles produced by 2008, 75% by 2009, 95% by 2010, and 100% by 2011.

 

In May 2007, the NHTSA issued a final rule to revise some performance requirements for head restraints, to delay the effective date, and to set a phase-in compliance schedule. For front seat requirements, manufacturer must comply with the revised requirements for 80% of all vehicles produced by 2009, and 100% by 2010. For voluntarily installed rear head restraints, manufacturers also must be in compliance for 80% of all vehicles by 2010, and 100% by 2011.

 

In September 2007, the NHTSA issued a final rule to upgrade side impact occupant protection standards, and later in June 2008, phase-in schedule was amended. The rule imposes a requirement to provide head protection and adopt a small adult female dummy in side crashes for the first time. Manufacturers must meet an additional performance test involving a 32km/h vehicle side impact into a rigid pole at an approach angle of 75 degrees for 20% of all vehicles produced by a manufacturer by 2010, 40% by 2011, 60% by 2012, 80% by 2013 and 100% by 2014. New dummies are to be used from September 1, 2010 for the existing moving deformable barrier and new pole tests.

 

In January 2008, the NHTSA issued a final rule to revise some performance requirements for event data recorders and to delay the effective date. Manufacturers offering passenger cars and/or other light vehicles equipped with event data recorders must comply with revised requirements on or after September 2012.

 

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In January 2008, the NHTSA issued a supplemental proposed rule to upgrade vehicle roof crush standard. The rule newly introduces a “Two-sided Roof Test” which imposes the strength tests for both sides of the vehicle roof as an alternative for the existing “Single-sided Roof Test”. Manufacturers must comply with either test requirement from the first September that occurs after three years have elapsed after the issuance of the final rule.

 

Europe

 

The European Commission issued a regulation and technical prescription for pedestrian protection. The regulation required M1 (Passenger vehicles up to nine passengers) and N1 (Light commercial vehicles with gross vehicle weight up to 3.5t) vehicles to meet standards for the protection of pedestrians in the event of a collision with the front of a motor vehicle.

 

The regulation consists of Phase 1, to be effective October 1, 2005 for new types of vehicles and December 31, 2012 for all vehicles, and Phase 2, to be effective September 1, 2010 for new types of vehicles and September 1, 2015 for all vehicles.

 

In early 2004, the European Commission issued a revised regulation relating to indirect vision to reduce “blind spots” on vehicles of which side and rear areas were not visible to the driver via side or rear-view mirrors. The regulation has been effective from January 29, 2006 for new types of vehicles and will be effective on January 29, 2010 for all vehicles.

 

Additionally, the European Commission has established a project called “eSafety” aiming at cutting road fatalities in half by 2010. The project focuses on road accident prevention. To achieve this target, such issues as the introduction of new features on automobiles are being discussed.

 

5. New Car Assessment Program (NCAP)

 

Programs that provide customers with assessments of car safety functions and promote the development of car safety by automobile manufacturers are conducted in countries such as the United States, Japan, Australia, the EU, Korea and China. The principal items assessed in these programs are passenger protection and braking power, which are typically assessed with stricter standards or criteria than those required by statute.

 

In January 2007, NHTSA also issued a report titled “The New Car Assessment Program Suggested Approaches for Future Program Enhancements” to encourage additional safety improvements, and to provide consumers with relevant information that will aid them in their new vehicle purchasing decisions. The future program includes detailed proposals regarding not only crash worthiness assessment but also crash avoidance assessment.

 

Outline of Environmental and Safety Regulation for Motorcycles

 

1. Emissions

 

Japan

 

Japan has emissions regulations for motorcycles applicable to all classes of engine displacement. Some aspects of these requirements, such as standards for hydro-carbon levels and durability, are stricter than the current European regulations, namely the Euro1 regulations. The Central Environment Council in the Ministry of Environment issued a final report on targets for fiscal year 2006. The target level is similar to those under the Euro3 standards.

 

The United States

 

Emissions regulations regarding off-road motorcycles and ATVs were introduced in 2006. In addition, the EPA adopted the current California emissions standards regarding on-road motorcycles on a national basis two years behind the schedule of California. The new regulations include fuel permeation requirements rather than traditional evaporative emission standards.

 

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Canada

 

The Canadian federal government has introduced emissions regulations generally equivalent to the U.S. EPA regulations for on-road motorcycles from the 2006 model year.

 

Currently, the Canadian federal government has proposed to introduce the emission regulations for off-road motorcycles generally equivalent to the U.S. EPA regulations.

 

Europe

 

The EU maintains emissions regulations (Euro2) for motorcycles, as well as the “Motor Cycle (& Moped)-Whole Vehicle Type Approval”, a uniform certification system for two and three-wheeled motor vehicles.

 

The Euro3 regulations are the most stringent standard for motorcycles. Euro3 regulations have been in effect from January 2006.

 

Other Regions

 

Other countries, mainly in Asia, have implemented tighter emissions regulations based on European regulations.

 

In Thailand, a fifth stage of emissions control, which is generally equivalent to or stricter than Euro2, has been implemented. A sixth stage of emissions control, which is generally equivalent to or stricter than Euro3, will be introduced in 2008.

 

In Indonesia, Euro2-equivalent regulations have been in effect from January 2006.

 

In China, Euro2-equivalent regulations were introduced in 2004.

 

In Korea, Euro2-equivalent regulations were implemented in 2006. In addition, Euro3- equivalent regulations will be implemented from 2008.

 

In Brazil, Euro2-equivalent regulations have been in effect from the beginning of last year. Euro3-equivalent regulations will be implemented in the beginning of 2009.

 

In India, regulations based on the Indian authorities’ own test method are in effect and enhanced regulations were enacted in 2005.

 

2. Safety

 

Japan

 

Japan introduced the ECE R78—Braking system based on the Global Technical Regulation that was promulgated by the United Nation’s World Forum for Harmonization of Vehicle Regulations. It will apply to new vehicle types on and after June 18, 2009, and to all models on and after June 18, 2011.

 

The United States

 

Three wheeled all terrain vehicles, or ATVs (formerly referred to as “ATC”s) were a problem due to the youth- involved accidents in the 80s’, and ATV regulations being established at that time. However, it turned out that a voluntary standard, which was agreed to between the industry and regulators, was established. Although the number of accidents did not increase in the 90s’, the ATV market in the US experienced a rapid development from 2000 and the problem of youth-involved accidents increasing continued to be a focal point.

 

The Consumer Product Safety Commission (CPSC) and ATV industry updated the voluntary standard in 2007. The CPSC is now considering that the standard will be introduced in the regulation.

 

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Europe

 

The number of ATVs designed to travel on four low pressure tires on non-paved surfaces has recently increased in the EU market. Most ATVs have received approval by the Whole Vehicle Type Approval (WVTA) and are permitted to run on highways. As a result, there has been an increase in the number of accidents which resulted in the establishment of the All Terrain Vehicle European industry Association (ATVEA). The ATVEA is now focusing on ATV standards rulemaking. It is expected that a standard will be completed in approximately five years at the earliest.

 

The driving licenses directive was updated, and established a new category for mopeds and changed the contents of each category. A new directive will be effective from January 19, 2013.

 

Other Regions

 

Brazilian government issued a new regulation regarding anti-theft device and will require installing an immobilizer and a vehicle tracking system on vehicles and motorcycles sold or registered from August 1, 2009.

 

Many Asian countries, e.g. India, Thailand, and Vietnam are introducing several regulations, e.g. lighting, braking, and anti-theft, based on ECE regulations.

 

Canadian government revised the controls and display regulation in order to harmonize with the U.S.— vehicle safety standards. It applied to all motorcycle manufactured from February 22, 2008.

 

Outline of Environmental and Safety Regulation for Power Products

 

1. Emissions

 

The United States

 

The EPA enacted new engine emissions regulations applicable to model year 1997 for small non-road engines. These regulations are also applicable to engines in use from the 2001 model year. With respect to marine engines, emissions regulations for outboard engines and personal watercraft were implemented for the 1998 model year products and were gradually strengthened every year until the 2006 model year. Currently, the EPA has proposed enhanced emission regulations for non-road engines and marine engines.

 

In 1995, the State of California enacted new engine emissions regulations for small non-road engines. California is now gradually shifting its focus on emissions regulations for engines in use manufactured in the 2000 model year and thereafter. California has introduced tighter tail-pipe emissions standards and added requirements for evaporative emissions from small non-road engines from the 2006 model year. With respect to marine engines, California enacted emissions regulations for model year 2001 outboard engines and personal watercraft that are equivalent to the U.S. federal government’s 2006 model year regulations, and strengthened these regulations in the model year 2004. California plans to further strengthen the regulations for these products in the 2008 model year.

 

Canada

 

The Canadian federal government has introduced emissions regulations generally equivalent to the U.S. EPA regulations for small non-road engines from the 2005 model year, with some exceptions.

 

Currently, the Canadian federal government has proposed to introduce emission regulations for marine engines generally equivalent to the U.S. EPA regulations.

 

Europe

 

Emissions regulations regarding diesel non-road mobile machinery have been in place in the European Union. The EU has introduced regulations covering gasoline engines from 2004 based on the contents of the current EPA regulations in the United States and introduced emissions regulations targeting outboard engines and personal watercraft from 2005. In addition, with respect to marine engines, emissions regulations have been implemented since 1993 in Bodensee, which is located between Switzerland, Germany and Austria.

 

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2. Safety

 

Japan

 

The Consumer Product Safety Law, as amended, which mandates manufacturers and/or importers liable for product accidents to give a report to the Minister of the Ministry of Economy, Trade and Industry (METI), became effective on May 14, 2007.

 

Main points of this Law are as follows:

 

  1. Manufacturers and importers are mandated to notify a serious product accident.

 

  2. Distributors, retailers and repair shops are encouraged to inform manufacturers and importers.

 

  3. Products covered by this Law include all products utilized in daily life except for products regulated by other laws (such as motor vehicles, medicines, etc.).

 

  4. Mandatory reports are limited to serious accidents (involving fatal and serious injury accident, CO poisoning, and fire).

 

  5. Product name, etc. are published to the public as necessary to prevent danger and hazard from occurring or expanding.

 

The United States

 

The CPSC issued a final rule to require that portable generators bear a carbon monoxide poisoning warning label. This regulation requires that the label include pictograms and statements warning consumers that “a generator’s exhaust contains poisonous carbon monoxide” and that “a generator should never be used inside the home or partially enclosed areas such as garages”. This regulation became effective on May 14, 2007 and applies to any portable generator manufactured or imported on or after that date.

 

Europe

 

The Machinery Directive was changed on May 16, 2006, and new directive will be effective from December 29, 2009. Main changes are to clarify the scope (e.g. partly completed machinery such as engine unit) and to add the concrete description of market survey and obligation to establish the penalty description for member states.

 

Preparing for the Future

 

In the global economy, there are concerns of economic slowdowns in the U.S., Europe and Japan. In addition, the pace of economic expansion in Asia outside Japan is expected to decline. Moreover, the global business environment in which Honda’s management operates still remain uncertain because of global political and economic uncertainties, fluctuations in oil and raw material prices, and movements in currency, finance and capital markets. As a result, Honda expects the operating environment to remain difficult.

 

It is under these circumstances that Honda seeks to strengthen its corporate structure quickly and flexibly to meet the requirements of its customers and society and the changes in its business environment. Also, in order to improve the competitiveness of its products, Honda will endeavor to enhance its R&D, production and sales capabilities. Furthermore, Honda will continue striving to earn even more trust and understanding from society through companywide activities. Honda recognizes that further enhancing the following specific areas is essential to its success:

 

Research and Development

 

Along with efforts to develop even more effective safety and environmental technologies, Honda will enhance creativity in its advanced technology and products, and will create and swiftly introduce new value-added products that meet specific needs in various markets around the world. Honda will also continue its efforts to conduct research on future technologies.

 

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Production Efficiency

 

Honda will establish and enhance efficient and flexible production systems and expand production capacity at its global production bases, with the aim of increasing its capability of supplying high quality products.

 

Sales Efficiency

 

Honda will remain proactive in its efforts to expand product lines through the innovative use of IT and to upgrade sales and service structure, in order to further satisfy its customers.

 

Product Quality

 

Responding to increasing customer demand, Honda will upgrade its quality control through enhancing the functions of and coordination among the development, purchasing, production, sales and service departments.

 

Safety Technologies

 

Honda is working to develop safety technologies that enhance accident prediction and prevention, technologies to help reduce the risk of injuries to passengers and pedestrians from car accidents, and technologies that enhance compatibility between large and small vehicles, as well as expand its line-up of products incorporating such technologies. Honda will reinforce and continue to advance its contribution to traffic safety in motorized societies in Japan and abroad. Honda also intends to remain active in a variety of traffic safety programs, including advanced driving and motorcycling training schemes provided by local dealerships.

 

The Environment

 

Honda will step up its efforts to create better, cleaner and more fuel-efficient engine technologies and to further improve recyclables throughout its product lines. Honda will also work to advance fuel cell technology and steadily promote its new solar cell business. In addition, Honda will further its efforts to minimize its environmental impact. To this end, we set global targets to reduce the environmental burden as measured by the Life Cycle Assessment*, in all areas of business, spanning production, logistics and sales.

 

 

* Life Cycle Assessment: A comprehensive system for quantifying the impact Honda’s products have on the environment at the different stages in their life cycles, from material procurement and energy consumption to waste disposal.

 

Continuing to Increase Society’s Trust in and Understanding toward Honda

 

In addition to continuing to provide products incorporating Honda’s advanced safety and environmental technologies, Honda will continue striving to earn even more trust and understanding from society by, among other things, undertaking activities for corporate governance, compliance, and risk management and contributing to society.

 

Through these Company-wide activities, Honda will strive to materialize Honda’s visions of “Value Creation (Creating New Value for our Customers),” “Glocalization (Expanding Regional Operations),” and “Commitment to the Future (Developing Safety and Environmental Solutions),” with the aim of sharing joy with Honda’s customers, thus becoming a company that society wants to exist.

 

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C. Organizational Structure

 

As of March 31, 2008, the Company had 131 Japanese subsidiaries and 266 overseas subsidiaries. The following table sets out for each of the Company’s principal subsidiaries, the country of incorporation, function and percentage ownership and voting interest held by Honda.

 

Company

   Country of
Incorporation
  

Function

   Percentage
Ownership
and
Voting Interest

Honda R&D Co., Ltd.

   Japan    Research & Development    100.0

Honda Engineering Co., Ltd.

   Japan    Manufacturing and Sales of machine tools, equipment and production techniques    100.0

Yachiyo Industry Co., Ltd.

   Japan    Manufacturing    50.5

Honda Lock Mfg. Co., Ltd.

   Japan    Manufacturing    100.0

Yutaka Giken Co., Ltd.

   Japan    Manufacturing    70.1

Asama Giken Co., Ltd.

   Japan    Manufacturing    81.7

Honda Foundry Co., Ltd.

   Japan    Manufacturing    82.1

Honda Motorcycle Japan Co., Ltd.

   Japan    Sales    100.0

Honda Finance Co., Ltd.

   Japan    Finance    100.0

Mobilityland Corporation

   Japan    Others (Leisure)    100.0

Honda Trading Corporation

   Japan    Others (Trading)    100.0

Honda Logistics Inc.

   Japan    Others (Physical Distribution)    100.0

American Honda Motor Co., Inc.

   U.S.A.    Sales    100.0

Honda North America, Inc.

   U.S.A.    Coordination of Subsidiaries Operation    100.0

Honda of America Mfg., Inc.

   U.S.A.    Manufacturing    100.0

American Honda Finance Corporation

   U.S.A.    Finance    100.0

Honda Manufacturing of Alabama, LLC

   U.S.A.    Manufacturing    100.0

Honda of South Carolina Mfg., Inc.

   U.S.A.    Manufacturing    100.0

Yachiyo of America Inc.

   U.S.A.    Holding Company    100.0

Honda Transmission Mfg. of America, Inc.

   U.S.A.    Manufacturing    100.0

Honda Precision Parts of Georgia, LLC

   U.S.A.    Manufacturing    100.0

Honda Power Equipment Mfg., Inc.

   U.S.A.    Manufacturing    100.0

Honda R&D Americas, Inc.

   U.S.A.    Research & Development    100.0

Cardington Yutaka Technologies Inc.

   U.S.A.    Manufacturing    100.0

Celina Aluminum Precision Technology Inc.

   U.S.A.    Manufacturing    100.0

Honda Trading America Corporation

   U.S.A.    Other (Trading)    100.0

Honda Engineering North America, Inc.

   U.S.A.    Manufacturing and Sales of machine tools, equipment and production techniques    100.0

Honda Canada Inc.

   Canada    Manufacturing and Sales    100.0

Honda Canada Finance Inc.

   Canada    Finance    100.0

Honda de Mexico, S.A. de C.V.

   Mexico    Manufacturing and Sales    100.0

Honda Europe NV

   Belgium    Sales    100.0

Honda Motor Europe Limited

   U.K.    Coordination of Subsidiaries Operation and Sales    100.0

Honda of the U.K. Manufacturing Ltd.

   U.K.    Manufacturing    100.0

Honda Finance Europe plc

   U.K.    Finance    100.0

Honda Motor Europe (South) S.A.

   France    Sales    100.0

Honda Europe Power Equipment, S.A.

   France    Manufacturing and Sales    100.0

 

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Company

   Country of
Incorporation
  

Function

   Percentage
Ownership
and
Voting Interest

Honda Bank GmbH

   Germany    Finance    100.0

Honda Motor Europe (North) GmbH

   Germany    Sales    100.0

Honda R&D Europe (Deutschland) GmbH

   Germany    Research & Development    100.0

Honda Italia Industriale S.p.A.

   Italy    Manufacturing and Sales    100.0

Montesa Honda S.A.

   Spain    Manufacturing and Sales    100.0

Honda Motor (China) Investment Corporation, Limited

   China    Holding Company and Sales    100.0

Jialing-Honda Motors Co., Ltd.

   China    Manufacturing and Sales    70.0

Honda Automobile (China) Co., Ltd.

   China    Manufacturing    65.0

Honda Auto Parts Manufacturing Co., Ltd.

   China    Manufacturing    100.0

Honda Motorcycle and Scooter India Private Limited

   India    Manufacturing and Sales    100.0

Honda Siel Cars India Limited

   India    Manufacturing and Sales    97.4

P.T. Honda Precision Parts Manufacturing

   Indonesia    Manufacturing    100.0

P.T. Honda Prospect Motor

   Indonesia    Manufacturing and Sales    51.0

Honda Malaysia SDN. BHD.

   Malaysia    Manufacturing and Sales    51.0

Honda Atlas Cars (Pakistan) Limited

   Pakistan    Manufacturing and Sales    51.0

Honda Philippines, Inc.

   Philippines    Manufacturing and Sales    99.6

Honda Cars Philippines, Inc.

   Philippines    Manufacturing and Sales    74.2

Honda Taiwan Co., Ltd.

   Taiwan    Sales    100.0

Asian Honda Motor Co., Ltd.

   Thailand    Coordination of Subsidiaries Operation and Sales    100.0

Honda Leasing (Thailand) Company Limited

   Thailand    Finance    100.0

Honda Automobile (Thailand) Co., Ltd.

   Thailand    Manufacturing and Sales    89.0

Thai Honda Manufacturing Co., Ltd.

   Thailand    Manufacturing    60.0

Honda Vietnam Co., Ltd.

   Vietnam    Manufacturing and Sales    70.0

Honda Motor de Argentina S.A.

   Argentina    Manufacturing and Sales    100.0

Honda South America Ltda.

   Brazil    Holding Company of Subsidiaries Operation    100.0

Honda Automoveis do Brasil Ltda.

   Brazil    Manufacturing and Sales    100.0

Moto Honda da Amazonia Ltda.

   Brazil    Manufacturing and Sales    100.0

Honda Componentes da Amazonia Ltda.

   Brazil    Manufacturing    100.0

Honda Turkiye A.S.

   Turkey    Manufacturing and Sales    100.0

Honda Australia Pty. Ltd.

   Australia    Sales    100.0

Honda New Zealand Limited

   New Zealand    Sales    100.0

 

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D. Property, Plants and Equipment

 

Honda’s manufacturing operations are principally conducted in 33 separate factories, four of which are located in Japan. The following table sets out information, as of March 31, 2008, with respect to Honda’s principal manufacturing facilities, all of which are owned by Honda:

 

Location

   Number of
Employees
  

Principal Products Manufactured

Sayama, Saitama, Japan

   5,334    Automobiles

Hamamatsu, Shizuoka, Japan

   3,295    Motorcycles, power products and transmissions

Suzuka, Mie, Japan

   6,981    Automobiles

Ohzu-machi, Kikuchi-gun Kumamoto, Japan

   3,032    Motorcycles, all-terrain vehicles, power products and engines

Marysville, Ohio, U.S.A.

   7,214    Motorcycles and automobiles

Anna, Ohio, U.S.A.

   2,598    Engines

East Liberty, Ohio, U.S.A.

   2,324    Automobiles

Lincoln, Alabama, U.S.A.

   4,513    Automobiles

Swepsonville, North Carolina, U.S.A.

   573    Power products

Timmonsville, South Carolina, U.S.A.

   1,484    All-terrain vehicles

Alliston, Ontario, Canada

   4,506    Automobiles

El Salto, Mexico

   1,913    Motorcycles and automobiles

Swindon, Wiltshire, U.K.

   4,924    Automobiles and engines

Ormes, France

   159    Power products

Atessa, Italy

   798    Motorcycles, power products and engines

Barcelona, Spain

   299    Motorcycles

Guangzhou, China

   1,131    Automobiles

Chongqing, China

   962    Power products

Greater Noida, India

   1,797    Automobiles

Gurgaon, India

   2,627    Motorcycles

Karawang, Indonesia

   1,295    Automobiles

Alor Gajah, Malaysia

   1,152    Automobiles

Lahore, Pakistan

   609    Automobiles

Manila, Philippines

   739    Motorcycles and power products

Laguna, Philippines

   687    Automobiles

Pingtung, Taiwan

   730    Automobiles

Ayutthaya, Thailand

   2,935    Automobiles

Bangkok, Thailand

   2,708    Motorcycles and power products

Vinhphuc, Vietnam

   1,880    Motorcycles and automobiles

Buenos Aires, Argentina

   211    Motorcycles

Sumare, Brazil

   2,956    Automobiles

Manaus, Brazil

   7,654    Motorcycles and power products

Gebze, Turkey

   862    Automobiles

 

In addition to its manufacturing facilities, the Company’s properties in Japan include sales offices and other sales facilities in major cities, repair service facilities, and research and development facilities.

 

We believe our production facilities and other properties, including the principal manufacturing facilities above, are suitable and adequate for the development, manufacture and sales of Honda’s products and parts.

 

As of March 31, 2008, the Company’s property, with a net book value of approximately ¥26.5 billion, was subject to specific mortgages securing indebtedness.

 

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Capital Expenditures

 

Capital expenditures in fiscal 2008 were applied to the expansion of manufacturing facilities, streamlining efforts, and the replacement of older equipment. Other expenditures included funds used to augment sales and R&D facilities.

 

Total capital expenditures for the year amounted to ¥1,493.2 billion, up ¥499.4 billion from the previous year. Also, total capital expenditures excluding property on operating leases for the year amounted to ¥654.0 billion, up ¥26.9 billion from the previous year. Spending by business segment is shown below.

 

     Fiscal years ended March 31,  
     2007    2008    Increase (Decrease)  
     Yen (millions)  

Motorcycle Business

   ¥ 68,880    ¥ 86,687    ¥ 17,807  

Automobile Business

     540,859      544,922      4,063  

Financial Services Business

     367,728      839,888      472,160  

Financial Services Business (Excluding Property on Operating Leases)

     933      627      (306 )

Power Product and Other businesses

     16,394      21,794      5,400  

Total

   ¥  993,861    ¥ 1,493,291    ¥ 499,430  

Total (Excluding Property on Operating Leases)

   ¥ 627,066    ¥ 654,030    ¥ 26,964  

 

In the motorcycle business, we made capital expenditures of ¥86,687 million in the fiscal year ended March 31, 2008. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of Sales and R&D facilities.

 

In the automobile business, we made capital expenditures of ¥544,922 million in the fiscal year ended March 31, 2008. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of Sales and R&D facilities. As one of our plans to increase the local production of automobile powertrain components in North America, Honda Transmission Mfg. of America, Inc. completed construction of its facilities for the production of high precision gears in July 2007.

 

In the financial services business segment, capital expenditures excluding property on operating leases amounted to ¥627 million in the fiscal year ended March 31, 2008, while capital expenditures for property on operating leases were ¥839,261 million. Capital expenditures in power products and other businesses in the fiscal year ended March 31, 2008, totaling ¥21,794 million, were deployed to upgrade, streamline, and modernize manufacturing facilities for power products, and to improve R&D facilities for power products.

 

Our finance subsidiaries in North America have historically accounted for all leases as direct financing leases. However, starting in the year ended March 31, 2007, some of the leases which do not qualify for direct financing leases accounting treatment because of the termination of insurance contract covering the estimated residual value of vehicles leased to customers are accounted for as operating leases. Therefore, because of the transfer from direct financing leases to operating leases, capital expenditures of the Company have increased from the year ended March 31, 2007.

 

Plans after fiscal 2008

 

We set out our original capital expenditure plans for the period from the fiscal year ended March 31, 2008 during the preceding fiscal year. We have subsequently modified these plans as follows:

 

The investment amount of the new R&D center in Sakura City, Tochigi, Japan has changed from approximately ¥17,000 million to ¥48,000 million because of the expansion of the building. The planned timing of the commencement of the center’s operations has not changed.

 

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The investment amount of the new auto plant in Yorii-machi Oosato-gun, and the new engine plant in Ogawa-machi Hiki-gun, Saitama, Japan has changed from approximately ¥70,000 million to ¥158,000 million because of the change of operations to strengthen the business competitiveness, strengthening of measures to environment, acquisition of land, inclusion of land development expenses, and a substantially increased building materials prices. The planned timing of the start of operation has not changed.

 

We have set out our capital expenditure plans for the period from the fiscal year ending March 31, 2009 as follows:

 

In order to respond efficiently to increases in global motorcycle demand as well as to advancements in products and improvements in production engineering, Honda plans to consolidate all motorcycle production in Japan at its Kumamoto Factory with an investment of approximately ¥33,000 million. This new motorcycle plant plans to start operation in 2008. The annual production capacity of Kumamoto Factory will be approximately 600,000 units.

 

Honda Siel Cars India Limited, which is one of the Company’s consolidated subsidiaries, plans to build a new auto plant in Rajasthan, India with an investment of approximately $230 million. The annual production capacity of this new plant will be approximately 60,000 units. This new auto plant plans to start operation in the end of 2009.

 

Honda Automobile (Thailand) Co., Ltd., which is one of the Company’s consolidated subsidiaries, plans to build a new auto plant in Ayutthaya, Thailand with an investment of approximately 6,200 million bahts. The annual production capacity of this new plant will be expandable up to approximately 120,000 units. This new auto plant plans to start operation in the latter half of 2008.

 

Honda Motor de Argentina S.A., which is one of the Company’s consolidated subsidiaries, plans to build a new auto plant in Buenos Aires, Argentina with an investment of approximately $100 million. The annual production capacity of this new plant will be approximately 30,000 units. This new auto plant plans to start operation in the latter half of 2009.

 

Yachiyo Industry Co., Ltd., which is one of the Company’s consolidated subsidiaries, plans to build a new auto plant capable of synchronous auto production—from the engine to the entire automobile—in Yokkaichi City, Mie, Japan with an investment of approximately ¥50,000 million, to further strengthen the mini-vehicle business. The annual production capacity of this new plant and the current operating plant will be approximately 240,000 units, which is the same as the current production capacity. This new auto plant plans to start operation in the latter half of 2010.

 

The estimated amounts of capital expenditures in fiscal year ending March 31, 2009 are shown below.

 

      Fiscal year ending
March 31, 2009
     Yen (millions)

Motorcycle Business

   ¥ 136,600

Automobile Business

     549,800

Financial Services Business

     1,300

Power Product and Other Businesses

     22,300

Total

   ¥ 710,000

 

The estimated amount of capital expenditures for Financial Services Business in the above table does not include property on operating leases.

 

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Table of Contents

Item 4A. Unresolved Staff Comments

 

We do not have any unresolved written comments provided by the staff of the Securities and Exchange Commission regarding our periodic reports under the Securities and Exchange Act of 1934.

 

Item 5. Operating and Financial Review and Prospects

 

A. Operating Results

 

Overview

 

Business Environment

 

The business environment during the fiscal year ended March 31, 2008 was characterized by escalation in crude oil prices around the world and increases in other raw material prices. The U.S. economy showed increasing signs of a slowdown triggered by the subprime mortgage crisis. In Europe, consumer spending was relatively weak, and the pace of the economic growth moderated. On the other hand, the economies of Asia, particularly China and India, continued to report generally rapid economic expansion. In Japan, signs of an economic slowdown emerged, as private capital investment and consumer spending were virtually level with the previous year.

 

Overview of Fiscal 2008 Operating Performance

 

Taking on market challenges and opportunities head on, Honda posted the highest level of net sales and other operating revenue in its history as a result of higher unit sales in automobile business and other factors. Profit indicators, including operating income, income before income taxes, minority interest and equity in income of affiliates and net income, also set new records. Factors driving this movement to new highs in profitability included higher revenues and the positive impact of cost reductions, both of which more than offset the escalation in raw material costs.

 

Motorcycle Business

 

Global unit sales of motorcycles declined, despite increases in Other Regions mainly in Brazil, as our unit sales in North America and certain other markets decreased.

 

By region, in Other Regions, which includes South America, we reported major increases in sales of 125cc-class models as a result of expansion in the Brazilian market. In Asia, sales of scooters and other motorcycles in India were favorable, and sales in the fast-growing economy of Vietnam were strong, especially for automatic transmission models.

 

In North America, however, as a result of the deceleration in the U.S. economy because of fallout from the subprime mortgage crisis, unit sales of medium- to large-size motorcycle models, sport-type ATVs, and other products declined from the levels of the previous year. In Japan, we took steps to increase the appeal of Honda products and stimulate market demand by installing fuel-injection (FI) systems* on scooters and other models, making full model changes in our large scooters, and adopting other measures, but unit sales dropped below the previous year.

 

 

* Fuel Injection (FI): Electronically controlled fuel injection systems

 

Automobile Business

 

During the fiscal year under review, as a result of strong unit sales of Honda’s global automobile models—the Civic, Accord, CR-V and Fit—unit sales increased in all overseas regions, and total unit sales were at a record level for the ninth consecutive year.

 

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Table of Contents

In North America, as the U.S. economy showed growing signs of deceleration, Honda sustained its efforts and momentum, especially for the new-model Accord and CR-V, and reported a steady rise in unit sales in the United States. In Europe, sales of units with clean, high-efficiency diesel engines expanded, while Honda posted rapid sales growth in Russia, supported by strong economic conditions, and in Eastern Europe, where markets are continuing to expand. Meanwhile, in Asia, sales of the Civic, CR-V and other models were favorable in China. In Japan, although sales of the new-model Fit were strong, overall demand conditions were weak and unit sales decreased.

 

Power Product and Other Businesses

 

Total unit sales of this segment during the fiscal year under review declined as a result of substantially lower sales in North America, despite increases in other areas outside the United States.

 

By region, in North America, overall unit sales of Honda power products were weak because of the decline of the housing market. On the other hand, unit sales increased in Europe, mainly of general-purpose engines for OEM*1 use, along with expansion in the Russian and Eastern European markets as well as solid sales of lawn mowers and other products in Western Europe. In Asia, sales of general-purpose engines and pumps were favorable.

 

 

*1

OEM (Original equipment manufacturing):

 

OEM refers to a manufacturing of products and components supplied for sale under a third-party brand.

 

Results of the 9th Mid-Term Management Plan

 

Fiscal 2008 was the concluding year in Honda’s 9th Mid-term management plan, which was launched in fiscal 2006. During the three years covered by the plan, Honda focused on establishing a foothold in order to achieve a significant leap in the future, focusing on

 

  Strengthening the core characteristics that make Honda unique,

 

  Strengthening the foundation for global growth, and

 

  Strengthening Honda’s efforts to reduce its environmental footprint.

 

Over the three years of the plan, Honda established a foothold as a manufacturing enterprise. Also, Honda succeeded in dramatically expanding its business scale as the economies of North America recorded a generally favorable performance, and the economies of Asia and South America continued to grow, by expanding its total net sales and other operating revenue 38.8% more than the final fiscal year of the previous mid-term plan.

 

– Strengthening the Core Characteristics that Make Honda Unique through Acceleration of Efforts in Japan

 

We believe that an important initiative that will facilitate the application of Honda’s technology and know-how in its operations around the world will be to strengthen in Japan the core characteristics that make Honda unique. During the period of the 9th Mid-term plan, Honda promoted standardization of production process and increased efficiency with an eye to overseas production plants, aiming to establish a production and development system that enables Honda to provide high quality products and flexibly meet the need of customers.

 

– Strengthening the Foundation for Global Growth

 

In its overseas operations, Honda has worked to structure and expand flexible production systems that can respond to continuing changes in demand. Honda has expanded its production capacity for automobiles in response to strong demand in India, China, Brazil and elsewhere, thus making it possible to supply a total of 3,955,000 automobiles to world markets during the fiscal year under review. This figure was 20.8% higher than production in the fiscal year ended March 31, 2005, the final year of the previous mid-term plan.

 

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– Strengthening Honda’s Efforts to Reduce Its Environmental Footprint

 

With the long-range goal of “giving joy to the next generation,” Honda has established voluntary targets*2 for making its products and production activities more environmentally-responsible and is stepping up its initiatives to reach these targets by an earlier date.

 

Sales of Honda automobiles with our originally developed diesel engines, which offer improved environmental performance and the same degree of driving comfort as cars with gasoline engines, are expanding in Europe. Furthermore, Honda has adopted the Variable Cylinder Management (VCM)*3 System, which offers improvement in fuel efficiency in conventional gasoline engines, to new Accord models in North America and began the marketing of these automobiles in September 2007. In the field of hybrid cars, Honda’s cumulative sales through the end of fiscal 2008 have exceeded 250,000 units. Sales continue to be strong, as requirements worldwide for better fuel efficiency are increasing. Also, Honda’s all-new fuel cell vehicle, the FCX Clarity, was unveiled in November 2007.

 

In the motorcycle business, Honda has completed the installation of fuel injection systems, which are superior in environmental performance, on almost all of its business bike and scooter models sold in Japan.

 

Honda is also active in the field of solar cells, and its consolidated subsidiary, Honda Soltec Co., Ltd., began the marketing of thin-film solar cells in June 2007.

 

 

*2

Honda’s worldwide goals for reducing CO2 emissions by 2010:

 

(Compared to fiscal 2001)

 

 

-

Reduce CO2 emissions per unit of motorcycles, automobiles and power products by 10%

 

 

-

Reduce CO2 emissions per unit in production of motorcycles and power products by 20%

 

 

-

Reduce CO2 emissions per unit in production of automobiles by 10%

 

*3

VCM: An advanced variable cylinder management system that can switch from six-cylinder mode to four-cylinder or three-cylinder mode, depending on driving conditions.

 

Fiscal Year 2008 Compared with Fiscal Year 2007

 

Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenues (hereafter, “net sales”) for the fiscal year ended March 31, 2008 grew ¥915.6 billion, or 8.3%, compared with fiscal 2007, to ¥12,002.8 billion. Factors behind this increase were higher unit sales in the motorcycle business in Other Regions, higher unit sales in the automobile business in all overseas regions, and higher unit sales of power products in Asia, as well as the positive impact of foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged against other currencies from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥743.0 billion, or 6.7%, compared to the increase as reported of ¥915.6 billion, which includes a positive foreign currency effect.

 

Domestic net sales decreased by ¥95.4 billion, or 5.7%, to ¥1,585.7 billion, but overseas net sales were up ¥1,011.1 billion, or 10.7%, to ¥10,417.0 billion.

 

Operating Income

 

Operating income increased ¥101.2 billion, or 11.9% to ¥953.1 billion when compared with the preceding year. After considering the net effect of the positive impact of foreign currency effects of ¥37.6 billion, Honda estimates operating income increased ¥63.5 billion, or 7.5%.

 

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Factors contributing to the remaining increase of ¥63.5 billion in operating income, after consideration of foreign currency effects can be summarized as follows (i) changes in net sales and the model mix, (ii) cost reductions and the effect of raw material cost fluctuations, (iii) changes in selling, general and administrative (SG&A) expenses and (iv) R&D expenses. Details regarding these factors are as follows.

 

Changes in net sales and the model mix was a positive impact of ¥170.0 billion due mainly to an increase of income because of higher sales and an effect of price increase. On the other hand, higher incentives payment in North America and change in model mix caused by shift of customers’ demands towards more fuel efficient (compact) models for automobiles segment because of the higher fuel prices negatively affected operating income.

 

Because of the positive impact of continuing cost reduction effects which offset the negative impacts of surging raw materials prices, such as steel and precious grade metals used as catalyst, as well as an increase in depreciation, cost of sales had a positive impact of ¥11.5 billion.

 

Selling, general and administrative expenses had a negative impact of ¥81.8 billion due to higher transportation and storage costs accompanying the increase in unit sales, an increase of provisions for credit losses mainly in financial services business in North America, and higher advertising and sales promotion costs.

 

R&D expenses also had a negative impact of ¥36.1 billion, as we spent more on safety and environmental technologies and worked to enhance the attractiveness of our products.

 

With respect to the discussion above of the change in operating income, management has identified the factors set forth below and used what it believes to be a reasonable method to analyze the respective changes in such factors. Each of these factors is explained below. Management has analyzed changes in these factors at the levels of the Company and its material consolidated subsidiaries.

 

(1) “Foreign currency effects” consist of translation adjustments, which come from the translation of the currency of foreign subsidiaries’ financial statements into Japanese yen, and foreign currency adjustments, which result from foreign-currency-denominated sales. At the levels of the Company and those consolidated subsidiaries which have been analyzed, such foreign currency adjustments primarily relate to the following currencies: U.S. dollar, Canadian dollar, Euro, British pound, Brazilian real and Japanese yen.

 

(2) With respect to “cost reduction and effects of raw material cost fluctuations”, management has analyzed cost reduction and effects of raw material cost fluctuations at the levels of the Company and its material foreign manufacturing subsidiaries in North America, Europe and Other Regions.

 

(3) With respect to “changes in net sales and model mix”, management has analyzed changes in sales volume and in the mix of product models sold in major markets which have resulted in increases/decreases in profit, as well as certain other reasons for increases/decreases in net sales and cost of sales.

 

(4) With respect to “selling, general and administrative expenses”, management has analyzed reasons for an increase/decrease in selling, general and administrative expenses from the previous fiscal year excluding currency translation effects.

 

Income before Income Taxes, Minority Interest and Equity in Income of Affiliates

 

Income before income taxes, minority interest and equity in income of affiliates increased ¥102.9 billion, or 13.0%, to ¥895.8 billion. Main factors of this increase except factors relating operating income are as follows;

 

Losses on the valuation of interest rate swaps and other derivatives of our finance subsidiaries had a negative impact of ¥13.4 billion. The other factors had a net positive impact of ¥15.1 billion. Among such other factors, the effects of transaction gains and losses had a positive impact, but this was offset by the negative impact of various factors, including the net loss associated with the revaluation of assets and liabilities denominated in foreign currencies, and the absence of gains on sale of investment securities which were recorded in the fiscal year ended March 31, 2007.

 

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Income Tax Expense

 

Income tax expense increased ¥103.5 billion, or 36.5%, to ¥387.4 billion. The effective tax rate was 43.2%, an increase by 7.4 percentage points from the previous fiscal year. This increase in the effective tax rate was mainly due to the recognition of liabilities for unrecognized tax benefits as a result of an ongoing examination of the Company’s tax filings by the Tokyo Regional Taxation Bureau with regard to transfer pricing matters.

 

Additional detailed information is described in Note (10) to the accompanying consolidated financial statements.

 

Minority Interest in Income of Consolidated Subsidiaries

 

The amount deducted for minority interest in income of consolidated subsidiaries grew ¥7.1 billion, or 35.7% from the previous year, to ¥27.3 billion.

 

Equity in Income of Affiliates

 

Equity in income of affiliates grew ¥15.5 billion, or 15.0%, to ¥118.9 billion, due mainly to an increase of income at equity method affiliates in Asia accompanying an increase in their sales along with market expansion.

 

Net Income

 

Net income rose ¥7.7 billion, or 1.3% from the previous year, to ¥600.0 billion.

 

Business segments

 

Motorcycle Business

 

Unit sales of Honda motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC) in fiscal 2008 totaled 9,320,000 units, a decrease of 10.1%, from the previous fiscal year. Unit sales in Japan were 311,000 units, a decrease of 7.7%. Overseas unit sales in the motorcycle totaled 9,009,000 units, a decrease of 10.2%, due mainly to a decrease in unit sales of parts for local production at affiliates accounted for under equity method in Asia, which offset the increase in unit sales in Other Regions, especially in South America. Revenue from external customers increased ¥188.0 billion, or 13.7%, to ¥1,558.6 billion, from the previous fiscal year, due mainly to increased unit sales in Asia and Other Regions, and the positive impact of foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥94.8 billion, or 6.9%, compared to the increase as reported of ¥188.0 billion, which includes a positive foreign currency effect.

 

Operating income increased ¥50.6 billion, or 50.4 %, to ¥151.2 billion, from the previous fiscal year, due mainly to a positive foreign currency effects caused by an appreciation of Brazilian real and a positive impact of changes in the model mix, which offset the increased R&D expenses and higher SG&A expenses.

 

Japan

 

In Japan, total demand* for motorcycles in fiscal 2008 was approximately 710,000 units, a decline from the previous fiscal year. Although sales of small, two-wheeled motor vehicles (over 251cc) were strong—due to structural factors, including the decline in the population of younger people and those obtaining first-class motorcycle driver’s licenses, the shortage of motorcycle parking space in urban areas and other factors—sales of first-class motor-driven cycles (up to 50cc) and mini-sized two-wheeled motor mini-vehicles (126cc to 250cc) declined.

 

Amid these market conditions, Honda’s unit sales of motorcycles declined 7.7% from the previous fiscal year to 311,000 units, despite an increase in sales of second-class motor-driven cycles (51cc to 125cc) for business use from replacement demands of corporate customers, as sales of scooters and other first-class motor-driven cycles as well as mini-sized two-wheeled motor mini-vehicles declined.

 

To accelerate initiatives to reduce the load on the natural environment, Honda newly adopted its fuel-injection system on its Today motor-driven cycles, its Super Cub 50 business bike and other models. In addition, to stimulate new demand, Honda introduced the DN-01, a large super sport cruiser equipped with its new automatic transmission.

 

 

* Source: JAMA (Japan Automobile Manufacturers Association)

 

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North America

 

In calendar 2007, total demand in the United States for motorcycles and ATVs declined. Although sales of on-road bikes remained stable, sales of off-road bikes and sport ATVs, which are recreational products, declined as a result of such factors as the turmoil in financial markets stemming from the subprime mortgage crisis.

 

Amid these conditions, Honda’s unit sales in this market for fiscal 2008 declined 9.9%, to 453,000 units. Among motorcycle sales, although the number of super sport bikes such as CBR600RR increased, sales of cruiser models and off-road bikes declined. As a result, Honda’s motorcycle sales in this market fell 14.2%, to 242,000 units. Sales of ATVs decreased 4.5%, to 211,000 units, despite favorable sales of models in the FourTrax Rancher utility ATV series, as the number of sport ATVs declined.

 

Europe

 

In calendar 2007, total demand in Europe*1 increased over the previous year, to approximately 1,320,000 units as every country except Italy saw an increase from the growth in sales of large scooters, which are the largest market sub-segment in Europe.

 

In this operating environment, Honda’s motorcycle sales in this region for fiscal 2008 decreased 4.9% from the previous year, to 313,000 units. This occured in spite of approximately the same level of sales of large scooters as in the previous fiscal year, because of weakness in unit sales of 125cc scooters as well as naked*2 and dual-purpose*3 models.

 

 

*1

Total for ten countries: United Kingdom, Germany, the Netherlands, Belgium, France, Spain, Italy, Switzerland, Portugal and Hungary

 

*2

Naked: models not equipped with a cowl (a front guard to protect against the wind)

 

*3

Dual-purpose: motorcycles used mainly for off-road riding but also designed to run on paved roads (public roads)

 

Asia

 

In Asia, demand for motorcycles as an essential mode of transportation has continued to grow. During calendar 2007, total demand in principal Asian countries outside Japan* increased from the previous year, to approximately 35,500,000 units, as a result of stable economic growth and other factors.

 

Amid this environment, unit sales of completed products of Honda and its consolidated subsidiaries and unit sales of parts to Honda affiliate companies accounted for under the equity method for use in local production by such companies declined 16.0%, to 6,633,000 units.

 

Honda is working to expand local businesses in the region through actively promoting the local procurement of parts used in overseas production. In Asia, this strategy has resulted in an increase in sales of Honda-brand motorcycles that are manufactured and sold by affiliated companies accounted for under the equity method in India and China, but do not include any parts supplied by Honda or its consolidated subsidiaries, and, therefore, are not included in Honda’s consolidated unit sales.

 

By country, although sales of the Wave series in Thailand were favorable, sales of existing models weakened. As a result, Honda’s unit sales in Thailand declined 8.2% from the previous fiscal year, to 1,286,000 units.

 

In Vietnam, unit sales in fiscal 2008 climbed 42.9% over the previous fiscal year, to 1,125,000 units. Factors accounting for this were mainly the introduction in April 2007 of the first fuel-injection model, the Future Neo FI, and the Air Blade, with an automatic transmission.

 

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In Indonesia, P.T. Astra Honda Motor, an affiliate accounted for under the equity method, added a new model of the Revo to its lineup of 100cc Cub-type models in April 2007 and introduced a version of the Fit X with disk brakes in August 2007. P.T. Astra Honda Motor also added another new model, the Supra X125, a Cub-type model, to its line in September 2007. However, these initiatives were not sufficient to make up for the slump in the first half of the year, and unit sales to affliate(s) accounted for under the equity method declined 16.7%, to 2,056,000 units.

 

Our Indian consolidated subsidiary, Honda Motorcycle and Scooter India Private Limited, reported robust sales of the Shine, a 125cc motorcycle that had undergone a model change; the Unicorn, a 150cc motorcycle; the Activa scooter, with an automatic transmission, and the Dio motorcycle. In addition, Hero Honda Motors Ltd., an affiliate accounted for under the equity method, reported robust sales of the low-priced CD Deluxe 100cc motorcycle; the Splendor-NXG, which it introduced in May 2007; and the Glamour, a 125cc motorcycle with cast wheel specifications. For the fiscal year under review, total unit sales of completed motorcycles of Honda and its consolidated subsidiaries and unit sales of parts to Honda affiliate companies accounted for under the equity method for use in local production by such companies declined 47.5%, to 1,120,000 units.

 

 

* Total for eight countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, India, Pakistan and China

 

Other Regions

 

In Other Regions—including South America, the Middle & Near East, Africa and Oceania—unit sales increased 23.4%, to 1,610,000 units.

 

In Brazil, where economic performance continued to be strong, total demand in calendar 2007 increased, to 1,690,000 units. Amid this operating environment, Honda posted growth in sales of its core models, the CG150 Titan, the CG125 Fan and the Biz 125 models, and unit sales in Brazil expanded.

 

Automobile Business

 

Honda’s unit sales of automobiles amounted to 3,925,000 units, up 7.5% from the previous fiscal year. In Japan, unit sales decreased 8.5%, to 615,000 units. Overseas unit sales increased 11.1%, to 3,310,000 units, due mainly to increased unit sales in North America, Europe, Asia and Other Regions.

 

Revenue from external customers increased ¥600.3 billion, or 6.8%, to ¥9,489.3 billion, from the previous fiscal year, due to increased unit sales and the positive impact of the foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥514.4 billion, or 5.8%, compared to the increase as reported of ¥600.3 billion, which includes a positive foreign currency effect.

 

Operating income increased ¥62.1 billion, or 10.4%, to ¥661.6 billion, from the previous fiscal year, due mainly to the positive impacts of higher revenue attributable to the increased unit sales, continuing cost reduction effects, increased prices, and the positive foreign currency effects, while offsetting the negative impacts of increased sales incentives in North America, substantially increased raw material costs, increased SG&A expenses, changes in the model mix, higher R&D expenses, and increased depreciation expenses.

 

Japan

 

Total automobile demand in Japan* (as measured by the number of registrations of regular vehicles (661cc or higher) and mini-vehicles (660cc or lower)) through December 2007 was below the level of the previous year for 21 consecutive months, thus creating severe market conditions. In fiscal 2008, total demand declined from the previous fiscal year, to 5,320,000 units. Of this total, regular vehicle registrations remained below the level of the

 

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previous year throughout the fiscal year and amounted to approximately 3,430,000 units, despite the positive impact on sales of the Tokyo Motor Show in the latter half of fiscal 2008 and the introduction of new models by various automakers. Registrations of mini-vehicles amounted to about 1,890,000 units, also below the level of the previous fiscal year, despite continued interest among drivers in owning these vehicles, in part because of a decline of the positive impact of the introduction of new types of mini-vehicles.

 

Within this operating environment, although sales of Honda vehicles in the regular vehicle category during fiscal 2008, including the Stream and CR-V continued to be strong, and sales of the new Fit and Inspire models were robust, in the mini-vehicle category sales were lackluster due to the decline in sales of Zest and Life. As a result of this and other factors, overall automobile sales declined 8.5%, to 615,000 units.

 

 

* Source: JAMA (Japan Automobile Manufacturers Association)

 

North America

 

In calendar 2007, total demand in the United States declined from the previous year, to 16,150,000 units. A decline in new car demand became clear toward the end of the year as consumer interest in purchasing new automobiles declined substantially due to such factors as the increase in oil prices, the turmoil in financial markets stemming from the subprime mortgage crisis. In addition, the market continued to shift from large sport utility vehicles (SUVs) and light trucks including pickup trucks, and toward small-size vehicles and crossover utility vehicles (CUVs) because of their fuel efficiency and smaller size.

 

Amid these operating conditions, unit sales of Honda automobiles in North America during the fiscal year under review rose 3.5%, to 1,850,000 units, despite a decline in sales of the Pilot, as sales of the small-size Fit and the CR-V in the CUV category continued to be strong, and a favorable sales performance was recorded for the core Accord and Civic models.

 

Europe

 

Total demand in Germany, Europe’s largest market, were below the levels of the previous year for 12 consecutive months. However, markets in Eastern and Central European countries continued to expand. As a result, total demand in Europe* in calendar 2007 amounted to approximately 15,960,000 units, about the same as in calendar 2006.

 

Total demand in Russia in calendar 2007 showed strong growth, to about 2,580,000 units as a result of strong economic conditions accompanying the rise in prices of crude oil and other resources that Russia possesses as well as the rapid expansion of automobile loan financing in that country.

 

Amid this operating environment, during the fiscal year under review, Honda’s automobile sales increased 20.7%, to 391,000 units. Factors accounting for this performance were the expansion in sales of diesel-powered cars as well as favorable sales for the new model CR-V, which was introduced in January 2007, and the three-door Type S as well as Type R models in the Civic series. Especially in Russia, sales of the Accord and Civic four-door sedans recorded strong sales.

 

 

* Source: Passenger automobile division of Association des Constructeurs Européens d’Automobiles (the European automobile association) (Figures include 25 EU countries and 3 European Free Trade Association (EFTA) countries)

 

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Asia

 

In Asia outside Japan, total demand in principal countries* in calendar 2007 increased, to 14,330,000 units, as a result of stable economic expansion.

 

In Asia in fiscal 2008, total sales of finished automobiles of Honda and its consolidated subsidiaries and unit sales of parts to Honda affiliate companies accounted for under the equity method for use in local production by such companies expanded 21.8%, to 755,000 units.

 

By country, sales of the Civic and the new CR-V models that were introduced in early 2007 showed favorable expansion in Indonesia, India and other countries. In China, sales were strong for the City and Odyssey by Guangzhou Honda Automobile Co., Ltd., an affiliate accounted for under the equity method, and for the Civic and the CR-V, which was introduced in April 2007 by Dongfeng Honda Automobile Co., Ltd., also an equity-method affiliate.

 

 

* The total includes Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Singapore, Taiwan, Korea, India, Pakistan and China.

 

Other Regions

 

In calendar 2007, other major markets in the Other Regions geographical segment expanded against a background of increasing crude oil and other raw material prices. Compared with the previous year, the Brazilian automobile market*1 grew, to approximately 2,460,000 units, while the Australian market*2 expanded to approximately 1,050,000 units. Markets in the Middle & Near East and South American markets other than Brazil also experienced overall expansion.

 

Amid these operating conditions, Honda’s unit sales in the Other Regions expanded 26.6%, to 314,000 units. In Brazil, sales of Civic and Fit flexible fuel vehicle (FFV) models which are able to operate on 100% ethanol or a mixture of gasoline and ethanol were quite robust, while in other countries, sales of the CR-V and Civic were strong.

 

 

*1

Source : Associação Nacional dos Fabricantes de Veículos Automotores (the Brazilian automobile association)

 

*2

Source: Federal Chamber of Automotive Industries (the Australian automobile association)

 

Power Product and Other Businesses

 

Honda’s unit sales of power products totaled 6,057,000 units, down 5.7% from the previous fiscal year. In Japan, unit sales totaled 550,000 units, an increase of 4.4%. Overseas unit sales came to 5,507,000 units, a decrease of 6.6%, due mainly to decreased unit sales in North America. Revenue from external customers increased ¥3.4 billion, or 0.8%, to ¥421.1 billion, from the previous fiscal year, due mainly to the positive impact of foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have decreased by approximately ¥3.3 billion, or 0.8%, compared to the increase as reported of ¥3.4 billion, which includes a positive foreign currency effect.

 

Operating income was ¥22.3 billion, a decrease of ¥13.8 billion, or 38.2% from the previous fiscal year, due mainly to the negative impact of the increased SG&A expenses and an increase of R&D expenses in other businesses, which offset the positive impact of the foreign currency effects caused by the appreciation of the European currencies.

 

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Japan

 

In Japan, unit sales grew 4.4%, to 550,000 units. These gains were due primarily to higher sales of pumps, sales of GX series engines for electric power generators and other products on an original equipment manufacturer (OEM*1) basis and sales of compact, home-use cogeneration systems for household use.*2

 

 

*1

OEM (Original equipment manufacturing):

 

OEM refers to a manufacturing of products and components supplied for sale under a third-party brand.

 

*2

Compact, home-use cogeneration systems: Honda has applied its original electromagnetic inverter technologies to create small and light-weight electronic power generation systems built with an efficient layout.

 

North America

 

Sales in North America declined 22.2%, to 2,415,000 units. Factors accounting for these declines were weakness in sales of engines for OEM use in high-pressure washers and lawn mowers and weakness in sales of lawn mowers, generators and other products, due mainly to the slowdown in the housing market caused by the subprime loan issue mainly in the United States.

 

Europe

 

In Europe, sales expanded 4.2%, to 1,693,000 units. Sales of GCV series engines for OEM use in lawn mowers and sales of GX series engines for OEM use in generators, construction machinery and other applications expanded.

 

Asia

 

Unit sales in Asia, excluding Japan, increased 20.4% from the previous fiscal year, to 915,000 units, as a result of higher sales of general-purpose engines in China, general-purpose engines and pumps in Indonesia and India as well as other factors.

 

Other Regions

 

In Other Regions, unit sales for the fiscal year under review rose 19.2%, to 484,000 units, mainly as a result of increased sales of general-purpose engines in Brazil and higher sales of electric power generators in Australia and South Africa.

 

Financial Services Business

 

To support the sale of its products, Honda provides wholesale financing to dealers and retail lending and leasing to customers through our finance subsidiaries in Japan, the United States, Canada, the United Kingdom, Germany, Brazil and Thailand.

 

As a result of increased sales of automobiles mainly in North America, credit assets and property on operating leases of financial subsidiaries rose 3.4% from the previous fiscal year, to ¥4,967.5 billion.

 

In fiscal year 2008, revenue from external customers in a financial services business increased ¥123.8 billion, or 30.2%, to ¥533.5 billion from the previous fiscal year due mainly to an increase in operating lease revenue. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥137.0 billion, or 33.4%, compared to the increase as reported of ¥123.8 billion, which includes a negative foreign currency effect.

 

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Operating income also expanded ¥2.2 billion, or 2.0%, to ¥117.7 billion from the previous fiscal year, due mainly to the increased profit attributable to higher revenue benefiting from a higher loan balance in North America, which offset the negative impact of the increased SG&A expenses caused by an increase of provisions for credit losses.

 

Our finance subsidiaries in North America have historically accounted for all leases as direct financing leases. However, starting in the year ended March 31, 2007, some of the leases which do not qualify for direct financing leases accounting treatment are accounted for as operating leases. Generally, direct financing lease revenues and interest income consist of the recognition of finance lease revenue at inception of the lease arrangement and subsequent recognition of the interest income component of total lease payments using the effective interest method. In comparison, operating lease revenues include the recognition of the gross lease payment amounts on a straight line basis over the term of the lease arrangement, and operating lease vehicles are depreciated to their estimated residual value on a straight line basis over the term of the lease. It is not anticipated that the differences in accounting for operating leases and direct financing leases will have a material net impact on the Company’s results of operations overall, however, operating lease revenues and associated depreciation of leased assets do result in differing presentation and timing compared to those of direct financing leases.

 

Information about allowance for credit losses is provided at Item 5. Operating and Financial Review and Prospects A. Operating Results, Application of Critical Accounting Policies. Information about finance subsidiaries-receivables and securitizations is described in Note (3) to the accompanying consolidated financial statements.

 

Geographical Information

 

Japan

 

In Japan, revenue from domestic and export sales was ¥4,889.0 billion, up ¥114.9 billion, or 2.4% compared to the previous fiscal year, due primarily to the increased revenue from exports in automobile business which offset the negative impact of the decreased revenue in domestic automobile business. Operating income was ¥192.5 billion, down ¥35.5 billion, or 15.6%, compared to the previous fiscal year, due primarily to the increased R&D expenses, increased depreciation expenses, and substantially increased raw material costs, which offset the positive impact of the continuing cost reduction effects, increased profit attributable to higher revenue, and the decreased SG&A expenses.

 

North America

 

In North America, which mainly consists of the United States, revenue increased ¥92.6 billion, or 1.5%, to ¥6,265.2 billion, due mainly to increased revenue in the automobile business, which offset the negative impact of foreign currency translation effects.

 

Operating income decreased ¥24.1 billion, or 5.3%, to ¥432.6 billion, from the previous fiscal year, due primarily to the negative impacts of increased sales incentives in the automobile business, substantially increased raw material costs, the change in the model mix in the automobile business, increased SG&A expenses caused by an increase of provisions for credit losses in the financial services business, increased depreciation expenses, and the negative impact of foreign currency effect because of the depreciation of U.S. dollars, which offset the positive impacts of increased profit attributable to higher revenue, continuing cost reduction effects, and increased prices.

 

Europe

 

In Europe, revenue increased ¥246.4 billion, or 18.3%, to ¥1,594.2 billion, compared to the previous fiscal year, due primarily to increased revenue in the automobile business and the positive impact of foreign currency translation effects.

 

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Operating income increased ¥19.5 billion, or 61.1%, to ¥51.5 billion, from the previous fiscal year, due mainly to the positive impacts of increased profit attributable to higher revenue, continuing cost reduction effects and the foreign currency effects, which offset the negative impacts of the increased SG&A expenses.

 

Asia

 

In Asia, revenue increased ¥366.8 billion, or 28.9%, to ¥1,638.2 billion from the previous fiscal year, due primarily to increased revenue in the motorcycle and automobile businesses and the positive impact of foreign currency translation effects.

 

Operating income increased ¥53.5 billion, or 69.4%, to ¥130.7 billion, from the previous fiscal year, due mainly to the positive impacts of increased profit attributable to higher revenue and the foreign currency effects, which offset the negative impact of increased SG&A expenses.

 

Other Regions

 

In Other Regions, revenue increased ¥295.1 billion, or 37.0%, to ¥1,092.8 billion, compared to the previous fiscal year, due mainly to increased revenue in all of the business segments and the positive impact of foreign currency translation effects.

 

Operating income rose ¥44.2 billion, or 61.2%, to ¥116.4 billion, from the previous fiscal year, due mainly to the positive impact of the increased profit attributable to higher revenue, the foreign currency effects, and continuing cost reduction effects which offset the negative impact of increased SG&A expenses.

 

Initiatives under the 10th Mid-Term Management Plan

 

In April 2008, we began our 10th three-year mid-term management plan. As we launched the new plan, environmental issues were continuing to rise in importance and many uncertainties loomed, including volatility in foreign currency exchange rates and the difficulty in forecasting the macro trends in the world economy. Under our 10th Mid-term plan, the basic concept is “to establish the necessary systems to give Honda the strengths to continue to grow globally in the medium-to-long term and apply its strengths in Japan to its operations around the world.”

 

To do this, we will take initiatives including, strengthening motorcycle business, innovation of automobile manufacturing in Japan, and increasing the market penetration of environmentally-responsible products.

 

– Strengthening Motorcycle Business

 

Looking to the future, Honda will continue to create products that will offer new value and exceed customer expectations. To do this, Honda will make further advances in R&D, expand the application of fuel injection technology and actively apply safety technologies, including a motorcycle airbag system and antilock braking systems. In addition to introducing environmental and safety technologies, Honda will work to improve fuel efficiency through the installation of a VCM system for motorcycles that increases fuel economy and an advanced electronically controlled combined antilock braking system (C-ABS) that improves stability when braking, while also working to enhance the attractiveness of medium to large-size models and give Honda owners a greater sense of joy in riding.

 

At new motorcycle plant at Honda’s Kumamoto Factory, which began operations in April 2008, will play a key role in strengthening motorcycle production. Honda created efficient production lines to make it possible to efficiently produce approximately 60 models, from small commuters to large motorcycles, and accommodate the unique characteristics of each model. The initiatives we have taken at this new motorcycle plant will be applied in our plants in regions outside of Japan, where the markets for motorcycles are continuing to expand, and the Kumamoto Factory will be a driving force for creating new products going forward.

 

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– Innovation of Automobile Manufacturing in Japan

 

Several next-generation production plants will begin operation in Japan over the coming three years. They will include a new engine plant in Ogawa, a new automobile plant in Yorii, a new mini-vehicle production plant to be built by our consolidated subsidiary, Yachiyo Industry Co., Ltd. Also, the renovation is planned for Hamamatsu Factory to make it to specialize in production of transmissions.

 

The new auto engine plant in Ogawa will be responsible for the production of next-generation environmentally responsible engines that require highly advanced manufacturing technologies. This plant will use flexible manufacturing technology to produce engines requiring different production processes, including gasoline engines, diesel engines, in-line four-cylinder engines and V-type engines. We are planning to make the Yorii Plant a next-generation manufacturing facility by introducing systems that optimally control the amount of energy used during production and works to create more people-friendly assembly lines.

 

Also, in regions outside Japan, in the latter half of fiscal 2008 we will begin production at a new automobile plant in Indiana, in the United States; a new auto engine plant in Canada; and a second automobile plant in Thailand.

 

– Environmentally Responsible Vehicles

 

Honda believes that the most important environmental issue is the reduction of CO2 emissions, which is a means of protecting the natural environment on a global scale. Recognizing this, Honda has proactively announced global CO2 reduction targets for 2010 for both its products and manufacturing activities.

 

Hybrid Vehicles

 

In addition to the Civic Hybrid, which is currently on the market, Honda is planning to introduce a new dedicated hybrid vehicle that will be compact and easy to drive, with five doors and room for five passengers. For its hybrid system, the new automobile will incorporate a compact, lightweight Integrated Motor Assist (IMA) system. The new Honda hybrid will go on sale in Japan, North America and Europe early in 2009. Looking ahead, we plan to debut a new sporty hybrid based on the CR-Z concept model that we showed at the 40th Tokyo Motor Show. Furthermore, development is planned to put the hybrid system on Fit model.

 

FCX Clarity

 

The FCX Clarity is a fuel cell vehicle, which features zero CO2 emissions. Lease sales of this epoch-making vehicle will begin in the United States in July 2008 and in Japan in fall 2008.

 

Fiscal 2007 Compared with Fiscal 2006

 

Overview

 

Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenue (hereafter, “net sales”) for the fiscal year ended March 31, 2007 grew ¥1,179.1 billion, or 11.9%, compared with fiscal year 2006, to ¥11,087.1 billion. Factors behind this increase were higher unit sales in the motorcycle business in Other Regions, higher overseas unit sales in the automobile business and higher unit sales in all regions in power product and other businesses, as well as the positive impact of foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged against other currencies from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥732.4 billion, or 7.4%, compared to the increase as reported of ¥1,179.1 billion, which includes a positive foreign currency effect.

 

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Domestic net sales decreased by ¥12.8 billion, or 0.8% to ¥1,681.1 billion, but overseas net sales were up ¥1,191.9 billion, or 14.5% from fiscal year 2006, to ¥9,405.9 billion.

 

Operating Income

 

Operating income declined ¥17.0 billion, or 2.0% to ¥851.8 billion when compared with the preceding year. After considering the net effect of the positive impact of foreign currency effects of ¥125.5 billion in 2007 and the absence of a ¥138.0 billion gain on the return of the substitutional portion of the Employees Pension Funds which was presented in fiscal year 2006, Honda estimates operating income decreased ¥4.5 billion, or 0.5%.

 

Factors contributing to the remaining ¥4.5 billion decrease in operating income, after consideration of foreign currency effects in 2007 and the gain on the return of the substitutional portion of the Employees Pension Funds which was recorded in the fiscal year ended March 31, 2006, can be categorized into (i) changes in net sales and the model mix, (ii) cost reductions and the effect of raw material cost fluctuations, (iii) changes in selling, general and administrative (SG&A) expenses and (iv) R&D costs. Details regarding these factors are as follows.

 

Changes in net sales and the model mix had a positive impact of ¥155.1 billion due mainly to an increase of income because of higher sales in all businesses and in all regions coupled with an effect of price increase in North America. On the other hand, shift of customers’ demands towards more fuel efficient (compact) models mainly in Japan, North America, and Europe market for automobiles segment and higher incentives payment in North America negatively affected operating income.

 

Despite the effects of continuing cost reduction, cost of sales had a negative impact of ¥13.0 billion due to surging raw materials prices, such as steel, aluminum and precious grade metals used as catalyst, as well as an increase in depreciation and labor costs.

 

Selling, general and administrative expenses had a negative impact of ¥105.2 billion due to increases in line with higher unit sales, higher freight costs as the result of substantially increased crude oil prices and higher expenses related to product quality. The negative impact was offset by a decrease of sales promotion expense.

 

R&D expenses also had a negative impact of ¥41.4 billion, as we spent more on safety and environmental technologies and worked to enhance the attractiveness of our products.

 

With respect to the discussion above of the change in operating income, management has identified the factors set forth below and used what it believes to be a reasonable method to analyze the respective changes in such factors. Each of these factors is explained below. Management has analyzed changes in these factors at the levels of the Company and its material consolidated subsidiaries.

 

(1) “Foreign currency effects” consist of translation adjustments, which come from the translation of the currency of foreign subsidiaries’ financial statements into Japanese yen, and foreign currency adjustments, which result from foreign-currency-denominated sales. At the levels of the Company and those consolidated subsidiaries which have been analyzed, such foreign currency adjustments primarily relate to the following currencies: U.S. dollar, Canadian dollar, Euro, British pound, Brazilian real and Japanese yen.

 

(2) With respect to “cost reduction and effects of raw material cost fluctuations”, management has analyzed cost reduction and effects of raw material cost fluctuations at the levels of the Company and its material foreign manufacturing subsidiaries in North America, Europe and Other Regions.

 

(3) With respect to “changes in net sales and model mix”, management has analyzed changes in sales volume and in the mix of product models sold in major markets which have resulted in increases/decreases in profit, as well as certain other reasons for increases/decreases in net sales and cost of sales.

 

 

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(4) With respect to “selling, general and administrative expenses”, management has analyzed reasons for an increase/decrease in selling, general and administrative expenses from the previous fiscal year excluding currency translation effects.

 

Income before Income Taxes, Minority Interest and Equity in Income of Affiliates

 

Income before income taxes, minority interest and equity in income of affiliates decreased ¥37.0 billion, or 4.5%, to ¥792.8 billion. Main factors of this decrease except factors relating operating income are as follows;

 

Losses on the valuation of interest rate swaps and other derivatives of our finance subsidiaries had a negative impact of ¥46.3 billion. Offsetting this was the positive impact of various factors, totaling ¥26.3 billion, including the currency effect due to the difference between average rates and transaction rates and gains on sale of investment securities.

 

Income Tax Expense

 

Income tax expense decreased ¥33.3 billion, or 10.5%, to ¥283.8 billion. The effective tax rate was 35.8%, a decrease by 2.4 percentage points from the previous fiscal year. This decrease was due mainly to an increase of income at foreign subsidiaries which are located in the countries with lower statutory income tax rate.

 

Additional detailed information is described in Note (10) to the accompanying consolidated financial statements.

 

Minority Interest in Income of Consolidated Subsidiaries

 

The amount deducted for minority interest in income of consolidated subsidiaries grew ¥4.8 billion, or 31.6% from the previous year, to ¥20.1 billion, due mainly to the impact of a newly consolidated subsidiary.

 

Equity in Income of Affiliates

 

Equity in income of affiliates grew ¥3.8 billion, or 3.8%, to ¥103.4 billion due mainly to an increase of income at equity method affiliates in Asia accompanying an increase in their sales along with market expansion.

 

Net Income

 

Net income was down ¥4.7 billion, or 0.8% from the previous year, to ¥592.3 billion.

 

Business segments

 

Motorcycle Business

 

Unit sales of Honda motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC) in fiscal 2007 amounted to 10,369,000 units, an increase of 1.0%, from the previous fiscal year. Unit sales in Japan were 337,000 units, a decrease of 8.4%. Overseas unit sales in the motorcycle totaled 10,032,000 units, an increase of 1.3%, due mainly to an increase in unit sales in Other Regions, especially in South America. Revenue from external customers increased ¥144.8 billion, or 11.8%, to ¥1,370.6 billion, from the previous fiscal year, due mainly to increased unit sales and the positive impact of foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥45.9 billion, or 3.7%, compared to the increase as reported of ¥144.8 billion, which includes a positive foreign currency effect.

 

Operating income decreased ¥13.3 billion, or 11.7 %, to ¥100.6 billion, from the previous fiscal year, due mainly to increased SG&A expenses, higher R&D expenses and the gain on return which was recorded in the fiscal year ended March 31, 2006, offsetting the positive impact of increased profit attributable to higher revenue and positive foreign currency effects.

 

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Japan

 

In Japan, total demand for motorcycles in fiscal year 2007, was approximately 730,000 units, down from the previous year. Demand increased for second-class motor-driven cycles (51cc–125cc) and small-size two-wheeled motor vehicles (over 251cc), but fell for first-class motor-driven cycles (up to 50cc) and mini-size two-wheeled motor vehicles (126cc–250cc).

 

To meet increasingly diverse customer needs, we strengthened the Honda Dream Shop and other parts of our sales network, and strove to develop even more appealing motorcycles. Nevertheless, unit sales of motorcycles fell 8.4% in fiscal year 2007, to 337,000 units.

 

We adopted advanced technologies from specialized racing motorcycles in small-size two-wheeled motor vehicles, and sales of the fun-to-ride and maneuverable CBR1000RR super sports model were favorable, but sales of the CB1300 Super Bol d’Or decreased. In mini-size two-wheeled motor vehicles, sales of the Hornet, a naked sports model with refined and exciting styling, were strong. On the other hand, Forza sales declined. Sales of first- and second-class motor-driven cycles, such as the Today and the Duo, decreased.

 

North America

 

Looking at calendar year 2006, demand in the United States for motorcycles, ATVs and personal watercraft came roughly equal to the previous year’s demand. Demand for road bikes grew, but demand for ATVs—particularly utility ATVs—declined.

 

Of this number, Honda motorcycle sales fell 18.2%, to 503,000 units, in fiscal year 2007. Sales of the CBR1000RR, a super sports model, and our new off-road model, the CRF150R, were strong, but higher interest rates and economic uncertainty impacted demand for leisure products. Particularly affected by this impact were sales of off road-models, mainly Enduro*1 models such as CRF50F and CRF70F, which dropped 15.1%, to 282,000 units.

 

As one of our safety initiatives, we launched the world’s first mass-market motorcycle with an airbag system, the GoldWing touring bike, in the United States and Canada.

 

Although sales of the FourTrax Rancher series of utility ATVs, which underwent a full model change in December 2006, were strong, total unit sales of ATVs and personal watercraft came to 221,000 units in fiscal year 2007, down 21.9%.

 

Europe

 

In calendar year 2006, total European motorcycle demand*2 increased from the previous year, to approximately 1,290,000 units, particularly in Spain due to changes in licensing systems as well as economic expansion, followed by increases in Italy, France and the United Kingdom.

 

In fiscal year 2007, unit sales decreased 6.8%, to 329,000 units. Sales were strong for the SH300i, which launched in December 2006. Sales of PS125i, PS150i and Silver Wing 400 scooters were also stable, as were sales of the Deauville touring bike model. However, sales of large super sports models and models mainly in the 125cc class declined.

 

Asia

 

In Asia, demand for motorcycles as an essential mode of transportation has continued to grow. In fiscal year 2007, unit sales in Asia of completed products of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, declined 0.2%, to 7,895,000 units.

 

 

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The Honda Group is working hard to expand local businesses in the region through its active promotion of local procurement of parts used in overseas production. In Asia, this strategy has resulted in an increase in sales of Honda-brand motorcycles that are manufactured and sold by affiliates accounted for under the equity method in India and China, but do not include any parts supplied by Honda or its consolidated subsidiaries, therefore not included in the consolidated unit sales.

 

Total demand in India in calendar 2006 expanded to approximately 8,390,000 units, buoyed by growing market of motorcycles which is the largest category. Hero Honda Motors Limited, an affiliate accounted for under the equity method, enjoyed strong sales of its mainstay Splendor, Splendor Plus and Super Splendor models. In December 2006, the Company launched the new CD Dawn and CD Deluxe models, which feature class-leading fuel efficiency. Honda Motorcycle and Scooter India Private Limited, a consolidated subsidiary, reported strong sales of the Shine equipped with a newly developed engine and the Activa scooter. In India in fiscal year 2007, total unit sales of completed motorcycles of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, grew 10.3%, to 2,134,000 units.

 

In calendar year 2006, the Indonesian market experienced increasing inflation and interest rates, caused by a sharp rise in gasoline prices, which substantially dampened consumer purchasing power in the first half of the year. Fortunately, a mid-year monetary policy relaxation helped ease the inflation rate. Companies in Indonesia responded by strengthening measures to expand sales, but total demand fell to approximately 4,630,000 units nevertheless. P.T. Astra Honda Motors, an affiliate accounted for under the equity method, experienced strong sales of Vario, a automatic transmission (AT) equipped scooter launched in September 2006. Sales of Karizma by P.T. Astra Honda Motors, however, declined. As a result, in fiscal year 2007 total unit sales of completed motorcycles of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, fell 7.7%, to 2,467,000 units from the previous fiscal year.

 

In Thailand, total demand in calendar year 2006 came to approximately 2,060,000 units, down from the previous year. A maturing motorcycle market, the sharp rise in gasoline prices, political upheaval and irregular weather all had some impact on these results. Unit sales in fiscal year 2007 fell 7.5%, to 1,401,000 units from the previous year, although two AT-equipped scooters—the Click, which launched in fiscal year 2006, and the Air Blade, which went on sale in June 2006—were favorable.

 

Total demand for motorcycles in Vietnam in calendar year 2006 benefited greatly from the country’s thorough abolition of a regulation limiting riders to one per motorcycle. This move caused the market to expand and pushed up demand to approximately 2,370,000 units. Similarly, in fiscal year 2007, unit sales significantly increased 25.3%, to 787,000 units.

 

China’s 2005 implementation of Euro2 emission standards caused motorcycle demand to plunge, but in calendar year 2006, this demand returned to 2004 level, expanding to approximately 14,830,000 units. Sundiro Honda Motorcycle Co., Ltd., an affiliate accounted for under the equity method, experienced strong sales of the M-Power, which launched in June 2006. Sales of the Fight Hawk, featuring a large half cowl, were also strong. Similarly, another affiliate accounted for under the equity method, Wuyang-Honda Motors (Guangzhou) Co., Ltd., introduced the SCR110—the first model in China to be equipped with programmed fuel injection (PGM-FI)—in September 2006. In February 2007, the company also launched the SCR125 sports bike. Both models enjoyed favorable sales. As parts for manufacturing these new models are not supplied by Honda or its consolidated subsidiaries, their numbers are not included in Honda’s consolidated unit sales. For this reason, together with the decrease in unit sales of other models, total unit sales of completed motorcycles of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, fell 39.3%, to 204,000 units.

 

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To meet increasing demand in the region, two new plants began operations—one in the Philippines in May 2006, and the other in July in Pakistan.

 

Other Regions

 

Other Regions—including South America, the Middle & Near East, Africa and Oceania—unit sales grew 26.9%, to 1,305,000 units from the previous fiscal year. In Brazil, where economic performance was stable, Honda posted solid sales of such models as the Biz 125 and the CG125 Fan.

 

In June 2006, we began local production in Argentina to meet rising demand.

 

 

*1

Enduro:

 

A motor sport involving long races on relatively flat off-road courses and lasting between two and 12 hours

 

*2

Motorcycle registrations in Europe (10 countries)

 

Automobile Business

 

Honda’s unit sales of automobiles amounted to 3,652,000 units, up 7.7% from the previous fiscal year. In Japan, unit sales decreased 3.4%, to 672,000 units. Overseas unit sales increased 10.6%, to 2,980,000 units, due mainly to increased unit sales in North America, Europe, Asia and Other Regions. Revenue from external customers increased ¥884.3 billion, or 11.0%, to ¥8,889.0 billion, from the previous fiscal year, due to increased unit sales and the positive impact of the foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥562.7 billion, or 7.0%, compared to the increase as reported of ¥884.3 billion, which includes a positive foreign currency effect.

 

Operating income decreased ¥28.8 billion, or 4.6%, to ¥599.5 billion, from the previous fiscal year, due mainly to the negative impact of changes in the model mix, increased sales incentives in North America, substantially increased raw material costs, increased depreciation expenses and labor costs, higher SG&A expenses related to product quality, higher R&D expenses and the gain on return recorded in the fiscal year ended March 31, 2006, which offset the positive impacts of higher revenue attributable to the increased unit sales, increased prices in north America, continuing cost reduction effects and the positive foreign currency effects caused by the depreciation of the Japanese yen.

 

Japan

 

Total automobile demand in Japan in calendar year 2006 remained largely unchanged, at around 5,740,000 units. With the number of mini cars increased and the number of registered vehicles declined.

 

In fiscal year 2007, unit sales declined 3.4%, to 672,000 units. Although Honda’s sales of the Zest and new Stream, CR-V and Crossroad models increased, sales of the Step Wagon, Life and Airwave decreased. In July 2006, Honda introduced the new Stream, a stylish model that offers powerful driving performance. In October, the new CR-V also went on sale. This model features advancements in design, user-friendliness and driving performance, as well as an increased number of advanced safety features. In February 2007, Honda launched the Crossroad. This new model combines the handling ease of a compact car with the rugged exterior and versatility of an SUV.

 

Since integrating our sales channels in March 2006, sales have increased for mini cars and other vehicles used to be sold exclusively by each channel.

 

 

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In the mini car segment, Honda strengthened its capital relationship with Yachiyo Industry Co., Ltd., strengthening its alliance with the Company. The objective of this move was to strengthen Honda’s ability to develop highly competitive products and strengthen its business in this segment.

 

North America

 

In calendar year 2006, total demand in the United States was down to approximately 16,550,000 units. Impacted by the sharp rise in gasoline prices, demand for fuel-efficient vehicles expanded, while sales of large SUVs and pickup trucks was stagnant.

 

Total North American unit sales in fiscal year 2007 came to 1,788,000 units, up 6.3% from the previous year. Unit sales in the passenger car segment benefited from the April 2006 introduction of the Fit, but sales of Acura-brand cars declined, causing overall unit sales in this segment to be approximately the same level as the previous fiscal year. In the light truck segment, on the other hand, the new Acura RDX—an entry-premium SUV—launched in August. The CR-V, a compact SUV which underwent a full model change, went on sale in September, and the new Acura MDX, a premium SUV, launched in October. A favorable market response to these new models strengthened overall sales performance in this region.

 

To increase the local production of powertrain components, in May 2006 we started operating a new automatic transmission plant in Georgia. The Pilot, which was being manufactured on the second line of our plant in Canada, was transferred to Honda’s plant in Alabama in February 2007 and the second line of our plant in Canada began manufacturing the Civic in April 2007, raising annual capacity by 60,000 units, so as to respond to heightened demand for fuel-efficient vehicles.

 

Honda vehicles were selected as Top Picks in three of the 10 automobile categories rated by U.S. Consumer Reports magazine for 2007 models, earning particularly high marks for their fuel efficiency and safety performance. Earning top place were the Civic in the small sedan category, the Accord in the family sedan category and the Fit in the budget car category.

 

Europe

 

Total demand in Europe* in calendar year 2006 amounted to approximately 14,620,000 units, roughly the same level as in 2005.

 

 

* Source: European Automobile Manufacturers’ Association (ACEA), passenger car category (15 countries in the European Union, three countries in the European Free Trade Association)

 

Unit sales for fiscal year 2007 climbed 11.3%, to 324,000 units from the previous year. Recording strong sales results were the five-door Civic and the Accord, as well as the CR-V, a compact SUV that was launched in January 2007 which underwent a full model change, and the three-door Civic.

 

In production, consolidated subsidiary Honda of the U.K. Manufacturing Ltd. responded to rising demand for the Civic and the CR-V, ramping up to full production in calendar year 2007 by starting two-shift production in February at its second plant. The company is strengthening its production system through the gradual transfer of diesel engine production from Japan.

 

Asia

 

In Asia in fiscal year 2007, total unit sales of completed automobiles of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, grew 19.0%, to 620,000 units from the previous fiscal year.

 

 

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Total demand amounted to approximately 5,200,000 units in China in calendar year 2006, rising substantially from the previous year. Particularly strong were sales of the City by Guangzhou Honda Automobile Co., Ltd., an affiliate accounted for under the equity method, and Civic sales by Dongfeng Honda Automobile Co., Ltd., also an equity-method affiliate. In September 2006, the Acura brand was introduced in China, in the brand’s first launch outside North America, through sales of the Acura RL and the Acura TL. In fiscal year 2007, total unit sales of completed automobiles of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliates accounted for under the equity method for purposes of local production by such affiliates in the aggregate, significantly increased 37.6%, to 361,000 units from the previous fiscal year. In production, in September 2006 operations began at the second plant of Guangzhou Honda Automobile Co., Ltd., which has an annual production capacity of 120,000 units. In March 2007, production also began at a new plant in China that manufactures automobile transmissions and other powertrain components. These advances are in line with Honda’s move to strengthen its structure to meet burgeoning Chinese demand.

 

In India, where the market continues to expand, an Indian-made Civic model went on sale in July 2006, contributing to higher unit sales.

 

In Vietnam, consolidated subsidiary Honda Vietnam Co., Ltd., began local production of the Civic in July 2006.

 

Other Regions

 

Due to expansion in South America, the Pacific, and the Middle & Near East, unit sales in Other Regions rose 23.4% in fiscal year 2007, to 248,000 units.

 

In Brazil, Honda began local production of the Civic in April 2006, and sales of this model were strong. In November 2006, we introduced the Civic FFV, a flexible-fuel vehicle that runs on 100% ethanol or any gasoline–ethanol mixture, followed by the launch of the Fit FFV in December. Australian sales of the Civic, Jazz and the new CR-V were strong.

 

Power Product and Other Businesses

 

Honda’s unit sales of power products totaled 6,421,000 units, up 9.3% from the previous fiscal year. In Japan, unit sales totaled 527,000 units, an increase of 8.2%. Overseas unit sales came to 5,894,000 units, an increase of 9.4%, due mainly to increased unit sales in North America and Europe. Revenue from external customers increased ¥47.1 billion, or 12.7%, to ¥417.7 billion, from the previous fiscal year, due mainly to increased unit sales of power products and the positive impact of foreign currency translation effects. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥33.4 billion, or 9.0%, compared to the increase as reported of ¥47.1 billion, which includes a positive foreign currency effect.

 

Operating income was ¥36.1 billion, an increase of ¥0.2 billion, or 0.6% from the previous fiscal year, due mainly to the positive impact of increased profit attributable to higher revenue and the foreign currency effects caused by the depreciation of the Japanese yen, which offset the negative impact of the increased SG&A expenses and the gain on return which was recorded in the fiscal year ended March 31, 2006.

 

Japan

 

In Japan, unit sales rose 8.2%, to 527,000 units from the previous fiscal year. Sales of snowblowers, compact home-use cogeneration systems*1, the GX-series engines supplied to pump and generator manufacturers on an OEM*2 basis applications increased.

 

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North America

 

In North America, sales were strong for GCV series engines—mainly for OEM use in lawn mowers, as well as GX- and GC-series engines for such OEM applications as generators and high-pressure washers. Sales of completed equipment expanded, due to Honda’s introduction of the new HRR lawn mower, but sales of generators declined as a result of overall market shrinkage. As a result of these factors, unit sales from power product grew 9.8% in fiscal year 2007, to 3,103,000 units.

 

During the year, J.D. Power and Associates of the United States accorded Honda the highest ranking for the third consecutive year in the electronic fuel-injected (EFI) four-stroke outboard segment.

 

Europe

 

In Europe, OEM sales of GCV-series engines for lawn mowers were favorable, as were sales of GX-series engines for OEM use in generators and construction equipment. As a result, unit sales grew 10.0%, to 1,625,000 units.

 

Asia

 

Unit sales in Asia expanded 6.0%, to 760,000 units, due to increased sales of pumps and other equipment in China and India.

 

Other Regions

 

In Other Regions, increased unit sales of GX-series engines for OEM production, mainly in South Africa, pushed up sales 10.3%, to 406,000 units from the previous fiscal year.

 

In fiscal year 2007, Honda introduced two four-stroke outboard engines, the BF90 and BF75 that underwent a full model change, responding to needs throughout the world by simultaneously addressing demands for high levels of both environmental performance, power performance and fuel efficiency. Honda also began sales in Japan of the EU55is generator, which employs electromagnetic inverter technology to supply a high level of power, but emit a low level of noise, and of the EU6500is generator in North America. In Japan, we introduced a compact home-use cogeneration system with improved generation efficiency which underwent a full model change. We also launched this model in the United States. In addition, Honda launched the Punch X compact tiller in Japan, and the F501 and FE500 compact tillers in Europe which underwent a full model change. In China, we launched the new EM10000 high-output 10kVA generator, which is compact and equipped with a newly developed alternator.

 

 

*1:

Compact, home-use cogeneration systems: Honda has applied its original electromagnetic inverter technologies to create small and light-weight electronic power generation systems built with an efficient layout.

 

*2:

OEM (Original equipment manufacturing):

 

OEM refers to a manufacturing of products and components supplied for sale under a third-party brand.

 

Financial Services Business

 

Honda offers a variety of financial services to its customers and dealers, with the aim of supporting sales of Honda motorcycles and automobiles. These services are provided through finance subsidiaries in the United States, Japan, Canada, the United Kingdom, Germany, Brazil and Thailand. In fiscal year 2007, revenue from external customers in a financial services business, increased ¥102.8 billion, or 33.5%, to ¥409.7 billion from the

 

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previous fiscal year. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, consolidated net sales for the period would have increased by approximately ¥90.2 billion, or 29.4%, compared to the increase as reported of ¥102.8 billion, which includes a positive foreign currency effect.

 

Operating income also expanded ¥24.9 billion, or 27.6%, to ¥115.5 billion from the previous fiscal year, due mainly to the increased profit attributable to higher revenue benefiting from a higher loan balance in North America and positive foreign currency translation effects, which offset the negative impact of the increased interest rates.

 

Our finance subsidiaries in North America have historically accounted for all leases as direct financing leases. However, starting in the year ended March 31, 2007, some of the leases which do not qualify for direct financing leases accounting treatment are accounted for as operating leases. Generally, direct financing lease revenues and interest income consist of the recognition of finance lease revenue at inception of the lease arrangement and subsequent recognition of the interest income component of total lease payments using the effective interest method. In comparison, operating lease revenues include the recognition of the gross lease payment amounts on a straight line basis over the term of the lease arrangement, and operating lease vehicles are depreciated to their estimated residual value on a straight line basis over the term of the lease. It is not anticipated that the differences in accounting for operating leases and direct financing leases will have a material net impact on the Company’s results of operations overall, however, operating lease revenues and associated depreciation of leased assets do result in differing presentation and timing compared to those of direct financing leases.

 

Information about allowance for credit losses is provided at Item 5. Operating and Financial Review and Prospects A. operating Results, Application of Critical Accounting Policies. Information about finance subsidiaries-receivables and securitizations is described in Note (3) to the accompanying consolidated financial statements.

 

Geographical Information

 

Geographical information are based on the location of the Company and its subsidiaries.

 

Japan

 

In Japan, revenue from domestic and export sales was ¥4,774.1 billion, up ¥336.2 billion, or 7.6% compared to the previous fiscal year, due primarily to the increased revenue from exports in automobile business which offset the negative impact of the decreased unit sales in domestic automobile business. Operating income was ¥228.1 billion, down ¥142.8 billion, or 38.5%, compared to the previous fiscal year, due primarily to the negative impact of the changes in the model mix, substantially increased raw material costs, increased depreciation expenses and labor costs, higher SG&A expenses related to product quality, increased R&D expenses and the absence of a gain on the return of the substitutional portion of the Employee Pension Funds of the Japanese government which was present in fiscal year 2006, which offset the positive impact of the increased profit attributable to higher revenue, continuing cost reduction effects and the foreign currency effects caused by the depreciation of the Japanese yen.

 

North America

 

In North America, which mainly consists of the United States, revenue increased ¥556.3 billion, or 9.9%, to ¥6,172.6 billion, due mainly to increased unit sales in the automobile business and the positive impact of foreign currency translation effects. Operating income increased ¥102.8 billion, or 29.1%, to ¥456.8 billion, from the previous fiscal year, due primarily to the positive impacts of increased profit attributable to higher revenue, increased prices in the automobile business, continuing cost reduction effects, decreased SG&A expenses and the

 

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foreign currency effects caused by the depreciation of the Japanese yen, which offset the negative impacts of the change in the model mix, increased sales incentives in the automobile business, substantially increased raw material costs and increased depreciation expenses and labor costs.

 

Europe

 

In Europe, revenue increased ¥158.2 billion, or 13.3%, to ¥1,347.7 billion, compared to the previous fiscal year, due primarily to increased unit sales in the automobile and power product businesses and the positive impact of foreign currency translation effects. Operating income increased ¥5.6 billion, or 21.6%, to ¥31.9 billion, from the previous fiscal year, due mainly to the positive impacts of increased profit attributable to higher revenue, continuing cost reduction effects and the foreign currency effects caused by the depreciation of the Japanese yen, which offset the negative impacts of the change in the model mix and increased SG&A expenses.

 

Asia

 

In Asia, revenue increased ¥274.0 billion, or 27.5%, to ¥1,271.4 billion from the previous fiscal year, due primarily to increased unit sales in the automobile business and the positive impact of foreign currency translation effects. Operating income increased ¥12.1 billion, or 18.7%, to ¥77.1 billion, from the previous fiscal year, due mainly to the positive impacts of increased profit attributable to higher revenue, which offset the negative impact of increased SG&A expenses.

 

Other Regions

 

In Other Regions, revenue increased ¥225.9 billion, or 39.5%, to ¥797.6 billion, compared to the previous fiscal year, due mainly to increased unit sales in all of the business segments and the positive impact of currency translation effects. Operating income rose ¥15.0 billion, or 26.4%, to ¥72.2 billion, from the previous fiscal year, due mainly to the positive impact of the increased profit attributable to higher revenue, and the foreign currency effects caused by the depreciation of the Japanese yen, offsetting the negative impact of increased SG&A expenses.

 

Application of Critical Accounting Policies

 

Critical accounting policies are those which require us to apply the most difficult, subjective or complex judgments, often requiring us to make estimates about the effect of matters that are inherently uncertain and which may change in subsequent periods, or for which the use of different estimates that could have reasonably been used in the current period would have had a material impact on the presentation of our financial condition and results of operations.

 

The following is not intended to be a comprehensive list of all our accounting policies. Our significant accounting policies are more fully described in Note (1) to the accompanying consolidated financial statements.

 

We have identified the following critical accounting policies with respect to our financial presentation.

 

Product Warranty

 

We warrant our products for specific periods of time.

 

Product warranties vary depending upon the nature of the product, the geographic location of their sales and other factors.

 

We recognize costs for general warranties on products we sell and product recalls. We provide for estimated warranty costs at the time products are sold to customers or the time new warranty programs are initiated. Estimated warranty costs are provided based on historical warranty claim experience with consideration given to

 

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the expected level of future warranty costs, including current sales trends, the expected number of units to be affected and the estimated average repair cost per unit for warranty claims. Our products contain certain parts manufactured by third party suppliers. Since suppliers typically warrant these parts, the expected receivables from warranties of these suppliers are deducted from our estimates of accrued warranty obligations.

 

We believe our accrued warranty liability is a “critical accounting estimate” because changes in the calculation can materially affect net income, and require us to estimate the frequency and amounts of future claims, which are inherently uncertain.

 

Our policy is to continuously monitor warranty cost accruals to determine their adequacy of the accrual. Therefore, warranty expense accruals are maintained at an amount we deem adequate to cover estimated warranty expenses.

 

Actual claims incurred in the future may differ from the original estimates, which may result in material revisions to the warranty expense accruals.

 

The changes in provisions for those product warranties and net sales and other operating revenue for each business segment for each of the years in the three-year period ended March 31, 2008 are as follow:

 

     Yen (millions)  
     2006     2007     2008  

Provisions for product warranties

      

Balance at beginning of year

   ¥ 268,429     ¥ 283,947     ¥ 317,103  

Warranty claims paid during the period

   ¥ (126,834 )   ¥ (113,454 )   ¥ (137,591 )

Liabilities accrued for warranties issued during the period

     125,732       143,280       136,355  

Changes in liabilities for pre-existing warranties during the period

     332       605       (1,476 )

Foreign currency translation

     16,288       2,725       (20,631 )
                        

Balance at end of year

   ¥ 283,947     ¥ 317,103     ¥ 293,760  
                        

Net sales and other operating revenue

   ¥ 9,907,996     ¥ 11,087,140     ¥ 12,002,834  

 

Credit Losses

 

Our finance subsidiaries provide wholesale financing to dealers and retail lending and leasing to customers mainly in order to support sales of our products, principally in North America. We classify retail and direct financing lease receivables derived from those services as finance subsidiaries-receivables. Operating leases are classified as property on operating leases. Certain finance receivables related to sales of inventory are included in trade receivables and other assets in the consolidated balance sheets.

 

The majority of the credit risk is with consumer financing and to a lesser extent with dealer financing. To determine the overall allowance for credit loss amount, receivables are segmented into pools with common characteristics such as product and collateral types, credit grades, and original loan terms. For each of these pools, we estimate losses primarily based on our historic loss experiences, delinquency rates, recovery rates and scale and composition of the portfolio, taking factors into consideration such as changing economic conditions and changes in operational policies and procedures. Estimated losses due to customer defaults on operating leases are not recognized in the allowance for credit losses. These losses are recognized as a component of impairment losses on operating leases.

 

We believe our allowance for credit losses is a “critical accounting estimate” because it requires us to make assumptions about inherently uncertain items such as future economic trends, quality of finance subsidiaries- receivables and other factors. We review the adequacy of the allowance for credit losses, and the allowance for

 

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credit losses is maintained at an amount that we deem sufficient to cover the estimated credit losses incurred on our owned portfolio of finance receivables. However, actual losses may differ from the original estimates as a result of actual results varying from those assumed in our estimates.

 

As an example of the sensitivity of the allowance calculation, the following scenario demonstrates the impact that a deviation in one of the primary factors estimated as a part of our allowance calculation would have on the provision and allowance for credit losses. If we had experienced a 10% increase in net credit losses during fiscal 2008 in our North America portfolio, the provision for fiscal 2008 and the allowance balance at the end of fiscal 2008 would have increased by approximately ¥7.2 billion and ¥2.8 billion, respectively. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2008.

 

Additional Narrative of the Change in Credit Loss as Below

 

The following table shows information related to our credit loss experience in our North American portfolio:

 

     Yen (billions)  
           2006                 2007                 2008        

Charge-offs (net of recoveries)

   22.8     26.2     39.9  

Provision for credit losses

   27.4     25.5     44.8  

Allowance for credit losses

   30.1     28.7     28.4  

Ending receivable balance

   4,166.5     4,351.8     3,890.4  

Average receivable balance, net

   3,938.2     4,330.8     4,317.0  

Charge-offs as a % of average receivable balance

   0.58 %   0.61 %   0.93 %

Allowance as a % of ending receivable balance

   0.72 %   0.66 %   0.73 %

 

Fiscal Year 2008 Compared with Fiscal Year 2007

 

The provision for credit losses increased by ¥19.3 billion, or 75% primarily as a result of the weakening U.S. economy brought upon by the subprime mortgage crisis. The weakening economy has negatively affected certain customers’ ability to pay their contractual obligations. Net charge-offs in our North American portfolio increased by ¥13.7 billion, or 52%. The increase in charge-offs was experienced primarily in the lower range of credit quality customers. The Company has focused collection efforts to minimize the losses on delinquent and defaulted contracts.

 

The allowance for credit losses decreased by ¥0.3 billion, or 1%, despite the reflection of the higher estimated losses incurred as of March 31, 2008 in the North American portfolio. The decrease was primarily due to the effect of exchange rate changes on the allowance for credit losses.

 

Fiscal Year 2007 Compared with Fiscal Year 2006

 

Net charge-offs in our North American portfolio increased by ¥3.4 billion, or 15%. Higher originations of finance receivables due to business expansion in fiscal year 2006 compared to fiscal year 2005 resulted in higher charge-offs in fiscal year 2007.

 

The provision for credit losses decreased by ¥1.9 billion, or 7% and the allowance for credit losses decreased by ¥1.4 billion, or 5%. The decreases were due to lower estimates of losses incurred as of March 31, 2007 even though finance receivables increased.

 

Losses on Lease Residual Values

 

End-customers of leased vehicles typically have an option to buy the leased vehicle for the contractual residual value of the vehicle or to return the vehicle to our finance subsidiaries through the dealer at the end of the lease term. Likewise, dealers have the option to buy the vehicle returned by the customer or to return the vehicle to our

 

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finance subsidiaries. The likelihood that the leased vehicle will be purchased varies depending on the difference between the actual market value of the vehicle at the end of the lease term and the contractual value determined at the inception of the lease. Our finance subsidiaries in North America have historically accounted for all leases as direct financing leases. However, starting in the year ended March 31, 2007, some of the leases which do not qualify for direct financing leases accounting treatment are accounted for as operating leases.

 

We initially determine the contract residual values by using our estimate of future used vehicle values, taking into consideration data obtained from third parties. We are exposed to risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values at the end of the lease term. We periodically review the estimate of residual values. Downward adjustments are made for declines in estimated residual values that are deemed to be other-than-temporary. For direct financing leases, our finance subsidiaries in North America purchase insurance to cover a portion of the estimated residual value. The adjustments on the uninsured portion of the vehicle’s residual value are recognized as a loss in the period in which the estimate changed.

 

For vehicle leases accounted for as operating leases, the adjustments to estimated residual values result in changes to the remaining depreciation expense to be recognized prospectively on a straight-line basis over the remaining term of the lease.

 

The primary components in estimating losses on lease residual values are the expected frequency of returns, or the percentage of leased vehicles we expect to be returned by customers at the end of the lease term, and the expected loss severity, or the expected difference between the residual value and the amount we receive through sales of returned vehicles plus proceeds from insurance, if any. We estimate losses on lease residual values by evaluating several different factors, including trends in historical and projected used vehicle values and general economic measures.

 

We believe that our estimated losses on lease residual values is a “critical accounting estimate” because it is highly susceptible to market volatility and requires us to make assumptions about future economic trends and lease residual values, which are inherently uncertain. We believe that the assumptions used are appropriate. However actual losses incurred may differ from original estimates.

 

If future auction values for all Honda and Acura vehicles in our North American direct financing lease portfolio as of March 31, 2008, were to decrease by approximately ¥10,000 per unit from our present estimates, the total impact would be an increase in losses on lease residual values by approximately ¥0.7 billion. Similarly, if future return rates for our existing portfolio of all Honda and Acura vehicles were to increase by one percentage point from our present estimates, the total impact would be an increase in losses on lease residual values by approximately ¥0.1 billion. With the same prerequisites shown above, the impacts to the operating lease portfolio would be approximately ¥0.5 billion and ¥0.07 billion, which would be recognized over the remaining lease terms. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2008.

 

Pension and Other Postretirement Benefits

 

We have various pension plans covering substantially all of our employees in Japan and certain employees in foreign countries. Benefit obligations and pension costs are based on assumptions of many factors, including the discount rate, the rate of salary increase and the expected long-term rate of return on plan assets. The discount rate is determined mainly based on the rates of high quality corporate bonds or governmental bonds currently available and expected to be available during the period to maturity of the defined benefit pension plans. The salary increase assumptions reflect our actual experience as well as near-term outlook. The expected long-term rate of return is determined based on the expected long-term return of the various asset categories. Honda considers the current expectations for future returns and the actual historical returns of each plan asset category. Our assumed discount rate and rate of salary increase as of March 31, 2008 were 2.0% and 2.3%, respectively,

 

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and our assumed expected long-term rate of return for the year ended March 31, 2008 was 4.0% for Japanese plans. Our assumed discount rate and rate of salary increase as of March 31, 2008 were 5.5-6.8% and 2.9-6.4%, respectively, and our assumed expected long-term rate of return for fiscal 2008 was 6.5-8.3% for foreign plans.

 

We believe that the accounting estimates related to our pension plans is “critical accounting estimate” because changes in these estimates can materially affect our financial condition and results of operations.

 

Actual results may differ from our assumptions, and the difference is accumulated and amortized over future periods. Therefore, the difference will be generally reflected as our recognized expenses and recorded obligations in future period. We believe that the assumptions currently used are appropriate, however, differences in actual expenses or changes in assumptions could affect our pension costs and obligations, including our cash requirements to fund such obligations.

 

The following table shows the effect of a 0.5% change in the assumed discount rate and the expected long-term rate of return on our funded status, equity, and pension expense.

 

Japanese Plans                    
     Yen (billions)

Assumptions

   Percentage
Point
Change (%)
   Funded
status
   Equity    Pension expense

Discount rate

   +0.5/-0.5    -89.5/+100.8    +45.2/-57.6    -4.7/+5.9

Expected long-term rate of return

   +0.5/-0.5    —      —      -3.6/+3.6
Foreign Plans                    
     Yen (billions)

Assumptions

   Percentage
Point
Change (%)
   Funded
status
   Equity    Pension expense

Discount rate

   +0.5/-0.5    -36.2/+41.0    +27.7/-31.7    -5.6/+7.5

Expected long-term rate of return

   +0.5/-0.5    —      —      -2.2/+2.2

 

 

(*1)

Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions at March 31, 2008.

 

(*2)

Funded status for fiscal 2008 is affected by March 31, 2008 assumptions.

 

   Pension expense for fiscal 2008 is affected by March 31, 2007 assumptions.

 

Income Taxes

 

Honda adopted the provision of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN No. 48) on April 1, 2007. Honda is subject to income tax examinations in many tax jurisdictions. We recognize the tax benefit from an uncertain tax position based on the technical merits of the position when the position is more likely than not to be sustained upon examination. Benefits from tax positions that meet the more likely than not recognition threshold are measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate resolution. We performed a comprehensive review of any uncertain tax positions in accordance with FIN No. 48.

 

We believe our accounting for tax uncertainties is a “critical accounting estimate” because it requires us to evaluate and assess the probability of the outcome that could be realized upon ultimate resolution. Our estimates may change in the future due to new developments.

 

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We believe that our estimates and assumptions of unrecognized tax benefits are reasonable, however, if our estimates of unrecognized tax benefits and potential tax benefits are not representative of actual outcomes, our consolidated financial statements could be materially affected in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution.

 

New Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. This statement is effective as of an entity’s first fiscal year that begins after November 15, 2007.

 

In February 2008, FASB issued FASB staff position (FSP) No. FAS 157-2 “Effective date of FASB statement No. 157”. This FSP delays the effective date for SFAS No. 157, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

 

It is not anticipated that adoption will have a material impact on the Company’s consolidated financial position or results of operations.

 

The Company and its subsidiaries adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” on March 31, 2007.

 

This statement also changes the date at which benefit obligations are to be measured to the date of the year-end statement of financial position. Certain foreign subsidiaries of the Company use a December 31 measurement date for their plans. The measurement provisions of this statement are effective for fiscal years ending after December 15, 2008.

 

It is not anticipated that adoption will have a material impact on the Company’s consolidated financial position or results of operations.

 

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities— including an amendment of SFAS No. 115”. This statement permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent changes in fair value for designated items will be required to be reported in earnings in the current period. The statement also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Honda is currently in the process of assessing the financial impact of adoption.

 

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141(R), “Business Combinations”. This statement replaces SFAS No. 141. This statement requires an acquirer to recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date measured at that date. The statement shall be applied prospectively to business combinations for which the acquisition date is on and after an entity’s first fiscal year that begins after December 15, 2008, with early adoption not permitted. It is not anticipated that adoption will have a material impact on the Company’s consolidated financial position or results of operations.

 

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In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This statement requires that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements, and requires that changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary shall be accounted for as equity transactions. This statement is effective as of an entity’s first fiscal year that begins after December 15, 2008, with early adoption not permitted. It is not anticipated that the initial adoption will have a material impact on the Company’s consolidated financial position or results of operations.

 

B. Liquidity and Capital Resources

 

Overview of Capital Requirements, Sources and Uses

 

The policy of Honda is to support its business activities by maintaining sufficient capital resources, a sufficient level of liquidity and a sound balance sheet.

 

Honda’s main business is the manufacturing and sale of motorcycles, automobiles and power products. To support this business, it also provides retail financing and automobile leasing services for customers, as well as wholesale financing services for dealers.

 

In its manufacturing and sales business, Honda requires operating capital mainly to purchase parts and materials required for production, as well as to maintain inventory of finished products and cover receivables from dealers. Honda also requires funds for capital expenditures, mainly to introduce new models, upgrade, rationalize and renew production facilities, as well as to expand and reinforce Sales and R&D facilities.

 

Honda meets its operating capital requirements primarily through cash generated by operations. Honda funds its financial programs for customers and dealers primarily from corporate bonds, medium-term notes, commercial paper, and securitization of finance receivables. The year-end balance of liabilities associated with fund-raising by finance subsidiaries was ¥4,778.9 billion as of March 31, 2008.

 

Cash Flows

 

Consolidated cash and cash equivalents for the year ended March 31, 2008 increased by ¥105.3 billion from March 31, 2007, to ¥1,050.9 billion. The reasons for the increases or decreases for each cash flow activity are as follows.

 

Net cash provided by operating activities amounted to ¥1,126.9 billion of cash inflows for the fiscal year ended March 31, 2008. Cash flow from operating activities consists of the following main components: the major component of the Company’s cash inflows is cash received from customers, while the major components of the Company’s cash outflows are payments for parts and raw materials, SG&A expenses, and income taxes.

 

Compared with the prior fiscal year, cash inflows from cash received from customers increased, due to the continued growth in net sales because of higher unit sales in motorcycle business in Other Regions and higher overseas unit sales in automobile business. On the other hand, cash outflows for payments for parts and raw materials increased, as a result of an increase in sales units. The other reasons for increases in cash outflows are an increase of payments for operating expenses. However, these increases were within the range of the growth in net sales, and because of stable operating margins, net cash provided by operating activities increased by ¥222.3 billion compared with the previous fiscal year.

 

Net cash used in investing activities amounted to ¥1,686.3 billion, due mainly to capital expenditures, the acquisitions of finance subsidiaries-receivables, which exceeded collections of and proceeds from sales of finance subsidiaries-receivables and the purchase of operating lease assets. Cash outflows from investing activities increased by ¥555.6 billion compared with the previous fiscal year.

 

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Net cash provided by financing activities amounted to ¥688.0 billion, which was attributable to proceeds from long-term debt and increase in short-term debt (which exceeded repayment of long-term debt), cash dividends paid and payment for purchase of the Company’s own stock. Cash inflows from financing activities increased by ¥264.5 billion compared with the previous fiscal year.

 

Liquidity

 

The ¥1,050.9 billion in cash and cash equivalents at end of year corresponds to approximately 1.1 month of net sales, and Honda believes it has sufficient liquidity for its business operations.

 

At the same time, Honda is aware of the possibility that various factors, such as recession-induced market contraction and financial and foreign exchange market volatility, may adversely affect liquidity. For this reason, finance subsidiaries that carry total short-term borrowings of ¥2,128.4 billion have committed lines of credit equivalent to ¥ 923.3 billion that serve as alternative liquidity for the commercial paper issued regularly to replace debt. Honda believes it currently has sufficient credit limits, extended by prominent international banks. Honda believes it has sufficient liquidity to meet its cash obligations for the near future, at least for the year ending March 31, 2009.

 

Honda’s short- and long-term debt securities are rated by credit rating agencies, such as Moody’s Investors Service, Inc., and Standard & Poor’s Rating Services. Based on major current ratings, which are shown below, Honda will be able to raise funds even if it requires more capital than its present level of liquidity would allow.

 

The following table shows the ratings of Honda’s unsecured debt securities by Moody’s and Standard & Poor’s as of the date of the filing of Honda’s Form 20-F.

 

     Credit ratings for
     Short-term
unsecured debt securities
   Long-term
unsecured debt securities

Moody’s Investors Service

   P-1    Aa3

Standard & Poor’s Rating Services

   A-1    A+

 

The above ratings are based on information provided by Honda and other information deemed credible by the rating agencies. They are also based on the agencies’ assessment of credit risk associated with designated securities issued by Honda. Each rating agency may use different standards for calculating Honda’s credit rating, and also makes its own assessment. Ratings can be revised or nullified by agencies at any time. These ratings are not meant to serve as a recommendation for trading in or holding Honda’s unsecured debt securities.

 

C. Research and Development

 

Honda and its consolidated subsidiaries use the most advanced technologies to conduct R&D activities aimed at creating distinctive products that are internationally competitive. The Group’s main R&D divisions operate independently as subsidiaries, allowing technicians to pursue their tasks with significant freedom. Product-related R&D is spearheaded by the Honda R&D Co., Ltd.; Honda R&D Americas, Inc. in the United States; and Honda R&D Europe (Deutschland) GmbH in Germany. R&D on production technologies centers around Honda Engineering Co., Ltd. in Japan and Honda Engineering North America, Inc. All of these entities work in close association with our other entities and businesses in their respective regions.

 

Total consolidated R&D expenditures for the year ended March 31, 2008 amounted to ¥587.9 billion.

 

Motorcycle Business

 

In the motorcycle business, Honda is committed to developing products with new value-added features that meet the individual needs of customers around the world, and to implementing the timely local development of

 

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products tailored to specific regions at its overseas locations. At the same time, we are focusing on developing industry-leading technologies that address safety and environmental issues.

 

Major developments in Japan in fiscal 2008 included a full model change for the CBR600RR super sport bike. Changes in the new model include a more compact engine and a lighter-weight hollow aerial aluminum die-cast frame that results in a substantial reduction in weight compared with previous versions. The new model also features better environmental performance and drivability owing to (a) the introduction of a new electronic fuel injection system (Programmed Dual Sequential Fuel Injection System) that has two injectors per cylinder to provide a precise fuel flow and the optimal air-oil ratio and (b) the installation of a twin catalyzer. In addition, we introduced a new scooter model, Lead, which boasts a newly developed, lighter and more compact engine that combines high environmental performance with sufficient power for smooth riding in urban settings. Moreover, we fitted out our DN-01 680cc large sports cruiser with Honda’s original, compact and efficient infinitely variable hydraulic mechanical transmission (Human-Friendly Transmission) complete with a lockup mechanism, which features a diversity of functions within a single unit, including power transmission on a single axle from the start-up mode all the way to infinitely variable gear changing. In North America, we newly introduced the high-powered TRX700XX sport all-terrain vehicle (ATV), which is outfitted with a newly designed liquid-cooled SOHC engine and an electronic fuel injection system (PGM-FI).

 

R&D expenses in the Motorcycle Business segment in fiscal 2008 totaled ¥91.7 billion.

 

Automobile Business

 

In the Automobile Business segment, we work to develop innovative technologies and products through creativity-oriented development in response to customer needs. We are also actively developing technologies that address environmental issues and provide advanced safety performance.

 

Major achievements in Japan during the fiscal year under review included a full model change for the FIT. The new FIT combines a newly developed maximum 100 horsepower, 1.3-liter intelligent Variable Valve Timing and Lift, Electronic Control (i-VTEC) engine and a newly developed Continuously Variable Transmission (CVT) with a torque converter to provide excellent driving performance and good fuel economy. Also, we implemented a full model change for the INSPIRE in Japan and for the Accord in North America, Asia and Other Regions. The new versions boast high-level safety features and are equipped with Honda’s newly developed 3.5-liter i-VTEC V6 engine with the new Variable Cylinder Management (VCM) System that achieves high power and good fuel economy by switching from the most powerful six-cylinder mode to four-cylinder or three-cylinder mode for efficiency, depending on driving conditions.

 

Another technology development milestone in the field of fuel cell cars was the announcement of the FCX Clarity, which is based on Honda’s original “V Flow” (vertical gas flow) fuel cell platform. By employing Honda’s V Flow fuel cell stack, which incorporates a wave flow separator where hydrogen combines with atmospheric oxygen to generate energy that is then converted to electric power used to propel the vehicle, the new cell structure achieves a higher output of power and considerably lower weight and smaller size. In addition to this breakthrough in fuel cell vehicles, Honda has announced the commencement of tests on the fourth-generation Home Energy Station (Home Energy Station IV), which it is developing jointly with Plug Power Inc., of the United States. This unit can function both as a hydrogen supply source for fuel cell cars and as a cogeneration system for electric power. These units are undergoing pilot testing in Torrance, California.

 

R&D expenses in the Automobile Business segment in fiscal 2008 totaled ¥475.4 billion.

 

Power Product and Other Businesses

 

In the Power Product Business, we are seeking to develop products that match customers’ lifestyles and needs while strengthening our lineup of offerings that address environmental issues.

 

Important developments in this segment in Japan and other areas during the fiscal year included a full model change in the BF40 and BF50 four-stroke marine outboard motors. The new models boast improved acceleration

 

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through a combination of the PGM-FI electronic fuel injection system with the world’s first ignition timing governed by Honda’s original Boosted Low Speed Torque (BLAST) air-fuel ratio technology. They also have improved fuel economy as a result of the incorporation of a Lean Burn Control system for cruising. In addition to these developments, in Japan, Honda has begun to market its compound thin-membrane solar cell modules HSPV-125A, HEM115PA, and HEM125PA, which are formed around Honda’s originally developed thin membranes. These modules employ membranes made from a Copper, Indium, Gallium, and Selenium (CIGS) compound, which makes it possible to conserve the amount of energy required in the manufacturing stage.

 

Among other activities, GE Honda Aero Engines LLC, a joint venture of Honda and General Electric Co., has begun the testing of the HF-120 full demonstrator turbofan jet engine, which is designed for volume production.

 

R&D expenses in this segment in fiscal 2008 totaled to ¥20.7 billion.

 

Fundamental Research

 

In the area of fundamental research, Honda is pursuing steady and varied research activities into technologies that may lead to innovative applications.

 

One of Honda’s research initiatives is the development of a technological base for ethanol production from soft biomass, including plant stalks and leaf matters, such as rice straw. Honda has established a pilot plant within its research facilities and is moving forward with R&D to establish volume production technology. In the field of robotics and ASIMO technology, Honda researchers are working on new ASIMO intelligence and skill functions, including such motion functions as moving back one step to allow human beings to pass and passing to one side of human beings coming from the opposite direction as well as work task functions, such as carrying small latrines and pushing wagons. Other ASIMO functions and systems under development include proceeding automatically to a charging station when battery power runs low and learning to perform cooperative functions on a continuing basis, such as sharing work tasks among a number of ASIMO robots when conditions are appropriate and having other robots perform tasks in place of a robot that is temporarily charging its battery.

 

Expenses incurred in fundamental research are distributed among Honda’s business segments.

 

Patents and Licenses

 

At March 31, 2008, Honda owned more than 12,700 patents and 20 utility model registrations in Japan and more than 20,300 patents abroad. Honda also had applications pending for more than 17,400 patents in Japan and for more than 19,200 patents abroad. Under Japanese law, a utility model registration is a right granted with respect to inventions of less originality than those which qualify for patents. While the Company considers that, in the aggregate, Honda’s patents are important, it does not consider any one of such patents, or any related group of them, to be of such importance that the expiration or termination thereof would materially affect Honda’s business.

 

D. Trend Information

 

See Item 5. A “Operating and Financial Review and Prospects” for information required by this item.

 

E. Off-Balance Sheet Arrangements

 

(Special Purpose Entity)

 

For the purpose of accelerating the receipt of cash related to our finance receivables, we periodically securitize and sell pools of these receivables. In these securitizations, we sell a portfolio of finance receivables to a special purpose entity, which is established for the limited purpose of buying and reselling finance receivables. We remain as a servicer of the finance receivables and are paid a servicing fee for our services. The special purpose entity transfers the receivables to a trust or bank conduit, which issues interest-bearing asset-backed

 

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securities or commercial paper, respectively, to investors. We retain certain subordinated interests in the sold receivables in the form of subordinated certificates, servicing assets and residual interests in certain cash reserves provided as credit enhancements for investors. We apply significant assumptions regarding prepayments, credit losses and average interest rates in estimating expected cash flows from the trust or bank conduit, which affect the recoverability of our retained interests in the sold finance receivables. We periodically evaluate these assumptions and adjust them, if appropriate, to reflect the performance of the finance receivables. Information about finance subsidiaries-receivables and securitizations is described in Note (3) to the accompanying consolidated financial statements.

 

(Guarantee)

 

At March 31, 2008, we guaranteed ¥36.4 billion of employee bank loans for their housing costs. If an employee defaults on his/her loan payments, we are required to perform under the guarantee. The undiscounted maximum amount of our obligation to make future payments in the event of defaults is ¥36.4 billion. As of March 31, 2008, no amount was accrued for any estimated losses under the obligations, as it was probable that the employees would be able to make all scheduled payments.

 

F. Tabular Disclosure of Contractual Obligations

 

The following table shows our contractual obligations at March 31, 2008:

 

Contractual Obligations

 

     At March 31, 2008
Yen(millions)
     Payments due by period
     Total    Less than
1 year
   1-3
years
   3-5
years
   After
5 years

Long-term debt

   2,707,702    871,050    1,240,604    564,916    31,132

Operating leases

   139,332    26,144    37,006    23,833    52,349

Purchase commitments (*1)

   122,073    122,073    —      —      —  

Interest payments (*2)

   300,266    179,149    97,708    22,732    677

 

(*1)

Honda had commitments for purchases of property, plant and equipment at March 31, 2008.

 

(*2)

To estimate the schedule of interest payments, the company utilized the balances and average interest rates of borrowings and debts and derivative instruments as of March 31, 2008.

 

Honda expects to contribute ¥28,843 million to its domestic pension plans and ¥18,170 million to its foreign pension plans in the year ending 31, 2009. The Pension Protection Act of 2006 (PPA) is effective for plan years beginning after December 31, 2007. Certain of the Company’s subsidiaries in the United States are unable to determine the amounts of contribution for fiscal year 2009 because the procedures required by the PPA have not been completed. The contribution amounts to foreign pension plan described above do not include the contributions of these subsidiaries.

 

If our estimates of unrecognized tax benefits and potential tax benefits are not representative of actual outcomes, our consolidated financial statements could be materially affected in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Since it is difficult to estimate actual payment in the future related to our uncertain tax positions, unrecognized tax benefit totaled ¥99,527 million is not represented in the table above . Honda is currently being examined by the Tokyo Regional Taxation Bureau (“Bureau”) on matters related to a transfer pricing issue. In the examination, the Bureau claims that the allocation of the total profit Honda and its Chinese joint venture companies earned from their automobile business in China was not an “arms’ length” allocation but rather that too much of this total profit was realized by the Chinese joint venture companies over the five-year period ended March 31, 2006. Honda has recognized the liability for unrecognized tax benefits, including those related to this examination.

 

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At March 31, 2008, we had no material capital lease obligations or long-term liabilities reflected on our balance sheet under U.S. GAAP other than those set forth in the table above.

 

G. Safe Harbor

 

All information disclosed under Item 5. E and F contains “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

 

Such statements are based on management’s assumptions and beliefs taking into account information currently available to it. Therefore, please be advised that Honda’s actual results could differ materially from those described in these forward-looking statements as a result of numerous factors, including general economic conditions in Honda’s principal markets and foreign exchange rates between the Japanese yen and the U.S. dollar, the Euro and other major currencies, as well as other factors detailed from time to time.

 

Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

 

Honda’s Articles of Incorporation provide for a Board of Directors of not more than 30 Directors and for a Board of Corporate Auditors of not more than seven Corporate Auditors. Directors and Corporate Auditors are elected by resolution of the general meetings of shareholders. The Corporate Auditors are nominated by the Board of Directors as candidates for election with an approval by the Board of Corporate Auditors. The normal term of office of a Director is one year and that of a Corporate Auditor is four years. Directors and Corporate Auditors may serve any number of consecutive terms.

 

The Board of Directors appoints one President and Director and may appoint one Chairman of the Board of Directors and several Executive Vice Presidents and Directors, Senior Managing Directors and Managing Directors from among its members. The President represents the Company. In addition, the Board of Directors may appoint, pursuant to its resolutions, Directors who shall each represent the Company. Under the Japanese Company Law, a representative director individually has authority to represent the Company generally in the conduct of its affairs. The Board of Directors has the ultimate responsibility for the administration of the affairs of the Company.

 

Under the Japanese Company Law, the Corporate Auditors of the Company have the duty to audit the Director’s execution of their duties. Corporate Auditors are not required to be, and the Corporate Auditors of the Company are not, certified public accountants, and may not at the same time be Directors or employees of the Company or any of its subsidiaries. They are entitled to participate in meetings of the Board of Directors but are not entitled to vote. Corporate Auditors of the Company form the Board of Corporate Auditors, which must consist of at least three Corporate Auditors. Not less than half of the members of the Board of Corporate Auditors must be outside Corporate Auditors, each of whom has never served as a director, accounting councilor, operating officer, manager or employee of the Company or any of its subsidiaries. Corporate Auditors are required to elect from among themselves at least one Standing Corporate Auditor. Corporate Auditors also have a statutory duty to provide their report to the Board of Corporate Auditors, which must submit its audit report to the Representative Director each year. A Corporate Auditor may note his or her opinion in the audit report if his or her opinion is different from the opinion expressed in the audit report. The Board of Corporate Auditors is empowered to establish audit principles, methods of investigation by Corporate Auditors of the status of the corporate affairs, and assets of the Company and other matters concerning the performance of the Corporate Auditors’ duties. In addition, the Company is required to appoint independent certified public accountants as accounting auditor. Such independent certified public accountants have their primary statutory duties to audit the consolidated and non-consolidated financial statements of the Company prepared in accordance with the Japanese Company Law to be submitted by the Representative Director to general meetings of shareholders to prepare an accounting audit report thereon and to notify the contents of such report to the specified Corporate Auditor and the specified Director in charge.

 

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The following table provides the names of all Directors and Corporate Auditors of the Company and the current positions held by such persons.

 

Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Directors

        

Satoshi Aoki

(August 19, 1946)

  

Director of the Company from June 1995

 

Chairman and Director of the Company,

appointed in June 2007

 

Executive Vice President and Director of the Company,

appointed in June 2005

 

Compliance Officer,

appointed in April 2004

 

Senior Managing Director of the Company,

appointed in June 2000

 

Managing Director of the Company,

appointed in June 1998

 

Chief Operating Officer for Business Management Operations,

appointed in June 1998

 

Director of the Company,

appointed in June 1995

 

General Manager of Finance Division for Business Management Operations,

appointed in June 1994

 

Joined Honda in April 1969

   *3    16,300

Takeo Fukui

(November 28, 1944)

  

Director of the Company from June 1988

 

President and Director of the Company,

appointed in June 2003

 

Senior Managing Director of the Company,

appointed in June 1999

 

Motor Sports,

appointed in June 1999

 

President and Director of Honda R&D Co., Ltd.,

appointed in June 1998

 

President and Director of Honda of America Mfg., Inc.,

appointed in June 1996

 

Managing Director of the Company,

appointed in June 1996

 

Executive Vice President and Director of Honda of America Mfg., Inc.,

appointed in June 1994

 

Senior Managing Director of Honda R&D Co., Ltd.,

appointed in June 1990

   *3    23,900

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Director of the Company,

appointed in June 1988

 

Managing Director of Honda R&D Co., Ltd.,

appointed in May 1987

 

President and Director of Honda Racing Corporation,

appointed in May 1987

 

Joined Honda in April 1969

     

Koichi Kondo

(February 13, 1947)

  

Director of the Company from June 1997

 

Executive Vice President and Director of the Company,

appointed in June 2007

 

Chairman and Director of American Honda Motor Co., Inc.,

appointed in April 2007

 

Chief Operating Officer for Regional Sales Operations (Japan),

appointed in April 2007 (presently held)

 

Senior Managing Director of the Company,

appointed in June 2005

 

President and Director of Honda North America, Inc.,

appointed in April 2005

 

Chief Operating Officer for Regional Operations (North America),

appointed in April 2004

 

President and Director of American Honda Motor Co., Inc.,

appointed in June 2003

 

Executive Vice President and Director of American Honda Motor Co., Inc.,

appointed in April 2003

 

Managing Director of the Company,

appointed in June 2002

 

Chief Operating Officer for Regional Operations (Latin America),

appointed in April 2000

 

Director of the Company,

appointed in June 1997

 

President and Director of Honda Automoveis do Brasil Ltda.,

appointed in June 1996

 

President and Director of Moto Honda da Amazonia Ltda.,

appointed in June 1996

 

President and Director of Honda Motor do Brasil Ltda. (presently Honda South America Ltda.),

appointed in June 1996

 

Joined Honda in April 1970

   *3    9,336

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
Atsuyoshi Hyogo (January 2, 1949)   

Director of the Company from June 1995

 

Senior Managing Director of the Company,

appointed in June 2005

 

President of Honda Motor (China) Investment Corporation, Limited,

appointed in February 2004 (presently held)

 

Chief Operating Officer for Regional Operations (China),

appointed in April 2003 (presently held)

 

Managing Director of the Company,

appointed in June 1998

 

Executive Vice President and Director of American Honda Motor Co., Inc.,

appointed in June 1996

 

Director of the Company,

appointed in June 1995

 

President and Director of Honda Canada Inc.,

appointed in October 1993

 

Joined Honda in April 1972

   *3    17,400
Mikio Yoshimi (September 6, 1947)   

Director of the Company from June 1998

 

Senior Managing Director of the Company,

appointed in June 2006

 

Government & Industrial Affairs,

appointed in April 2006 (presently held)

 

Chief Officer of Driving Safety Promotion Center,

appointed in April 2006

 

Compliance Officer,

appointed in April 2005 (presently held)

 

Managing Director of the Company,

appointed in June 2004

 

Chief Operating Officer for Business Support Operations,

appointed in April 2004

 

Human Resources, Associate Relations and Administration for Business Support Operations,

appointed in April 2003

 

Human Resources and Associate Relations for Business Support Operations,

appointed in April 2002

 

President and Director of Honda Manufacturing of Alabama, LLC,

appointed in April 2000

   *3    7,300

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Director of the Company,

appointed in June 1998

 

Executive Vice President and Director of Honda of America Mfg., Inc.,

appointed in June 1998

 

Joined Honda in April 1970

     

Takanobu Ito

(August 29, 1953)

  

Director of the Company from June 2007

 

Senior Managing Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Automobile Operations,

appointed in April 2007 (presently held)

 

Managing Officer of the Company,

appointed in June 2005

 

General Manager of Suzuka Factory of Production Operations,

appointed in April 2005

 

General Supervisor, Motor Sports,

appointed in April 2004

 

President and Director of Honda R&D Co., Ltd.,

appointed in June 2003

 

Motor Sports,

appointed in June 2003

 

Managing Director of the Company,

appointed in June 2003

 

Senior Managing Director of Honda R&D Co., Ltd.,

appointed in June 2001

 

Director of the Company,

appointed in June 2000

 

Executive Vice President of Honda R&D Americas, Inc.,

appointed in April 1998

 

Joined Honda in April 1978

   *3    6,000

Masaaki Kato

(September 16, 1949)

  

Director of the Company from June 2007

 

Purchasing Operations Support,

appointed in April 2008 (presently held)

 

Senior Managing Director of the Company,

appointed in June 2007

 

President and Director of Honda R&D Co., Ltd.,

appointed in April 2007 (presently held)

 

General Supervisor, Quality,

appointed in April 2007 (presently held)

   *3    16,900

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Managing Officer of the Company,

appointed in June 2005

 

President and Director of Honda of the U.K.

Manufacturing Ltd.,

appointed in April 2005

 

Executive Vice President and Director of Honda Motor Europe Ltd.,

appointed in April 2005

 

President and Director of Honda Manufacturing of Alabama, LLC,

appointed in April 2002

 

Director of the Company,

appointed in June 1998

 

General Manager of Human Resources Division and

HR Development Office for Business Support Operations,

appointed in January 1998

 

Joined Honda in April 1974

     

Shigeru Takagi

(February 4, 1952)

  

Director of the Company from June 1998

 

Senior Managing Director of the Company,

appointed in June 2008

 

Managing Director of the Company,

appointed in June 2004

 

President and Director of Honda Motor Europe Limited,

appointed in April 2004 (presently held)

 

Chief Operating Officer for Regional Operations (Europe, the Middle & Near East and Africa),

appointed in April 2004 (presently held)

 

Director of the Company,

appointed in June 1998

 

President and Director of Honda Canada Inc.,

appointed in June 1998

 

Joined Honda in April 1974

   *3    8,900

Akio Hamada

(December 2, 1948)

  

Director of the Company from June 2008

 

Senior Managing Director of the Company,

appointed in June 2008

 

General Supervisor, Information Systems,

appointed in April 2008 (presently held)

 

Risk Management Officer,

appointed in April 2008 (presently held)

 

Chief Operating Officer for Production Operations,

appointed in April 2008 (presently held)

   *3    6,000

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Managing Officer of the Company,

appointed in June 2005

 

President and Director of Honda of America Mfg., Inc.,

appointed in April 2005

 

President and Director of Honda Engineering Co., Ltd.,

appointed in June 2001

 

Director of the Company,

appointed in June 1999

 

Stationed at Honda Canada Inc. in June 1998

 

Joined Honda in April 1971

     

Tetsuo Iwamura

(May 30, 1951)

  

Director of the Company from June 2000

 

Senior Managing Director of the Company,

appointed in June 2008

 

President and Director of American Honda Motor Co., Inc.,

appointed in April 2007 (presently held)

 

President and Director of Honda North America, Inc.,

appointed in April 2007 (presently held)

 

Chief Operating Officer for Regional Operations (North America),

appointed in April 2007 (presently held)

 

Managing Director of the Company,

appointed in June 2006

 

President and Director of Honda Automoveis do Brasil Ltda.,

appointed in April 2003

 

President and Director of Moto Honda da Amazonia Ltda.,

appointed in April 2003

 

President and Director of Honda South America Ltda.,

appointed in April 2003

 

Chief Operating Officer for Regional Operations (Latin America),

appointed in April 2003

 

Director of the Company,

appointed in June 2000

 

Chief Operating Officer for Parts Operations,

appointed in April 2000

 

Joined Honda in April 1978

   *3    6,500

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Akira Takano

(August 18, 1949)

  

Director of the Company from June 1996

 

Chief Operating Officer for Customer Service Operations,

appointed in April 2004 (presently held)

 

Managing Director of the Company,

appointed in June 2003

 

President and Director of Honda of the U.K. Manufacturing Ltd.,

appointed in June 1998

 

Executive Vice President and Director of Honda

Motor Europe Ltd.,

appointed in June 1998

 

Director of the Company,

appointed in June 1996

 

Director of Honda R&D Co., Ltd.,

appointed in June 1995

 

Joined Honda in April 1972

   *3    9,400

Tatsuhiro Oyama

(July 9, 1950)

  

Director of the Company from June 2001

 

Chief Operating Officer for Motorcycle Operations,

appointed in April 2008 (presently held)

 

Managing Director of the Company,

appointed in June 2006

 

President and Director of Asian Honda Motor Co., Ltd.,

appointed in April 2006

 

Chief Operating Officer for Regional Operations

(Asia & Oceania) ,

appointed in April 2006

 

Chief Operating Officer for Parts Operations,

appointed in April 2003

 

President and Director of Honda Motorcycle Japan

Co., Ltd.,

appointed in August 2001

 

Director of the Company,

appointed in June 2001

 

General Manager of Motorcycle Sales Division for

Regional Sales Operations (Japan),

appointed in April 2001

 

Joined Honda in April 1969

   *3    9,400

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Fumihiko Ike

(May 26, 1952)

  

Director of the Company from June 2003

 

President and Director of Asian Honda Motor Co., Ltd.,

appointed in April 2008 (presently held)

 

Chief Operating Officer for Regional Operations

(Asia & Oceania) ,

appointed in April 2008 (presently held)

 

Managing Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Business Management Operations,

appointed in April 2006

 

Director of the Company,

appointed in June 2003

 

Chief Operating Officer for Power Product Operations,

appointed in April 2003

 

Joined Honda in February 1982

   *3    8,000

Masaya Yamashita

(April 5, 1953)

  

Director of the Company from June 2008

 

Managing Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Purchasing Operations,

appointed in April 2008 (presently held)

 

General Manager of Kumamoto Factory of Production Operations,

appointed in April 2006

 

Operating Officer of the Company,

appointed in June 2005

 

Director of the Company,

appointed in June 2003

 

General Manager of Automobile Purchasing Division 1 in Purchasing Operations,

appointed in April 2002

 

Joined Honda in April 1977

   *3    6,000

Satoru Kishi

(March 29, 1930)

  

Director of the Company from June 2001

 

Advisor of the Board of The Bank of Tokyo-Mitsubishi, Ltd. (presently The Bank of Tokyo-Mitsubishi UFJ, Ltd.),

appointed in June 2002 (presently held)

 

Director of the Company,

appointed in June 2001

 

Chairman of the Board of The Bank of Tokyo-Mitsubishi, Ltd. (presently The Bank of Tokyo-Mitsubishi UFJ, Ltd.),

appointed in June 2000

   *3    None

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Kensaku Hogen

(August 2, 1941)

  

Director of the Company from June 2005

 

Director of the Company,

appointed in June 2005

 

Ambassador to Canada,

appointed in April 2001

   *3    None

Hiroyuki Yoshino

(November 2, 1939)

  

Director of the Company from May 1983

 

Director and Advisor of the Company,

appointed in June 2003

 

President and Director of the Company,

appointed in June 1998

 

President and Director of Honda R&D Co., Ltd.,

appointed in June 1994

 

Executive Vice President and Director of the Company,

appointed in June 1992

 

Senior Managing Director of the Company,

appointed in June 1990

 

President and Director of Honda of America Mfg., Inc.,

appointed in June 1988

 

Managing Director of the Company,

appointed in June 1988

 

Director of the Company,

appointed in May 1983

 

Executive Vice President and Director of Honda R&D Co., Ltd.,

appointed in May 1983

 

Director of Honda R&D Co., Ltd.,

appointed in March 1977

 

Joined Honda R&D Co., Ltd. in April 1963

   *3    40,800

Sho Minekawa

(October 27, 1954)

  

Director of the Company from June 2007

 

Director of the Company,

appointed in June 2007

 

President and Director of Honda Automoveis do Brasil Ltda.,

appointed in April 2007 (presently held)

 

President and Director of Moto Honda da Amazonia Ltda.,

appointed in April 2007 (presently held)

 

President and Director of Honda South America Ltda.,

appointed in April 2007 (presently held)

 

Chief Operating Officer for Regional Operations (Latin America),

appointed in April 2007 (presently held)

   *3    7,500

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Operating Officer of the Company,

appointed in June 2005

 

Director of the Company,

appointed in June 2004

 

President of Guangzhou Honda Automobile Co., Ltd.,

appointed in April 2004

 

Joined Honda in April 1978

     

Hiroshi Soda

(September 14, 1956)

  

Director of the Company from June 2008

 

Director of the Company,

appointed in June 2008

 

Chief Officer of Driving Safety Promotion Center,

appointed in April 2008 (presently held)

 

Chief Operating Officer for Business Support Operations,

appointed in April 2008 (presently held)

 

Executive Vice President and Director of American Honda Motor Co., Inc.,

appointed in December 2006

 

Operating Officer of the Company,

appointed in June 2005

 

Executive Vice President and Director of Honda North America, Inc.,

appointed in January 2000

 

Joined Honda in April 1979

   *3    6,900

Takuji Yamada

(September 28, 1956)

  

Director of the Company from June 2008

 

Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Power Product Operations,

appointed in April 2008 (presently held)

 

President and Director of Honda Motor Europe (North) GmbH.,

appointed in April 2006

 

Operating Officer of the Company,

appointed in June 2005

 

Executive Vice President and Director of American Honda Motor Co., Inc.,

appointed in December 2004

 

Joined Honda in April 1980

   *3    6,000

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Yoichi Hojo

(February 17, 1956)

  

Director of the Company from June 2008

 

Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Business Management Operations,

appointed in April 2008(presently held)

 

Operating Officer of the Company,

appointed in June 2006

 

General Manager of Automobile Purchasing Division 2 in Purchasing Operations,

appointed in April 2006

 

Joined Honda in April 1978

   *3    6,400

Corporate Auditors

        

Toru Onda

(March 18, 1949)

  

Corporate Auditor of the Company (full-time),

appointed in June 2008

 

Managing Director of the Company,

appointed in June 2002

 

Chief Operating Officer for Purchasing Operations,

appointed in April 2000

 

Director of the Company,

appointed in June 1999

 

General Manager of Automobile Purchasing Division 1 in Purchasing Operations,

appointed in June 1998

 

Joined Honda in January 1977

   *6    8,000

Shinichi Sakamoto

(August 3, 1950)

  

Corporate Auditor of the Company (full-time),

appointed in June 2005

 

Regional Operating Officer of the Company,

appointed in April 2004

 

Joined in April 1969

   *4    6,000

Koukei Higuchi

(March 14, 1936)

  

Corporate Auditor of the Company,

appointed in June 2003

 

Advisor of the Board of The Tokio Marine & Fire

Insurance Co., Ltd. (presently Tokio Marine &

Nichido Fire Insurance Co., Ltd.),

appointed in June 2003 (presently held)

 

Chairman of The Tokio Marine & Fire Insurance Co., Ltd. (presently Tokio Marine & Nichido Fire Insurance Co., Ltd.),

appointed in June 2001

 

Joined The Tokio Marine and Fire Insurance Co., Ltd. (presently Tokio Marine & Nichido Fire Insurance Co., Ltd.) in April 1960

   *5    None

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Fumihiko Saito

(June 9, 1945)

  

Corporate Auditor of the Company,

appointed in June 2004

 

Representative of the Saito Law Office in February

2006 (presently held)

 

Partner of Haarmann Hemmelrath Saito Law Office

in June 2003

 

Registered as a lawyer, Joined The Law Firm of

Hamada & Yanagida (presently Mori

Hamada & Matsumoto) in April 1973

   *6    None

Yuji Matsuda

(August 27, 1951)

  

Corporate Auditor of the Company,

appointed in June 2007

 

President and Director of Mitsubishi UFJ Trust

Investment Technology Institute Co., Ltd.,

appointed in June 2006 (presently held)

 

Joined The Mitsubishi Trust and Banking

Corporation (presently The Mitsubishi UFJ Trust and Banking Corp.) in April 1975

   *5    1,000

 

*1. Mr. Satoru Kishi and Mr. Kensaku Hogen satisfy the required conditions for the outside director provided for in Article 2, Paragraph 1, Item 15 of the Company Law.
*2. Corporate Auditors Mr. Koukei Higuchi, Mr. Fumihiko Saito and Mr. Yuji Matsuda are outside corporate auditors as provided for in Article 2, Paragraph 1, Item 16 of the Company Law.
*3. The term of office of a Director is one year after his/her election to office at the close of the ordinary general meeting of shareholders on June 24, 2008.
*4. The term of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 23, 2005.
*5. The term of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 22, 2007.
*6. The term of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 24, 2008.
*7. The Company has introduced an operating officer system to facilitate transfer of authority to regions and local workplaces and effectively separate the supervisory and executive roles, while also making the Board of Directors more versatile. Managing Officers and Operating Officers under operating officer system are not statutory positions under the Japanese Company Law and do not conform to the definition of “Directors and Senior Management” as defined in Form 20-F. The Company’s Managing Officers and Operating Officers, as voluntarily disclosed in Japan, are listed below.

 

Managing Officers   
Takashi Yamamoto   

General Manager of Saitama Factory of Production Operations

Suguru Kanazawa   

Executive Vice President and Director of Honda Motor Europe Ltd.

 

President and Director of Honda of the U.K. Manufacturing Ltd.

Hiroshi Oshima   

Corporate Communications, Motor Sports

Hidenobu Iwata   

General Manager of Suzuka Factory of Production Operations

 

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Operating Officers   
Manabu Nishimae    President and Director of Honda Canada Inc.
Hiroshi Kobayashi   

Deputy Chief Operating Officer for Regional Sales Operations (Japan)

 

General Manager of Automobile Sales Operations for Regional Sales Operations (Japan)

 

General Manager of Aftermarket Operations in Regional Sales Operations (Japan)

 

General Manager of Asimo Business Office in Regional Sales Operations (Japan)

Gen Tsujii   

Production for Production Opertions

 

General Manager of Automobile Production

 

Planning Office in Production Operations

 

President and Director of Honda Engineering Co., Ltd.

Koichi Fukuo    Quality, Certification & Regulation Compliance
Hideki Okada   

General Manager of Regional Operation Planning Office in Regional Operations (North America)

 

Executive Vice President and Director of American Honda Motor Co., Inc.

Masahiro Takedagawa   

President and Director of Honda Siel Cars India Ltd.

 

President and Director of Honda Motor India Private Ltd.

Tsuneo Tanai    President and Director of Honda of America Mfg., Inc.
Yoshiyuki Matsumoto    Automobile Products for Automobile Operations
Eiji Okawara   

Production in China in Production Operations

 

President of Guangzhou Honda Automobile Co., Ltd.

Ko Katayama    Manufacturing of Honda Canada Inc.
Masahiro Yoshida    General Manager of Hamamatsu Factory of Production Operations
Seiji Kuraishi    President of Dongfeng Honda Automobile Co., Ltd.
Takashi Nagai    Executive Vice President and Director of Asian Honda Motor Co., Ltd.
Katsushi Watanabe    General Manager of Kumamoto Factory of Production Operations
Toshiaki Mikoshiba   

East Europe, the Middle & Near East and Africa for Regional Operations (Europe, the Middle & Near East and Africa)

 

Executive Vice President and Director of Honda Motor Europe Ltd.

Yohshi Yamane    General Manager of Corporate Project of the Company
Takashi Sekiguchi    Executive Vice President and Director of American Honda Motor Co., Inc.
Takahiro Hachigo    General Manager of Automobile Purchasing Division 2 in Purchasing Operations

 

There is no family relationship between any director or executive officer and any other director or executive officer.

 

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B. Compensation

 

Directors and Corporate Auditors receive monthly remuneration, the aggregate maximum monthly amount of which is approved at the annual general meeting of shareholders. Also, Directors and Corporate Auditors receive bonuses, the aggregate amount of which is approved at the annual general meeting of shareholders and is based on the Company’s performance for prior fiscal year. The amounts of the remuneration and bonuses approved to pay to Directors and Corporate Auditors are allocated among them at meetings of the Board of Directors and Corporate Auditors.

 

The total amount of remuneration paid to the Company’s directors and corporate auditors during the fiscal year ended March 31, 2008 was ¥923 million, including ¥817 million paid to 23 directors (who include three directors who retired during that fiscal year) and ¥106 million paid to seven corporate auditors (who include one corporate auditor who retired during that fiscal year). The amount of remuneration paid to the directors includes amount of wages paid to those directors who were also directors of subsidiaries of the Company.

 

The total amount of bonuses that were paid during the year ended March 31, 2008 was ¥578 million, including ¥501 million to our 20 directors as of the end of the year ended March 31, 2007 and ¥77 million to our six corporate auditors as of the end of the year ended March 31, 2007.

 

The amount of retirement allowances paid to five retired directors (including two managing officers who were directors in the past) and one retired corporate auditor totaled ¥1,100 million, both of which payments were in accordance with a resolution of the Ordinary General Meeting of Shareholders held in June 2007.

 

C. Board Practices

 

See Item 6.A “Directors and Senior Management” for information concerning the Company’s Directors and Corporate Auditors required by this item.

 

Corporate Governance

 

Companies listed on the New York Stock Exchange (the “NYSE”) must comply with certain standards regarding corporate governance under Section 303A of the NYSE Listed Company Manual.

 

However, listed companies that are foreign private issuers, such as Honda, are permitted to follow home country practice in lieu of certain provisions of Section 303A.

 

The following table shows the significant differences between the corporate governance practices followed by U.S. listed companies under Section 303A of the NYSE listed Company Manual and those followed by Honda.

 

Corporate Governance Practices Followed by

NYSE-listed U.S. Companies

  

Corporate Governance Practices Followed by Honda

A NYSE-listed U.S. company must have a majority of directors meeting the independence requirements under Section 303A of the NYSE Listed Company Manual.    For Japanese companies, which employ a corporate governance system based on a board of corporate auditors (the “board of corporate auditors system”), including Honda, Japan’s Company Law has no independence requirement with respect to directors. The task of overseeing management and, together with the accounting audit firm, accounting is assigned to the corporate auditors, who are separate from the company’s management and meet certain independence requirements under Japan’s Company Law.

 

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Corporate Governance Practices Followed by

NYSE-listed U.S. Companies

  

Corporate Governance Practices Followed by Honda

  

In the case of Japanese companies which employ the board of corporate auditors system, including Honda, at least half of the corporate auditors must be “outside” corporate auditors who must meet additional independence requirements under Japan’s Company Law. An outside corporate auditor is defined as a corporate auditor who has not served as a director, accounting councilor, executive officer, manager or any other employee of the company or any of its subsidiaries.

 

Currently, Honda has three outside corporate auditors which constitute 60% of Honda’s corporate auditors.

A NYSE-listed U.S. company must have an audit committee composed entirely of independent directors, and the audit committee must have at least three members.   

Like a majority of Japanese companies, Honda employs the board of corporate auditors system as described above. Under this system, the board of corporate auditors is a legally separate and independent body from the board of directors. The main function of the board of corporate auditors is similar to that of independent directors, including those who are members of the audit committee, of a U.S. company: to monitor the performance of the directors, and review and express opinion on the method of auditing by the company’s accounting audit firm and on such accounting audit firm’s audit reports, for the protection of the company’s shareholders.

 

Japanese companies which employ the board of corporate auditors system, including Honda, are required to have at least three corporate auditors. Currently, Honda has five corporate auditors. Each corporate auditor has a four-year term. In contrast, the term of each director of Honda is one year.

   With respect to the requirements of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 relating to listed company audit committees, Honda relies on an exemption under that rule which is available to foreign private issuers with boards of corporate auditors meeting certain criteria.
A NYSE-listed U.S. company must have a nominating/corporate governance committee entirely of independent directors.   

Honda’s directors are elected at a meeting of shareholders. Its Board of Directors does not have the power to fill vacancies thereon.

 

Honda’s corporate auditors are also elected at a meeting of shareholders. A proposal by Honda’s Board of Directors to elect a corporate auditor must

 

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Corporate Governance Practices Followed by

NYSE-listed U.S. Companies

  

Corporate Governance Practices Followed by Honda

   be approved by a resolution of its Board of Corporate Auditors. The Board of Corporate Auditors is empowered to request that Honda’s directors submit a proposal for election of a corporate auditor to a meeting of shareholders. The corporate auditors have the right to state their opinion concerning election of a corporate auditor at the meeting of shareholders.
A NYSE-listed U.S. company must have a compensation committee composed entirely of independent directors.    Maximum total amounts of compensation for Honda directors and corporate auditors are proposed to, and voted on, by a meeting of shareholders. Once the proposals for such maximum total amounts of compensation are approved at the meeting of shareholders, each of the Board of Directors and Board of Corporate Auditors determines the compensation amount for each member within the respective maximum total amounts.
A NYSE-listed U.S. company must generally obtain shareholder approval with respect to any equity compensation plan.    Currently, Honda does not adopt stock option compensation plans. When Honda adopts it, Honda must obtain shareholder approval for stock options only if the stock options are issued with specifically favorable conditions or price concerning the issuance and exercise of the stock options.

 

D. Employees

 

The following tables list the number of Honda full-time employees as of March 31, 2008, 2007 and 2006.

 

As of March 31, 2008

 

Total

   Motorcycle
Business
   Automobile
Business
   Financial Services
Business
   Power Product and
Other Businesses

178,960

   36,059    130,457    2,014    10,430
                     

 

At March 31, 2008, Honda had 178,960 full-time employees, including 109,213 local nationals employed in its overseas operations.

 

As of March 31, 2007

 

Total

   Motorcycle
Business
   Automobile
Business
   Financial Services
Business
   Power Product and
Other Businesses

167,231

   33,137    121,691    1,988    10,415
                     

 

At March 31, 2007, Honda had 167,231 full-time employees, including 98,493 local nationals employed in its overseas operations.

 

As of March 31, 2006

 

Total

   Motorcycle
Business
   Automobile
Business
   Financial Services
Business
   Power Product And
Other Businesses

144,785

   28,783    105,623    1,921    8,458
                     

 

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At March 31, 2006, Honda had 144,785 full-time employees, including 83,088 local nationals employed in its overseas operations.

 

Most of the Company’s regular employees in Japan, except management personnel, are required by the terms of the Company’s collective bargaining agreement with its labor union to become members of the Federation of All Honda Workers’ Union (AHWU), which is affiliated with the Japan Council of the International Metalworkers’ Federation. Approximately 85% of the employees of the Company and its Japanese subsidiaries were members of AHWU at March 31, 2008.

 

In Japan, basic wages are negotiated annually and the average increases in wages of the Company’s employees in fiscal 2006, 2007 and 2008 were 2.0%, 2.0% and 2.0%, respectively. In addition, in accordance with Japanese custom, each employee is paid a semi-annual bonus. Bonuses are negotiated during wage negotiations and are based on the overall performance of the Company or the applicable subsidiary in the previous year, the outlook for the current year and other factors.

 

The Company has had labor contracts with its labor union in Japan since 1970. These contracts are renegotiated with respect to basic wages and other working conditions. The regular employees of the Company’s domestic subsidiaries are covered by similar contracts. Since 1957, neither the Company nor any of its subsidiaries has experienced any strikes or other labor disputes that materially affected its business activities. The Company considers labor relations with its employees to be very good.

 

E. Share Ownership

 

The total amount of the Company’s voting securities owned by its officers, directors and corporate auditors as a group as of June 24, 2008 is as follows.

 

Title of Class   Amount Owned   % of Class  
Common Stock   233,936 shares   0.013 %

 

The Company’s full-time employees are eligible to participate in the Honda Employee Shareholders’ Association, whereby participating employees contribute a portion of their salaries to the Association and the Association purchases shares of the Company’s Common Stock on their behalf. As of March 31, 2008, the Association owned 4,563,276 shares of the Company’s common stock.

 

Item 7. Major Shareholders and Related Party Transactions

 

A. Major Shareholders

 

As of March 31, 2008, 1,834,828,430 shares of Honda’s Common Stock were issued and 1,814,537,899 shares were outstanding.

 

The following table shows the shareholder that owned of record 5% or more of the issued shares of Honda’s Common Stock as of March 31, 2008:

 

Name   Shares owned   Ownership (%)  
    (thousands)      
Moxley & Co.   117,366   6.4 %

 

According to a statement on Schedule 13G (Amendment No. 4) filed by Mitsubishi UFJ Financial Group, Inc. with the Securities and Exchange Commission on February 4, 2008, Mitsubishi UFJ Financial Group, Inc. directly and indirectly held, as of December 31, 2007, 136,594,177 shares, or 7.6% of the then issued shares, of Honda’s Common Stock.

 

None of the above shareholders has voting rights that are different from those of our other shareholders.

 

ADS representing American Depositary Shares are issued by JPMorgan Chase Bank, N.A., as Depositary. The normal trading unit is 100 American Depositary Shares. Total issued shares of Honda as of the close of business on March 31, 2008 were 1,834,828,430 shares of Common Stock, of which 117,364,816 shares represented by ADS and 243,346,399 shares not represented by ADS were owned by residents of the United States. The number of holders of record of the Company’s shares of Common Stock in the United States was 225 at March 31, 2008.

 

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To the knowledge of Honda, it is not directly or indirectly owned or controlled by any other corporation, by any government, or by any other natural or legal person or persons severally or jointly. As far as is known to the Company, there are no arrangements, the operation of which may at a subsequent date, result in a change in control of the Company.

 

B. Related Party Transactions

 

Honda purchases materials, supplies and services from numerous suppliers throughout the world in the ordinary course of business, including firms with which Honda is affiliated.

 

During the fiscal year ended March 31, 2008, Honda had sales of ¥366.8 billion and purchases of ¥1,066.3 billion with equity affiliates accounted under the equity method. As of March 31, 2008, Honda had receivables of ¥104.2 billion from affiliated companies, and had payables of ¥159.8 billion to affiliated companies.

 

Honda does not consider the amounts involved in such transactions to be material to its business.

 

C. Interests of Experts and Counsel

 

Not applicable.

 

Item 8. Financial Information

 

A. Consolidated Statements and Other Financial Information

 

1 – 3. Consolidated Financial Statements

 

Honda’s audited consolidated financial statements are included under “Item 18—Financial Statements”.

 

4. Not applicable.

 

5. Not applicable.

 

6. Export Sales.

 

See “Information on the Company—Marketing and Distribution—Overseas Sales”.

 

7. Legal Proceedings.

 

Various legal proceedings are pending against us. We believe that such proceedings constitute ordinary routine litigation incidental to our business. With respect to product liability, personal injury claims or lawsuits, we believe that any judgment that may be recovered by any plaintiff for general and special damages and court costs will be adequately covered by our insurance and accrued liabilities. Punitive damages are claimed in certain of these lawsuits. We are also subject to potential liability under other various lawsuits and claims including 74 purported class actions in the United States.

 

In accordance with Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies”, Honda has recorded a contingent liability when it is probable that an obligation has been incurred and the amount of loss can be reasonably estimated. Honda reviews these pending lawsuits and claims periodically and adjusts the amounts recorded for these contingent liabilities, if necessary, by considering the nature of lawsuits and claims, the progress of the case and the opinions of legal counsel. Honda does not record liabilities for lawsuits or potential claims that it believes will not result in an unfavorable outcome or when a reasonable estimate of the amount of probable loss cannot be determined. After consultation with legal counsel, and taking into account all known factors pertaining to existing lawsuits and claims, Honda believes that the

 

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ultimate outcome of such lawsuits and pending claims including 74 purported class actions in the United States should not result in liability to Honda that would be likely to have an adverse material effect on its consolidated financial position, results of operations or cash flows.

 

8. Profit Redistribution Policy

 

The Company strives to carry out its operations from a global perspective and to increase its corporate value. With respect to the redistribution of profits to its shareholders, which it considers to be one of the most important management issues, and its basic policy for dividends is to make distributions after taking into account its long-term consolidated earnings performance.

 

The Company’s basic policy for dividends is to make quarterly distributions. The Company may determine dividends from surplus by a resolution of the Board of Directors. Also, please note that the year-end cash dividends for the year ended March 31, of each year are matters to be resolved at general meeting of shareholders.

 

The Company will also acquire its own shares at the optimal timing with the goal of improving efficiency of the Company’s capital structure. The present goal is to maintain a shareholders return ratio (i.e. the ratio of the total of the dividend payment and the repurchase of the Company’s own shares to consolidated net income) of approximately 30%. Retained earnings will be allocated toward financing R&D activities that are essential for the future growth of the Company and capital expenditures and investment programs that will expand its operations for the purpose of improving business results and strengthening the Company’s financial condition.

 

The Company distributed year-end cash dividends of ¥22 per share for the year ended March 31, 2008. As a result, total cash dividends for the year ended March 31, 2008, together with the first quarter cash dividends of ¥20, the second quarter cash dividends of ¥22 and the third quarter cash dividends of ¥22, were ¥86 per share, an increase of ¥19 from the annual dividends paid for the year ended March 31, 2007.

 

The Company plans to distribute quarterly cash dividends of ¥22 per share for each quarter for the year ending March 31, 2009. As a result, total cash dividends for the year ending March 31, 2009 are planned to be ¥88 per share, an increase of ¥2 from the annual dividends paid for the year ended March 31, 2008.

 

Details of Distribution of Surplus (Record dates of the fiscal year ended March 31, 2008)

 

    Resolution of
the Board
of Directors
  Resolution of
the Board
of Directors
  Resolution of
the Board
of Directors
  Resolution at
General Meeting
of Shareholders
    July 25, 2007   October 25, 2007   January 30, 2008   June 24, 2008

Dividend per Share of Common Stock (yen)

  20.00   22.00   22.00   22.00

Total Amount of Dividends Yen (millions)

  36,292   39,921   39,921   39,921

 

B. Significant Changes

 

Except otherwise disclosed in this Annual Report on Form 20-F, no significant change has occurred since the date of the annual financial statements.

 

Item 9. The Offer and Listing

 

A. Offer and Listing Details

 

Honda’s shares have been listed on the Tokyo Stock Exchange (TSE) since 1957 and as of March 31, 2008, Honda’s shares were traded over two stock exchanges in Japan.

 

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Since February 11, 1977, American Depositary Shares (each representing one share of Common Stock and evidenced by American Depositary Receipts (ADRs)) have been listed and traded on the New York Stock Exchange (the NYSE), having been traded on the over-the-counter markets in the United States since 1962. In addition, European Shares (each representing ten shares of Common Stock and evidenced by European Depositary Receipts (EDRs)) have been traded in bearer form on the over-the-counter markets in several European countries since 1963. In June 1981, the shares of Common Stock were admitted to the official list of The Stock Exchange of London. In May 1983, the Company listed its shares on the stock exchanges in Zurich, Geneva and Basel in the form of Swiss Bearer Depositary Receipts. In June 1985, the shares of Common Stock were admitted to trading on the Paris Stock Exchange. As for the stock exchanges in Switzerland, the floor exchanges in Zurich, Basel and Geneva were consolidated to form a single national bourse—the Swiss Exchange, in 1995. The Paris Stock Exchange was merged with the exchanges in Amsterdam and Brussels and created Euronext in September 2000. The Company delisted itself from Euronext Paris and SWX Swiss Exchange and terminated European Depositary Receipts during fiscal year 2008.

 

The monthly average turnover of Honda’s shares of Common Stock and American Depositary Shares for the fiscal year ended March 31, 2008 was approximately 156,759,900 shares of Common Stock on the TSE and approximately 14,697,810 American Depositary Shares on the NYSE.

 

The following table sets out, for the periods indicated, the reported high and low sales prices of Honda’s shares on the TSE in yen and its American Depositary Shares on the NYSE in the U.S. dollars.

 

     Yen per share of
Common Stock on
the TSE*
   U.S. dollars per
American
Depositary Share on
the NYSE

Fiscal year

       High            Low            High            Low    

2004

   ¥ 2,755    ¥ 1,785    $ 23.59    $ 15.47

2005

     2,850      2,185      27.30      19.25

2006

     3,750      2,510      31.74      23.75

2007

           

1st quarter

   ¥ 4,285    ¥ 3,270    $ 37.95    $ 29.13

2nd quarter

     4,030      3,410      35.00      29.43

3rd quarter

     4,740      3,910      39.87      33.49

4th quarter

     4,940      4,050      40.82      34.64

2008

           

1st quarter

   ¥ 4,520    ¥ 3,950    $ 36.59    $ 33.30

2nd quarter

     4,600      3,430      37.80      31.29

3rd quarter

     4,400      3,530      37.64      32.14

4th quarter

     3,660      2,610      33.61      27.01

CY 2008

           

Jan

   ¥ 3,660    ¥ 2,890    $ 33.61    $ 27.35

Feb

     3,510      3,100      32.48      29.12

Mar

     3,160      2,610      30.87      27.01

Apr

     3,490      2,765      32.88      27.69

May

     3,550      3,120      33.50      30.55

 

* The reported high and low sales prices of Honda’s shares on the TSE in yen from 2004 to 2006 have been adjusted based on the shares after stock split.

 

B. Plan of Distribution

 

Not applicable.

 

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C. Markets

 

See Item 9.A, “Offer and Listing Details”

 

D. Selling Shareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses of the Issue

 

Not applicable.

 

Item 10. Additional Information

 

A. Share Capital

 

Not applicable

 

B. Memorandum and Articles of Association

 

Set forth below is information relating to Honda’s common stock, including brief summaries of the relevant provisions of Honda’s articles of incorporation and share handling regulations as currently in effect, and of the Company Law of Japan and related legislation.

 

General

 

Honda’s authorized share capital as of the date of the filing of this Form 20-F is 7,086,000,000 shares of common stock, of which 1,834,828,430 shares were issued. Effective as of July 1, 2006, Honda implemented a two for one stock split. Under the Company Law, shares must be registered and are transferable by delivery of share certificates. In order to assert shareholders’ rights against Honda, a shareholder must have its name and address registered on Honda’s register of shareholders, in accordance with Honda’s share handling regulations. The registered beneficial holder of shares underlying the ADSs is the depositary for the ADSs. Accordingly, holders of ADSs will not be able directly to assert shareholders’ rights.

 

A holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan. Participating shareholders must deposit certificates representing all of the shares to be included in this clearing system with the Japan Securities Depository Center, Inc. (the “Securities Center”). If a holder of shares is not a participating institution in the Securities Center, it must participate through a participating institution, such as a securities company or a bank having a clearing account with the Securities Center. All shares deposited with the Securities Center will be registered in the name of the Securities Center on Honda’s register of shareholders. Each participating shareholder will in turn be registered on Honda’s register of beneficial shareholders and be treated in the same way as shareholders registered on Honda’s register of shareholders. For the purpose of transferring deposited shares, delivery of share certificates is not required. Entry of the share transfer in the books maintained by the Securities Center for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The registered beneficial owners may exercise the rights attached to the deposited shares, such as voting rights, and will receive dividends (if any) and notices to shareholders directly from Honda. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial owner are aggregated for these purposes. Beneficial owners may at any time withdraw and receive their share certificates from the Securities Center.

 

 

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A law to establish a new central book entry clearing system for shares of listed companies and to eliminate the issuance and use of certificates for such shares was promulgated in June 2004 and the part of such law that is relevant to the shares of Honda will come into effect on a date within five years of the date of the promulgation which will be determined by a Cabinet Order and is currently expected to be around early January 2009. On the effective date, a new book entry central clearing system will be established and will become responsible for handling the shares of all Japanese companies listed on any Japanese stock exchange, including the shares of Honda. On the same day, all existing share certificates will become null and void. The transfer of shares will be effected by book-entry in the accounts maintained under the new central clearing system.

 

Objects and Purposes

 

Article 2 of the articles of incorporation of Honda states that its purpose is to engage in the following businesses:

 

   

Manufacture, sale, lease and repair of motor vehicles, ships and vessels, aircrafts and other transportation machinery and equipment.

 

   

Manufacture, sale, lease and repair of prime movers, agricultural machinery and appliances, generators, processing machinery and other general machinery and apparatus, electric machinery and apparatus and precision machinery and apparatus.

 

   

Manufacture and sale of fiber products, paper products, leather products, lumber products, rubber products, chemical industry products, ceramic products, metal products and other products.

 

   

Overland transportation business, marine transportation business, air transportation business, warehousing business, travel business and other transport business and communication business.

 

   

Sale of sporting goods, articles of clothing, stationary, daily sundries, pharmaceuticals, drink and foodstuffs and other goods.

 

   

Financial business, nonlife insurance agency business, life insurance agency business, construction business including building construction work and real estate business including real estate brokerage.

 

   

Publishing business, advertising business, translation business, interpretation business, management consultancy business, information services including information processing, information and communication and information provision, industrial planning and design, comprehensive security business and labor dispatch services.

 

   

Management of parking garages, driving schools, training and education facilities, racecourses, recreation grounds, sporting facilities, marina facilities, hotels, restaurants and other facilities.

 

   

Manufacture, sale and licensing of equipment, parts and supplies and all other relevant business activities and investments relating to each of the foregoing items.

 

Dividends

 

Under its articles of incorporation, Honda’s financial accounts will be closed on March 31 of each year. The record date for dividends is June 30, September 30, December 31 and March 31 of each year. In addition, the Company may distribute dividends from surplus by determining any record date.

 

Under the Company Law, a company is permitted to make distributions of surplus to the shareholders any number of times per fiscal year pursuant to resolutions of a general meeting of shareholders, subject to certain limitations provided by the Law and the Ordinances of the Ministry of Justice thereunder. Distributions of surplus are required, in principle, to be authorized by a resolution of a general meeting of shareholders. However, if the articles of incorporation so provide and certain other requirements under the Company Law are met, distributions of surplus may be made pursuant to a board resolution. Pursuant to the provisions of the Company Law and its articles of incorporation, the board of directors of Honda may determine distributions of its surplus.

 

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Distributions of surplus may be made in cash or in-kind in proportion to the number of shares held by each shareholder. If a distribution of surplus is to be made in-kind, a special resolution of a general meeting of shareholders is required, except in the case that a right to receive cash distribution instead of distribution in-kind is granted to shareholders. If such right is granted, distributions in-kind may be made pursuant to an ordinary resolution of a general meeting of shareholders or, as the case may be, a board resolution.

 

Under the Company Law, Honda is permitted to prepare non-consolidated extraordinary financial statements consisting of a balance sheet as of any date subsequent to the end of the previous fiscal year and an income statement for the period from the first day of the current fiscal year to the date of such balance sheet. If such extraordinary financial statements are prepared and approved in accordance with the provisions of the Company Law and the Ordinances of the Ministry of Justice thereunder, the results of such extraordinary financial statements may be considered in the calculation of distributable amount.

 

Under its articles of incorporation, Honda is not obligated to pay any dividends which are left unclaimed for a period of three full years after the date on which they first became payable.

 

Capital and Reserves

 

The entire amount of the issue price of the shares to be issued in the future will generally be required to be accounted for as stated capital. However, Honda may account for an amount not exceeding one-half of such issue price as additional paid-in capital by resolution of the board of directors in accordance with the Company Law. Honda may at any time reduce the whole or any part of its additional paid-in capital or transfer them to stated capital by resolution of a general meeting of shareholders. The whole or any part of surplus may also be transferred to stated capital, additional paid-in capital or legal reserve by resolution of a general meeting of shareholders.

 

Stock Splits

 

Honda may at any time split its shares into greater number of shares by resolution of the board of directors. When the board of directors approves a stock split, it may also amend the articles of incorporation of Honda without approval of shareholders to increase the number of its authorized shares in proportion to the stock split, so long as Honda does not issue more than one class of shares.

 

Upon stock splits, shareholders will not be required to exchange share certificates held by them for new share certificates. In respect of deposited shares, new shares resulting from the stock split will be deposited with the Securities Center, and shareholders who directly possess share certificates will receive additional certificates representing the additional shares resulting from the stock split.

 

Consolidation of Shares

 

Honda may at any time consolidate the shares into a smaller number of shares by a special resolution of the general meeting of shareholders. A representative director of Honda must disclose the reason for the consolidation of the shares at the general meeting of shareholders.

 

Japanese Unit Share System

 

Consistent with the requirements of the Company Law, the articles of incorporation of Honda adopts unit share system called as “tan-gen-kabu”, under which 100 shares constitute one voting unit of shares. The board of directors of Honda by itself may reduce, but not to increase, the number of shares that constitute a voting unit or abolish the unit share system entirely by a board resolution. An increase in the number of shares that constitute one voting unit requires a resolution of a general shareholders’ meeting. In any case, the number of shares constituting one voting unit may not exceed 1,000 shares.

 

 

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The articles of incorporation of Honda provide that Honda may not issue share certificates for a number of shares not constituting an integral number of voting units. Because the transfer of shares normally requires delivery of the share certificates for the shares being transferred, shares constituting a fraction of a voting unit and for which no share certificates are issued may not be transferable, however, the holder of shares constituting less than one voting unit may at any time require Honda to purchase or sell such shares to constitute a voting unit at the market price in accordance with the Company’s share handling regulations (see below). Because the transfer of ADRs does not require changes in the ownership of the underlying shares, holders of ADRs evidencing ADSs that constitute less than one voting unit of shares are not affected by these restrictions in their ability to transfer the ADRs. However, because transfers of less than one voting unit of the underlying shares are normally prohibited under the unit share system, under the deposit agreement, the right of ADR holders to surrender their ADRs and withdraw the underlying shares for sale in Japan may only be exercised as to whole voting units.

 

Right of a Holder of Shares Representing Less Than One Voting Unit to Require Honda to Purchase or Sell Its Shares

 

A holder of Honda’s shares representing less than one voting unit may at any time require Honda to purchase its shares. These shares will be purchased at (a) the closing price of the shares reported by the Tokyo Stock Exchange on the day when the request for purchase reaches the share handling agent, or (b) if no sale takes place on the Tokyo Stock Exchange on that day, then the price at which the first sale of shares is effected on the Tokyo Stock Exchange thereafter. In each case, Honda will request the payment of an amount determined by Honda as an amount equal to the brokerage commission required for the sale and purchase of the shares. A holder of shares representing less than one voting unit may, in accordance with the provisions of the share handling regulations, also make a request to the effect that such number of shares should be sold to it that will, when added to the shares less than one voting unit already held by that shareholder, constitute one voting unit. However, because holders of ADSs representing less than one unit are not able to withdraw the underlying shares from deposit, these holders will not be able to exercise many shareholder rights as a practical matter.

 

Other Rights of a Holder of Shares Representing Less Than One Voting Unit

 

A holder of shares representing less than one voting unit has the following rights and these rights may not be restricted by the articles of incorporation:

 

   

rights to receive any consideration for acquisition by a corporation of special shares all of which may be acquired by such corporation (zembu shutoku joukou tsuki shurui kabushiki) as provided by Article 171, paragraph 1, item 1 of the Company Law,

 

   

rights to receive any cash or other consideration for acquisition by a corporation of shares which may be acquired by such corporation on occurrence of certain event (shutoku joukou tsuki shurui kabushiki) as provided by Article 107, paragraph 1, item 3 of the Company Law,

 

   

rights to be allocated any shares without consideration as provided by Article 185 of the Company Law,

 

   

rights to receive distribution of any residual assets of a corporation, and

 

   

any other rights provided in the relevant Ordinance of the Ministry of Justice, including rights to receive cash an other distribution derived from consolidation of shares, stock split, allocation of stock acquisition rights without consideration, distribution of surplus or reorganization of a corporation.

 

Other rights of a holder of shares constituting less than one voting unit may be restricted if the articles of incorporation so provide.

 

Voting rights under the unit share system

 

Under the unit share system, the shareholders shall have one voting right for each voting unit of shares that they hold. A shareholder who owns shares representing less than one voting unit will not be able to exercise voting rights and any other rights relating thereto, including the right to examine Honda’s accounting books and records.

 

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Voting Rights

 

Honda holds its ordinary general meeting of shareholders in June of each year. In addition, Honda may hold an extraordinary general meeting of shareholders whenever necessary by giving at least two weeks’ advance notice. Under the Company Law, notice of any shareholders’ meeting must be given to each shareholder having voting rights or, in the case of a non-resident shareholder, to his resident proxy or mailing address in Japan in accordance with Honda’s share handling regulations, at least two weeks prior to the date of the meeting.

 

A shareholder of Honda is generally entitled to one vote per voting unit of shares as described in this paragraph and under “Japanese Unit Share System” above. In general, under the Company Law and the articles of incorporation of Honda, a resolution may be adopted at a meeting of shareholders by a majority of the shares having voting rights represented at the meeting. The Company Law and Honda’s articles of incorporation require a quorum for the election of directors and corporate auditors of not less than one-third of the total number of voting rights of all shareholders and the resolution shall be adopted by majority voting. Honda’s shareholders are not entitled to cumulative voting in the election of directors. A corporate shareholder whose voting rights are in turn more than one-quarter directly or indirectly owned by Honda does not have voting rights.

 

Shareholders may exercise their voting rights through proxies, provided that those proxies are also shareholders who have voting rights. Shareholders who intend to be absent from a general meeting of shareholders may exercise their voting rights in writing. In addition, they may exercise their voting rights by electronic means if the board of directors decides to accept such means.

 

Under the Company Law, in order to approve certain significant matters of a corporation, more strict requirement for the quorum or the number of voting rights to approve is provided. The articles of incorporation of Honda provide that such resolution may be adopted at a meeting of shareholders by two thirds of the voting rights of the shareholders present at the meeting representing at least one third of all the shareholders having voting rights. Such significant matters include, but not limited to:

 

   

the determination of the matters relating to acquisition of its own shares from a specific shareholder,

 

   

the determination as to acquisition of special shares all of which may be acquired by a corporation (zembu shutoku joukou tsuki shurui kabushiki),

 

   

the determination of consolidation of the shares,

 

   

the determination of discharge of a part of responsibilities of directors, corporate auditors or accounting auditors,

 

   

the determination of the matters concerning distribution of surplus by property other than cash (only in the case that no cash distribution is allowed to shareholders),

 

   

the determination of the matters concerning amendments to the articles of incorporation, transfer of whole or important part of business or dissolution of a corporation,

 

   

the determination of the matters concerning reorganization of a corporation.

 

Pursuant to the terms of the Deposit Agreement, upon receipt of notice of any meeting of holders of Common Shares of the Registrant, the Depositary will mail to the record holders of ADRs and publish a notice which will contain the information in the notice of the meeting. The record holders of ADRs at the close of business on a date specified by the Depositary will be entitled to instruct the Depositary as to the exercise of the voting rights pertaining to the amount of Common Stock of the Registrant represented by their respective Depositary Receipts. The Depositary will endeavor, in so far as practicable, to vote the amount of Common Stock of the Registrant represented by such Depositary Receipts in accordance with such instructions, and the Registrant has agreed to take all action which may at any time be deemed necessary by the Depositary in order to enable the Depositary to so vote such Common Stock. In the absence of such instructions, the Depositary has agreed to use its best efforts to give a discretionary proxy to a person designated by the Registrant. However,

 

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such proxy may not be given with respect to any proposition of which the Depositary has knowledge regarding any contest related to the action to be taken at the meeting, or the purpose of which is to authorize a merger, consolidation or any other matter which may substantially affect the rights or privileges of the Common Stock of the Registrant or other securities, property or cash received by the Depositary or the Custodian in respect thereof.

 

Subscription Rights and Stock Acquisition Rights

 

Holders of shares have no preemptive rights under Honda’s articles of incorporation. Under the Company Law, the board of directors may, however, determine that shareholders be given subscription rights in connection with a particular issue of new shares. In this case, such rights must be given to all shareholders as of a specified record date by at least two weeks’ prior public notice to shareholders of the record date. In addition, individual notice must be given to each of these shareholders at least two weeks prior to the date of expiration of the subscription rights.

 

Honda also may decide to grant the stock acquisition rights (shinkabu-yoyakuken), with or without bonds, to any person including shareholders, by resolution of its board of directors unless issued under specially favorable conditions. The holder of such rights may exercise its rights within the exercise period by paying subscription moneys all as prescribed in the terms of such rights.

 

Liquidation Rights

 

In the event of a liquidation of Honda, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed among the shareholders in proportion to the number of shares they own.

 

Liability to Further Calls or Assessments

 

All of Honda’s currently issued shares, including shares represented by the ADSs, are fully paid and nonassessable.

 

Shareholders’ Register Manager

 

The Chuo Mitsui Trust and Banking Company, Limited is the Shareholders’ Register Manager for the shares. Chuo Mitsui’s office is located at 33-1, Shiba 3-chome, Minato-ku, Tokyo, 105-8574, Japan. Chuo Mitsui maintains Honda’s register of shareholders and records transfers of record ownership upon presentation of share certificates.

 

Record Date

 

As mentioned above, the record date for Honda’s dividends is June 30, September 30, December 31 and March 31, if paid. A holder of shares constituting one or more whole voting units who is registered as a holder on Honda’s register of shareholders at the close of business as of March 31 is entitled to exercise shareholders’ voting rights at the ordinary general meeting of shareholders with respect to the fiscal year ended on March 31. In addition, Honda may set a record date for determining the shareholders entitled to other rights and for other purposes by giving at least two weeks’ prior public notice.

 

The shares generally trade ex-dividend or ex-rights on the Japanese stock exchanges on the third business day before a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings.

 

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Acquisition by Honda of Shares

 

Under the Company Law, Honda is generally required to obtain authorization for any acquisition of its own shares by means of:

 

(i) a resolution at a general meeting of shareholders, which may be effective for one year at the most from the date thereof;

 

(ii) a resolution of the board of directors if the acquisition is in accordance with its articles of incorporation; or

 

(iii) a resolution of the board of directors if the acquisition is to purchase its shares from a subsidiary.

 

Honda may only dispose of shares so acquired in accordance with the procedures applicable to a new share issuance under the Company Law.

 

Upon due authorization, Honda may acquire its own shares:

 

   

in the case of (i) and (ii) above, from stock markets or by way of tender offer;

 

   

in the case of (i) above, from a specific person, but only if its shareholders approve such acquisition by special resolution; and

 

   

in the case of (iii) above, from such subsidiary.

 

In the event Honda is to acquire its own shares from a specific person other than its subsidiary at a price which is higher than the higher of (i) the final market price on the market trading such shares as of the date of such request or (ii) in the event that such shares are subject to a tender offer, etc., the price set in the contract regarding such tender offer, any shareholder may request that Honda includes such shareholder’s shares in the proposed purchase.

 

Acquisitions described in (i) through (iii) above must satisfy certain other requirements, including the restriction of the source of consideration in which the total amount of the purchase price of such own shares may not exceed the distributable amount of the corporation.

 

Reports to Shareholders

 

Honda currently furnishes shareholders with notices of shareholders’ meetings, business reports, including financial statements, and notices of resolutions adopted at the shareholders’ meetings, all of which are in Japanese. Such notices as described above may be furnished by electronic means to those shareholders who have approved such way of furnishing notices. Pursuant to its articles of incorporation, Honda must publish notices to shareholders in Japanese in the Nihon Keizai Shimbun, a Japanese newspaper of general circulation.

 

Report of Substantial Shareholdings

 

The Financial Instruments and Exchange Law of Japan and regulations under such Law require any person who has become a holder (together with its related persons) of more than 5% of the total issued shares of a corporation listed on any Japanese stock exchange or whose shares are traded on the over-the-counter market (including ADSs representing such shares) to file with the Director of a competent Local Finance Bureau, within five business days, in general, a report concerning those shareholdings. A similar report must also be filed to reflect any change of 1% or more in any shareholding or any change in material matters set out in reports previously filed. Copies of any report must also be furnished to the corporation and to all Japanese stock exchanges on which the corporation’s shares are listed or in the case of shares traded on the over-the-counter market, the Japan Securities Dealers Association. For this purpose, shares issuable or transferable to such person upon exercise of exchangeable securities, conversion of convertible securities or exercise of warrants or stock acquisition rights are taken into account in determining both the number of shares held by that holder and the corporation’s total issued share capital.

 

 

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Daily Price Limits under Japanese Stock Exchange Rules

 

Share prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges set daily price limits, which limit the maximum range of fluctuation within a single trading day. Daily price limits are set in absolute yen according to the previous day’s closing price or special quote. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell his shares at such price on a particular trading day, or at all.

 

C. Material Contracts

 

All contracts concluded by Honda during the two years preceding this filing were entered into in the ordinary course of business.

 

D. Exchange Controls

 

There are no laws, decrees, regulations or other legislation which materially affect our ability to import or export capital for our use or our ability to pay dividends to nonresident holders of our shares.

 

E. Taxation

 

Japanese Taxes

 

The following is a summary of the principal Japanese tax consequences to owners of our shares or ADSs who are non-resident individuals or non-Japanese corporations without a permanent establishment in Japan to which income from our shares is attributable. The tax treatment is subject to possible changes in the applicable Japanese laws or double taxation conventions occurring after that date. This summary is not exhaustive of all possible tax considerations that may apply to a particular investor. Potential investors should consult their own tax advisers as to:

 

   

the overall tax consequences of the acquisition, ownership and disposition of shares or ADSs, including specifically the tax consequences under Japanese law;

 

   

the laws of the jurisdiction of which they are resident; and

 

   

any tax treaty between Japan and their country of residence.

 

Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations.

 

In the absence of any applicable tax convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to a non-resident of Japan or a non-Japanese corporation is 20%. With respect to dividends paid on listed shares issued by Japanese corporations (such as our shares) to a non-resident of Japan or a non-Japanese corporation, the aforementioned 20% withholding tax rate is reduced to (i) 7% for dividends to be paid until March 31, 2009, and (ii) 15% for dividends to be paid thereafter, except for dividends paid to any individual shareholder who holds 5% or more of the issued shares of us. Japan has entered into income tax treaties, conventions or agreements, whereby the maximum withholding tax rate is generally set at 15% for portfolio investors with, among others, Belgium, Canada, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, and Switzerland.

 

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Pursuant to the Convention Between the United States of America and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, a portfolio investor that is a U.S. holder is generally subject to Japanese withholding tax on dividends on shares at a rate of 10%. A similar withholding tax treatment applies under the new tax treaty between the United Kingdom and Japan for dividends taxed on or after January 1, 2007 due to the renewal of such treaty. The tax treaty between France and Japan was renewed, effective from December 1, 2007, under which the standard treaty withholding rate for portfolio investors on dividends was reduced from 15% to 10%. In addition, the tax treaty between Australia and Japan has been renewed (the effective date undetermined) under which the standard treaty withholding rate on dividends will be reduced in general from 15% to 10%. Under Japanese tax law, the maximum rate applicable under the tax treaties, conventions or agreements shall be applicable except when such maximum rate is more than the Japanese statutory rate.

 

Gains derived from the sale outside Japan of common stock or Depositary Receipts by a non-resident of Japan or a non-Japanese corporation, or from the sale of common stock within Japan by a non-resident of Japan or by a non-Japanese corporation not having a permanent establishment in Japan, are in general not subject to Japanese income or corporation taxes. Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired common stock or Depositary Receipt as a legatee, heir or donee, even if the individual is not a Japanese resident.

 

United States Taxes

 

This section describes the material U.S. federal income tax consequences of the ownership of shares or ADSs by U.S. holders, as defined below. It applies only to persons who hold shares or ADSs as capital assets for tax purposes.

 

This section is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect, as well as on the Old Treaty and the New Treaty. These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.

 

For purposes of the New Treaty and the Code, U.S. holders of ADRs evidencing ADSs will be treated as the owners of the Shares represented by those ADRs. Exchanges of shares for ADRs and ADRs for shares, generally will not be subject to U.S. federal income tax. For purposes of this discussion, a “U.S. holder” is a beneficial owner of shares or ADSs that is for United States federal income tax purposes, (i) a citizen or resident individual of the United States, (ii) a domestic corporation, (iii) an estate whose income is subject to United States federal income tax regardless of its source, or (iv) a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust; and that, for purposes of the New Treaty, as (i) the shares and ADSs do not form part of the business property of a permanent establishment through which the beneficial owner carries on or has carried on business and (ii) is not otherwise ineligible for benefits under the New Treaty, as the case may be, with respect to income and gain from the shares or ADSs.

 

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This section does not apply to a person who is a member of a special class of holders subject to special rules, including a dealer in securities, a trader in securities that elects to use a mark-to-market method of accounting for its securities holdings, a tax-exempt organization, a life insurance company, a person liable for alternative minimum tax, a person that actually or constructively owns 10% or more of the voting stock of Honda, a person that holds shares or ADSs as part of a straddle or a hedging or conversion transaction, or a person whose functional currency is not the U.S. dollar.

 

This summary is not a comprehensive description of all the tax considerations that may be relevant with respect to a U.S. holder’s shares or ADSs. Each beneficial owner of shares or ADSs should consult its own tax advisor regarding the U.S. federal, state and local and other tax consequences of owning and disposing of shares and ADSs in its particular circumstances.

 

Taxation of Dividends

 

Under the U.S. federal income tax laws and subject to the passive foreign investment company, or PFIC, rules discussed below, the gross amount of any dividend paid by Honda out of its current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) is subject to United States federal income taxation. A U.S. holder must include any Japanese tax withheld from the dividend payment in this gross amount even though it does not in fact receive it.

 

Dividends paid to a noncorporate U.S. holder in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to such holder at a maximum tax rate of 15% provided that the noncorporate U.S. holder holds shares or ADSs for more than 60 days during the 121 day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends that Honda pays with respect to the shares or ADSs generally will be qualified dividend income. A U.S. holder must include the dividend in its taxable income when the holder, in the case of shares, or the Depositary, in the case of ADSs, receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. The amount of the dividend distribution that a U.S. holder must include in its income will be the U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S. dollar rate on the date of the dividend distribution, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the U.S. holder includes the dividend payment in income to the date it converts the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the U.S. for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of U.S. holder’s basis in the shares or ADSs and thereafter as capital gain.

 

Subject to certain limitations, the Japanese tax withheld in accordance with the Old Treaty or the New Treaty, as applicable, and paid over to Japan will be creditable against a U.S. holder’s United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to a U.S.

 

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holder under Japanese law or under the Old Treaty or the New Treaty, the amount of tax withheld that is refundable will not be eligible for credit against the U.S. holder United States federal income tax liability. Please see “Japanese Taxation,” above, for the procedures for obtaining a reduced rate of withholding under a treaty or a tax refund.

 

Dividends will be income from sources outside the United States, but dividends paid in taxable years beginning before January 1, 2007 generally will be “passive income” or “financial services income, and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be “passive” or “general” income which in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to a U.S. holder.

 

Taxation of Capital Gains

 

Subject to the PFIC rules discussed below, if a U.S. holder sells or otherwise disposes of its shares or ADSs, it will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount that it realizes and its tax basis, determined in U.S. dollars, in its shares or ADSs. Capital gain of a noncorporate U.S. holder that is recognized before January 1, 2011 will generally be taxed at a maximum rate of 15% where the property is held for more than one year. The gain or loss will generally be income or loss from sources within the U.S. for foreign tax credit limitation purposes.

 

Passive Foreign Investment Company (PFIC) Rules

 

Honda believes it was not a PFIC for United States federal income tax purposes in 2007, and that it will not be a PFIC in 2008. Honda’s shares and ADRs are not stock of a PFIC for United States federal income tax purposes. This conclusion is a factual determination that is made annually and thus may be subject to change.

 

In general, Honda will be a PFIC with respect to a U.S. holder if for any taxable year in which it held our ADRs or shares:

 

   

at least 75% of Honda’s gross income for the taxable year is passive income; or

 

   

at least 50% of the value, determined on the basis of a quarterly average, of Honda’s assets is attributable to assets that produce or are held for the production of passive income.

 

Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.

 

If Honda is treated as a PFIC, and a U.S. holder does not make a mark-to-market election, as described below, that U.S. holder will be subject to special rules with respect to:

 

   

any gain it realizes on the sale or other disposition of its shares or ADRs; and

 

   

any excess distribution that Honda makes to it (generally, any distributions to it during a single taxable year that are greater than 125% of the average annual distributions received by it in respect of the shares or ADRs during the three preceding taxable years or, if shorter, its holding period for the shares or ADRs).

 

Under these rules:

 

   

the gain or excess distribution will be allocated ratably over its holding period for the shares or ADSs,

 

   

the amount allocated to the taxable year in which it realized the gain or excess distribution will be taxed as ordinary income,

 

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the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year, and

 

   

the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.

 

Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.

 

If a U.S. holder owns shares or ADRs in a PFIC that are treated as marketable stock, it may make a mark-to-market election. If it makes this election, it will not be subject to the PFIC rules described above. Instead, in general, it will include as ordinary income each year the excess, if any, of the fair market value of its shares or ADSs at the end of the taxable year over its adjusted basis in its shares or ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. It will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Its basis in the shares or ADSs will be adjusted to reflect any such income or loss amount.

 

In addition, notwithstanding any election that a U.S. holder makes with regard to the shares or ADSs, dividends that a U.S. holder receives from Honda will not constitute qualified dividend income to such holder if Honda is a PFIC either in the taxable year of the distribution or the preceding taxable year. Moreover, shares or ADSs held by a U.S. holder will be treated as stock in a PFIC if Honda was a PFIC at any time during the U.S. holder’s holding period in its shares or ADSs, even if Honda is not currently a PFIC. For purposes of this rule, if a U.S. holder makes a mark-to-market election with respect to its shares or ADSs, the U.S. holder will be treated as having a new holding period in its shares or ADSs beginning on the first day of the first taxable year beginning after the last taxable year for which the mark-to-market election applies. Dividends that a U.S. holder receives that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, the U.S. holder must include the gross amount of any such dividend paid by Honda out of our accumulated earnings and pr