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HONDA MOTOR CO LTD 6-K 2005
Form 6-K
Table of Contents

No.1-7628

 


SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 6-K

 


 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE MONTH OF August 2005

 

COMMISSION FILE NUMBER: 1-07628

 


 

HONDA GIKEN KOGYO KABUSHIKI KAISHA

(Name of registrant)

 

HONDA MOTOR CO., LTD.

(Translation of registrant’s name into English)

 


 

1-1, Minami-Aoyama 2-chome,

Minato-ku, Tokyo 107-8556, Japan

(Address of principal executive offices)

 


 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

Form 20-F        *                Form 40-F                    

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):                    

 

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):                    

 

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes                            No                                           

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-                    

 



Table of Contents

Contents

 

Exhibit 1:

 

On August 9, 2005, through joint research with Nagoya University, Honda Research Institute Japan Co., Ltd. (HRI-JP), a subsidiary of Honda R&D Co., Ltd., discovered a gene which dramatically improves the regeneration ability of rice. The new discovery will lead the way to more rapid improvements in Koshihikari, the most popular variety of rice in Japan. (Ref. #C05-077)

 

Exhibit 2:

 

On August 26, 2005, Honda Motor Co., Ltd. announced production, domestic sales and export results for the month of July 2005. (Ref. #C05-079)

 

Exhibit 3:

 

English summary of Honda Report to Stockholders No. 126, which was prepared full in Japanese and mailed to stockholders of Honda Common Stock in Japan in August 2005.

 

Exhibit 4:

 

Annual report for the fiscal year ended March 31, 2005 (which was mailed to ADR stockholders for the Company in August 2005).


Table of Contents

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

HONDA GIKEN KOGYO

KABUSHIKI KAISHA

( HONDA MOTOR CO., LTD. )

/s/ Satoshi Aoki


Satoshi Aoki

Executive Vice President and

Representative Director

 

Date: September 13, 2005


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LOGO

 

ref.#C05-077

 

Honda Discovers Gene Which Improves Regeneration Ability in Rice

 

Tokyo, August 08, 2005— Through joint research with Nagoya University, Honda Research Institute Japan Co., Ltd. (HRI-JP), a subsidiary of Honda R&D Co., Ltd., discovered a gene which dramatically improves the regeneration ability of rice. The new discovery will lead the way to more rapid improvements in Koshihikari, the most popular variety of rice in Japan.

 

Plant has an essential ability to regenerate the whole plant body from a piece of tissue. Plant culture applying this regeneration ability has been utilized for the mass reproduction of commercial seedlings or crop improvements. However, it is known that not all the plant species or varieties can regenerate easily. Many leading varieties in Japan, such as Koshihikari, can rarely be regenerated, resulting in a serious problem of efficient rice improvement. In addition, it has not yet been understood the biological mechanisms regulating the plant regeneration ability.

 

HRI-JP identified a gene controlling the regeneration ability in rice for the first time in the world by genetic examination of a low regeneration rice variety, Koshihikari. The gene, named “PSR1”, produces an enzyme which involves in the metabolic pathway of nitrogen, an essential source of nutrition for plants. The research revealed that lower activity of PSR1 gene in Koshihikari results in low regeneration ability. This finding makes it possible to improve Koshihikari rice with high regeneration ability, and consequently to breed new varieties surpassing Koshihikari easier.

 

On June 2005, HRI-JP released the identification of a gene increasing crop yield of rice. The high yielding Koshihikari, the outcome of this research, will be equipped with the high regeneration ability by PSR1 gene. Moreover, the gene may be applicable to other crops which are difficult to improve because of its low regeneration ability. The research results will be published through online Early Edition (http://www.pnas.org/papbyrecent.shtml) of PNAS (Proceedings of the National Academy of Sciences and United States of America) in this week and appeared as printed article on August 16.

 

Honda has been committed to addressing issues of environmental protection and energy conservation and has been conducting multidimensional efforts leading to the development of technologies for improvement of fuel efficiency. As part of its “Commitment for the Future,” Honda is pursuing its R&D efforts in a new area of science technology of this century — genome science — by building a foundation in the research of rice, which is a model plant for plant genetic research.

 

LOGO   LOGO

Regular Koshihikari

 

Koshihikari with improved regeneration ability by enhanced PSRI


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LOGO

 

Ref.#C05-079

 

Honda Sets All-Time Monthly Production Record in Asia

 

August 26, 2005 — Honda Motor Co., Ltd. today announced production, domestic sales, and export results for the month of July 2005.

 

Domestic production in July declined 12.3% compared to the same month a year ago when a minor model change for the Fit led to an overall boost in domestic production last year. Overseas production for the month of July was down by 0.5% compared to the same month a year ago due to a reduced number of operating days for factories in North America because of holidays calendar change and decline in Europe. However, the overall decline remained small due to strong production in Asia, especially in China, where production increased 18.7% to set an all-time monthly record for the region.

 

Total domestic sales in July declined 15.1% compared to the same month a year ago. Step WGN was Honda’s best-selling car for the month and the industry’s third best-selling model in July on sales of 12,218 units. The Fit and Life, with sales of 8,937 and 8,008 units, respectively, were Honda’s second and third best-selling models. Sales of Honda’s all-new Airwave compact station wagon, introduced in April, continues to be strong, ranking as Honda’s fourth best selling model in July with 6,479 units. Despite strong sales of newly introduced models including the all-new Step WGN and Airwave, overall sales decreased compared to the same month a year ago when a double-digit increase was achieved with new models including Fit, which underwent a minor model change last year.

 

Total exports in July increased 7.5% compared to the same month a year ago, exceeding the monthly total from the previous year for the 11th consecutive month. Exports to the U.S. increased due to strong sales of the Acura RSX, Honda CR-V and Accord Hybrid.

 

-1-


Table of Contents

PRODUCTION, SALES, EXPORTS (July 2005)

 

PRODUCTION

 

     July

   

Year-to-Date Total

(Jan - July 2005)


 
     Units

   Vs.7/04

    Units

   Vs.2004

 

Domestic

   101,291    -12.3 %   754,115    +4.7 %

Overseas (CBU only)

   157,596    -0.5 %   1,236,515    +11.1 %
    
  

 
  

Worldwide Total

   258,887    -5.5 %   1,990,630    +8.5 %
    
  

 
  

 

OVERSEAS PRODUCTION

 

     July

   

Year-to-Date Total

(Jan - July 2005)


 
     Units

   Vs.7/04

    Units

   Vs.2004

 

North America

   87,996    -8.2 %   776,127    +9.0 %

(USA only)

   62,581    +0.4 %   535,865    +14.5 %

Europe

   13,221    -6.7 %   110,497    -2.9 %

Asia

   51,834    +18.7 %   304,944    +23.6 %

Others

   4,545    -4.7 %   44,947    +9.9 %
    
  

 
  

Overseas Total

   157,596    -0.5 %   1,236,515    +11.1 %
    
  

 
  

 

SALES (JAPAN)

 

Vehicle type


   July

   

Year-to-Date Total

(Jan - July 2005)


 
     Units

   Vs.7/04

    Units

   Vs.2004

 

Passenger Cars & Light Trucks

   43,286    -10.2 %   275,031    -3.3 %

(Imports)

   446    -31.8 %   3,666    -36.8 %

Mini Vehicles

   16,193    -25.8 %   150,580    -3.2 %
    
  

 
  

Honda Brand Total

   59,479    -15.1 %   425,611    -3.3 %
    
  

 
  

 

EXPORTS

 

     July

   

Year-to-Date Total

(Jan - July 2005)


 
     Units

   Vs.7/04

    Units

   Vs.2004

 

North America

   21,087    +40.0 %   160,847    +16.4 %

(USA only)

   19,607    +42.5 %   144,574    +14.7 %

Europe

   10,690    -20.6 %   86,800    +6.1 %

Asia

   1,276    -20.2 %   10,037    +0.5 %

Others

   7,869    -1.0 %   63,822    +13.1 %
    
  

 
  

Total

   40,922    +7.5 %   321,506    +12.2 %
    
  

 
  

 

For further information, please contact:

 

Shigeki Endo

Tatsuya Iida

Honda Motor Co., Ltd. Corporate Communications Division

Telephone: 03-5412-1512

Facsimile: 03-5412-1545

 

-2-


Table of Contents

English summary of Honda Report to Stockholders No. 126 (which was prepared in full in Japanese language and mailed to Stockholders of Honda Stock in Japan in August 2005)

 

1. CEO’s message to shareholders

 

Honda’s cumulative worldwide motorcycle production reached 150 million units at the end of April 2005. We have advanced the production of motorcycles around the world since mass production began in 1949. In our view, this comes as a result of achieving worldwide customer satisfaction. We continue to live up to the expectations of our customers by developing products that meet their needs.

 

Honda began a new 3-year business plan this spring. We will further pursue our efforts to create new value for the customer by strengthening the core characteristics that make Honda unique. Our goal is to establish Honda as a brand that people trust and identify with by further strengthening Honda’s spirit of innovation and creativity.

 

The powertrain is the key factor in making our products fun-to-drive and it is the foundation technology that enables Honda to continue to provide the joy of mobility to people around the world. Honda will pursue further powertrain innovation including the engine, transmission and motor. And Honda will further pursue our efforts to become number one in the world in creating new value for our customers.

 

2. Honda’s Cumulative Worldwide Motorcycle Production Reaches 150 Million Units – Expanding possibility of motorcycle business

 

Mass production of motorcycles began in 1949 with the “Dream Type D” model. Honda now builds motorcycles at 30 locations in 22 countries.

 

3. Honda’s picture book

 

Gold Wing:   A flagship bike that was introduced in 1975 adopting the water-cooled, four-stroke, OHC engine.

 

4. Twin Ring Motegi’s activity

 

Introduction of Twin Ring Motegi’s activity – enhancing the fun of mobility to children

 

5. Honda Topics:

 

-   

Honda and Nagoya University Jointly Isolate Rice Gene; Research Effort Will Greatly Increase Crop Yields.

 

(Details are as filed in Form 6-K of June 2005)

-   

Honda Develops New 1.8-Liter i-VTEC Engine and New Honda Hybrid System Featuring 3-Stage i-VTEC + IMA

 

(Details are as filed in Form 6-K of July 2005)

 

6. Introduction of New Products:

 

Airwave:   1.5-liter compact station wagon that boasts top-of-class*1 luggage capacity, practical utility, versatile seating arrangements in a compact body, along with an extra-large glass “Sky Roof”*2 that conveys an exhilarating open-air feeling.
Step WGN:   All-new third generation Step WGN that combines the spaciousness of a minivan with the driving performance of a sedan
HRC536:   Push lawn mower providing durability and easy operation

*1    1.5-liter station wagon class
*2    Window glass is fixed in position; available on G Sky Roof and L Sky Roof types

 

7. Consolidated financial results for the fiscal first quarter ended June 30, 2005

 

Honda announced its consolidated financial results for the fiscal first quarter ended June 30, 2005.

 

(Details are as filed in Form 6-K of July 2005)

 

(end)


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LOGO

 

 


Table of Contents

LOGO

 

(Cover)

The next-generation Ridgeline truck went on sale in North America in March 2005.

 

Contents

 

1

  

Financial Highlights

2

  

To Our Shareholders

7

  

Review of Operations

8

  

–Motorcycle Business

13

  

–Automobile Business

18

  

–Financial Services Business

20

  

–Power Product & Other Businesses

21

  

The Continuous Advancement of the Civic

30

  

Environment and Safety

34

  

Preparing for the Future

35

  

Risk Factors

37

  

Corporate Governance

42

  

Board of Directors, Corporate Auditors and Operating Officers

45

  

Financial Section

100

  

Corporate Information

102

  

Honda’s History

103

  

Investor Information

 

Corporate Profile

 

Since its establishment in 1948, Honda Motor Co., Ltd., has remained on the leading edge by providing products of the highest quality that create new values, at a reasonable price, for worldwide customer satisfaction. In addition, the Company has conducted its activities with a commitment to environmental protection and enhancing safety in a mobile society.

 

The Company has grown to become the world’s largest motorcycle manufacturer and one of the leading automakers. With a global network of 437* subsidiaries and equity-method affiliates, Honda develops, manufactures, and markets a wide variety of products ranging from small general-purpose engines and scooters to specialty sports cars, to earn the Company an outstanding reputation from customers worldwide.

 

Maintaining its commitment to achieving the visions of “Value Creation,” “Glocalization” and “Commitment for the Future,” Honda aims to share joy with its customers worldwide, thus becoming “a company that society wants to exist.”

 

* As of March 31, 2005

 

Caution with Respect to Forward-Looking Statements

 

This annual report 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.


Table of Contents

Financial Highlights

 

Financial Data

 

Honda Motor Co., Ltd., and Subsidiaries

Years ended or at March 31

   Yen
(millions except
per share amounts)


   U.S. dollars
(millions except
per share amounts)


   2003

   2004

   2005

   2005

Net sales and other operating revenue

   ¥   7,971,499    ¥   8,162,600    ¥   8,650,105    $   80,549

Operating income*

     724,527      600,144      630,920      5,875

Income before income taxes and equity in income of affiliates

     609,755      641,927      656,805      6,116

Net income

     426,662      464,338      486,197      4,527

Per common share (Basic)

     439.43      486.91      520.68      4.85

Per American depositary share

     219.71      243.45      260.34      2.42

Cash dividends paid during the period

     30,176      33,541      47,797      445

Per common share

     31      35      51      0.47

Per American depositary share

     15.5      17.5      25.5      0.24

Stockholders’ equity

     2,629,720      2,874,400      3,289,294      30,629

Per common share

     2,734.69      3,054.90      3,556.49      33.12

Per American depositary share

     1,367.34      1,527.45      1,778.24      16.56

Total assets

     7,681,291      8,328,768      9,316,970      86,758

Depreciation

     220,874      213,445      225,752      2,102

Capital expenditures

     316,991      287,741      373,980      3,482

* Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the presentation used for the years ended March 31, 2004 and 2005.

 

Operating Data

 

Years ended March 31    Motorcycle
(Thousands)


   Automobile
(Thousands)


   Power Products
(Thousands)


Unit Sales Breakdown


   2003

   2004

   2005

   2003

   2004

   2005

   2003

   2004

   2005

Japan

   432    403    378    849    716    712    472    477    432

North America

   610    656    643    1,522    1,558    1,575    1,872    2,363    2,514

Europe

   305    299    338    207    231    267    1,290    1,261    1,309

Asia

   5,948    7,017    8,192    205    341    512    657    619    712

Other Regions

   785    831    931    105    137    176    293    327    333
    
  
  
  
  
  
  
  
  

Total

   8,080    9,206    10,482    2,888    2,983    3,242    4,584    5,047    5,300
    
  
  
  
  
  
  
  
  

 

Years ended March 31   Motorcycle Business
Yen (millions)


  Automobile Business
Yen (millions)


  Financial Services Business
Yen (millions)


  Power Product & Other Businesses
Yen (millions)


Net Sales
Breakdown


  2003

  2004

  2005

  2003

  2004

  2005

  2003

  2004

  2005

  2003

  2004

  2005

Japan

  ¥ 98,391   ¥ 93,203   ¥ 97,405   ¥ 1,513,596   ¥ 1,397,237   ¥ 1,463,531   ¥ 21,308   ¥ 20,043   ¥ 20,017   ¥ 115,411   ¥ 118,010   ¥ 118,252

North America

    329,073     322,213     321,828     3,926,848     3,900,755     3,923,930     210,903     212,522     222,494     101,102     107,440     106,824

Europe

    175,736     182,400     198,471     420,292     516,108     597,467     5,548     7,448     8,827     60,385     64,154     66,030

Asia

    222,955     242,370     289,169     397,156     532,552     661,471     199     899     1,441     25,216     25,790     24,930

Other Regions

    151,940     156,104     190,881     182,202     245,372     317,236     —       1,784     2,962     13,238     16,196     16,939
   

 

 

 

 

 

 

 

 

 

 

 

Total

  ¥ 978,095   ¥ 996,290   ¥ 1,097,754   ¥ 6,440,094   ¥ 6,592,024   ¥ 6,963,635   ¥ 237,958   ¥ 242,696   ¥ 255,741   ¥ 315,352   ¥ 331,590   ¥ 332,975
   

 

 

 

 

 

 

 

 

 

 

 

 

LOGO


Throughout this annual report, the United States dollar amounts have been translated from Japanese yen solely for the convenience of the reader at the rate of ¥107.39=U.S.$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market on March 31, 2005.

 

1


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     LOGO    

 

Review of Previous Mid-Term Business Plan

 

Fiscal 2005, ended March 31, 2005, was the final year of Honda’s mid-term business plan. During the year, in our bid to “make 20 million customers happy”—one of the stated goals of the plan—we embraced various challenges in our respective markets. As a result, we reported significant growth in all business segments, achieving virtually all of our targets.

 

Environment

 

Business conditions during the three-year period covered by the plan were very challenging. In the motorcycle segment, competition intensified in each region amid ongoing market expansion, especially in Asia. In the automobile segment, industrywide consolidation, which has occurred frequently since the late 1990s, tapered off. Nevertheless, competition grew fiercer as automakers staked their survival on bold new initiatives. In the United States, overall demand remained high, at over 16 million units, and the market saw a shift in demand from passenger cars to light trucks. In China and elsewhere in Asia, the passenger car market grew sharply. In the power products segment, customer needs continued to diversify due to increasing environmental awareness as well as other factors.

 

Key Honda Initiatives

 

In the motorcycle segment, demand continued to expand in Asia, where motorcycles are a popular mode of transportation. By offering attractive products at competitive prices, Honda significantly increased unit sales, greatly boosting its motorcycle business, which is Honda’s origin. We also introduced new sports bikes—incorporating advanced technologies developed through racing activities—to the European, North American and Japanese markets. In these ways, we strove to deliver products that meet the needs of customers around the world.

 

During the year, we continued working actively in the interests of safety and the environment. For example, we completed the transformation of all motorcycles into four-stroke models*1. We also equipped small-displacement models with programmed fuel injection (PGM-FI)*2, thus making emissions even cleaner. In addition, we equipped more models with our original Hydraulic Combined Braking System with ABS*3.

 

LOGO


Unit sales is the total of sales of completed products of Honda and its consolidated subsidiaries, and sales of parts for affiliates accounted for under the equity method. Unit sales of Honda-brand motorcycle products 100% locally procured, manufactured and sold by overseas equity-method affiliates are not included in unit sales.

 

2


Table of Contents
*1: This does not include CR series racing bikes or special-purpose bikes (Gyro series).
*2: Programmed fuel injection (PGM-FI)

This original Honda system is designed to enhance fuel efficiency and lower emissions. It employs various sensors to monitor engine operating status and a computer to calculate the optimal amounts of fuel required. The system then delivers those amounts to the engine cylinders. Honda adapted its PGM-FI system, originally developed for automobiles, to motorcycles by reducing the number of parts to make it more compact and less expensive.

*3: Hydraulic Combined Braking System with ABS

This original Honda development integrates a hydraulic combined braking system, which links both front and rear wheels when the left brake lever is engaged, with an anti-lock braking system (ABS), which prevents the front and rear wheels from locking when the brake is engaged too forcefully.

Note: Although this system is designed to support the braking action, both the front-and rear-wheel brakes should still be applied simultaneously.

*4: “Safety for Everyone”

Honda is committed to providing comprehensive safety solutions with its “Safety for Everyone” initiative. By the end of 2006, all Honda and Acura models sold in the United States and Canada will feature front-side airbags, side curtain airbags, anti-lock brakes and pedestrian safety technologies in all but a few niche models; with Vehicle Stability Assist (VSA) and side curtain airbags with rollover sensors as standard features in all light trucks. Finally, Honda’s Advanced Compatibility Engineering (ACE) body structure is being introduced to all vehicles as new platforms are introduced during full model changeovers.

*5: Compact, home-use cogeneration unit Honda has combined its original electromagnetic inverter technologies with the world’s smallest(i) natural gas engine (GE160V) in an efficient layout to create a small, lightweight generation unit. Due to its compactness, the unit can be installed in the home and boasts an overall energy efficiency of 85%. It also emits approximately 30% less carbon dioxide than conventional natural gas-powered generators or hot-water heating units using natural gas.(ii)
  i: A Honda development, the reciprocal gas engine
  ii: Data from Honda test results. Data compares electric power from natural gas-powered generation with hot-water heating units that use natural gas (as of October 2004).

 

In the automobile segment, we increased sales in the U.S. market by introducing new models in the light truck segment. In China and elsewhere in Asia, the automobile market continued to expand, and we achieved remarkable growth thanks to the high profile of the Honda brand. In Europe, where demand for diesel-powered vehicles is increasing, we unveiled models equipped with Honda’s original diesel engines. In Japan, meanwhile, overall demand remained low. We responded by strengthening the appeal of our products, strengthening our sales system to ensure customer satisfaction and raising our profitability. Through these initiatives in various regions, we steadily solidified our automobile business.

 

We worked hard to enhance the environmental and safety aspects of our automobiles. In addition to further improving fuel economy in all vehicles, we endeavored to make the emissions of our vehicles even cleaner. We also expanded our lineup of hybrid models, and in Japan and the United States we began leasing the FCX, a fuel cell vehicle incorporating our original next-generation fuel cell stack, which we developed in-house. In the United States and Canada, we promoted our “Safety for Everyone”*4 campaign.

 

In the power products segment, we supplied a variety of items that benefit customers around the world. These included general-purpose engines, generators, pumps, brush cutters, outboard engines and lawnmowers—all designed from the perspectives of safety and the environment. At the same time, we sought to expand our business through a variety of activities. We also developed and promoted a compact, home-use cogeneration unit*5 incorporating a natural gas-powered engine.

 

By embracing challenges in these ways across our various regions, we achieved solid growth in all of our businesses. In fiscal 2005, the final year of our mid-term business plan, we sold 10.48 million motorcycles, up 4.39 million units (72.0%), compared with fiscal 2002. We also sold 3.24 million automobiles, up 576,000 units (21.6%), and 5.3 million power product units, up 1.37 million units (35.0%).

 

Net sales in fiscal 2005 reached ¥8,650.1 billion, up 17.5% from the previous year. Net income jumped 34.0%, to ¥486.1 billion, due partly to a significant increase in income from earnings of affiliates accounted for under the equity method. In short, Honda’s financial results have improved dramatically over the past three years.

 


 

Future Initiatives

 

New Mid-Term Business Plan

 

In 1998, we formulated our “Vision 2010 ”*6 initiative, designed to transform Honda into a “company that society wants to exist.” In other words, we want people around the world to be glad that Honda exists. To realize this vision, we identified three themes—“Value Creation” (creating new value for our customers), “Glocalization” (expanding local operations) and “Commitment for the Future” (developing safety and environmental solutions)—and stepped up our business development accordingly.

 

We now have a new business plan, covering the three-year period through March 2008. Under the plan, we will further strengthen those core characteristics that make Honda unique by renewing our focus on “creating new value.” We are strongly determined in this regard, because we recognize that it is impossible to expand local operations and continue to develop advanced safety and environmental solutions without first creating new value for our customers. In addition to developing technologies and products that exceed people’s expectations, we will strive to further strengthen Honda’s unique innovative spirit and creativity across all activities, including production, sales and services. Such actions will be key to Honda achieving a significant leap in the future. Toward this end, we will place even greater emphasis on Honda people who are “at the spot” in order to address every issue at its source of origin—which is the foundation of our value as a manufacturer—and then make decisions based on the reality of what is happening “at the spot.”

 

Now, I will describe the primary initiatives for fiscal 2006, the first year of our new mid-term business plan.

 

*6: Vision 2010

 

LOGO

 

3


Table of Contents

Fiscal 2006: Key Initiatives by Business Segment

 

Looking at the operating environment, we believe that the world economy will continue growing, especially in the United States and Asia, but there are concerns that the rate of growth will slow. Uncertainties will remain in such areas as the global geopolitical situation, oil and raw materials prices and foreign exchange movements. Even in Japan, where economic recovery is steady and personal consumption is expected to grow significantly, we believe that sales competition will further intensify.

 

For fiscal 2006, we are targeting sales of 10.30 million motorcycles, 3.42 million automobiles and 5.79 million power products.

 

LOGO

 

*7: Unit sales is the total of sales of completed products of Honda and its consolidated subsidiaries, and sales of parts for affiliates accounted for under the equity method. Unit sales of Honda-brand motorcycle products 100% locally procured, manufactured and sold by overseas equity-method affiliates are not included in unit sales.

 

Motorcycle Business

 

In the continually expanding motorcycle market in Asia, we will renew our focus on cost reduction in areas marked by intense competition. Our goal is to deliver price-competitive products and thus further increase sales. In response to growing sales in the region, last year we increased our production capacity in India, and we plan to also boost capacity at our affiliates accounted for under the equity method in Indonesia and China, as well as our plant in the Philippines. In addition, we will strengthen the capabilities of our R&D operations in Thailand to ensure swifter responses to customers’ diversifying needs and to strengthen our ability to supply attractive products.

 

We have followed a proactive local procurement policy for our overseas production operations. In this way, we work to grow our business in close association with the regions where we operate. Recent years have seen a sharp increase in the number of Honda-brand motorcycles made 100% from locally procured parts by our affiliates accounted for under the equity method in India and China. We expect to sell approximately 3.4 million of these vehicles in fiscal 2006, based on local estimates. (These are not included in consolidated unit sales figures*7.) In the process, we will build a dominant presence in the continually expanding Asian motorcycle market.

 

In Europe, we will work to increase sales of sports bikes, which are popular there. In other regions, we will seek to boost sales, especially in Brazil, where growth continues unabated. In the all-terrain vehicle (ATV) category, we are targeting higher sales of core models, focusing on North America.

 

Meanwhile, we will further enhance our technological skills to roll out new models effectively and actively nurture the skills of our engineers, who hold the key to our future. We will also strengthen our advanced production technologies in Japan, which play a key role in the development of overseas motorcycle markets, so that we can respond appropriately to the ongoing globalization of the business.

 

Through these and other initiatives in various regions, we will target further progress in our motorcycle business.

 

Automobile Business

 

In the automobile segment, we will seek to increase sales by providing attractive products that meet the needs of customers in our respective markets. A key initiative for fiscal 2006 will be a full model change of the Civic, which is sold in approximately 160 nations and regions worldwide. To prepare for sales growth, we will also expand our production capacity, centering on Asia. By maximizing customer satisfaction on a worldwide basis, we will work to boost sales of automobiles in all regions.

 

North America

 

In March 2003, Honda launched its next-generation light truck, the Ridgeline, developed in the United States. With superlative packaging and excellent driving performance, the new vehicle has generated solid initial sales, indicating that it not only satisfies the changing needs of existing Honda users, but also has won strong support from a wide range of new customers in this segment.

 

In the fall, the Civic will undergo its first full model change in five years. Since 1995, the Civic has received widespread grass-roots support, with U.S. sales consistently reaching approximately 300,000 units per year. The model change is based on the concepts of “emotional styling” and “exhilarating driving experience,” and backed by a new high-performance engine. In the beginning of 2006, we will launch an entry-level model targeting young people in the hopes of capturing a new base of customers who will become loyal Honda customers in the future.

 

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Back in 1999, we unveiled the Insight, the first hybrid vehicle to be sold in North America. We have since released hybrid versions of the Civic (2002) and the Accord (2004). Going forward, we will increase efforts to meet demand for hybrid vehicles.

 

In the area of manufacturing, in 2005 the second line of our Alabama Plant will reach full capacity at 150,000 units per year, to help meet growing demand for light truck models. From 2006, we will also add more light truck models to the production line of our Ohio plants. In these ways, we will position our North American production network to respond flexibly to changing customer needs.

 

Our plan is to maintain a consistent level of sales in the passenger car market, which is declining, while targeting increased sales in the growing light truck market.

 

For fiscal 2006, Honda forecasts sales of 1,675,000 vehicles in North America, up 6.3%.

 

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Asia

 

While China has seen spectacular growth in demand for passenger vehicles, the pace of expansion has moderated since the central government tightened monetary policy and adopted other measures last April. Nevertheless, Honda believes that demand will continue growing, and that China has great potential to become the world’s largest automobile market after the United States. A number of existing models are selling well in this important market, including the Accord and Fit series. In 2006, we will seek to further increase sales by adding the new Civic to our lineup.

 

With respect to local production in China, by the end of 2006, we will raise our total capacity—the combined capacity of two local affiliates, Guangzhou Honda Automobile Co., Ltd., and Dongfeng Honda Automobile Co., Ltd.—from 270,000 to 480,000 units per year. In April 2005, Honda Automobile (China) Co., Ltd., a subsidiary devoted exclusively to making automobiles for export, started mass-producing the Jazz model for the European market, with exports beginning in June. These efforts reflect Honda’s strategy of broadening its automobile business in China.

 

Meanwhile, India, Indonesia and other Asian markets continue to grow. Our plan is to increase sales in those areas, centering on such highly regarded models as the Jazz and Fit. We will also expand production capacity to meet rising demand.

 

In Asia, we are targeting unit sales in fiscal 2006 of 540,000 automobiles, up 5.5%. This figure represents the combination of finished cars sold by the Company and its subsidiaries, as well as component parts sets supplied to affiliates accounted for under the equity method.

 

Power Product Business

 

Based on the approach of creating new value for the customer through useful tools, Honda delivers a variety of safe, environmentally friendly power products to customers worldwide.

 

In the upcoming fiscal year, we will unveil a next-generation, general-purpose engine incorporating electronic control technologies to improve user-friendliness, offer superb environmental performance and reduce noise. We will also increase the supply of cost- competitive products made in Asia to customers in various other regions. In addition, we will continue actively promoting our

compact, home-use cogeneration unit, which greatly reduces environmental impact, to users in Japan and overseas.

 

Through these initiatives, we will seek to further develop our power products business.

 

Research And Development

 

To succeed amid fierce global competition, Honda will further strengthen its ability to create advanced technologies and products. Our goal is to deliver new levels of value and bring products to market quickly to meet customer needs in various regions worldwide. At the same time, we recognize the importance of ongoing improvements in the safety and environmental performance of our products.

 

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We will continue to actively allocate the Company’s resources to developing attractive models in our automobile business, as well as to enhancing the appeal of our motorcycles and power products. We will strive to further improve the power, fuel efficiency and environmental performance of our gasoline and diesel engines, while conducting aggressive R&D on hybrid technologies, which will grow in importance, together with fuel cell and other technologies.

 

Going forward, we will advance research and development on next-generation technologies, including humanoid robotics and compact aircraft engines, as well as future-oriented basic technologies.

 

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In Closing

 

Management System

 

As our business grows on a global scale, so does the importance of upgrading corporate governance and increasing the autonomy of our various regional headquarters and business operations. With this in mind, Honda has introduced a new corporate management system.

 

In the past, members of the Board of Directors were responsible for business execution in their role as directors. However, we have now separated that role into two: the “director” role (supervision and business execution within the Board of Directors) and the “operating officer” role (business execution at the regional level and at each local “spot”). The goal of this change is to enhance the flexibility of the Board of Directors, as well as to accelerate the transfer of authority to each region and each local spot as a means to increase the speed and flexibility of our regional operations.

 

With this new system in place, we will strive to strengthen both the supervisory and executive functions while targeting swifter, more flexible business operational management.

 

Returning Profits To Shareholders

 

Honda strives to carry out its operations from a global perspective and thus increase its corporate value.

 

The Company regards redistribution of profits to shareholders as one of its most important management issues. Our basic dividend policy is to make distributions after taking into account our long-term consolidated earnings performance. We will also buy back our own shares as appropriate, with the aim of improving the efficiency of our capital structure. At present, our goal is to achieve a shareholder return ratio (ratio of the sum of dividend payments and value of share buybacks to consolidated net income) of approximately 30%.

 

Based on these policies, Honda plans to declare a fiscal 2005 year-end cash dividend of ¥37 per share, bringing total annual dividends to ¥65.00 (after adding the ¥28 interim dividend). In fiscal 2006, we plan to raise the interim dividend ¥9.00, to ¥37.00 per share, and maintain the year-end dividend at ¥37.00, bringing annual dividends to ¥74.00 per share.

 

As we move confidently into the future, we look forward to the continued understanding and support of shareholders and other investors.

 

June 23, 2005

 

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Takeo Fukui

President and Chief Executive Officer

 

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Unit Sales

Years ended March 31

 

     Thousands

   % change

 
     2004

   2005

  

Japan

   403    378    (6.2 )%

North America

   656    643    (2.0 )

Europe

   299    338    13.0  

Asia

   7,017    8,192    16.7  

Other Regions

   831    931    12.0  
    
  
  

Total

   9,206    10,482    13.9 %
    
  
  

 

Net Sales

Years ended March 31

 

     Yen (millions)

   % change

 
     2004

   2005

  

Japan

   ¥ 93,203    ¥ 97,405    4.5 %

North America

     322,213      321,828    (0.1 )

Europe

     182,400      198,471    8.8  

Asia

     242,370      289,169    19.3  

Other Regions

     156,104      190,881    22.3  
    

  

  

Total

   ¥ 996,290    ¥ 1,097,754    10.2 %
    

  

  

 

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Fiscal 2005 Results

 

Unit sales of Honda motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWCs) in fiscal 2005 posted a solid 13.9% increase, to 10,482,000 units. This was due to an outstanding performance in Asia, where we reported a significant jump in sales of finished products by Honda and its subsidiaries, as well as in motorcycle component parts sets supplied for mass production to affiliates accounted for under the equity method. Sales of 100% locally procured Honda motorcycles produced and sold by affiliates in India and China increased significantly, to around 1 million units. As a result, net sales grew 10.2%, to ¥1,097 billion, despite the negative impact of yen appreciation against the U.S. dollar. Operating income rose 63.4%, to ¥69.3 billion, and the operating margin was 6.3%. Our operating income figure does not include earnings from our affiliates accounted for under the equity method in Indonesia, India and China. However, their earnings are included in Honda’s consolidated net income results.

 

Japan

 

In Japan, where the market remained sluggish, unit sales were down 6.2%, to 378,000 units. Sales of mini-sized motorcycles (126cc–250cc) were up, supported by strong sales of scooters, as were sales of small-sized motorcycles (over 250cc), which benefited from healthy sales of sports bikes. However, sales of 50cc and smaller models and second-class motor-driven cycles (51cc–125cc) declined.

 

With respect to mini- and small-sized motorcycles, in July 2004 we unveiled our fourth Chinese-made model, the Dio Cesta, following the success of the Today, Spacy 100 and Dio scooters. We also commenced sales of two entry-level sports bikes, the XR50 Motard and XR100 Motard.

 

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Also in the mini-sized category, we enjoyed strong sales of the Forza, which underwent a full model change in April 2004, and other models. In June 2004, we launched the PS250, a comfortable scooter with a fresh individualized style. This was followed in March 2005 by the release of the Forza Z ABS, equipped with Hydraulic Combined Braking System with ABS*1. In the same month, we also introduced the XR230 onto the Japanese market. The XR230 is a dual-purpose bike offering superb ease of handling that is suited for both on-road and off-road use.

 

In the small-sized motorcycles category, sales were strong for the CBR1000RR. This model, introduced in April 2004, features advanced technology inherited from Honda’s racing bikes. In March 2005, we launched the XR400 Motard, modeled on the Super Motard*2 sports bike.

 

In these ways, we worked to expand our lineup of attractive sports bikes and scooters that continue to perform strongly on the domestic market.

 

North America

 

In North America, unit sales of motorcycles, ATVs and PWCs edged down 2.0%, to 643,000 units.

 

In the mini-sized motorcycle category, we recorded healthy sales of on-road models, including the Shadow Spirit750, as well as of the CRF250X and CRF250R off-road bikes. In February 2005, we launched the CRF450X, an off-road model based on our premier CRF450R motocross machine. However, a decline in sales of models for children led to a 3.9% decline in unit sales of mini-sized models, to 346,000 units.

 

We recorded healthy sales of ATVs, including the TRX450R, launched in September 2004, and the FourTrax Recon and TRX400EX, both of which underwent a full model change in September 2004. Another strong performer was the FourTrax Foreman, which underwent a full model change in November 2004. As a result, unit sales of ATVs and PWCs for the year edged up 0.3%, to 297,000 units.

 

*1: Hydraulic Combined Braking System with ABS

This original Honda development integrates a hydraulic combined braking system, which links both front and rear wheels when the left brake lever is engaged, with an anti-lock braking system (ABS), which prevents the front and rear wheels from locking when the brake is engaged too forcefully.

Note: Although this system is designed to support the braking action, both the front- and rear-wheel brakes should still be applied simultaneously.

*2: Super Motard

This off-road sports bike is equipped with small-diameter wheels and on-road tires, making it more nimble for riding on city streets and dirt roads.

 

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Europe

 

In Europe, unit sales rose 13.0%, to 338,000 units.

 

In that region, we recorded robust sales of core products, including the CBR1000RR, CBF600 and the CBR125R. We also launched the Zoomer scooter, the first model in the 50cc market to be equipped with Honda’s original PGM-FI*3, which delivers superior environmental performance. In February 2005, we released SH125 and SH150 models equipped with PGM-FI, and these models have carved out a solid following among our customers. In the following month, we launched the FMX650, a stylish sports bike. Overall, support from our wide customer base for our upgraded model lineup contributed to Honda’s healthy sales record.

 

*3: Programmed fuel injection (PGM-FI)

This original Honda system is designed to enhance fuel efficiency and lower emissions. It employs various sensors to monitor engine operating status and a computer to calculate the optimal amounts of fuel required. The system then delivers those amounts to the engine cylinders. Honda adapted its PGM-FI system, originally developed for automobiles, to motorcycles by reducing the number of parts to make it more compact and less expensive.

 

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Asia

 

In Asia, demand for motorcycles as a convenient mode of transportation has continued to grow. Total unit sales of motorcycles made by Honda and its subsidiaries, as well as of motorcycle parts sold to affiliates accounted for under the equity method in the region, jumped 16.7%, to 8,192,000 units. Honda is working hard to expand local businesses in the region through its active promotion of local parts procurement used in overseas production. This strategy has resulted in a sharp increase in 100% locally procured models made by our affiliates in India and China that are not included in Honda’s unit sales. Production and unit sales of 100% locally

procured Honda-brand motorcycles in Asia rose significantly from the preceding term, to around 1.0 million units.

 

In India, we enjoyed healthy sales of core models, including Splendor, Passion and CD Dawn, made by our affiliate, Hero Honda Motors Limited (HHML). In March 2005, we launched the Super Splendor, an improved version of the best-selling Splendor model, with added power and fuel efficiency. Honda Motorcycle and Scooter India Private Limited (HMSI), a subsidiary, recorded strong sales of core scooter models, the Activa and Eterno. In October 2004, HMSI released its first motorcycle, the Unicorn, a model with a newly developed 150cc engine that delivers excellent power and fuel economy. In India, combined unit sales of finished vehicles by Honda and its subsidiaries, as well as sales of component parts sets for motorcycle production by affiliates accounted for under the equity method, rose 21.2%, to 2,799,000 units. These figures exclude the approximately 300,000 units of 100% locally procured vehicles manufactured and sold by affiliates accounted for under the equity method.

 

In Indonesia, P.T. Astra Honda Motors (AHJ), an equity-method affiliate, posted healthy sales of its Supra series, centering on the core Supra Fit model. In August 2004, AHJ added the Karisma-X to its lineup, targeting the younger generation and women. Strong sales of the popular Karisma series pushed up total sales for finished vehicles by Honda and its subsidiaries, as well as sales of component parts sets for motorcycle production by affiliates accounted for under the equity method, by 42.2%, to 2,265,000 units.

 

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In Thailand, unit sales rose 13.9%, to 1,489,000 units. This increase was due to robust sales of the Sonic, following a full model change, as well as solid demand for the core models, the Wave100 and Wave125.

 

In China, Sundiro Honda, an affiliate accounted for under the equity method, reported healthy sales of the Wave and other core models. Sundiro Honda augmented its lineup in September 2004 with the addition of two environmentally friendly 125cc models, the Xin-Gainian family bike and the e-cai, featuring a sporty design. Wuyang Honda, an equity-method affiliate, recorded strong sales of the SCR100, a scooter with excellent environmental and safety features.

 

Total sales in China of 100% locally procured Honda vehicles grew significantly during the year. Consequently, finished vehicles manufactured by Honda and its consolidated subsidiaries, and sales of motorcycle production parts by equity-method affiliates, declined by 461,000 units, to 433,000. This figure excludes the approximately 700,000 units of 100% locally procured Honda vehicles that were produced and sold by equity-method affiliates.

 

Other Regions

 

In other regions—covering Latin America, the Middle & Near East and Africa and Oceania—unit sales grew 12.0%, to 931,000 units.

 

We posted solid sales in Brazil following the full model change in the previous fiscal year of the core CG150 model, which resulted in enhanced fuel economy.

 

In the Middle & Near East and Africa, we enjoyed robust sales of the Chinese-made CGL125 and the Indian-made Activa.

 

Outlook for Fiscal 2006

 

In the fiscal year ending in March 2006, we project that unit sales of motorcycles, ATVs and PWCs will post a slight decline, edging down 1.8%, to 10,295,000 units.

 

By contrast, we forecast an increase in the number of 100% locally procured motorcycles made and sold by our equity-method affiliates in India and China, which are not included in Honda’s unit sales. Based on local sales projections, we estimate that unit sales of such motorcycles will surge more than three-fold, to around 3.4 million units. In effect, therefore, we anticipate continued expansion of our motorcycle business in fiscal 2006, with the inclusion of 100% locally procured Honda motorcycles.

 

In Japan, we look forward to strong sales of popular 50cc and smaller scooters, including the Today and Dio Chester, and our CB series, to which we added the CB400 Super Bol D’or, featuring enhanced driving safety. We also expect solid demand for sports bikes upgraded in early 2005, including the XR series. We estimate that domestic unit sales in fiscal 2006 will reach 370,000 units.

 

On the production side, we plan to transfer part of our North American ATV manufacturing capacity to our Kumamoto Plant. The purpose of this initiative is to strengthen our advanced domestic production technologies, which play a key role in the growth of our overseas motorcycle business. To this end, we will strengthen the technological capabilities of Honda in Japan required for the

creation of new models, while bolstering efforts to train the future generation of Honda engineers. The overall effect will be to create new technologies that will support the growth of Honda’s global operations.

 

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In North America, we expect an increase in sales of motorcycles, due mainly to healthy sales of sports bikes, including the CRF450X, which was launched in February 2005, and other core products. We are also working hard to boost sales of ATVs, especially the FourTrax Recon and the TRX450R. Concentrating ATV production at our South Carolina Plant will bring further efficiencies to our motorcycle operations in North America. For fiscal 2006, we are targeting regional sales of 690,000 units for motorcycles, ATVs and PWCs, up 7.3%.

 

In Europe, we launched the Forza-X and the Forza-EX, equipped with Hydraulic Combined Braking System with ABS, in April 2005. We expect to see an increase in sales of the FMX650, which we added to our lineup in fiscal 2005, and in the upgraded SH125 and SH150. Based on these healthy sales projections, we are targeting unit sales in Europe of 350,000 units, up 3.6%.

 

In Asia, we project overall unit sales will dip 3.4%, to 7,915,000 units. Sales of 100% locally procured motorcycles, which are not included in this figure, are forecast to increase more than three-fold, to approximately 3,400,000 units, based on local sales projections.

 

In India, we expect strong sales of the Super Splendor, made by our affiliate, HHML, and which underwent a full model change in March 2005. In addition, HHML and HMSI will more effectively utilize local R&D facilities in order to introduce new models that meet customer needs and thus target higher motorcycle sales in the Indian market.

 

In Indonesia, we will pursue a number of activities to boost sales of the popular Supra and Karisma series, made by AHJ, an equity-method affiliate. To meet this increase in demand, AHJ plans to expand its production capacity from 2,000,000 units to 3,000,000 units by October 2005.

 

In Thailand, we boosted our price-competitiveness by launching the new Wave125i, equipped with PGM-FI, in April 2005. Strengthening our research and development facility in that nation will enable us to offer an appealing product lineup and permit a swifter response to the diversifying needs of customers.

 

With respect to the Chinese market, an equity method affiliate, Sundiro Honda, is actively promoting sales of its models, including the Storm, which was unveiled in March 2005. On the production side, in January 2005 we began production at a new plant in Tianjin, featuring an innovative layout designed to improve production and distribution efficiency. In April 2005, Wuyang Honda, another equity method affiliate, released the 125cc Freeway, a new model featuring superior environmental performance and low noise. It also plans to start operations at a new plant in the spring of 2006 that will further boost production efficiency and raise capacity to 700,000 units. These and other initiatives are aimed at increasing sales by enhancing our product appeal in the highly competitive Chinese market.

 

Unit sales in other regions are expected to increase 4.2%, to 970,000 units. In Brazil, where the market continues to expand, we increased the annual production capacity of our plants at the end of 2004 from 750,000 to 1,000,000 units in order to meet growing demand. We are also continuing a range of activities targeting higher sales of the core CG150 model. In the Middle & Near East and

Africa, we plan to increase sales of highly competitive products, centering on the Chinese-made CGL125 and the Thai-made Wave.

 

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Unit Sales

Years ended March 31

 

     Thousands

   % change

 
     2004

   2005

  

Japan

   716    712    (0.6 )%

North America

   1,558    1,575    1.1  

Europe

   231    267    15.6  

Asia

   341    512    50.1  

Other Regions

   137    176    28.5  
    
  
  

Total

   2,983    3,242    8.7 %
    
  
  

 

Net Sales

Years ended March 31

 

     Yen (millions)

   % change

 
     2004

   2005

  

Japan

   ¥ 1,397,237    ¥ 1,463,531    4.7 %

North America

     3,900,755      3,923,930    0.6  

Europe

     516,108      597,467    15.8  

Asia

     532,552      661,471    24.2  

Other Regions

     245,372      317,236    29.3  
    

  

  

Total

   ¥ 6,592,024    ¥ 6,963,635    5.6 %
    

  

  

 

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Fiscal 2005 Results

 

In fiscal 2005, unit sales of automobiles rose 8.7%, to 3,242,000 units, due mainly to strong sales in Asia and Europe and increased sales of parts for automobile production to Guangzhou Honda Automobile Co., Ltd., an affiliate of Honda. Segment sales grew 5.6%, to ¥6,963.6 billion, due to increased overseas sales and other factors, which compensated for the negative impact of yen appreciation against the U.S. dollar. Operating income rose 3.1%, to ¥452.3 billion, and the operating margin was 6.5%. It should be noted that the operating income figure does not include income from our affiliates in China and other countries. However, such income is recognized as equity in income of affiliates and reflected in the Company’s net income figure.

 

Japan

 

Total domestic automobile demand in calendar 2004 remained largely unchanged, at approximately 5.85 million units. For Honda, however, despite the introduction of two new models, the Elysion and Edix, total unit sales in fiscal 2005 edged down 0.6%, to 712,000 units, due mainly to a decline in sales of the Fit and Life.

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In May 2004, we launched Elysion, a new eight-passenger minivan offering a luxurious sense of space and comfort for all occupants. This was followed in July by the release of Edix, a distinctive new minivan featuring six independent seats in two rows of three, creating a variety of seating arrangements to enhance in-vehicle communication. In October 2004, we introduced the all-new Legend, Honda’s flagship luxury performance sedan, featuring a number of advanced technologies, including a 300-horsepower engine and the world’s first Super Handling All-Wheel Drive (SH-AWD) system*1.

 

In addition to products offering new levels of value, we are applying information technology to improve marketing, sales and service. In these ways, Honda is committed to maximizing the satisfaction of its approximately 8.8 million customers.

 

North America

 

In calendar 2004, automobile demand in the United States remained high, totaling 16.91 million units.

 

In the passenger car segment, the Acura TL and Acura TSX posted healthy sales increases. At the same time, demand for light truck models in North America has continued to increase. In addition to the CR-V, we reported strong sales of the Pilot, now also manufactured on the second production line of the Alabama Plant, which began operation in April 2004. As a result, overall unit sales in North America increased 1.1%, to 1,575,000 units, despite a downturn in the Canadian market.

 

In September 2004, the Odyssey underwent a full model change, giving it more flexible seating, as well as excellent safety performance and the highest fuel economy in its class. This was followed in October by the release of the new Acura RL, and in December by the launch of the Accord Hybrid sedan, combining a V6 engine with Honda’s Variable Cylinder Management (VCM) system*2 and Integrated Motor Assist (IMA) system*3. In March 2005, we launched the next-generation Ridgeline truck, the first sold in all 50 states to be compliant with California’s ULEV emission standards*4. Developed in the United States, the Ridgeline comes with ample interior space and plenty of cargo room. In these ways, we boosted sales in both the light truck and passenger car markets with the introduction of appealing new models.

 

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Europe

 

In Europe, overall automobile demand remained almost unchanged in calendar 2004, at 17.57 million units. Nevertheless, Honda’s unit sales in fiscal 2005 jumped 15.6%, to 267,000 units. This was due mainly to an increase in sales of the new Accord, equipped with the Honda-developed i-CTDi diesel engine*5, released in late 2003, as well as continued healthy sales of the Jazz.

 

*1: Super Handling All-Wheel Drive (SH-AWD)

This system is the first of its kind in the world to combine front-rear torque distribution control with independently regulated torque distribution to the left and right rear wheels, while distributing the optimum amount of torque to all four wheels.

*2: Variable Cylinder Management (VCM) system

With Honda’s VCM system, all six cylinders are engaged when power is needed (such as startup and acceleration), but three cylinders on one side become idle when the vehicle is cruising or slowing down. This results in improved fuel economy.

*3: Integrated Motor Assist (IMA)

With IMA, an electric motor assists by supplying additional power required for startup and acceleration, while the gasoline engine serves as the main source of power.

*4: Ultra Low Emission Vehicle (ULEV)

This is a type of vehicle that meets California’s strict ULEV exhaust emission regulations.

*5: i-CTDi

This is a proprietary diesel engine developed by Honda that optimizes combustion through the adoption of a high-pressure fuel injection system, combined with a newly developed emission treatment system. The i-CTDi is also compliant with Euro4 emission standards for 2005.

 

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We unveiled two new models during fiscal 2005, further enhancing Honda’s competitiveness in the difficult European market. In November 2004, we launched the FR-V, and in January 2005 we released the CR-V equipped with a Honda-developed diesel engine. The new CR-V complements the Accord to address growing demand for diesel-powered automobiles in the region.

 

Asia

 

Our automobile business in Asia expanded considerably in fiscal 2005. Total unit sales of automobiles and automobile parts sold by Honda and its subsidiaries and affiliates surged 50.1%, to 512,000 units.

 

In China, the passenger car market has continued to expand, however the effect of money-tightening measures taken by the central government in April 2004 resulted in only a moderate increase in demand for passenger cars during calendar 2004, to around 2.5 million units. Guangzhou Honda, an affiliate of Honda, recorded healthy sales of its popular Accord and Fit Saloon models. It augmented its lineup in September 2004 with a new Fit and in March 2005 with the launch of the all-new Odyssey. Another affiliate, Dongfeng Honda, began production and sales of the CR-V in April 2004. Such enhancement of our offerings resulted in a huge 74.2% jump in unit sales in China, to 263,000 units, including sales of finished cars from Honda and its subsidiaries, plus sales of component part sets for car production to equity-method affiliates.

 

Demand continued to expand in other Asian markets, with substantial sales increases for the Jazz in Indonesia and the City in India. Sales also rose in Malaysia, Pakistan and Taiwan. For the ASEAN region, unit sales jumped 31.1%, to 249,000 units.

 

Other Regions

 

Unit sales in other regions grew 28.5%, to 176,000 units, due mainly to increased sales in South America, Oceania and the Middle & Near East.

 

In Brazil, sales of the locally produced Fit and Civic increased. In Australia and the Gulf countries, too, we enjoyed healthy sales of the Accord and other models.

 

Outlook for Fiscal 2006

 

For fiscal 2006, total unit sales of Honda automobiles is expected to rise 5.3%, to 3,415,000 units.

 

In Japan, we launched the Airwave, an all-new compact station wagon, in April 2005, followed by the third-generation Step Wagon in May. Featuring a low-floor, low-center-of-gravity platform, the new Step Wagon offers superior comfort and a compact body along with sedan-like handling and maneuverability. This autumn, the Civic will undergo a full model change as part of our strategy to reinforce the Honda brand and boost sales. In sales and services, Honda will continue to maximize lifetime customer satisfaction through a range of initiatives, including active promotion of the “e-Dealer” network linking Honda and its dealers. As a result, we project a 3.9% increase in domestic unit sales in fiscal 2006, to 740,000 units.

 

In North America, we will continue strengthening sales of the next-generation Ridgeline pickup truck, released in March 2005, and of our existing light truck models. We will further strengthen our lineup through the introduction of an entry SUV for the Acura channel, tentatively named the Acura RD-X, to be introduced in calendar 2006. In the passenger car category, the Civic, which ranks alongside the Accord as one of Honda’s core models in the U.S. market, will undergo its first full model change in five years. In early 2006, we plan to introduce an entry model aimed at the younger generation. Through these and other initiatives, we will further expand sales by offering an appealing range of models in both the light truck and passenger car markets.

 

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On the production side, the second line of the Alabama Plant, which manufactures the Odyssey and Pilot, is scheduled to begin operating at full capacity by the end of 2005. This increased capacity will help meet growing demand for light trucks. We are currently building a new transmission assembly plant in Georgia, which is scheduled to begin operations in fall of 2006. In addition, in spring of 2005 we began expansion of two facilities—the Alabama Plant for local production of new engine parts, and the Ohio transmission plant to accommodate local production of high-precision gears. In these ways, Honda is increasing the ratio of locally procured parts to further strengthen its flexible and highly efficient local manufacturing operation. For fiscal 2006, we project unit sales in North America of 1,675,000 units, up 6.3%.

 

In Europe, following the launch in January 2005 of the CR-V, equipped with a Honda-developed diesel engine, we plan to release a diesel-powered FR-V, also featuring a Honda-developed engine, in the middle of the year. To further strengthen our product competitiveness in the expanding diesel automobile market, we plan to adopt a Honda-made diesel engine in the new Civic, which will undergo a full model change in early 2006. To accommodate growing sales of locally made diesel-powered Civic and CR-V models, in the latter half of 2005 we will begin assembly of Honda-made diesel engines at Honda of the U.K. Manufacturing, Ltd. As a result, we project a 4.9% increase in unit sales in Europe, to 280,000 units.

 

In Asia, we project unit sales in fiscal 2006 will increase 5.5%, to 540,000 units. Despite the impact of money-tightening measures implemented by China’s central government, which slowed market growth in 2004, we believe that the Chinese passenger car market will continue to grow, making it the second largest in the world behind the United States.

 

We will respond to flourishing demand for existing models made by our Chinese affiliate, Guangzhou Honda, such as the Accord and Fit, by further strengthening that company’s sales network and expanding its annual production capacity from 240,000 to 360,000 units in the latter half of calendar 2006.

 

Similarly, we will expand the sales network of Dongfeng Honda, another Chinese affiliate, and increase its production capacity from 30,000 to 120,000 units by early 2006. These measures are designed to accommodate the significant increase in sales projected for the CR-V, as well as the scheduled introduction of the Civic.

 

We are expanding production capacity outside of China as well, in order to meet increased demand. In Indonesia, we raised the capacity of P.T. Honda Prospect Motor from 40,000 to 50,000 units. In India, too, we plan to expand the annual production capacity of Honda Siel Cars India Ltd. from 30,000 to 50,000 units by the end of calendar 2005.

 

In other regions, we project unit sales of 180,000 units, up 2.3% from fiscal 2005. This projected increase takes into account continued sales increases for the Civic and Fit in Brazil, as well as higher sales of the Accord in Australia.

 

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Finance Subsidiaries–Receivables, Net

Years ended March 31

 

     Yen (millions)

   % change

 
     2004

   2005

  

Non-current

   ¥ 2,377,338    ¥ 2,753,266    15.8 %

Current

     1,264,620      1,396,104    10.4  
    

  

  

Total

   ¥ 3,641,958    ¥ 4,149,370    13.9 %
    

  

  

 

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The finance subsidiaries–receivable category above includes items that have been reclassified as trade receivables and other assets. For more detailed information, refer to Note 4 to the consolidated financial statements, Finance Subsidiaries–Receivables and Securitizations.

 

Fiscal 2005 Results

 

We offer an array of financial services to our customers and dealers in the effort to support sales of our products. These services are provided through financial subsidiaries in the United States, Japan, Canada, the United Kingdom, Germany, Brazil and Thailand. In fiscal 2005, net sales of our financial services business, including inter-segment sales within Honda, rose 5.4%, to ¥259.1 billion, due mainly to strong sales of automobiles in the United States. This was despite the negative effect of yen appreciation against the U.S. dollar. Operating income declined 17.1%, to ¥89.9 billion, due largely to higher interest rates paid to raise funds, which outweighed the benefits of a higher loan balance accompanying expansion of our business.

 

Outlook for Fiscal 2006

 

Based on expectations of renewed growth in our operations, especially the automobile business, in fiscal 2006 we look forward to further expansion of our financial services business, which helps bolster sales from other businesses.

 

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Fiscal 2005 Results

 

In fiscal 2005, unit sales of power products rose 5.0%, to 5.3 million units, due mainly to increased sales of general-purpose engines in North America. Net sales from power products and other businesses, including sales between segments, edged up 0.3%, to ¥342.8 billion. Operating income soared 85.9%, to ¥19.3 billion, and the operating margin was 5.6%.

 

Unit Sales

Years ended March 31

 

     Thousands

   % change

 
     2004

   2005

  

Japan

   477    432    (9.4 )%

North America

   2,363    2,514    6.4  

Europe

   1,261    1,309    3.8  

Asia

   619    712    15.0  

Other Regions

   327    333    1.8  
    
  
  

Total

   5,047    5,300    5.0 %
    
  
  

 

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In Japan, unit sales of power products fell 9.4%, to 432,000 units, due largely to declines in sales of power generation equipment and a decrease in sales of the GX series of general-purpose engines supplied to pump manufacturers on an OEM*1 basis.

 

In North America, unit sales grew 6.4%, to 2,514,000 units, due to solid sales of power generation equipment, as well as strong sales of highly price-competitive, Thai-made GX general-purpose engines for use in high-pressure cleaning equipment.

 

Unit sales in Europe climbed 3.8%, to 1,309,000 units, bolstered by firm demand for Thai-made GX general-purpose engines, as well as healthy sales of GC engines for use in lawn mowers.

 

In Asia, unit sales jumped 15.0%, to 712,000 units. This was due primarily to increased sales of GX engines reported by our Thai subsidiary and higher sales of production components to Jialing-Honda Motors, an equity-method affiliate in China.

 

In other regions, unit sales moved up 1.8%, to 333,000 units. In Brazil, we reported increased sales of GX engines manufactured in Brazil, which become more price-competitive as a result of further cuts in procurement costs. In Australia, we posted higher sales of the HRU series of push lawn mowers, boasting superb fuel efficiency.

 

In July 2004, Honda rolled out the world’s first power generators capable of simultaneous output of different voltages. Equipped with sine-wave inverters, these were released as the EM45is and EM55is in Japan and the EM5000is and EM7000is in North America.

 

*1: Original equipment manufacturing (OEM)

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

 

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In September 2004, we launched the Honda-original, hybrid HSS970i snowblower in Japan and Europe. The HSS970i features a gasoline engine for removing snow and an electric motor for travel motion. We also began domestic sales of the Salad FF500 mini-tiller, boasting improved performance and operating efficiency thanks to a high-powered engine. The Salad series continues to be well-received by Japanese customers.

 

In Japan, we launched the HRX537 push lawn mower, combining myriad functions in a single unit and featuring excellent economy and environmental performance, in February 2005. In the United States, we unveiled the FG110 portable tiller, offering improvements in fuel economy and lightness. Back in Japan, we worked hard to promote our compact, home-use cogeneration system*2, which greatly reduces environmental impact compared with conventional systems.

 

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Outlook for Fiscal 2006

 

In fiscal 2006, we expect unit sales of power products to grow 9.2%, to 5.79 million units.

 

Domestically, we will target increased sales of the Salad FF5000 mini-tiller, launched in September 2004. We will also continue promoting our compact, home-use cogeneration system.

 

We will strive to further boost sales of power products in North America, centering on the EU2000i inverter-equipped mobile generator for camping and leisure use, in response to emerging customer needs. In the United States, we will spearhead new initiatives aimed at commercializing our home-use cogeneration system.

 

In July 2005, Honda will release the iGX440, a next-generation, general-purpose engine featuring enhanced user-friendliness, superior environmental performance and reduced noise thanks to adoption of electronic engine speed control*3 and other technologies.

 

Meanwhile, we will step up efforts to supply highly competitive, Asian-made products, notably the GX series, to customers in each region.

 

Through these initiatives, we are targeting further sales increases, especially in North America and Asia.

 

*2: Compact, home-use cogeneration system

Honda has combined its original electromagnetic inverter technologies with the world’s smallest(i) natural gas engine (GE160V) in an efficient layout to create a small, lightweight generation unit. Due to its compactness, the unit can be installed in the home and boasts an overall energy efficiency of 85%. It also emits approximately 30% less carbon dioxide than conventional natural gas-powered generators or hot-water heating units using natural gas.(ii)

  i: A Honda development, the reciprocal gas engine
  ii: Data from Honda test results. Data compares electric power from natural gas-powered generation with hot-water heating units that use natural gas (as of April 2005).
*3: Electronic speed control

With Honda’s original electronic engine speed control technology, the electronic control units continuously monitors throttle opening and engine speed, electronically regulating the throttle to maintain a constant engine speed, even under changing engine load conditions.

 

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The Continuous Advancement of the Civic

 

Birth of the Civic

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Honda Targets World Market As Newcomer in Automobiles

 

The year 1970 was a historic one for Japan. Amid a period of remarkable economic growth, the nation hosted the Osaka Expo and busily prepared itself for the 1972 Sapporo Winter Olympic Games. These international events prompted Japan to accelerate the building of transportation infrastructure and fueled its swift transition into an urbanized society, symbolized by the automobile. It was then that Japan took over the position as the world’s No. 2 automobile manufacturing nation.

 

Such rapid economic expansion and urbanization caused major issues in the form of traffic jams and air pollution. At the time, Honda specialized in high-performance, sporty vehicles. Given the issues facing the nation, however, the Company assumed the urgent task of developing a new, economic passenger car that would become a central part of people’s lives. This led to the creation of the first-generation Civic, a strategic model incorporating the comprehensive strengths of Honda.

 

The Civic’s development process contrasted completely with Honda tradition. Rather than pursue development based primarily on the vision of Company founder Soichiro Honda, the Civic’s development team traveled to various world markets, gained local knowledge and experience first-hand, and then set about creating a car that “is needed right now.”

 

Honda’s previous models had extremely high-performance engines, but were lacking in terms of space, noise reduction and weight balance—which are important factors in creating a car that is closely tied to people’s lives. After reflection, the Company decided to develop a new model that was compact and nimble—a basic car acceptable to people worldwide that provided “maximum value from the minimum number of mechanical components.”

 

As a latecomer to the automobile industry, the Company’s decision to lead the industry in developing a global car for world markets was a true demonstration of Honda’s challenging spirit which has remained to this day.

 

At the time, the traditional “front-engine, rear-wheel-drive, 3-box” design (engine compartment, cab and trunk) was the mainstream standard for compact cars, but the Company boldly chose a “front-engine, front-wheel-drive, 2-box” specification (engine compartment and cab only) as the concept for the “basic world car.” Its project members were confronted with multiple new challenges and difficulties in the development process, and overcoming these issues led to the birth of new technologies. One was related to weight reduction. By decreasing the thickness of steel sheets to one-millimeter units and modifying their structure, the Company overcame conventional wisdom and achieved new levels of vehicle lightness, which also contributed greatly to reduced cost and fuel efficiency. Also, Honda chose an independent strut-type suspension*1, which offered a sporty driving feel as well as a comfortable ride, rather than the rigid-beam suspension used in most Japanese compact cars and trucks at the time. In another revolutionary first, the Company introduced its transverse-mounted engine to the compact car market, where vertical engines had been mainstream—giving its cars a “roomier” feel.

 

Perhaps the greatest determining factor in the success of the first-generation Civic was the distinctive three-door hatchback styling, which was unusual in Japan despite having won attention in Europe and North America. The Civic’s “mold” design spurned the traditional obsession with style and took the “maximum value from the minimum mechanical space” concept to the extreme. This design helped entrench its image as a familiar “people’s car.”

 

After only two years of extensive trial and error—an incredibly short amount of time in those days—development was complete, and the Civic made its debut, with a two-door model in July 1972, followed by a three-door version in September. The series was a major hit, especially among young people. For three consecutive years, from 1972 to 1974, the Civic won the Car of the Year Japan award, firmly entrenching its name in the Japanese market.

 

In 1972, Honda also began exporting the Civic to the United States, and its innovativeness soon won widespread acclaim internationally. Exports to Canada began in 1973, and between 1976 and 1978 the Civic was the best-selling import car for 28 consecutive months in that nation.

 

Low-Emission CVCC Engine Developed Ahead of World’s Major Competitors

 

The Civic CVCC, launched in the United States in 1974, was instrumental in cementing Honda’s reputation overseas. Initially, practically all manufacturers regarded the U.S. Clean Air Act*2 restrictions as impossible to meet. In 1972, however, a new Civic equipped with a CVCC engine became the first model in the world to officially qualify under the new standards. Honda, a latecomer to the automobile market, saw the legislation as a golden opportunity, not only to protect the environment and otherwise fulfill its social commitment but also to join the leaders in the front line of technology. The Company instantly took on the challenge with conviction.

 

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Since first entering the Isle of Man TT races in 1954, Honda had used the racetrack as a testing ground, making excellent technological progress in the areas of speed and durability, as well as maximizing safety. The Company also learned much about setting and meeting difficult goals through its racing activities, and soon fully mastered the principles of engine combustion. Indeed, the renowned CVCC engine was the result of product development conducted through Honda’s racing activities.

 

The CVCC engine won acclaim not only for its clean emissions but also for its excellent fuel efficiency, and Honda later even offered its technologies to other companies. In subsequent tests conducted by the U.S. Environmental Protection Agency (EPA), CVCC received the No. 1 fuel efficiency ranking for four consecutive years. In addition to meeting stringent emission standards, therefore, the Civic CVCC delivered superior economy and performance, thus strengthening Honda’s reputation for technological excellence in the minds of customers.

 

To this day, Honda has pursued an unwavering policy of meeting social obligations and offering technologies that benefit the world. This policy began with the CVCC engine.

 

The Civic not only became the foundation for subsequent Honda compact vehicles but has since prevailed through periods of major change, including oil crises and diversifying values. It has become a true “car for the people,” as its name suggests.

 

*1: Independent strut-type suspension With an independent strut-type suspension, the suspension of the right and left wheels operates independently, as opposed to a rigid-beam suspension, where the suspension of the right and left wheels is fixed onto each axle.
*2: U.S. Clean Air Act In 1970, the so-called “Muskie Law,” an amendment to the U.S. Clean Air Act, was passed. Under the new law, the carbon monoxide, hydrocarbon and nitrogen oxide levels in emissions of 1975- and 1976-model vehicles had to be at least 90% lower than for 1970 and 1971 models. At the time, these were the most stringent emission standards in the world.

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The Continuous Advancement of the Civic

 

Basic Car for the World

 

Honda’s Overseas Business Progresses in Tandem with the Civic

 

Honda’s overseas business has advanced in parallel with the globalization of the Civic, which is now sold in approximately 160 nations and regions worldwide. Overseas production began in Indonesia in 1975, and Civic vehicles are now made in 11 countries, including North America, Europe, Asia and South America. Total cumulative production of Civic models at the end of calendar 2004 was approximately 16 million units—making it one of the most popular models in Honda history. In addition to expanding its overseas business, Honda has made incremental increases in the Civic’s local content*3, which has reached 97% in North America, 85% in Europe and 72% in the ASEAN market, served by the model manufactured in Thailand.

 

The localization of the Civic and Honda’s business expansion in the United States are two sides of the same coin. In 1986, Honda of America Mfg., Inc. (HAM), began making the Civic, having already built the Honda Accord, at its Marysville Auto Plant in Ohio. In the following year, Honda announced its “Five Part Strategy for North America” initiative*4, which called for increased localization, not only of sales but also of production and research and development. As part of this initiative, Honda built a second U.S. auto plant, in East Liberty, Ohio, in 1989, with the Civic as its core model for full-scale localization of production.

 

In 1992, Honda R&D Americas, Inc. (HRA), developed the Civic Coupe, a dedicated model for the North American market. Until that time, the design of the Civic was common throughout the world—consistent with its image as a “world car.” In this case, however, Honda focused closely on local needs and created a model specifically for the local market. The response was very positive, further boosting the profile of the Civic.

 

The Civic also has a long history in Europe. Since sales began there in 1973, the Civic has progressed in line with changing market needs. Among world markets, demand for compact hatchback vehicles is strongest in Europe, and competition there is fiercest. In response, Honda focused on four-door and five-door hatchbacks when it embarked on production of the Civic in the region. Since 2001, a three-door model produced locally at Honda of the U.K. Manufacturing Ltd. has been exported to the United States and Japan, ushering in a new era in which a European-made Civic debuted on the world stage.

 

As the pace of motorization picks up in Asia, the Civic continues to be warmly received by customers as a car with high added value. In the Middle & Near East, South America and other developing markets, as well, the Civic remains highly regarded as a status symbol.

 

As we can see, the Civic is positioned differently according to the characteristics of each specific market. In any case, technological advances have given its true global appeal, both as a “people’s car” for commuters and a “prestige automobile” with added value.

 

Honda’s Worldwide Car Production and Production of the Civic (Cumulative)

 

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Note:  Through 1996, worldwide production figures are the total of Japanese production (CBU+CKD) plus exports of knockdown kits.
       From 1997 onward, these figures are calculated on an off-production-line basis, excluding domestic production (CBU+CKD) and overseas production (CKD).

 

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New Manufacturing System Attributable to the Civic

 

The globalization of the Civic is closely associated with Honda’s progress in manufacturing processes. The New Model Center, for example, was established in Tochigi Prefecture in 1997 to “develop high-quality production technology for automobiles.” It is charged with the task of improving the quality of automobiles produced at Honda’s facilities around the world. Planning of every Civic series since the seventh generation has been spearheaded by the Center, via computer-aided design on a global scale. With computer-aided design technology, various processes including designing, simulations and production support are done digitally. Moreover, Honda’s production teams in various countries create prototype vehicles that reflect their respective market needs, in an effort to incorporate global production requirements into planning from the early design stage.

 

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In 1998, Honda began implementing its New Manufacturing System. In September 2000, this innovation was extended to cover all major production facilities worldwide—a decision sparked by the rollout of the seventh-generation Civic at its Suzuka Plant. By making production equipment more flexible and standardizing assembly line processes, Honda built a production system capable of responding flexibly to changing markets while maintaining high levels of quality. It also enabled the Company to lower investment costs associated with the launch of new models.

 

In these ways, the Civic has continued to play a major role, not only in its performance as a product, but also in Honda’s advancement as a corporation, in such areas as the simultaneous development around the world of different body types, as well as new product development and manufacturing systems.

 

*3: Local contents

For measuring procurement ratios, we use the former EPA method for North America and the EPA method for Europe.

*4: Five Part Strategy for North America

(1) increased local content targets (75% by 1991); (2) strengthening and expansion of Honda R&D Americas (increase in associates and acquisition of comprehensive test track facility); (3) strengthening and expansion of the Ohio facility of Honda Engineering North America, Inc., which is responsible for production systems and technologies (increase in associates to boost capacity); (4) expansion of HAM’s No. 2 line and engine production project (boost finished vehicle output to 150,000 units per year and raise capacity of engine production line); and (5) establish an export plan for HAM-produced passenger vehicles (increase in exports, including to Japan, in line with expanded production capacity).

 

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Technologies for the Society

 

Throughout its history, Honda has consistently incorporated the day’s most advanced, leading-edge technologies into its Civic models, opening up new frontiers for the compact car. The progress of the Civic is an exact parallel of Honda’s technological progress. This is a result of the Company’s willingness, since developing the first-generation Civic, to make available technologies that help society, in such areas as environmental protection and safety. (Please refer to page 29 of this report.)

 

In 1998, Honda began making and selling the Civic GX, a compressed natural gas (CNG) powered vehicle, in the United States. In 2001, it began production and sales in Japan of the Civic Hybrid, which was subsequently sold overseas, first in North America and Europe, then throughout the world. In 2000, we completed construction of the world’s first indoor omni-directional vehicle-to-vehicle crash test facility, located in Tochigi Prefecture. Utilizing this facility for the seventh-generation Civic, we achieved the Euro NCAP*5 four-star rating for passenger safety and a three-star rating for pedestrian safety—both landmarks for this class of car—earning the Civic a reputation as “the safest car in Europe.” In this way, the Civic has served as Honda’s flagship model, continuing to advance one step ahead of the expectations of society.

 

The sophistication of technologies incorporated into the Civic has been reflected in its reception of multiple awards in various nations. The Civic has received the Car of the Year Japan award on seven occasions. In 2000, Automotive Engineering International, the monthly publication of SAE International*6, voted the 1974 Civic CVCC the Best Engineered Car of the 20th Century (1970s category), the only Japanese car to receive this honor. These and other awards are testimony to Honda’s high level of technological excellence and a great boost to the confidence of its development teams.

 

*5: Euro NCAP (European New Car Assessment Program) A government-backed testing center for automobile crashworthiness.
*6: SAE (Society of Automotive Engineers)

SAE was formed in 1905. Now called SAE International, it has approximately 80,000 individual members worldwide. In 2000, it conducted its Best Engineered Car of the 20th Century survey via its monthly publication, Automotive Engineering International, in which readers submitted their choices for the best engineered cars in each of the ten decades of the 20th century. Votes were based on three criteria: (1) “The car successfully introduced a new engineering system and/or solution that was subsequently adopted by others, either wholly or in part”; (2) “The car enjoyed exceptional longevity in the marketplace, thereby indicating and validating sound initial engineering capable of further development”; and (3) “The car achieved better performance than its contemporaries by virtue of the excellence of its engineering.” Honda’s Civic CVCC was voted the Best Engineered Car of the 20th Century in the 1970s category.

 

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The Continuous Advancement of the Civic

 

The New 2006 Civic

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From fall 2005 to mid-2006, the Civic will undergo its first full model change in five years. Naturally, the new Civic will incorporate “advanced, leading edge technologies,” as it has always done in the past. In addition, it will feature models tailored to the specific characteristics of its various regional markets. In other words, the new Civic will be better suited to each local market than ever before.

 

In the United States, the series will include the ever-popular two- and four-door models, providing excellent driving comfort and fuel economy thanks to a new engine, and improved safety performance. Honda will build a stronger sales foundation and strive to enhance the Civic’s appeal to younger customers.

 

In Europe, where competition in the compact car market is intense, Honda will broaden its presence by introducing a five door model, for which demand remains strong. Moreover, the sporty look of the current model, which is very popular, will be further highlighted in an effort to attract younger drivers. The new Civic series will also feature an original Honda-developed diesel engine that has already proved highly popular in its Accord and CR-V models. As the market for diesel-powered vehicles continues to expand in Europe, Honda will increase its profile accordingly.

 

In Japan and elsewhere in Asia, Honda will rejuvenate the Civic’s image by providing new visual features that closely reflect regional characteristics.

 

In 2006, Dongfeng Honda Automobile Co., Ltd., an affiliate based in Wuhan, China, will begin producing the new Civic, as well. It will be positioned as a mainstay model following the success of the Accord, Odyssey, Fit series and CR-V, which have together underscored Honda’s brand image in China. As a result, the Civic will be produced in six regions worldwide, further highlighting its presence as a truly global car.

 

All of the new Civic models worldwide will feature newly developed engines that deliver performance equivalent to larger engines, but with the fuel efficiency of smaller engines—thereby taking performance and efficiency to a new level

 

The Future for the Civic and Honda

 

According to the original development team of the Civic, “We were committed to creating a car that made people smile. We knew that we could deliver a good product to our customers if we could convey our beliefs with strong conviction. The Civic enabled us to achieve our quest.” Honda’s concept of “a car for all people, a car for the world” has been truly incorporated in the Civic, which has advanced together with the changing needs of the times and consistently provided new levels of value to customers worldwide.

 

In the early stages of the new century, the world is facing a mixture of both accelerating globalization and more distinctive regional attributes. Starting from the autumn of 2005, the Civic will undergo its first full model change in the 21st century. It will take a giant leap forward in meeting the increasingly diverse needs of customers as it evolves into a “car for the global citizen that reflects the times and regional values.”

 

As the times change, the values people expect from their products also change. Both Honda and the products we make will continue to advance in order to pursue new values. Together with the reborn Civic, Honda will continue to grow in the years to come.

 

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[Successive Honda Civic Generations]

 

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First Generation (1972)

 

Following the original two-door and three-door Civic models, the Company expanded its lineup with the Hondamatic (variable-speed automatic) and Civic CVCC in 1973. These were complemented in 1974 by the sporty Civic RS, with a twin-cab engine, and the Civic Van, a practical, commercial-use vehicle. For three consecutive years—from 1972 to 1974—Civic was awarded “Car of the Year Japan.” Overseas, as well, the Civic CVCC earned high acclaim in the United States. In 1973, the Civic ranked third in Europe’s “Car of the Year” awards—the highest ranking for a Japanese vehicle at that time. It also took the top prize among imported vehicles in the U.S. Road Test magazine’s “1974 Car of the Year.”

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Second Generation (1979)

 

Seeking to create a “high-quality car representing 1980s values,” Honda implemented the first full model change of the Civic in seven years, resulting in enhanced economy, interior comfort and driving performance. This led to the development in 1980 of the CVCC-II engine, which delivered improved combustion efficiency. In 1981, Honda rolled out the Civic Country station wagon and the Civic 4-Door Sedan, featuring a Hondamatic transmission with overhead drive, front-wheel drive and notchback styling. The new Civic received the “U.S. Import Car of the Year 1980” award from Motor Trend Magazine.

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Third Generation (1983)

 

The concept for the third-generation Civic was “maximum space for people, minimum space for mechanisms.” Based on this concept, Honda developed three-, four- and five-door variations of the Civic—a three-door hatchback and four-door sedan, as well as a five-door shuttle offering superior utility space. In 1984, the Company unveiled the Civic Si, featuring a DOHC engine incorporating Formula 1 technologies. It was instantly popular thanks to its innovative, long-roofed design, and won the “Car of the Year Japan” award in 1984. In the United States, the Civic placed first in fuel efficiency tests conducted by the U.S. Environmental Protection Agency in 1984 for the second consecutive year. In Europe, it won the “Torino-Piedmonte Car Design Award 1984.”

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Fourth Generation (1987)

 

Developers of the fourth-generation Civic emphasized “exhilarating performance based on human sensitivities.” Targeting higher efficiency, Honda created its Hyper 16-valve engine in five variations, from 1,300cc to 1,500cc. Combined with a four-wheel double wishbone suspension, the result was everything a person could want in a car. In 1989, the Company unveiled the Civic SiR, equipped with its high-performance DOHC VTEC engine, featuring Honda’s revolutionary variable valve timing technology. That model received the “Golden Steering Wheel Award” from Bild am Sonntag, a German newspaper. It also ranked first according to a 1989 survey about car quality and reliability conducted by France’s L’Automobile Magazine.

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Fifth Generation (1991)

 

The most striking feature of the fifth-generation Civic was it futuristic aerodynamic form, with flexible interior space to suit the specific requirements of young people. The new series also heralded the arrival of new VTEC engine variations to provide an excellent mix of driving performance and high fuel efficiency. These included the 170-horsepower DOHC VTEC, the ultrahigh fuel efficiency VTEC-E and a high-balance VTEC. The new cars represented a major advancement in human and environmental friendliness, with enhanced safety features and a high proportion of recyclable components. The fifth-generation Civic received “Car of the Year Japan” awards in 1991 and 1992.

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Sixth Generation (1995)

 

Transcending its traditional “car for the masses” appeal, the sixth-generation Civic sought to become a vehicle that represents the times from a global perspective. It incorporated a range of new technologies to satisfy strong demand for high performance, safety and low emissions. These included the 3-stage VTEC engine, boasting high output and high fuel efficiency and Honda Multimatic, a next-generation, variable-speed automatic transmission. Consequently, the Civic received “Car of the Year Japan” awards in 1995 and 1996.

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Seventh Generation (2000)

 

The seventh-generation Civic was developed as the “benchmark for compact cars,” satisfying all important criteria, with maximum cabin space, superlative economy and smooth ride, and unparalleled safety for occupants and pedestrians. The interior space was made more comfortable based on a low, flat-floor design enabling occupants to easily move between front and rear seats. Due to Honda’s G-CON collision safety technology, the seventh-generation Civic has met the highest safety standards, winning “Car of the Year Japan” awards in 2001 and 2002.

      

 

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[Key Technologies Behind the Civic’s Evolution]

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Environment and Safety

 

LOGO

 

Honda proactively employs advanced environmental and safety technologies, reflecting its commitment not only to comply with regulations but also to pass the “joy of mobility” on to future generations.

 

Environmental Initiatives

 

May 2005 saw the enactment of the Kyoto Protocol Target Attainment Plan in Japan, and the nation has since joined together to expedite efforts to meet the Plan’s targets.

 

Honda began actively tackling environmental issues from an early stage. In 1992, we announced the “Honda Environment Statement,” which clarifies our stance with respect to the environment. Following the principles outlined in the Statement, Honda will step up efforts across all product categories, focusing on such challenges as making exhaust gases cleaner, improving fuel economy and increasing the recyclability of products and materials. We will also boost development of next-generation energy technologies, including fuel cells. In addition to establishing “green factories” within our various production facilities, we will employ Life Cycle Assessment (LCA) techniques to lower the environmental burden of all of our business activities—including distribution and sales. In these ways, we will strive to minimize the impact of our operations on the environment.

 

Achievement of 2005 Targets

 

In 1999, Honda announced companywide 2005 targets for reducing exhaust emissions and increasing fuel efficiency, and has since reported annually on its progress in meeting these targets. We intend to meet all of these targets by the end of fiscal 2006.

 

Motorcycles

 

In the area of motorcycles, we completed the changeover to four-stroke engines in all models, with the exception of some specialty products, in order to achieve cleaner exhaust emissions and higher fuel efficiency. We are also incorporating more fuel injection technologies into our small-displacement models and we are stepping up development of new technologies and expanding their application in our mass-produced models.

 

1. Cleaner Exhaust Gas

 

2005 Target

 

To reduce total hydrocarbon (HC) exhaust emissions (total for Japan, the United States, the European Union and Thailand) of new vehicles to approximately one-third of the fiscal 1996 level.

 

Progress

 

•Target attained

 

In the previous fiscal year, ended March 2004, total HC emissions from new motorcycles were up 3.3% from the preceding period. In the fiscal year ended in March 2005, however, we achieved a 4.9% reduction (compared with fiscal 2004) thanks to increased development and application of new technologies. This means that Honda has reduced HC emissions to approximately one-quarter of 1995 levels—representing major progress since 2000, when it reached its original target (one-third of 1995 levels). In Japan, total HC emissions in fiscal 2005 were equivalent to 13.3% of the 1995 level, down 2.9% from fiscal 2004. This stemmed from the full-scale adoption of four-stroke engines and incorporation of FI technologies in small-displacement models, as well as further technological developments and their expanded application in mass-produced motorcycles.

 

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Environment and Safety

 

2. Improvement in Fuel Economy

 

2005 Target

 

To improve fleet average fuel economy (total average in Japan, the United States, the European Union and Thailand) by approximately 30% compared with fiscal 1996.

 

Progress

 

•Target attained

 

Honda expanded the use of four-stroke engines in motorcycles not only in Japan, but overseas, as well. It also developed and applied new technologies that enhance fuel economy, including by increasing fuel injection-equipped motorcycles in Japan and abroad. As a result, we achieved a 34.2% improvement in average fuel economy in fiscal 2005 (compared with the fiscal 1996 level), surpassing the 30% milestone attained in fiscal 2004.

 

Automobiles

 

Besides achieving cleaner exhaust gas and improved fuel economy for Honda automobiles, efforts are under way to develop products using alternative forms of energy.

 

1. Cleaner Exhaust Gas

 

2005 Target

 

To reduce total hyrdrocarbon (HC) and nitrogen oxide (NOx) exhaust emissions by approximately 75% for new vehicles in Japan, compared with 1995.

 

* Practically all of Honda’s passenger vehicles have been approved as “««« low emission vehicles” or “«««« low emission vehicles.”

 

Progress

 

•Target attained

 

The target of a 75% reduction in total exhaust emissions in Japan (compared with the fiscal 1996 level) has been attained since fiscal 2004.

 

* Total HC emission level: Reduced by around 86.0% (compared with fiscal 1996)

 

* Total NOx emission level: Reduced by around 86.0% (compared with fiscal 1996)

 

2. Improvement in Fuel Economy

 

2005 Target

 

To achieve the new fuel efficiency standards of Japan for fiscal 2011 in all weight categories; and to improve fleet average fuel economy for gasoline-powered vehicles by approximately 25% compared with fiscal 1996.

 

Progress

 

•Target attained

 

Honda has achieved the new fuel efficiency standards in all weight categories. In fiscal 2005, fleet average fuel economy had improved approximately 30.9% compared with the fiscal 1996 level. Honda reached the 25% target in fiscal 2002 and continues to record further improvements.

 

Power Products

 

In this segment, Honda focuses on cleaner exhaust emissions and improved fuel economy in anticipation of more stringent regulations being implemented in various countries.

 

1. Cleaner Exhaust Gas

 

2005 Target

 

To reduce average exhaust emissions (average emission levels worldwide) of HC and NOx by approximately 30% for new products (compared with the fiscal 1996 level).

 

Progress

 

•Target attained

 

We achieved the target of a 30% reduction in average HC and NOx emission levels in fiscal 2002. For fiscal 2005, average HC and NOx emissions were 38% lower than the fiscal 1996 levels, thanks to ongoing efforts in this area.

 

2. Improvement in Fuel Economy

 

2005 Target

 

To improve average fuel economy by approximately 30% (compared with fiscal 1996).

 

Progress

 

•Target attained

 

By March 2005, the average fuel economy had improved by approximately 28% of the fiscal 1996 level.

 

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Environment and Safety

 

Global Activities

 

Honda’s global mission is to create products with the highest level of environmentally friendly technologies through the adoption of the most efficient manufacturing systems in all regions. Below are some examples of Honda’s overseas activities involving automobiles.

 

Thanks to its proprietary technologies, Honda is able to offer a wide range of products that deliver environmental performance beyond legal requirements adopted in various parts of the world with regard to reducing exhaust emissions and improving fuel economy. The Company continues to make a valuable contribution to today’s mobility-oriented society by reconciling demand for transportation with the manufacture of products that have minimal impact on the global environment. Honda has adopted the following three key approaches in all product categories.

 

1. Further improvement in exhaust emissions and fuel efficiency of internal combustion engines;
2. Advances in hybrid vehicle technologies;
3. Widespread adoption of alternative energy vehicles.

 

1. Further Improvement in Exhaust Emissions and Fuel Efficiency of Internal Combustion Engines

 

•North America (United States)

 

Honda is one of the leading automakers in the United States and has achieved the industry’s highest corporate average fuel economy (CAFE) ranking for its 2004 year models. Consistently supplying the U.S. market with vehicles that surpass emissions requirements, Honda was the first automaker to launch Low Emission Vehicles (LEVs), Ultra-Low Emission Vehicles (ULEVs) and Super Ultra-Low Emission Vehicles (SULEVs) in this market. Today, more than 60% of Honda and Acura vehicles have either achieved or surpassed the federal government’s Tier2/bin5 exhaust emission standard (NOx: 0.07g/mile) *1. Based on such successes, in December 2004, Honda received the “2004 Greenest Automaker” award from the Union of Concerned Scientists (UCS).

 

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•Europe

 

In Europe, Honda offers low-fuel-consumption vehicles, hybrid vehicles and clean diesel vehicles in an effort to reduce carbon dioxide levels. It is making steady progress toward attaining its 2009 target of 140g/km (carbon dioxide emissions) set voluntarily by the industry.

 

•Asia

 

In Thailand, Honda offers the Jazz, whose performance exceeds Euro4*2 emission regulations due for implementation in 2007. In calendar 2004, vehicles meeting Euro4 regulations accounted for 40% of Honda’s sales in Asia. All Honda models sold in China already meet Euro3 regulations, due for gradual implementation in Beijing starting in November 2005.

 

2. Advances in Hybrid Vehicle Technologies

 

In November 1999, Honda unveiled the Insight, its first hybrid vehicle, equipped with the Company’s original Integrated Motor Assist (IMA) system. The Insight delivered the world’s highest-level fuel efficiency* for a gasoline-powered vehicle. In December 2001, Honda launched the Civic Hybrid. This was followed in December 2004 by the Accord Hybrid, launched in the United States as the world’s first V6 hybrid vehicle, combining Honda’s IMA hybrid technology with its Variable Cylinder Management (VCM) engine technology. Production of Honda’s hybrid vehicles currently takes place at two facilities in Japan, in Suzuka and Saitama. The mass-market Civic Hybrid model is sold in 19 countries, including North America, Europe, Japan and Asia/Oceania. Global sales of hybrid vehicles stood at around 100,000 units as of April 2005 (89,000 units in the United States, 5,900 in Japan, 3,800 in Europe and 1,500 in Canada).

 

* Fuel efficiency of the Insight (10-15 mode, 5-speed MT) was 35.0 km/l at the time of its introduction in 1999. The current model achieves 36.0 km/l.

 

3. Widespread Adoption of Alternative Energy Vehicles

 

Honda leads the automotive industry in promoting the widespread adoption of alternative energy vehicles. By the end of fiscal 2005, Honda had delivered a total of 19 FCX fuel cell vehicles in the United States and Japan. We are also working to increase sales of our natural-gas-powered Civic GX sedan in North America. In addition, we are working on the infrastructure to supply alternative forms of energy, including development of hydrogen fuel stations and promotion of a home fueling system for natural-gas-powered vehicles.

 

LOGO

 

In April 2005, Honda began selling its natural-gas-powered Civic GX sedan in California, together with a home natural-gas fueling system called Phill (left of photo).

 

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*1: Tier2/bin5 (NOx: 0.07g/mile)

This standard for exhaust emissions went into effect in 2004, as established in the United States by the Environmental Protection Agency as part of the U.S. Clean Air Act. There are 11 “bin” emission categories. Bin 5 is a stringent level that must be met in order to continue selling vehicles in the United States.

*2: Euro4

Exhaust emission regulations implemented in Europe from 2005. Although China and many Asian countries have introduced European regulations, at present they only comply with Euro3 standards. Euro4 is a stringent level that Thailand is considering adopting from 2008.

 

Note:  For further details, please refer to the Honda Environmental Annual Report 2005.

 

URL:  http://www.honda.co.jp/environmental-report/2005/

 

Safety Initiatives

 

As a manufacturer of mobility products, Honda is committed to making products that provide high levels of safety, not only for drivers and passengers but also for pedestrians. We are committed to promoting safer driving and to making mobility safer for everyone.

 

Safety Technologies

 

Honda is committed to improving and adopting a wide range of safety technologies. These include accident avoidance technologies, technologies that minimize the impact on passengers and pedestrians in the event of an accident, and technologies that mitigate the impact of a collision on other vehicles.

 

Seeking to increase stability and ensure more effective braking control, Honda has set the target of incorporating its Hydraulic Combined Anti-Lock Brake System*3 into all new touring and sports bikes (250cc and above) and large-displacement scooters by the end of 2007. We also plan to adopt the system in all 250cc-and-above bikes, except off-road models, as standard by 2010. Moreover, all on-road and off-road models will be equipped with ABS braking. As a leader in the European motorcycle market, Honda is committed to actively incorporating the aforementioned safety technologies into its motorcycles, to help realize the European Commission’s plan to cut road deaths in half by 2010.

 

In our automobile business, Honda is demonstrating its “Safety for Everyone” commitment by incorporating a core set of safety features as standard equipment on every vehicle we sell. By the end of 2006, all Honda and Acura models sold in the United States and Canada will feature front-side airbags, side curtain airbags, anti-lock brakes and pedestrian safety technologies in all but a few niche models; with Vehicle Stability Assist (VSA) and side curtain airbags with rollover sensors as standard features in all light trucks. Finally, Honda’s Advanced Compatibility Engineering (ACE) body structure is being introduced to all vehicles as new platforms are introduced during full model changeovers.

 

Promoting Safer Driving

 

Honda will expand its driver safety promotion activities, which have been in place for some time, to include Asian countries undergoing rapid motorization. We will continue promoting our traffic safety education programs to meet the diversifying needs of customers and step up safety initiatives conducted at the local level through our sales outlets. By enhancing education of riders and drivers, we are dedicated to creating an even safer society for drivers, passengers and pedestrians.

 

Driver safety programs modeled on Honda’s activities in Japan are now operated by 22 corporations in 16 countries. These programs are modified to reflect the various driving conditions and licensing systems of each country. In 2004, four more countries began such driver safety programs. They include in-house instructor training programs conducted by our motorcycle distributors in South Korea, Malaysia and Turkey, with the goal of promoting safer driving practices among dealerships. In Germany, Honda has joined forces with the German Automobile Association to run education programs to enhance the safety skills of people returning to motor-cycles after a long absence. In 2004, we upgraded the content of programs offered in China since 2003 and in Thailand since 1989, accelerating Honda’s commitment to the local communities.

 

In 2005, Honda plans to add Russia to the list of countries where it provides full-scale driver safety activities, in anticipation of further growth of the automobile market in that nation.

 

Honda will continue seeking the opinions of customers and society as it strives to further enhance its “Safety for Everyone” initiatives.

 

*3: Hydraulic Combined Braking System with ABS

This is an original Honda development. It integrates a hydraulic combined braking system, which links both front and rear wheels when the left brake lever is engaged, with an anti-lock braking system (ABS), which prevents the front and rear wheels from locking when the brake is engaged too forcefully.

Note: Although this system is designed to support the braking action, both the front- and rear-wheel brakes should still be applied simultaneously.

 

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Preparing for the Future

 

Preparing for the Future

 

The global economy, driven primarily by the U.S. and Asian economies, is expected to grow steadily, but the pace of growth is anticipated to slow. Also, the global management environment still lacks transparency because of global political and economic uncertainty, fluctuations in oil prices, and currency movements.

 

In Japan, the economic recovery has become more moderate, and weak consumer spending is anticipated to continue. As a result, competition in the Japanese market is expected to intensify.

 

It is under these circumstances that Honda will strengthen its corporate structure quickly and flexibly to meet the requirements of our customers and society and the changes in its business environment. Honda recognizes that further enhancing the following specific areas is essential to its success:

 

1. Research and Development

 

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

 

Honda will also continue efforts in the research of future technologies, including the advancement of advanced humanoid robots and compact business jets and their engines.

 

2. Production Efficiency

 

Honda will establish 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.

 

3. Sales Efficiency

 

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

 

4. Product Quality

 

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

 

5. Safety Technologies

 

Honda will develop safety technologies for accident prediction and prevention, technologies to reduce injuries to passengers and pedestrians from car accidents, and technologies for reducing aggressivity, as well as expand its line-up of products incorporating such technologies. Honda intends to enhance its contribution to traffic safety in motorized societies, including Asian countries. Honda also intends to remain active in a variety of traffic safety programs, including advanced driving and motorcycling training schemes provided by local dealerships.

 

6. The Environment

 

Honda will step up its efforts to create better clean, fuel-efficient engine technologies and to improve further the recyclability throughout its product lines. Honda will also advance alternative fuel technologies, including fuel cells. In addition, Honda will continue its efforts to minimize environmental impact, as measured by the Life Cycle Assessment*, in all of its business fields, including logistics and sales. In its production activities, Honda will promote environmental preservation issues under its Green Factory concept.

 

* 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.

 

7. 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 Companywide activities, we will strive to materialize Honda’s visions of “Value Creation,” “Glocalization,” and “Commitment for the Future,” with the aim of sharing the joy with Honda’s customers, thus becoming a company that society wants to exist.

 

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Risk Factors

 

Risk Factors

 

1. Honda may be adversely affected by market conditions

 

Honda conducts its operation 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 operation.

 

2. Prices for automobiles, motorcycles and power products can be volatile

 

Prices for automobiles, motorcycles and power products in certain markets have, at times, experienced 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 import regulations, shortages of certain supplies 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.

 

3. 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 operation, balance sheet and cash flow, 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 yen, Honda’s results of operations would be adversely affected by an appreciation of the yen against other currencies, in particular the U.S. dollar.

 

4. 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 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 also is 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.

 

5. 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, 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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6. 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.

 

7. 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.

 

8. 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.

 

9. 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.

 

10. 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 acquisition 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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Corporate Governance

 

Basic Stance

 

Based on its fundamental corporate philosophy, the Company is working to improve corporate governance as one of its most important management issues. Our aim is to ensure that Honda is a company whose existence is appreciated by shareholders, customers and society.

 

Honda’s organization reflects its fundamental corporate philosophies. Each regional operation carries out its businesses so as to quickly and efficiently respond to customer needs, and each business operation is responsible for its own specific products. The result is a system that functions very effectively and efficiently.

 

The task of the Audit Office is to carry out more effective audits of the performance of each division’s business. Each division aims to enhance compliance and risk management, while advancing its own self-reliance.

 

To ensure objective control of the Company’s management, outside directors and corporate auditors are appointed to the Board of Directors and the Board of Corporate Auditors, which are responsible for the supervision and auditing of the Company. The term of office of each director is limited to one year, and the amount of remuneration payable to them is determined according to a standard that reflects their contributions to the Company. Our goal is to maximize flexibility in response to changes in the operating environment.

 

For shareholders and investors, Honda’s basic policy emphasizes disclosure of financial results on a quarterly basis, as well as timely and accurate disclosure of its management strategies. Honda will remain committed to such disclosures in the future.

 

The Company’s Corporate Governance Activities

 

(1) Management Organization of the Company’s Corporate Governance for Decision-Making, Execution, Supervision and Others

 

LOGO

 

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Organization

 

The Company supervises and audits its business activities through its Board of Directors and Board of Corporate Auditors.

 

The Board of Directors consists of 21 directors, including two outside directors, and makes decisions on statutory matters, including the execution of important business. The Board of Directors also supervises the execution of the Company’s businesses. From June 2005, the Company introduced an operating officer system aiming at strengthening its business execution and improving flexibility in decision-making at the Board of Directors. The Company also increased the number of outside directors to strengthen the supervisory functions of the Board of Directors.

 

The Board of Corporate Auditors consists of six corporate auditors, including three outside corporate auditors. In accordance with the Company’s auditing policies and the apportionment of responsibilities as determined by the Board of Corporate Auditors, each corporate auditor audits the directors’ execution of duties. Corporate auditors accomplish these audits through various means, including attending meetings of the Board of Directors and inspecting the state of the Company’s assets and liabilities. In addition, a Corporate Auditors’ Office was established to provide direct support to the Board of Corporate Auditors.

 

At its meeting on June 23, 2005, the Board of Corporate Auditors certified Shinichi Sakamoto, a corporate auditor of the Company, as an “audit committee financial expert,” as set out in the rules of the Securities and Exchange Commission pursuant to Section 407 of the U.S. Sarbanes-Oxley Act of 2002. Mr. Sakamoto was elected as a corporate auditor on the same day at the general meeting of shareholders, held prior to the meeting of the Board of Corporate Auditors.

 

The total amount of remuneration and bonuses of directors and corporate auditors is determined according to a standard that reflects their contributions to the Company.

 

The total remuneration paid to directors and corporate auditors during fiscal 2005 was ¥1,373 million: ¥1,288 million to the 40 directors (including four directors who retired during the year) and ¥85 million to the six corporate auditors (including one corporate auditor who retired during the year). The remuneration paid to directors includes employee wages paid to directors who also held employee status and remuneration paid by subsidiaries of the Company to directors who had business execution responsibilities for said subsidiaries. The remuneration paid to corporate auditors includes amounts paid by subsidiaries of the Company to corporate auditors who also served as corporate auditors for those subsidiaries.

 

Total executive bonuses paid during fiscal 2005 was ¥650 million: ¥606 million to the 36 directors who were directors at the end of fiscal 2004 and ¥44 million to the four corporate auditors who were corporate auditors as at the end of fiscal 2004.

 

Total retirement allowances paid to the four retired directors was ¥923 million, while ¥216 million was paid to a retired corporate auditor. Both payments were in accordance with a resolution of the Ordinary General Meeting of Shareholders, held in June 2004.

 

In order to ensure proper auditing of the Company’s accounts, the Board of Corporate Auditors and the Board of Directors receive auditing reports based on the Commercial Code’s Audit Special Exceptions Law, the Securities and Exchange Law of Japan and the U.S. Securities Exchange Act. In addition, they supervise the election of independent auditors, their remuneration and their non-audit services.

 

For fiscal 2005, the Company elected Ernst & Young ShinNihon as its independent auditor under the Commercial Code’s Audit Special Exceptions Law and the Securities and Exchange Law, and elected AZSA & Co. as its independent auditor under the U.S. Securities Exchange Act.

 

A total of 37 people from Ernst & Young ShinNihon provided auditing services for Honda: five Japanese certified public accountants (Yoshinobu Shimizu, Masa-hiko Sano, Norihiko Inui, Toshihiro Yasada and Masami Koike) and 32 assistants (15 Japanese certified public accountants, 10 assistant accountants, two U.S. certified public accountants and five others). Among the Japanese certified public accountants who provided auditing services for the Company, Shigenobu Shimizu and Masahiko Sano have provided auditing services for the Company for consecutive periods of 11 years and 14 years, respectively. These terms include the period prior to April 1, 2004, when restrictions on the number of consecutive years of auditing (seven years) came into effect in accordance with the Enforcement Ordinance of the Certified Public Accountants Law.

 

A total of 26 people from AZSA & Co. provided services for Honda: 10 Japanese certified public accountants, 13 assistant accountants and three U.S. certified public accountants.

 

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Fees and Services of Independent Auditor

 

The fees paid to AZSA & Co. and its affiliate for services under the U.S. Securities Exchange Act are described below.

 

Yen (millions)


   2004

   2005

Audit fees

   581    688

Fees for audit-related businesses

   221    113

Fees for tax audits

   484    390

Other fees

   2    0
    
  

Total

   1,288    1,191
    
  

 

“Audit fees” are fees for professional services related to the independent auditor’s audit of the Company’s financial statements, and for general services provided by the independent auditors in relation to documents to be submitted by law or regulation.

 

“Fees for audit-related services” are fees for the independent auditor’s provision of assurance reasonably related to the implementation of audits and reviews of financial statements and fees for other services related thereto. These cover, for example, audits of the employee wage system, accounting consultancy, reviews of internal controls, provision of assurances that are not required by law, regulations, or the like, and consultations related to financial accounting reports.

 

“Fees for tax audits” are fees for services provided to ensure compliance with tax legislation and regulations, tax advice and tax planning.

 

“Other fees” are fees for all other services provided by the independent auditor, other than auditing services, audit-related services and tax services. These include education and other various support services.

 

Policy and Procedures for Obtaining Board of Corporate Auditors’ Prior Consent

 

To ensure that the independent auditor and its affiliate under the U.S. Securities Exchange Act act in accordance with all applicable laws and regulations and maintain complete independence from the Company, they must obtain the prior consent of the Company’s Board of Corporate Auditors before they carry out auditing services, auditing-related services, tax services and other services for Honda.

 

The Company’s initial policy required that each contractual agreement have a separate prior consent from the Board of Corporate Auditors. In order to make the decision-making process more efficient, however, we are enhancing procedural efficiency by establishing categories of matters requiring comprehensive prior consent. These categories are reviewed regularly by the Board of Corporate Auditors. Any matter that does not fall under one of these categories still requires separate consent of the Board of Corporate Auditors.

 

Divisions and subsidiaries of Honda that receive auditing services, audit-related services, tax services and other services must all report to the Board of Corporate Auditors on the details of services received, as well as fees paid for those services, during the relevant business year. The Board of Corporate Auditors takes these reports into consideration when it reviews the categories of matters requiring comprehensive prior consent.

 

Business Execution System

 

The Company has established a Management Council, which consists of 10 representative directors. Along with discussing in advance the items to be resolved at meetings of the Board of Directors, the Management Council discusses important management issues as directed by the Board of Directors.

 

As for execution of business, the Company has six regional operations around the world to develop business based on its fundamental corporate philosophy. These operations adopt long-term perspectives and maintain close ties with local communities. To enhance the independence of each regional operation and ensure swift decision-making, each regional operating council discusses important management issues in the region within the scope of authority conferred upon it by the Management Council.

 

The Company’s four business operations—motorcycles, automobiles, power products and spare parts—formulate the medium- and long-term plans for their business development, and each operation aims to maximize its business performance on a global basis. Each functional operation—such as Customer Service Operations, Production Operations, Purchasing Operations, Business Management Operations and Business Support Operations—supports the other functional operations, with the aim of increasing Honda’s efficiencies.

 

Research and development activities are conducted principally at the independent subsidiaries of the Company.

 

Honda R&D Co., Ltd., is responsible for research and development on products, while Honda Engineering Co., Ltd., handles research and development in the area of production technology. The Company actively carries out research and development in advanced technologies with the aim of creating products that are distinctive and internationally competitive.

 

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In June 2005, the Company introduced an operating officer system, whereby execution of business is handled primarily by executive directors who are the heads of regional operations and business operations, as well as by operating officers. Together with regional operating officers, whose system was integrated with that for functional operating officers in April 2005, the Company aims to reinforce its business execution system in each region and operation.

 

Internal Control

 

The Audit Office is an independent supervisory department under the direct control of the president. This office audits the performance of each department and works to improve the internal auditing of subsidiaries and affiliates in each region.

 

In addition to establishing the “Honda Conduct Guidelines,” which will be shared throughout the entire Group, the Company has also set up a systematic framework for compliance and risk management in which each division of the Honda Group works to ensure compliance with laws and ordinances and prevent management risks, and to verify status of same on a regular basis under the supervision of the director in charge.

 

Honda has appointed a director in charge of compliance and risk management. The Company has also established entities, such as the “Business Ethics Committee,” to deliberate matters related to corporate ethics and compliance, and the “Business Ethics Improvement Proposal Line,” to receive suggestions related to corporate ethics issues.

 

The Company has also established a “Code of Ethics” as set forth in the rules of the U.S. Securities and Exchange Commission regulations pursuant to Section 406 of the Sarbanes-Oxley Act of 2002.

 

(2) Vested Interests

 

There are no personal, capital or transactional relationships between the Company and its outside directors or its outside corporate auditors.

 

There is no particular relationship between the Company and its outside director, Satoru Kishi.

 

There is no particular relationship between the Company and its outside director, Kensaku Hogen.

 

There is no particular relationship between the Company and its outside corporate auditor, Koukei Higuchi.

 

There is no particular relationship between the Company and its outside corporate auditor, Kuniyasu Yamada. Mr. Yamada serves as President and Director of MTB Apple Planning, Co., Ltd. There is no particular relationship between MTB Apple Planning, Co., Ltd. and the Company.

 

There is no particular relationship between the Company and its outside corporate auditor, Fumihiko Saito. Mr. Saito serves as partner of Haarmann Hemmelrath Saito Law Office. There is no particular relationship between Haarmann Hemmelrath Saito Law Office and the Company.

 

(3) Enhancing Corporate Governance

 

During fiscal 2005, eight meetings of the Board of Directors, one meeting of the Assets and Loan Management Committee and 31 meetings of the Management Council were held. Matters concerning the execution of important businesses were thereby determined, and important matters of management were deliberated.

 

During the same period, the Board of Corporate Auditors held 14 meetings and determined auditing policy, the apportionment of responsibilities and other matters. The Board of Corporate Auditors and the Audit Office provided, jointly or individually, business audits for the Company and a total of 117 subsidiaries and affiliates of the Company in Japan and overseas.

 

The Business Ethics Committee held two meetings and deliberated matters related to corporate ethics and compliance.

 

The Company pushed ahead with systematic improvements in the areas of compliance and risk management for each department, subsidiary and affiliate.

 

For the purpose of enhancing corporate disclosure, the Company held meetings to outline results in each quarter, focusing on consolidated financial results prepared in accordance with accounting principles generally accepted in the United States of America. The Company has also been proactive in such activities as holding meetings explaining corporate performance for investors, publishing various kinds of corporate information on the Company’s website and pursuing swift and accurate disclosure of information on management policies through the mass media and other channels.

 

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Companies listed on 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 large Japanese companies, including Honda, which employ a corporate governance system based on a board of corporate auditors (the “corporate auditor system”), 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.

 

Large Japanese companies, including Honda, are required to have at least one “outside” corporate auditor who must meet independence requirements under Japan’s company law. An outside corporate auditor is defined as a corporate auditor who has not served as a director, executive officer, manager or any other employee of the company or any of its subsidiaries for the last five years prior to the appointment.

 

Currently, Honda has three outside corporate auditors. Starting on the date of the ordinary meeting of shareholders of Honda relating to the fiscal year ending March 31, 2006, at least 50% of Honda’s corporate auditors will be required to be outside corporate auditors.

 

Also, starting on the same date, the independence requirements for outside corporate auditors will be strengthened by extending the five-year period referred to above to any time prior to the appointment.

 

Honda’s current corporate auditor system meets these new requirements.

 

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 corporate auditor 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.

 

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

 

Starting on July 31, 2005, when the requirements of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 relating to listed company audit committees become applicable to foreign private issuers, Honda expects to rely on an exemption under that rule which is available to foreign private issuers with boards of corporate auditors meeting certain criteria. Honda expects to make a disclosure regarding such reliance in its annual reports on Form 20-F for the fiscal year ending March 31, 2006, and thereafter.

 

A NYSE-listed U.S. company must have a nominating/corporate governance committee composed 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 be approved by a resolution of its Board of Corporate Auditors. The Board of Corporate Auditors is empowered to adopt a resolution requesting 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 he 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 concerning the issuance and exercise of the stock options.

 

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Board of Directors, Corporate Auditors and Operating Officers

 

     LOGO    LOGO     
     President and Representative Director    Executive Vice President and Representative Director     
     Takeo Fukui    Satoshi Aoki     
LOGO    LOGO    LOGO    LOGO
Senior Managing and Representative Director    Senior Managing and Representative Director    Senior Managing and Representative Director    Senior Managing and Representative Director
Motoatsu Shiraishi    Michiyoshi Hagino    Minoru Harada    Satoshi Dobashi
LOGO    LOGO    LOGO    LOGO
Senior Managing and Representative Director    Senior Managing and Representative Director    Senior Managing and Representative Director    Senior Managing and Representative Director
Koki Hirashima    Atsuyoshi Hyogo    Satoshi Toshida    Koichi Kondo

 

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Directors

 

    

<Name>


  

<Area of Responsibility or Principal Occupations>


President and Representative Director    Takeo Fukui     
Executive Vice President and Representative Director    Satoshi Aoki    Chief Operating Officer for Business Management Operations
Senior Managing and Representative Director    Michiyoshi Hagino   

General Supervisor, Purchasing Policy

General Supervisor, Quality

Senior Managing and Representative Director    Minoru Harada    Chief Operating Officer for Motorcycle Operations
Senior Managing and Representative Director    Motoatsu Shiraishi    President and Director of Honda R&D Co., Ltd.
Senior Managing and Representative Director    Satoshi Dobashi   

Chief Operating Officer for Regional Sales Operations (Japan)

Chief Officer of Driving Safety Promotion Center in Regional Sales Operations (Japan)

Government & Industrial Affairs

Senior Managing and Representative Director    Atsuyoshi Hyogo   

Chief Operating Officer for Regional Operations (China)

President of Honda Motor (China) Investment Corporation, Limited

Senior Managing and Representative Director    Satoshi Toshida   

Chief Operating Officer for Regional Operations (Asia & Oceania)

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

Senior Managing and Representative Director    Koki Hirashima   

Chief Operating Officer for Production Operations

Risk Management Officer

General Supervisor, Information Systems

Senior Managing and Representative Director    Koichi Kondo   

Chief Operating Officer for Regional Operations (North America)

President and Director of Honda North America, Inc.

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

Managing Director    Toru Onda    Chief Operating Officer for Purchasing Operations
Managing Director    Akira Takano    Chief Operating Officer for Customer Service Operations
Managing Director    Mikio Yoshimi   

Chief Operating Officer for Business Support Operations

Compliance Officer

Managing Director    Shigeru Takagi    Chief Operating Officer for Regional Operations (Europe, the Middle & Near East and Africa), President and Director of Honda Motor Europe Ltd.
Managing Director    Hiroshi Kuroda    Chief Operating Officer for Automobile Operations
Director    Satoru Kishi    Advisor of the Board of The Bank of Tokyo-Mitsubishi, Ltd.
Director    Kensaku Hogen     
Director and Advisor    Hiroyuki Yoshino     
Director    Tetsuo Iwamura   

Chief Operating Officer for Regional Operations (Latin America)

President and Director of Honda South America Ltda.

President and Director of Moto Honda da Amazonia Ltda.

President and Director of Honda Automoveis do Brasil Ltda.

Director    Tatsuhiro Oyama    Chief Operating Officer for Parts Operations
Director    Fumihiko Ike    Chief Operating Officer for Power Products Operations

Note: Mr. Satoru Kishi and Mr. Kensaku Hogen satisfy the required conditions for outside directors provided for in Article 188, Paragraph 2, Item 7-2 of the Commercial Code.

 

Corporate Auditors          
    

<Name>


  

<Principal Occupations>


Corporate Auditor (Full-time)    Hiroshi Okubo     
Corporate Auditor (Full-time)    Koji Miyajima     
Corporate Auditor (Full-time)    Shinichi Sakamoto     
Corporate Auditor    Koukei Higuchi    Advisor of the Board of Tokio Marine & Nichido Fire Insurance Co., Ltd.
Corporate Auditor    Kuniyasu Yamada    President of MTB Apple Planning Co., Ltd.
Corporate Auditor    Fumihiko Saito    Partner of Haarmann Hemmelrath Saito Law Office

Note:  Corporate Auditors Mr. Koukei Higuchi, Mr. Kuniyasu Yamada and Mr. Fumihiko Saito are outside corporate auditors as provided in Article 18, Section 1, of the Law for Special Exceptions to the Japanese Commercial Code Concerning Audits, etc., of Kabushiki Kaisha.

 

(As of June 23, 2005)

 

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Operating Officers

 

    

<Name>      


  

<Area of Responsibility>        


Managing Officer    Yasuo Ikenoya    Deputy Chief Operating Officer for Regional Operations (China)
Managing Officer    Takanobu Ito    General Manager of Suzuka Factory of Production Operations
Managing Officer    Masaaki Kato   

Executive Vice President and Director of Honda Motor Europe Limited

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

Managing Officer    Akio Hamada    President and Director of Honda of America Mfg., Inc.
Managing Officer    Teruo Kowashi    General Manager of Saitama Factory of Production Operations
Operating Officer    Takashi Yamamoto    President and Director of Honda Manufacturing of Alabama, LLC
Operating Officer    Suguru Kanazawa   

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

President and Director of Honda Racing Corporation

Operating Officer    Manabu Nishimae   

Deputy Chief Operating Officer for Regional Sales Operations (Japan)

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

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

Operating Officer    Masaya Yamashita    General Manager of Automobile Purchasing Division 1 in Purchasing Operations
Operating Officer    Hiroshi Kobayashi    President and Director of Honda Canada Inc.
Operating Officer    Kazuo Sagawa    Production in China
Operating Officer    Kazuto Iiyama    Automobile Production for Production Operations
Operating Officer    Hiroshi Oshima   

Corporate Communications, Motor Sports

General Manager of Corporate Communications Division in Business Support Operations

Operating Officer    Sho Minekawa    President of Guangzhou Honda Automobile Co., Ltd.
Operating Officer    Tsutomu Saka    General Manager of Hamamatsu Factory of Production Operations
Operating Officer    Hidenobu Iwata    President and Director of Honda Engineering Co., Ltd.
Operating Officer    Motohide Sudo   

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

President and Director of A.P. Honda Company, Ltd.

Operating Officer    Gen Tsujii    Executive Vice President and Director of Honda of America Mfg., Inc.
Operating Officer    Koichi Fukuo    Quality, Certification & Regulation Compliance
Operating Officer    Hiroshi Soda    Executive Vice President and Director of Honda North America, Inc.
Operating Officer    Takuji Yamada    Executive Vice President and Director of American Honda Motor Co., Inc.

Note:  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.

 

(As of June 23, 2005)

 

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Financial Section

 

CONTENTS

 

46   

Financial Review

62   

Consolidated Balance Sheets

64   

Consolidated Statements of Income

65   

Consolidated Statements of Stockholders’ Equity

66   

Consolidated Statements of Cash Flows

67   

Notes to Consolidated Financial Statements

96   

Report of Independent Registered Public Accounting Firm

97   

Selected Quarterly Financial Data (Unaudited and Not Reviewed)

97   

Net Sales and Operating Income by Business Segment

98   

Financial Summary

 

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Financial Review

 

Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenue (hereafter “net sales”) for fiscal 2005, ended March 31, 2005, amounted to ¥8,650.1 billion, up 6.0% from the previous fiscal year.

 

Of this amount, domestic net sales increased by ¥70.7 billion, or 4.3%, to ¥1,699.2 billion, while overseas net sales increased by ¥416.7 billion, or 6.4% to ¥6,950.9 billion.

 

Operating Income

 

Operating income amounted to ¥630.9 billion, which was an increase of 5.1% from the previous fiscal year.

 

This increase was primarily due to positive impacts of increased profit from higher revenue and ongoing cost reduction effects which offset negative impacts of the depreciation of the U.S. dollar and an increase in selling, general and administrative expenses and research and development expenses.

 

Selling, General and Administrative Expenses/Research and Development Expenses

 

SG&A expenses for fiscal 2005 increased by ¥9.5 billion or 0.6%, to ¥1,513.2 billion, reflecting increased expenses from higher revenue and increased advertisement expenses which offset the positive impact of decreased product warranty-related expenses.

 

R&D expenses increased by ¥18.7 billion or 4.2%, to ¥467.7 billion.

 

Income before Income Taxes and Equity in Income of Affiliates

 

Income before income taxes and equity in income of affiliates was up 2.3%, to ¥656.8 billion.

 

Other income & expenses, net decreased by ¥15.8 billion from the previous fiscal year, due mainly to decline in gains on derivative instruments.

 

Equity in Income of Affiliates

 

Equity in income of affiliates increased by 27.8%, to ¥96.0 billion. This increase was due mainly to boosted gains from affiliates in Asia.

 

Net Income

 

Net income amounted to ¥486.1 billion, an increase of 4.7%. The effective tax rate was 40.6%, an increase by 1.2 percentage points from the previous fiscal year.

 

Basic net income per common share amounted to ¥520.68, compared with ¥486.91 in fiscal 2004.

 

Liquidity and Capital Resources

 

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

 

Honda’s main business is the manufacture 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 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 control inventory of finished products and cover receivables from dealers.

 

Honda also requires funds for capital expenditures, mainly to upgrade, rationalize and renew production facilities, as well as to expand and reinforce research and development and sales facilities.

 

Honda meets its operating capital requirements mainly through cash generated by operations. Honda funds its financial programs for customers and dealers primarily from corporate bonds, medium-term notes and commercial paper, as well as securitization of finance receivables.

 

LOGO      LOGO

 

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Cash Flows

 

Consolidated cash and cash equivalents at end of year amounted to ¥773.5 billion as of March 31, 2005, up ¥49.1 billion or an increase of 6.8%, from a year earlier.

 

Year-end cash and cash equivalents of business subsidiaries increased as net income, depreciation and other items sufficiently compensated for purchases of production-related property and equipment, as well as funds required for investments in Asian affiliates. Year-end cash and cash equivalents of finance subsidiaries, however, remained largely unchanged.

 

Net cash provided by operating activities amounted to ¥746.6 billion. Factors increasing cash flows included ¥486.1 billion in net income, ¥225.7 billion in depreciation and a ¥76.3 billion increase in trade payables related to Japanese and North American operations. By contrast, there was a ¥60.4 billion devaluation loss on derivative instruments and related others, which have no relation to cash flows.

 

Net cash used in investing activities totaled ¥807.8 billion. This was mainly due to a ¥464.9 billion increase in acquisition of finance subsidiaries’ receivables associated with higher sales of automobiles in North America and elsewhere, as well as ¥373.9 billion in capital expenditures associated with introducing new models, upgrading and renewing production facilities, and reforming the production organization in the automobile and other businesses.

 

Net cash provided by financing activities was ¥97.4 billion. During the year, Honda raised ¥704.4 billion in long-term debt through the issue of bonds and medium-term notes to meet capital requirements associated with an increase in liabilities of finance subsidiaries, as well as to repay ¥495.1 billion in long-term debt. By contrast, Honda also made ¥84.1 billion in payments for purchase of treasury stock and ¥47.7 billion in cash dividends paid.

 

The ¥773.5 billion in cash and cash equivalents at end of year corresponds to approximately one 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, financial subsidiaries carry total short-term borrowings of ¥1,310.6 billion in the form of commercial paper issued regularly to replace debt. This serves as alternative liquidity for a back-up credit line equivalent to ¥643.6 billion. In addition, Honda currently has ample credit limits, extended by prominent international banks, that are not subject to contracts.

 

Honda’s short- and long-term debt securities are rated by credit rating agencies, such as Moody’s Investor 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 at the date of filing of this annual report.

 

     Credit Ratings for

     Short-term
unsecured
debt securities


   Long-term
unsecured
debt securities


Moody’s Investors Service

   P-1    A1

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 uses different standards for calculating Honda’s credit rating, and also makes its own assessments. 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 debt.

 

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 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.

 

Guarantee

 

At March 31, 2005, we had guarantees of approximately ¥69.5 billion of bank loans of employees 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 approximately ¥69.5 billion. As of March 31, 2005, 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.

 

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Tabular Disclosure of Contractual Obligations

 

The following table shows our contractual obligations at March 31, 2005:

 

     (Millions of yen)

     Payments due by period

     Total

  

Less than

1 year


   1-3 years

   3-5 years

   After 5 years

Long-term debt

   2,094,605    535,105    1,099,200    436,525    23,775

Operating leases

   118,923    25,151    32,119    20,350    41,303

Purchase commitments(*)

   40,145    40,145    —      —      —  

(*)    Honda had commitments for purchases of property, plant and equipment at March 31, 2005.

 

At March 31, 2005, 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.

 

Capital Expenditures

 

Manufacturing-related expenditures in fiscal 2005 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 ¥373,980 million, up ¥86,239 million from the previous year.

 

Spending by business segment is shown below.

 

     (Millions of yen)

Fiscal year ended March 31                     


   2004

   2005

Motorcycle Business

   ¥ 35,041    ¥ 41,845

Automobile Business

     240,416      317,271

Financial Services

     430      1,941

Power Product and Other Businesses

     11,854      12,923
    

  

Total

   ¥ 287,741    ¥ 373,980
    

  

 

In the motorcycle business, we made capital expenditures of ¥41,845 million in the fiscal year ended March 31, 2005. Funds were allocated to introduction of new models, as well as the improvement and modernization of production facilities.

 

In the automobile business, we made capital expenditures associated with introducing new models, improving and modernizing our production facilities and improving of production efficiency in the fiscal year ended March 31, 2005.

 

In the financial services segment, capital expenditures amounted to ¥1,941 million in the fiscal year ended March 31, 2005. Capital expenditures in power products and other businesses in the fiscal year ended March 31, 2005, totaling ¥12,923 million, were deployed to upgrade and modernize manufacturing facilities for power products and renovate facilities related to motor sports.

 

In July 2004, the Company completed construction of the Honda Wako Building in the old Wako facility site. The new building subsequently became the Company’s regional domestic sales headquarters. Other key operations were also transferred there, including the Company’s power product and parts related operations, company-wide production strategy formulation and support functions, and core functions of the IT Division. Capital expenditures associated with this facility were distributed among the relevant business segments.

 

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In April 2004, the Company discontinued production of automobiles at its facility in Takanezawa, Tochigi Prefecture. In the following month, automobile production was transferred to the Suzuka Factory. The Takanezawa facility will be used to support rollouts of new models, as well as for testing and development activities. In addition, the Company’s production facility in Tochigi Factory Mohka Plant changed its name to Tochigi Factory.

 

Research and Development Activities

 

Using the most advanced technologies, the Honda Group (Honda Motor Company and its consolidated subsidiaries) 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 complete freedom.

 

Product-related research and development is spearheaded by the Honda R&D Co., Ltd. in Japan, Honda R&D Americas, Inc., in the United States and Honda R&D Europe (Deutschland) GmbH in Germany. Research and development on production technologies centers on Honda Engineering Co., Ltd., in Japan and Honda Engineering North America, Inc. All of these entities work in close association with their respective regions.

 

Total consolidated R&D expenditures for the fiscal year ended March 31, 2005 amounted to ¥467.7 billion. Research and development activities for each business segment are outlined below.

 

Motorcycle Business

 

Honda is committed to developing motorcycles with new value-added features that meet the individual needs of customers around the world, and to implementing timely local development of regional products at its overseas locations. At the same time, we focus on developing technologies that lead the industry in addressing safety and environmental issues.

 

In Japan, we made a number of R&D achievements in fiscal 2005. The FORZA, which underwent a full model change, became the first 250cc scooter in the world to be equipped with the Honda S-Matic (electronically controlled belt converter) transmission, which allows riders to easily choose between automatic and six-speed manual modes. The new FORZA also features the Honda Smart Card system for effective theft deterrence. It was the first motorcycle in the world to incorporate such a system as standard.

 

In Europe, the Honda Zoomer became the first 50cc scooter sold in the region to be equipped with PGM-FI (electronically controlled programmed fuel injection) system, which delivers enhanced start-up performance and response, as well as improved fuel economy and cleaner exhaust emissions. Also, the SH125 and SH150 scooters were the first European models fitted with engines that meet the Euro 3 emission standard set by the European Union.

 

In India, Honda released the Unicorn, equipped with a newly developed four-stroke, 150cc engine that offers superlative acceleration and fuel efficiency.

 

For some time, Honda has been studying next-generation motorcycle power sources from the perspective of reducing emissions and lowering the effect of global warming. By making motorcycle bodies lighter and more compact and by incorporating a lightweight nickel-hydrogen battery into an aluminum frame, for example, we have developed an electric commuter-style scooter with superior heat dissipation and longer battery life. Seeking to reduce emissions and greatly enhance fuel efficiency, we have also developed a hybrid 50cc scooter combining an electric motor with a gasoline engine that is nearing the market launch stage.

 

Honda has a strong track record in fuel cell technologies for automobiles. In fiscal 2005, we applied these technologies in our motorcycle business, developing a fuel cell model equipped with a specially modified version of Honda FC STACK, a light, compact fuel cell stack.

 

Research and development expenses in the Motorcycle Business segment in fiscal 2005 totaled ¥72.4 billion.

 

Automobile Business

 

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

 

Major achievements in Japan in fiscal 2005 include the new Elysion, an eight-seater minivan with a host of revolutionary features. These include a crash-compatibility body frame structure, designed to provide both improved self protection and reduced aggressivity toward other vehicles during a vehicle-to-vehicle collision; a brake system that reduces damage and injury due to rear-end collisions; and the V6 3.0-liter i-VTEC engine, with a variable cylinder management system that improves fuel economy by varying the number of cylinders employed according to driving conditions.

 

In fiscal 2005, we also introduced the new Legend, featuring Honda’s Super Handling All-Wheel Drive (SH-AWD) system, which provides variable torque distribution between the front and rear wheels while also varying the lateral torque distribution to the left and right rear wheels to deliver maximum performance from all four wheels in all driving conditions. The new Legend also has the world’s first developed Intelligent Night Vision System, which uses infrared cameras to detect pedestrians during nighttime

driving and provides visual and audio cautions to help prevent accidents.

 

In the United States, we undertook a full model change of the Odyssey, which now has the V6 3.5-liter i-VTEC engine with a variable cylinder management system, making it more environmentally friendly. We also launched the Ridgeline, an innovative next-generation pickup truck that delivers new levels of value, complemented by ample cabin and storage space.

 

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In other news, we developed a pop-up hood system, which raises the engine hood in the event of a collision with a pedestrian and also provides added engine compartment clearance, thus reducing the possibility of serious impact to the pedestrian’s head region.

 

In fuel cell technologies, the FCX received approval from Japan’s Minister for Land, Infrastructure and Transportation. The FCX features Honda FC STACK, which enables startup at subzero temperatures. As a result, we can now sell the FCX in cold regions which have freezing winter temperatures. Also, the FCX was approved by the Environmental Protection Agency, which is the U.S. regulatory authority for fuel cell vehicles, and the California Air Resources Board (CARB).

 

Research and development expenses in the Automobile Business segment in fiscal 2005 totaled ¥382.8 billion.

 

Power Product and Other Businesses

 

In the Power Products Business, we seek to develop products that meet customers’ lifestyles and needs while strengthening our lineup of products that address environmental issues.

 

In fiscal 2005, we launched the Honda i-Deluxe series of generators (sold as the EM45is and EM55is in Japan and EM5000is/EM7000is in the United States). Thanks to sine wave inverter technologies, these are the first generators in the world to provide simultaneous output of two different voltages—100V and 200V. They also feature Honda’s Eco-Throttle, which automatically controls engine revolutions according to power load and thus reduces fuel consumption.

 

During the year, Honda launched the Salad FF500 mini-tiller, featuring a high-output engine, a newly developed single-side 10-blade rotary and a unique ratchet arrangement for enhanced tilling efficiency. The new machine went on sale in Japan and Europe.

 

Research and development expenses in this segment in fiscal 2005 amounted to ¥12.4 billion.

 

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

 

Previously, Honda established an experimental Home Energy Station (HES), which generates hydrogen from natural gas for use in fuel cell vehicles while supplying electricity and hot water to the home through fuel cell cogeneration functions. In fiscal 2005, Honda began operating a second-generation Home Energy Station (HES II) in collaboration with Plug Power Inc. of the United States.

 

Additionally in fiscal 2005, we developed new technologies for the next-generation ASIMO humanoid robot. These include Posture Control, which enables the robot to run in a natural human-like way, as well as Autonomous Continuous Movement and other technologies to ensure smooth human-like movements. These technologies provide a new level of mobility that will better enable ASIMO to make swift decisions and act more nimbly in real-world environments.

 

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

 

On March 31, 2005, Honda owned more than 9,200 patents and 350 utility model registrations in Japan and more than 14,600 patents abroad. Honda also had applications pending for more than 20,000 patents in Japan and for more than 17,500 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.

 

Segment Information

 

Business segments

 

Motorcycle Business

 

In fiscal 2005, domestic unit sales of motorcycles fell 6.2%, to 378,000 units. Overseas unit sales, by contrast, rose 14.8%, to 10,104,000 units. As a result, total unit sales of motorcycles amounted to 10,482,000 units, up 13.9% compared to the previous fiscal year. Net sales from sales to unaffiliated customers in the motorcycle segment increased 10.2%, to ¥1,097.7 billion, due mainly to higher unit sales, offsetting negative currency translation effects.

 

Operating income increased 63.4%, to ¥69.3 billion, due mainly to increased profits from higher revenue and ongoing cost reduction effects, which offset the negative currency effects of depreciation of the U.S. dollar.

 

Automobile Business

 

Domestic unit sales of automobiles in fiscal 2005 was 712,000 units, almost the same level as previous fiscal year, and overseas unit sales increased by 11.6%, to 2,530,000 units. Consequently, total unit sales of automobiles grew 8.7%, to 3,242,000 units, compared to the previous fiscal year. Net sales from sales to unaffiliated customers in the automobile segment increased 5.6%, to ¥6,963.6 billion, due to increased unit sales, offsetting the negative currency translation effects. Operating income increased 3.1%, to ¥452.3 billion, due mainly to the positive impact of increased profits from higher revenue and cost reduction effects, offsetting the negative impact of depreciation of the U.S. dollar.

 

Financial Services Business

 

Net sales from sales to unaffiliated customers in financial services business rose 5.4%, to ¥255.7 billion, compared to the previous fiscal year. Operating income decreased 17.1%, to ¥89.9 billion, due mainly to increased funding costs.

 

Power Product and Other Businesses

 

Domestic unit sales of power products in fiscal 2005 decreased 9.4%, to 432,000 units. Overseas unit sales climbed 6.5%, to 4,868,000 units. Accordingly, total unit sales of power products rose 5.0%, to 5,300,000 units, compared to the previous fiscal year.

 

Net sales from power products and other businesses increased 0.4%, to ¥332.9 billion, due mainly to increased unit sales of power products. Operating income increased 85.9%, to ¥19.3 billion, due to increased profits from higher revenue in power product businesses, offsetting the negative currency effects of the depreciation of the U.S. dollar.

 

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Geographical segments

 

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

 

Japan

 

Net sales in Japan were ¥4,138.9 billion, up by 5.3% from the previous fiscal year, due mainly to increased export sales in motorcycle and automobile businesses. Operating income in Japan was ¥184.8 billion, down by 3.9% from the previous fiscal year, due mainly to the negative currency impact caused by depreciation of the U.S. dollar, and increases in SG&A and R&D expenses, which offset the positive impact of increased profit from higher revenue and cost reduction effects.

 

North America

 

Net sales in North America increased by 0.7% from the previous fiscal year to ¥4,705.5 billion, due mainly to increased sales in the automobile and power product businesses, which offset negative currency translation effects. Operating income increased 3.5%, to ¥321.1 billion from the previous fiscal year, due mainly to increased profit from higher revenue and a decrease in SG&A, which offset the negative currency impact of depreciation of the U.S. dollar.

 

Europe

 

Net sales in Europe increased by 10.0% to ¥1,043.0 billion compared to the previous fiscal year, due mainly to increased unit sales in the motorcycle, automobile and power product businesses, and the positive impact of currency translation effects. Operating income increased by 59.6%, to ¥41.2 billion due mainly to the positive currency impact caused by the appreciation of the Euro, increased profit higher revenue and cost reduction effects.

 

Asia

 

Net sales in Asia increased by 22.2% to ¥860.5 billion from the previous fiscal year, due mainly to increased unit sales in the motorcycle, automobile and power product businesses, offsetting the negative currency translation effects. Operating income also increased 35.9% to ¥60.6 billion from the previous fiscal year, due to increased profit from higher revenue, which offset the negative impacts of an increase in SG&A.

 

Other Regions

 

Net sales in Other Regions increased by 33.8% to ¥465.9 billion compared to the previous fiscal year, due mainly to increased unit sales in the motorcycle, automobile and power product businesses, offsetting negative currency translation effect. Operating income increased by 39.5% to ¥33.1 billion from the previous year, due mainly to increased profit from higher revenue.

 

Application of Critical Accounting Policies

 

Critical accounting policies are those that require the application of our most difficult, subjective or complex judgments, often requiring us to make estimates about the effect of matters that are inherently uncertain and 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 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. Our warranty expense accruals are costs for general warranties on products we sell, product recalls and service actions outside the general warranties. We provide for estimated warranty expenses at the time products are sold to customers or the time new warranty programs are initiated. Estimated warranty expenses are provided based on historical warranty claim experience with consideration given to 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. As the manufacturing suppliers typically warrant these parts, expected receivables from warranties of these suppliers are deducted from our estimates of warranty expense accruals.

 

We believe that the accounting estimate related to warranty expense accruals is a “critical accounting estimate” because changes in it can materially affect net income, and it requires us to estimate the frequency and amounts of future claims, which are inherently uncertain.

 

Our policy is to continuously monitor warranty expense accruals to determine their adequacy. 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.

 

Allowance for Credit Losses

 

Our finance subsidiaries provide wholesale financing to dealers and retail lending and direct financing leases to customers mainly in order to support sales of our products, principally in North America. We classify the receivables derived from those services mainly as finance subsidiaries-receivables.

 

An allowance for credit losses is maintained to cover estimated losses on finance subsidiaries-receivables. To determine the overall allowance amount, receivables are segmented into pools with common characteristics such as product and collateral types. 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.

 

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We believe that the accounting estimate related to 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 credit losses is maintained at an amount that we deem sufficient to cover the estimated credit losses on our owned portfolio of finance receivables.

 

Actual losses may differ from 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 an effect on the provision and allowance for credit losses. If we had experienced a 10% increase in net credit losses during fiscal 2005 in our North America portfolio, the provision for fiscal 2005 and the allowance balance at the end of fiscal 2005 would have increased by approximately ¥5.5 and ¥3.2 billion, respectively. Note that these sensitivities may be asymmetric, and are specific to the base condition in fiscal 2005.

 

Additional Narrative of the Change in Provision for Credit Loss as Below

 

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

 

     (Billions of yen)

 
     2003

    2004

    2005

 

Charge-offs (net of recoveries)

   ¥ 13.2     ¥ 16.2     ¥ 23.1  

Provision for credit losses

     21.9       28.8       31.7  

Allowance for credit losses

     16.6       23.7       29.2  

Ending receivable balance

     3,051.0       3,301.5       3,772.9  

Average receivable balance

     2,692.0       3,201.0       3,569.1  

Charge-offs as a % of average receivable balance

     0.49 %     0.51 %     0.65 %

Allowance as a % of ending receivable balance

     0.55 %     0.72 %     0.77 %

 

(*) The allowance for credit losses and average receivable balance include allowance for credit losses and finance subsidiaries-receivables classified as trade receivables and other assets in the consolidated balance sheets. Additional detailed information is provided at the “(4) Finance subsidiaries-receivables and securitizations” in the notes to the accompanying consolidated financial statements.

 

Fiscal Year 2005 Compared with Fiscal Year 2004

 

Net charge-offs in our North American portfolio increased by ¥6.9 billion, or 43%, primarily due to the significant growth in finance receivables during fiscal year 2003 and 2004. Historically, the majority of customer defaults occur when loans are between one to two years old. Therefore, we experienced higher losses as the large number of new contracts booked in fiscal year 2003 and 2004 became between one to two years old in fiscal year 2005.

 

Higher losses were also attributable to difficulties experienced in connection with the implementation of a new customer account servicing system for our North American operations. The conversion process caused disruptions in servicing activities both during and after rollout of the new system. Disruptions were due to, among other things, periods of system downtime, periods devoted to user training, and extremely high volumes of calls from customers inquiring about new statements or errors on statements received. As a result, collectors were not able to make their requisite collection calls. These and other implementation difficulties contributed to higher delinquencies beginning in August, and resulted in higher charge-offs in the second and third quarters of fiscal year 2005. By the end of fiscal year 2005, delinquencies and charge-offs started to return back to historical levels experienced prior to the system conversion. Management expects that the initial period of difficulties involved with the system conversion has passed and that the new system, as designed, will improve operating efficiency and enhance customer service.

 

The provision for credit losses in our North American portfolio increased by ¥2.9 billion, or 10%, which was due to the increase in charge-offs and the increase to the allowance balance.

 

The allowance for credit losses in our North American portfolio was increased by ¥5.5 billion, or 23%, primarily due to the continued growth in finance receivables.

 

Fiscal Year 2004 Compared with Fiscal Year 2003

 

Net charge-offs in our North America portfolio increased by ¥3.0 billion, or 23%, primarily due to the increase in the size of our owned portfolio of finance receivables, continued economic weakness contributing to increased customer defaults, and continued weakness in used car markets reducing recoveries from sales of repossessed vehicles.

 

However, charge-offs as a percentage of average receivables remained consistent with the fiscal year 2003, increasing by only 0.02%.

 

This can be attributed to the growth in receivables in the fiscal year 2004, which reduced the percentage.

 

The provision for credit losses in our North America portfolio increased by ¥6.8 billion, or 31%, due to increased charge-offs and the increase in the allowance balance.

 

The allowance in our North America portfolio was increased by ¥7.0 billion, or 42%, primarily due to an increase in finance receivables, as well as an increase in our estimate of probable credit losses in the portfolio.

 

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We expected charge-offs to increase due to recent growth in new loan contracts.

 

Historically, the majority of customer defaults occur when loans are between one-half to one year old. As a result of recent growth in new loan contracts, charge-offs were estimated to increase accordingly in one-half to one year. Therefore, we estimated the allowance as a percentage of the amount of receivables as of March 31, 2004 to be 0.72%, which was 0.17% higher than for the fiscal year ended March 31, 2003.

 

Allowance for Losses on Lease Residual Values

 

End-customers of vehicles leased under a direct financing lease typically have an option to buy the leased vehicle from the car dealership (dealer) for the estimated residual value of the vehicle or to return the leased vehicle to the dealer at the end of the lease term. Likewise, dealers have the option to return the vehicle to our finance subsidiaries or to buy the leased vehicle at the end of the lease term from our 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 and the residual value estimated at the time of inception of the lease.

 

Our finance subsidiaries initially determine the residual value of the leased vehicle by using our estimation of future used vehicle values, which take into consideration data gathered from third parties. Our finance subsidiaries recognize a loss in an amount which the fair market value of a returned vehicle is below the actual residual value when the leased vehicle is returned to the finance subsidiary at the end of the lease term. Our finance subsidiaries purchase insurance to cover a portion of the estimated residual value at the end of the lease term of vehicles leased to customers under direct financing leases. An allowance for expected losses on lease residual values is maintained to cover estimated losses on the uninsured portion of the vehicles’ residual values.

 

We project two important components of losses in determining our allowance for losses on lease residual values: 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 expected loss severity, or the expected difference between the residual value and the amount we sreceive through sales of returned vehicles plus proceeds from insurance. 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 the accounting estimate related to allowance for 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.

 

The allowance is maintained at an amount we deem adequate to cover estimated losses on the uninsured portion of the vehicles’ lease residual values. Evaluating the adequacy of the allowance requires us to make assumptions of inherently uncertain factors, including changes in economic conditions. As a result, actual losses incurred may differ from original estimates.

 

If future auction values for all Honda and Acura vehicles in our U.S. lease portfolio as of March 31, 2005, were to decrease by approximately ¥10,000 per unit from our present estimates, the total impact would be an increase of our allowance for losses on residual value by about ¥1.8 billion, which would be charged to our provision for losses on residual values in the current year.

 

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 to increase our allowance for losses on residual values by about ¥0.5 billion, which would be charged to our provision for losses on residual values in the current year.

 

Note that these sensitivities may be asymmetric, and are specific to the base conditions in fiscal 2005.

 

Pension and Other Postretirement Benefits

 

We have various pension plans covering substantially all of our employees in Japan and in certain 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 and expected long-term rate of return on plan assets are determined based on our evaluation of current market conditions including changes in interest rates. The salary increase assumptions reflect our actual experience as well as near-term outlook. Our assumed discount rate and rate of salary increase as of March 31, 2005 were 2.0% and 2.3%, respectively, and our assumed expected long-term rate of return for the year ended March 31, 2005 was 4.0% for Japanese plans. Our assumed discount rate and rate of salary increase as of March 31, 2005 were 5.4-6.3% and 3.5-6.7%, respectively, and our assumed expected long-term rate of return for fiscal 2005 was 6.8-8.5% for foreign plans.

 

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

 

Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expenses and recorded obligations in future periods.

 

We believe that the assumptions used are appropriate. However, differences in actual experience or changes in assumptions

could affect our pension costs and obligations, including our cash requirements to fund such obligations.

 

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

 

Japanese Plans    (Billions of yen)

 

Assumptions


   Percentage point change (%)

   Funded status

   Equity

   Pension expense

Discount rate

   +0.5/–0.5    –132.2/+150.3    +68.5/–78.0    –7.7/+8.5

Expected long-term rate of return

   +0.5/–0.5    —      —      –4.1/+4.1
Foreign Plans                    

Assumptions


   Percentage point change (%)

   Funded status

   Equity

   Pension expense

Discount rate

   +0.5/–0.5    –29.3/+33.2    +5.2/–12.4    –3.4/+4.3

Expected long-term rate of return

   +0.5/–0.5    —      —      –1.0/+1.0

(*1) Note that these sensitivities may be asymmetric, and are specific to the base conditions at March 31, 2005.
(*2) Funded status for fiscal 2005 is affected by March 31, 2005 assumptions. Pension expense for fiscal 2005 is affected by March 31, 2004 assumptions.

 

Quantitative and Qualitative Disclosure About Market Risk

 

Honda is exposed to market risks, which are changes in foreign currency exchanges rates, in interest rates and in prices of marketable equity securities. Honda is a party to derivative financial instruments in the normal course of business in order to manage risks associated with changes in foreign currency exchanges rates and in interest rates. Honda does not hold any derivative financial instruments for trading purposes.

 

Foreign Currency Risk

 

Foreign currency forward contracts and purchased option contracts are normally used to hedge sale commitments denominated in foreign currencies (principally U.S. dollars).

 

Foreign currency written option contracts are entered into in combination with purchased option contracts to offset premium amounts to be paid for purchased option contracts.

 

The tables below provide information about our derivatives related to foreign exchange risk as of March 31, 2004 and 2005. For forward exchange contracts and currency options, the table presents the contract amounts and fair value. All forward exchange contracts and currency options to which we are a party have original maturities of less than one year.

 

Foreign Exchange Risk

 

     2004

   2005

     (Millions of yen)

   

Average

contractual
rate


   (Millions of yen)

   

Average

contractual
rate


     Contract
amounts


   Fair
value


       Contract
amounts


   Fair
value


   

Forward Exchange Contract

                                   

To sell US$

   ¥ 260,110    4,345     107.34    ¥ 225,573    (5,233 )   104.58

To sell EUR

     67,123    2,176     132.80      56,727    (915 )   136.32

To sell CAD

     22,716    110     80.93      22,736    (845 )   84.73

To sell GBP

     21,695    (13 )   191.70      49,407    (1,188 )   195.81

To sell other foreign currencies

     14,140    315     —        57,109    (523 )   —  

To buy US$

     3,774    (74 )   107.62      3,596    75     104.62

To buy other foreign currencies

     32    6     —        2,304    19     —  

Cross-currencies

     173,108    (437 )   —        275,389    (1,023 )   —  
    

  

      

  

   

Total

   ¥ 562,698    6,428          ¥ 692,841    (9,633 )    
    

  

      

  

   

Currency Option

                                   

Option purchased to sell US$

   ¥ 50,497    1,454     —      ¥ 71,004    258     —  

Option written to sell US$

     64,497    (192 )   —        92,482    (1,270 )   —  

Option purchased to sell other currencies

     2,050    151     —        20,462    123     —  

Option written to sell other currencies

     4,099    (10 )   —        30,263    (287 )   —  

Option purchased to buy other currencies

     —      —       —        —      —       —  

Option written to buy other currencies

     —      —       —        —      —       —  
    

  

      

  

   

Total

   ¥ 121,143    1,403          ¥ 214,211    (1,176 )    
    

  

      

  

   

 

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Interest Rate Risk

 

Honda is exposed to market risk for changes in interest rates related primarily to its debt obligations and finance receivables. In addition to short-term financing such as commercial paper, Honda has long-term debt with both fixed and floating rates. Our finance receivables are primarily fixed rate. Interest swap agreements are mainly used to convert floating rate financing to (normally 3-5 years) fixed rate financing in order to match financing costs with income from finance receivables. Foreign currency and interest rate swap agreements used among different currencies, also serve to hedge foreign currency exchange risk as well as interest rate risk.

 

The following tables provide information about Honda’s financial instruments that were sensitive to changes in interest rates at March 31, 2004 and 2005. For finance receivables and long-term debt, these tables present principal cash flows, fair value and related weighted average interest rates. For interest rate swaps and currency & interest rate swaps, the table presents notional amounts, fair value and weighted average interest rates. Variable interest rates are determined using formulas such as LIBOR+ a and an index at the fiscal year end.

 

Interest Rate Risk

 

Finance Subsidiaries-Receivables

 

     2004

   2005

 
     (Millions of yen)

   (Millions of yen)

      
                    Expected maturity date

       

Average
interest

rate


 
     Total

   Fair
value


   Total

   Within
1 year


   1-2
years


   2-3
years


   3-4
years


   4-5
years


   Thereafter

   Fair
value


  

Direct Finance Leases:

                                                            

JP¥

   ¥ 22,817    *    ¥ 24,250    14,187    4,985    3,051    1,354    673    —      *    5.30 %

US$

     1,454,460    *      1,562,695    439,500    517,893    472,591    132,654    57    —      *    4.77 %

Other

     244,439    *      335,303    103,436    80,554    79,358    62,332    9,522    101    *    5.51 %
    

  
  

  
  
  
  
  
  
  
  

Total—Direct Finance Leases

   ¥ 1,721,716    *    ¥ 1,922,248    557,123    603,432    555,000    196,340    10,252    101    *       
           
  

  
  
  
  
  
  
  
      

Other Finance Receivables:

                                                            

JP¥

   ¥ 331,559    301,749    ¥ 350,281    127,665    93,683    63,417    37,891    18,080    9,545    319,697    5.30 %

US$

     1,510,120    1,522,724      1,768,541    609,739    364,769    338,470    277,123    154,368    24,072    1,743,376    4.77 %

Other

     264,546    256,201      314,043    167,836    61,574    46,295    26,810    9,904    1,624    281,768    8.81 %
    

  
  

  
  
  
  
  
  
  
  

Total—Other Finance Receivables

   ¥ 2,106,225    2,080,674    ¥ 2,432,865    905,240    520,026    448,182    341,824    182,352    35,241    2,344,841       
           
  

  
  
  
  
  
  
  
      

Retained interest in the sold pool of finance receivables**

     61,072    61,072      62,904                                  62,904       
    

  
  

                                
      

Total***

   ¥ 3,889,013         ¥ 4,418,017                                          
    

       

                                         

*: Under the U.S. generally accepted accounting principles, disclosure of fair values of direct finance leases is not required.
**: The retained interest in the sold pool of finance receivables is accounted for as “trading” securities and is reported at fair value.
***: The finance subsidiaries-receivables include finance subsidiaries-receivables classified as trade receivables and other assets in the consolidated balance sheets. Additional detailed information is provided at the “(4) Finance Subsidiaries-Receivables and Securitizations” in the notes to the accompanying consolidated financial statements.

 

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Long-Term Debt (including current maturities)

 

     2004

   2005

 
     (Millions of yen)

   (Millions of yen)

      
                    Expected maturity date

       

Average
interest

rate


 
     Total

   Fair
value


   Total

   Within
1 year


   1-2
years


   2-3
years


   3-4
years


   4-5
years


   Thereafter

   Fair
value


  

Japanese yen bonds

   ¥ 171,000    170,989    ¥ 171,000    —      61,000    50,000    30,000    30,000    —      172,209    0.70 %

Japanese yen medium-term notes

     379,707    382,677      470,273    93,000    56,623    138,522    117,418    64,710    —      475,575    0.60 %

U.S. dollar medium-term notes

     1,028,039    1,033,548      1,111,126    391,759    354,176    164,801    90,844    88,172    21,374    1,118,885    3.17 %

U.S. dollar commercial paper

     184,690    184,690      187,526    —      187,526    —      —      —      —      187,526    2.71 %

Loans and others—primarily fixed rate

     118,301    118,482      154,680    50,346    53,614    32,938    14,429    952    2,401    154,832    3.53 %
    

  
  

  
  
  
  
  
  
  
      

Total

   ¥ 1,881,737    1,890,386    ¥ 2,094,605    535,105    712,939    386,261    252,691    183,834    23,775    2,109,027       
    

  
  

  
  
  
  
  
  
  
      

 

Interest Rate Swaps

 

         2004

    2005

 
         (Millions of yen)

    (Millions of yen)

             
                       Expected maturity date

                 

Notional
principal
currency


  

Receive/Pay


  Contract
amounts


  Fair
value


    Contract
amounts


  Within
1 year


  1-2
years


  2-3
years


  3-4
years


  4-5
years


  Thereafter

  Fair
value


    Average
receive
rate


    Average
pay rate


 

JP¥

  

Float/Fix

  ¥ 5,499   (103 )   ¥ 4,525   260   1,360   1,120   885   900   —     (87 )   0.82 %   1.83 %

US$

  

Float/Fix

    1,997,417   (21,866 )     2,326,726   200,052   406,948   1,033,436   686,290   —     —     28,996     2.82 %   3.14 %
    

Fix/Float

    114,145   4,064       250,219   2,148   22,552   32,217   91,281   80,543   21,478   (1,635 )   4.13 %   2.97 %
    

Float/Float

    71,975   (2 )     40,808   24,700   —     8,054   —     8,054   —     (199 )   2.84 %   2.93 %

CA$

  

Float/Fix

    238,581   (5,409 )     361,748   39,778   45,763   101,954   129,460   44,793   —     (1,981 )   2.46 %   3.78 %
    

Fix/Float

    19,877   261       50,737   —     —     —     38,493   —     12,244   (288 )   3.22 %   2.59 %
    

Float/Float

    19,878   (94 )     93,270   —     —     93,270   —     —     —     (147 )   2.58 %   2.68 %

GBP

  

Float/Fix

    66,232   83       75,061   31,460   23,269   14,621   5,155   556   —     175     5.13 %   5.03 %
    

Fix/Float

    22,575   83       24,311   11,597   7,797   3,900   1,017   —     —     (31 )   5.18 %   5.02 %
        

 

 

 
 
 
 
 
 
 

           

Total

       ¥ 2,556,179   (22,983 )   ¥ 3,227,405   309,995   507,689   1,288,572   952,581   134,846   33,722   24,803              
        

 

 

 
 
 
 
 
 
 

           

 

Currency & Interest Rate Swaps

 

               2004

    2005

 
               (Millions of yen)

    (Millions of yen)

             
                               Expected maturity date

                  

Receiving
side
currency


  

Paying
side
currency


  

Receive/Pay


   Contract
amounts


   Fair
value


    Contract
amounts


   Within
1 year


   1-2
years


   2-3
years


   3-4
years


   4-5
years


   Thereafter

   Fair
value


    Average
receive
rate


    Average
pay rate


 

JP¥

  

US$

  

Fix/Float

   ¥ 255,323    25,836     ¥ 353,314    70,912    29,581    106,939    92,692    53,190    —      21,472     0.69 %   3.11 %
         

Float/Float

     81,678    8,540       84,526    9,201    23,895    23,082    20,535    7,813    —      4,588     0.23 %   3.08 %

JP¥

  

EUR

  

Fix/Float

     12,000    198       —      —      —      —      —      —      —      —       —       —    

JP¥

  

CA$

  

Fix/Float

     —      —         2,418    —      —      —      —      —      2,418    (182 )   0.95 %   3.01 %
         

Float/Float

     8,647    (329 )     5,846    4,692    —      —      —      1,154    —      (868 )   0.83 %   2.83 %

JP¥

  

GBP

  

Fix/Float

     13,028    (70 )     28,314    28,314    —      —      —      —      —      5     0.04 %   4.94 %

Other

  

Other

  

Fix/Float

     1,665    39       —      —      —      —      —      —      —      —       —       —    
         

Float/Float

     29,915    (260 )     30,854    30,854    —      —      —      —      —      (194 )   2.72 %   5.03 %
              

  

 

  
  
  
  
  
  
  

           

Total

             ¥ 402,256    33,954     ¥ 505,272    143,973    53,476    130,021    113,227    62,157    2,418    24,821              
              

  

 

  
  
  
  
  
  
  

           

 

Equity Price Risk

 

Honda is exposed to equity price risk as a result of its holdings of marketable equity securities. Marketable equity securities included in Honda’s investment portfolio are generally securities of domestic Japanese companies and are held for purposes other than trading. At March 31, 2004 and 2005, the estimated fair value of marketable equity securities was ¥98.3 billion and ¥93.0 billion, respectively.

 

Additionally, Honda has convertible notes and convertible preferred stocks with conversion features that enable Honda to convert its investment into common shares of the issuer. Convertible features are accounted for as embedded derivatives.

 

The conversion features are measured at fair value in our consolidated balance sheets, and the changes in fair value are recognized as other income or expense in our consolidated statements of income.

 

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Table of Contents

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 reserves. Punitive damages are claimed in certain of these lawsuits. We are also subject to potential liability under other various lawsuits and claims.

 

Seventy-six purported class actions on behalf of all purchasers of new motor vehicles in the United States since January 1, 2001, have been filed in various state and federal courts against American Honda Motor Co., Inc., Honda Canada, Inc., General Motors, Ford, Daimler Chrysler, Toyota, Nissan and BMW and their Canadian affiliates, Volkswagen, the National Automobile Dealers Association and the Canadian Automobile Dealers Association. Several of the state court actions also name Honda Motor Co., Ltd. as a defendant, as well as other Japanese and German parent companies of United States based subsidiaries. The federal court actions have been consolidated for coordinated pretrial proceedings in federal court in Maine and more than 30 California cases have been consolidated in the state court in San Francisco. Additionally, there are pending cases in 10 other states.

 

The nearly identical complaints allege that the manufacturer defendants, aided by the association defendants, conspired among themselves and with their dealers to prevent United States citizens from purchasing vehicles produced for the Canadian market and sold by dealers in Canada. The complaints allege that new vehicle prices in Canada are 10 to 30% lower than those in the United States and that preventing the sale of these vehicles to United States citizens resulted in the payment of supracompetitive prices by United States consumers. The complaints seek treble damages under the antitrust laws, but do not specify damages. No Court has yet certified any of these cases as a class action. We believe our actions have been lawful and intend to vigorously defend these cases.

 

After consultation with legal counsel, and taking into account all known factors pertaining to existing lawsuits and claims, we believe that the overall results of all lawsuits and pending claims should not result in liability to us that would be likely to have an adverse material effect on our consolidated financial position and results of operations.”

 

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Table of Contents

Business Segment Information

 

     Yen (millions)

 

Years ended or at March 31     


   2004

    2005

 

Net sales and other operating revenue:

                

Motorcycle Business

                

Sales to unaffiliated customers

   ¥ 996,290     ¥ 1,097,754  

Automobile Business

                

Sales to unaffiliated customers

     6,592,024       6,963,635  

Financial Services

                

Sales to unaffiliated customers

     242,696       255,741  

Intersegment sales

     3,138       3,447  
    


 


Total

     245,834       259,188  

Power Product and Other Businesses

                

Sales to unaffiliated customers

     331,590       332,975  

Intersegment sales

     10,070       9,869  
    


 


Total

     341,660       342,844  

Eliminations

     (13,208 )     (13,316 )
    


 


Consolidated

   ¥ 8,162,600     ¥ 8,650,105  
    


 


Operating income:

                

Motorcycle Business

   ¥ 42,433     ¥ 69,332  

Automobile Business

     438,891       452,382  

Financial Services

     108,438       89,901  

Power Product and Other Businesses

     10,382       19,305  
    


 


Consolidated

   ¥ 600,144     ¥ 630,920  
    


 


Assets:

                

Motorcycle Business

   ¥ 764,893     ¥ 848,671  

Automobile Business

     3,727,259       4,160,818  

Financial Services

     3,818,915       4,362,096  

Power Product and Other Businesses

     247,451       261,843  

Corporate assets and eliminations

     (229,750 )     (316,458 )
    


 


Consolidated

   ¥ 8,328,768     ¥ 9,316,970  
    


 


Depreciation:

                

Motorcycle Business

   ¥ 25,156     ¥ 28,606  

Automobile Business

     181,266       189,150  

Financial Services

     359       419  

Power Product and Other Businesses

     6,664       7,577  
    


 


Consolidated

   ¥ 213,445     ¥ 225,752  
    


 


Capital expenditures:

                

Motorcycle Business

   ¥ 35,041     ¥ 41,845  

Automobile Business

     240,416       317,271  

Financial Services

     430       1,941  

Power Product and Other Businesses

     11,854       12,923  
    


 


Consolidated

   ¥ 287,741     ¥ 373,980  
    


 


 

58


Table of Contents

Geographical Segment Information

 

     Yen (millions)

 

Years ended or at March 31     


   2004

    2005

 

Net sales and other operating revenue:

                

Japan

                

Sales to unaffiliated customers

   ¥ 1,879,141     ¥ 1,983,182  

Transfers between geographical segments

     2,051,729       2,155,756  
    


 


Total

     3,930,870       4,138,938  

North America

                

Sales to unaffiliated customers

     4,552,941       4,585,650  

Transfers between geographical segments

     120,069       119,904  
    


 


Total

     4,673,010       4,705,554  

Europe

                

Sales to unaffiliated customers

     756,312       858,936  

Transfers between geographical segments

     192,235       184,136  
    


 


Total

     948,547       1,043,072  

Asia

                

Sales to unaffiliated customers

     637,163       773,753  

Transfers between geographical segments

     67,009       86,810  
    


 


Total

     704,172       860,563  

Others

                

Sales to unaffiliated customers

     337,043       448,584  

Transfers between geographical segments

     11,222       17,373  
    


 


Total

     348,265       465,957  

Eliminations

     (2,442,264 )     (2,563,979 )
    


 


Consolidated

   ¥ 8,162,600     ¥ 8,650,105  
    


 


Operating income:

                

Japan

   ¥ 192,451     ¥ 184,899  

North America

     310,150       321,154  

Europe

     25,843       41,243  

Asia

     44,672       60,692  

Others

     23,799       33,193  

Eliminations

     3,229       (10,261 )
    


 


Consolidated

   ¥ 600,144     ¥ 630,920  
    


 


Assets:

                

Japan

   ¥ 2,370,214     ¥ 2,480,052  

North America

     4,539,320       5,202,980  

Europe

     571,419       649,547  

Asia

     435,815       541,331  

Others

     141,851       203,605  

Corporate assets and eliminations

     270,149       239,455  
    


 


Consolidated

   ¥ 8,328,768     ¥ 9,316,970  
    


 


 

59


Table of Contents

Consolidated Balance Sheets Divided into Non-Financial Services Businesses and Finance Subsidiaries

 

     Yen (millions)

 

At March 31, 2004 and 2005    


   2004

    2005

 

Assets

                

Non-financial services businesses

                

Current Assets:

   ¥ 3,033,178     ¥ 3,376,411  

Cash and cash equivalents

     707,917       757,894  

Trade accounts and notes receivable

     377,049       422,673  

Inventories

     765,433       862,370  

Other current assets

     1,182,779       1,333,474  

Investments and advances

     743,427       830,698  

Property, plant and equipment, at cost

     1,418,397       1,564,762  

Other assets

     269,073       274,958  
    


 


Total assets

     5,464,075       6,046,829  

Finance subsidiaries

                

Cash and cash equivalents

     16,504       15,644  

Finance subsidiaries—short-term receivables, net

     956,284       1,028,488  

Finance subsidiaries—long-term receivables, net

     2,266,881       2,625,078  

Other assets

     579,246       692,886  
    


 


Total assets

     3,818,915       4,362,096  

Eliminations

     (954,222 )     (1,091,955 )
    


 


Total assets

   ¥ 8,328,768     ¥ 9,316,970  
    


 


Liabilities and Stockholders’ Equity

                

Non-financial services businesses

                

Current liabilities:

   ¥ 2,017,607     ¥ 2,281,768  

Short-term debt

     200,784       228,558  

Current portion of long-term debt

     6,912       6,385  

Trade payables

     913,649       1,022,394  

Accrued expenses

     691,637       770,887  

Other current liabilities

     204,625       253,544  

Long-term debt

     28,370       19,570  

Other liabilities

     724,331       717,636  
    


 


Total liabilities

     2,770,308       3,018,974  

Finance subsidiaries

                

Short-term debt

     1,170,538       1,310,678  

Current portion of long-term debt

     482,563       535,825  

Accrued expenses

     127,232       151,867  

Long-term debt

     1,378,346       1,546,953  

Other liabilities

     287,705       352,317  
    


 


Total liabilities

     3,446,384       3,897,640  

Eliminations

     (762,324 )     (888,938 )
    


 


Total liabilities

     5,454,368       6,027,676  
    


 


Common stock

     86,067       86,067  

Capital surplus

     172,719       172,531  

Legal reserves

     32,418       34,688  

Retained earnings

     3,589,434       3,809,383  

Accumulated other comprehensive income (loss)

     (854,573 )     (793,934 )

Treasury stock

     (151,665 )     (19,441 )
    


 


Total stockholders’ equity

     2,874,400       3,289,294  
    


 


Total liabilities and stockholders’ equity

   ¥ 8,328,768     ¥ 9,316,970  
    


 


 

Note:

In this current year, Honda reclassified certain finance subsidiaries-receivables to trade receivables in the consolidated balance sheets divided into Non-financial services businesses and Finance subsidiaries (unaudited). Reclassifications have been made to prior years’ consolidated financial statements to confirm to the presentation used for the year ended March 31, 2005.

 

60


Table of Contents

Consolidated Statements of Cash Flows Divided into Non-Financial Services Businesses and Finance Subsidiaries

 

     Yen (millions)

 
     2004

    2005

 

Years ended March 31, 2004 and 2005


   Non-financial
services
businesses


    Finance
subsidiaries


    Non-financial
services
businesses


    Finance
subsidiaries


 

Cash flows from operating activities:

                                

Net income

   ¥ 423,794     ¥ 40,569     ¥ 408,251     ¥ 77,955  

Adjustments to reconcile net income to net cash provided by operating activities:

                                

Depreciation

     213,086       359       225,333       419  

Deferred income taxes

     34,532       78,890       38,737       76,782  

Equity in income of affiliates

     (75,424 )     —         (97,821 )     —    

Loss on derivative instruments and related others

     (74,469 )     (10,314 )     (4,000 )     (56,432 )

Decrease (increase) in trade accounts and notes receivable

     53,035       (28,096 )     (29,754 )     (43,224 )

Decrease (increase) in inventories

     (51,836 )     —         (79,483 )     —    

Increase (decrease) in trade payables

     130,322       —         82,548       —    

Other, net

     (104,351 )     56,135       89,703       59,382  
    


 


 


 


Net cash provided by operating activities

     548,689       137,543       633,514       114,882  
    


 


 


 


Cash flows from investing activities:

                                

Decrease (increase) in investments and advances

     94,562       12       (119,182 )     —    

Capital expenditures

     (287,311 )     (430 )     (372,039 )     (1,941 )

Proceeds from sales of property, plant and equipment

     14,398       4,759       13,990       226  

Decrease (increase) in finance subsidiaries–receivables

     —         (708,418 )     —         (465,841 )
    


 


 


 


Net cash used in investing activities

     (178,351 )     (704,077 )     (477,231 )     (467,556 )
    


 


 


 


Cash flows from financing activities:

                                

Increase (decrease) in short-term debt

     (37,401 )     (97,505 )     14,604       138,511  

Proceeds from long-term debt

     11,663       885,084       7,752       697,703  

Repayment of long-term debt

     (11,169 )     (278,079 )     (9,172 )     (486,568 )

Proceeds from issuance of common stock

     —         57,280       —         1,911  

Cash dividends paid

     (33,566 )     —         (47,806 )     —    

Increase (decrease) in commercial paper classified as long-term debt

     —         280       —         (131 )

Payment for purchase of treasury stock, net

     (95,312 )     —         (84,147 )     —    
    


 


 


 


Net cash provided by (used in) financing activities

     (165,785 )     567,060       (118,769 )     351,426  
    


 


 


 


Effect of exchange rate changes on cash and cash equivalents

     (26,979 )     (1,083 )     12,463       388