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-	Headquartered in Japan, Honda Motor Company ([[NYSE Group (NYX)|NYSE]]: HMC) is the world's fifth largest [[Auto Makers|automaker]], specializing in motorcycles and small, simple, fuel efficient vehicles, generating income of $1.4 billion on revenues of nearly $102 billion for fiscal year ending March 31, 2008.<ref name=annual2009>[http://world.honda.com/investors/annualreport/2009/pdf/2009-page06-07.pdf Annual Report 2009: Financial Highlights]</ref> With nearly 179,000 employees worldwide, the firm operates in four main segments: Motorcycles, Automobiles, Financial Services, and Power Products.<ref>[http://world.honda.com/investors/annualreport/2008/pdf/ar2008.pdf 2008 Annual Report, page 115]</ref> North American is Honda's largest market, accounting for about half of revenue.<ref>[http://world.honda.com/investors/annualreport/2008/02.html Annual Report 2008: Financial Highlights]</ref>	+	Headquartered in Japan, Honda Motor Company ([[NYSE Group (NYX)|NYSE]]: HMC) is the world's fifth largest [[Auto Makers|automaker]], specializing in motorcycles and small, simple, fuel efficient vehicles, generating income of $1.4 billion on revenues of nearly $102 billion for fiscal year ending March 31, 2009.<ref name=annual2009>[http://world.honda.com/investors/annualreport/2009/pdf/2009-page06-07.pdf Annual Report 2009: Financial Highlights]</ref> With nearly 179,000 employees worldwide, the firm operates in four main segments: Motorcycles, Automobiles, Financial Services, and Power Products.<ref>[http://world.honda.com/investors/annualreport/2008/pdf/ar2008.pdf 2008 Annual Report, page 115]</ref> North American is Honda's largest market, accounting for about half of revenue.<ref>[http://world.honda.com/investors/annualreport/2008/02.html Annual Report 2008: Financial Highlights]</ref>
	A variety of factors impact Honda's earnings, ranging from U.S. legislation, the [[U.S. Housing Market|housing market]], and [[commodities prices]] to [[exchange rates]], [[emerging markets]], and an aging Japanese population.<ref>[http://www.stat.go.jp/english/data/handbook/c02cont.htm Statistical Handbook of Japan, chapter 2]</ref> Honda's fuel efficient fleet of small cars and motorcycles, provided it with a relative advantage compared to some its more SUV focused competitors, as fuel prices spiked through 2008, Honda's sales fell only 3.2%. <ref>[http://www.freep.com/article/20081120/BUSINESS01/81120061/1002/BUSINESS Freep.com: Honda announces deeper production cuts]</ref><ref>[http://money.cnn.com/2008/10/09/autos/jdpa_sales_down/index.htm CNN: Big drop predicted for global auto sales]</ref> The company did not perform as well during the latter half of 2008 and first half of 2009, as global demand for automobiles plummeted.		A variety of factors impact Honda's earnings, ranging from U.S. legislation, the [[U.S. Housing Market|housing market]], and [[commodities prices]] to [[exchange rates]], [[emerging markets]], and an aging Japanese population.<ref>[http://www.stat.go.jp/english/data/handbook/c02cont.htm Statistical Handbook of Japan, chapter 2]</ref> Honda's fuel efficient fleet of small cars and motorcycles, provided it with a relative advantage compared to some its more SUV focused competitors, as fuel prices spiked through 2008, Honda's sales fell only 3.2%. <ref>[http://www.freep.com/article/20081120/BUSINESS01/81120061/1002/BUSINESS Freep.com: Honda announces deeper production cuts]</ref><ref>[http://money.cnn.com/2008/10/09/autos/jdpa_sales_down/index.htm CNN: Big drop predicted for global auto sales]</ref> The company did not perform as well during the latter half of 2008 and first half of 2009, as global demand for automobiles plummeted.

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Revision as of 03:46, September 7, 2009

Headquartered in Japan, Honda Motor Company (NYSE: HMC) is the world's fifth largest automaker, specializing in motorcycles and small, simple, fuel efficient vehicles, generating income of $1.4 billion on revenues of nearly $102 billion for fiscal year ending March 31, 2009.^[1] With nearly 179,000 employees worldwide, the firm operates in four main segments: Motorcycles, Automobiles, Financial Services, and Power Products.^[2] North American is Honda's largest market, accounting for about half of revenue.^[3]

A variety of factors impact Honda's earnings, ranging from U.S. legislation, the housing market, and commodities prices to exchange rates, emerging markets, and an aging Japanese population.^[4] Honda's fuel efficient fleet of small cars and motorcycles, provided it with a relative advantage compared to some its more SUV focused competitors, as fuel prices spiked through 2008, Honda's sales fell only 3.2%. ^[5][6] The company did not perform as well during the latter half of 2008 and first half of 2009, as global demand for automobiles plummeted.

Corporate Overview

Honda employs approximately 178,000 employees who work at 35 major manufacturing facilities located throughout Argentina, Brazil, Mexico, the USA, Canada, Japan, Thailand, Vietnam, Indonesia, the Philippines, Malaysia, Pakistan, India, China, Taiwan, Turkey, Spain, Italy, France, and the U.K.^[7] Honda's nearly $120 billion in sales for 2008 makes it one of the world's largest 100 companies by revenue. Honda is one of the largest companies in Japan, recently superseding Nissan Motor (NSANY) but still trailing perennial leader Toyota Motor (TM).^[8] The company operates in four main segments: Motorcycle Business, Automobile Business, Financial Services Business, and Power Product & Other Business.

Fiscal Year 2008 Income Data, in billions of Japanese ¥ ^[9][1]

Financial Data	FY 2005	FY 2006	FY 2007	FY 2008	FY 2009
Automobile Division Income	¥6,963	¥8,004	¥8,889	¥9,489	¥7,674
Motorcycle Division Income	¥1,097	¥1,225	¥1,370	¥1,559	¥1,411
Power Product & Other Income	¥332	¥370	¥418	¥421	¥343
Financial Services Income	¥255	¥306	¥410	¥534	¥582
Total Revenue (% change y-o-y)	¥8,650 (6%)	¥9,908 (14.5%)	¥11,087 (11.9%)	¥12,003 (8.2%)	¥10,011 (16.7%)
Operating Income (operating margin)	¥631 (7.3%)	¥869 (7.4%)	¥852 (7.7%)	¥953 (7.9%)	¥190 (1.9%)
Net Income	¥486	¥597	¥592	¥600	¥137

Business Segments

Automobile

Responsible for 80% of the company's total revenue, the Automobile Business is Honda's lifeline. Automobiles are produced by Honda at two sites in Japan: the Saitama factory and the Suzuka factory. The firm's major production sites overseas are located in Ohio (U.S.A.), Alabama (U.S.A.), Alliston (Canada), Swindon (U.K.) and Ayutthaya (Thailand).^[12] Honda markets its cars under the Honda and Acura brands.The Acura brand is Honda's luxury car brand and is sold only in North America and China. For FY 2008, Honda's auto unit sales increased 7.5%, thereby increasing operating income 10.4% on revenue growth of 6.8%.^[13] For FY 2009, auto unit sales fell 10.4%.

The United States is Honda's largest automobile market; however, as the economies of the BRIC countries grow rapidly and the traditional mainstays of automobile consumption -North America, Western Europe, and Japan- remain in economic turmoil through 2008, Honda is increasingly relying on the third world to drive growth. For FY 2008, unit sales in these developing economies all increased 20-25%.^[14] Nevertheless, as gas prices climb, Americans and others are turning to Honda's cars, which are typically smaller, low-maintenance and more fuel efficient than its competitors. The company has a limited product line and focuses on low-powered vehicles, with no plans to offer a V8 or bigger engine and diminishing focus on its Acura luxury brand. The firm holds a comparative advantage in hybrid and fuel cell vehicles, such as the Civic and Accord Hybrid models both of which are helping Honda steal business from American car manufacturers. Even some of the company's non-hybrid vehicles achieve fuel efficiency greater than 30 mpg. Honda’s principal automobile products include the following vehicle models:

Passenger Cars	Minivans, Sport Utility Vehicle, Sports coupe	Mini cars
Accord	Pilot	Life
Civic	CR-V	That’s
Acura RL	Element	Vamos
Acura TL	Odyssey	Zest
Acura TSX	Acura MDX	Acty

Motorcycle

Responsible for 13% of FY 2008 revenue, Honda's motorcycle business includes motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC).^[16] Honda produces a range of motorcycles, consisting of sports (including trial and moto-cross racing), business and commuter models with engines ranging from 50 cubic centimeters to 1800 cubic centimeters in cylinder displacement. Honda's motorcycles are produced at two sites in Japan, Hamamatsu and Kumamoto, as well as through subsidiaries in the United States, Mexico Italy, Spain, Brazil, Thailand, Vietnam, the Philippines and India.

In fiscal 2009, Honda sold 10.1 million motorcycle units, a 8.5% increase from fiscal 2007.^[17] Despite this, for the year revenues increased 13.7% and operating income rose 50.4%.^[18] These improvements were driven exclusively by growth in emerging markets, which account for about 90% of motorcycle sales, even as revenues and profits stagnating or decreasing in Europe, Japan, and North America.^[19] This was especially true in Asia, where motorcycles are frequently a primary means of transportation. Honda's interaction with asian markets such as China and Indosnesia is unique, as Honda has a local company produce and sell its motorcycle designs, in exchange for a payment for each motorcycle sold.^[20]

The Motorcycle Business is crucial to the company's future growth in emerging markets where many cannot afford cars. As the wealth of these countries increases, so does the people's appetite for cars and other luxury items. The company's motorcycle sales help Honda establish its name brand in developing countries, paving the way for additional car sales in the medium to long run as these economies accumulate wealth.^[21]

Power Product & Other

Responsible for 4% of FY 2008 revenue, Honda's Power Product & Other Business manufacturers a variety of power products, including power tillers, portable generators, general-purpose engines, grass cutters, outboard engines, water pumps and snow throwers. Its power products also include power carriers, power sprayers, lawn mowers and lawn tractors (riding lawn mowers). Like sales from the Motorcycle Business, sales from the Power Product & Other Business help establish Honda's brand name in emerging markets, giving the company a chance to convert Power Product customers into higher margin car and motorcycle customers in the medium to long run. Total unit sales of power products fell 14.4% in fiscal 2008, to 5.187 million units.^[22] Yet this resulted in a .8% increase in revenue primarily due to positive currency effects caused by the depreciation of the Japanese yen, but lower operating income as this division increased R&D spending.^[23]

Honda is scheduled to begin production of its first airplane, known as Hondajet, in 2010 - with tentative plans to make about 200 of these aircraft every year thereafter.^[24] Another subsidiary began producing and selling solar cells in 2008.^[25] Management has not articulated how either of these highly capital intensive products play into the company's broader business plan.

Financial Services

Responsible for 4% of 2008 fiscal year revenue, Financial Services offers a variety of financial services to its customers and dealers through finance subsidiaries with the aim of providing sales support for its products. This segment competes against myriad options for its motor customers, including commercial banks and finance and leasing companies.Most of this division's activities are concentrated in more developed markets, as about 97.5% of credit was extended in Europe, North America, and Japan.^[26] In fiscal year 2008, net sales rose 30.2% to ¥533.5 billion, which increased operating income 2%.^[27]

Trends & Forces

Demand for fuel efficiency Despite falling Oil Prices in the second half of 2008, fuel efficiency and environmental concerns will likely remain of long-term importance to car buyers. Although Honda was the first company to commercially sell hybrid vehicles in the United States (the Honda Insight), the company quickly fell behind Toyota in sales for alternative fuel vehicles. Over the last decade Toyota has sold considerably more hybrids than Honda. In response, Honda announced in 2008 an effort to regain its preeminence in the hybrid sector by launching a series of low-cost hybrids by the end of 2009.^[28] These models will be priced to reduce the considerable premium hybrid buyers currently pay for hybrid technology. For example, a 2008 Toyota Camry hybrid costs about $6000 more than the non-hybrid version, and a 2008 civic hybrid costs $8000 more than the standard version.^[29] Honda's new hybrid models will reduce this premium from one to two thousand dollars per vehicle in a bid to recapture buyers from Toyota.

The Honda FCX Clarity is a hydrogen powered car with twice the efficiency of traditional gas and electric hybrid vehicles. And it doesn't emit greenhouse gases. Honda (HMC) is looking for a way to compete in an auto market that is increasingly focusing on green technology. And with the Clarity, Honda may find itself back in the game (its own gas and electric hybrid attempts were creamed by Toyota). Honda plans to sell 200 FCX Clarity vehicles in the US and Japan between 2009 and 2011.^[30] Right now, though, only a few people can test-lease the Clarity. This is because there aren't many hydrogen fueling stations around. Honda wants to make sure the Clarity's drivers have access to fuel, so the initial offering, here in the United States, is pretty much based in certain parts of California. But if investment in this grows, and if the Clarity finds success, it may be that Honda finds its green motor stock rising.

In December 2007, Congress passed the new CAFE fuel economy standards, which will require that automakers have a fleet average of 31.6 mpg by 2011, and 35 mpg by 2020.^[31] The current average fleet mpg standard is 27.5 mpg.^[32] This new legislation adds significantly to Honda's competitive advantage, as other automakers, even Toyota, will require time to realign their fleets away from trucks and SUVs to universally smaller vehicles, like Honda's.

U.S. car sales are tied to the housing market and general economy The strength of the housing market is traditionally tied to car-buying, as homeowners sometimes finance new cars with second mortgages. Recently in the US, both residential real estate prices and construction starts have begun to stagnate or fall in part due to the subprime lending crisis. In 2007, nearly 12% of new car purchases were financed with home equity loans.^[33] During the latter half of 2008, the financial crisis combined with a U.S. economic recession led to falling North American sales and profitability. As of December 17th, 2008, the carmaker estimated that it would earn 185MM in net profit, less than a 3rd of its 600MM in profit for fiscal year ended March 31, 2008.

Changing Demographics in Japan Retiring Customers: A quarter of Honda’s sales are concentrated in Japan, where the population is aging: 10% of the population was 65 or older in 1990, and by 2007 that number had doubled.^[34] Aging populations tend to save less, and to spend more on luxury items, such as Toyota's popular Lexus-branded vehicles.^[35] While Much of Honda's production takes place in Japan, which provides generous national health insurance. Although Honda has to pay for some of its Japanese employees' insurance in the form of higher taxes, American automakers pay for the entirety of their employees' insurance. This has become a competitive advantage to non-U.S. automakers, which have much less of a health insurance burden.

Commodity Price trends threaten to drive up the cost of both car manufacturing and car ownership.

• Steel: One of the main ingredients in cars is steel, so increases in steel prices reduce Honda's margins. Honda cannot easily substitute another material for steel to reduce its costs, unlike almost any other input into car production, even labor.

• Aluminum also affect the company's margins as this metal is also a significant production input, accounting for around 300 pounds of a new car's weight.

• Oil prices: Increases in the cost of gasoline inflate the day-to-day cost of car ownership. Since consumers buy cars only infrequently, rising oil prices have only a limited impact on year-to-year car sales, but over time they cut into the industry's sales, and force companies to design more fuel-efficient fleets.

Currency Variations Affect Yen Delineated Profits As a Japanese company, Honda's profits are recorded in Japanese yen, but its sales are denominated in euros, dollars, pounds, Chinese yuan, and many other currencies. Fluctuations in the exchange rate between these currencies and the yen can lead to sometimes large fluctuations in Honda's profits. Honda hedges its exchange rate risk by arranging currency swaps and purchasing futures, but these operations are costly and threaten to cut into the bottom line. In the long run, these effects are even more exacerbated: as the dollar depreciates against the yen, American sales are worth less to Honda, and Hondas are more expensive to consumers. Thus profit per revenue and absolute revenue both fall from depreciating exchange rates. While Honda can hedge out the risk to its profit margins, it cannot easily manage the risk from falling demand. Exchange rates have become a sensitive subject among U.S. legislators, who allege that Japan has kept the yen undervalued to stimulate sales.^[36]

Market Share

U.S. Auto Industry Market Share by Sales

Manufacturer	May-06[37]	May-07[38]	May-08[38]
GM	25%	24%	19%
Toyota	15%	17%	18%
Ford	17%	17%	15%
Chrysler	13%	13%	11%
Honda	9%	9%	12%
Nissan	6%	6%	7%
Hyundai	-	5%	6%
BMW	-	2%	2%
Volkswagen	-	2%	2%
Daimler	-	1%	2%

Global Auto Industry Market Share by Production^[39][40]

Manufacturer	Rank	2007	2008	Change in Production	Manufacturer	Rank	2007	2008	Change in Production
GM	1	13.0%	11.9%	-11%	Suzuki	11	3.6%	3.8%	1%
Toyota	2	11.8%	13.3%	8%	Chrysler	12	3.5%	2.7%	-25%
Volkswagen	3	8.7%	9.3%	3%	Daimler	13	2.9%	3.1%	4%
Ford	4	8.7%	7.8%	-13%	BMW	14	2.1%	2.1%	-7%
Honda	5	5.4%	5.6%	0%	Mitsubishi	15	2.0%	1.9%	-7%
PSA	6	4.8%	4.8%	-4%	Kia	16	1.9%	2.0%	2%
Nissan	7	4.8%	4.9%	-1%	Mazda	17	1.8%	1.9%	5%
Fiat	8	3.7%	3.6%	-6%	Avtovaz	18	1.0%	1.2%	9%
Renault	9	3.7%	3.5%	-9%	Faw	19	1.0%	0.9%	-6%
Hyundai	10	3.6%	4.0%	6%	Tata	20	0.8%	1.1%	36%

Competition

Automobile

In 2007, worldwide auto sales totaled 73.1 million vehicles, of which 3.9 million were made by Honda - giving the company a global market share of 5.4%.^[41] In 2007, Honda grew this market share by .4% over 2006. Honda's small-car, simple, fuel efficient product line lacks much of the diversity and range of the market share leaders. If Honda is to dominate the world market, it will have to expand its product line, diverging from what it does best - and likely hurting its margins.

Motorcycle

Harley-Davidson maintains a large lead in its dominance in the US Heavyweight Motorcycle market as compared to Honda and others. Unlike Harley, Honda specializes in the full array of motorcycles, ranging from dinky scooters sold primarily in emerging markets to the heavyweights Harley is known for. This means that HOG and Honda's respective sales react differently to economic changes. As Harley's are seldom used as primary transportation, but rather as a recreational vehicle, HOG's sales generally fall off during economic slowdowns as people have less disposable income. On the other hand, especially in emerging markets, Honda's motorcycles serve as a primary transportation method for lower income individuals, meaning that growing wealth can drive consumers to automobiles, which the company hopes will be also made by Honda.

Research indicates that Honda's motorcycle dealerships rank well below both the industry average and Harley-Davidson's number one position for customer satisfaction.^[43]

US Heavyweight Market Share^[44]

	US Market Share	2007	2006	2005	2004	2003	2002
Harley-Davidson'		49.4%	50%	49.6%	50.2%	50.3%	48.2%
Honda		14.2%	15.1%	16.6%	18.7%	18.4%
Suzuki'		12.5%	12.9%	12.4%	10.2%	9.8%	9.6%
Yamaha		9.2%	8.6%	8.9%	8.7%	8.5%	8.9%
Kawasaki		7.2%	6.8%	6.5%	6.4%	6.7%	6.9%

References

1. ↑ ^{1.0 1.1} Annual Report 2009: Financial Highlights
2. ↑ 2008 Annual Report, page 115
3. ↑ Annual Report 2008: Financial Highlights
4. ↑ Statistical Handbook of Japan, chapter 2
5. ↑ Freep.com: Honda announces deeper production cuts
6. ↑ CNN: Big drop predicted for global auto sales
7. ↑ 2008 Annual Report: Principal Manufacturing Facilities
8. ↑ OICA 2007 World Ranking of Manufacturers
9. ↑ 2008 Annual Report: Financial Hilights
10. ↑ "2008 Annual Report: Financial Highlights"
11. ↑ "Honda 2008 Annual Report: Summary of Operating Results by Business"
12. ↑ 2008 Annual Report: Principal Manufacturing Facilities
13. ↑ 2008 Annual Report: Automobile Business
14. ↑ 2008 Annual Report: Automobile Business
15. ↑ "Honda 2008 Annual Report: Summary of Operating Results by Business"
16. ↑ 2008 Annual Report: Motorcycle Business
17. ↑ 2008 Annual Report: Motorcycle Business
18. ↑ 2008 Annual Report: Motorcycle Business
19. ↑ 2008 Annual Report: Motorcycle Business
20. ↑ 2008 Annual Report: Motorcycle Business
21. ↑ Marketwatch: Honda's Cumulative Global Motorcycle Production Reaches 200 Million Units
22. ↑ 2008 Annual Report: Power Product and Other Businesses
23. ↑ 2008 Annual Report: Power Product and Other Businesses
24. ↑ 2008 Annual Report: Power Product and Other Businesses
25. ↑ 2008 Annual Report: Power Product and Other Businesses
26. ↑ 2008 Annual Report: Financial Services Business
27. ↑ 2008 Annual Report: Financial Services Business
28. ↑ Autospies: Honda Announces New Hybrid Models
29. ↑ Cars.com: Compare
30. ↑ IHT: Carmakers try to guess which way frustrated motorists will turn
31. ↑ Pittsburgh Post Gazette: Fuel standards leave some automakers feeling burned
32. ↑ Pittsburgh Post Gazette: Fuel standards leave some automakers feeling burned
33. ↑ NY Times: Auto Industry Feels the Pain of Tight Credit
34. ↑ Statistical Handbook of Japan, chapter 2
35. ↑ The General Paper: Is an Aging Population Necessarily a Bad Thing
36. ↑ Financial Times: US Congress takes aim at Tokyo over yen
37. ↑ Auto Oberver - A Historic Year For US Vehicle Sales
38. ↑ ^{38.0 38.1 38.2} US News - How Toyota Could Become the U.S. Sales Champ
39. ↑ [http://oica.net/wp-content/uploads/world-ranking-2007.pdf OICA - World Motor Vehicle Production, 2007]
40. ↑ [http://oica.net/wp-content/uploads/world-ranking-2008.pdf OICA - World Motor Vehicle Production, 2008]
41. ↑ International Organization of Motor Vehicle Manufacturers Production Data
42. ↑ Suite 101: Top Selling Cars in Europe in 2007
43. ↑ Biker News Online: Harley Dealers Satisfy Two Years in a Row
44. ↑ 2007 Harley Davidson Annual Report, page 9

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