Honda: expanding the HEV lineup and launching a new small car in India
and Thailand in 2011 Increasing the local content to minimize the foreign exchange impact and make small vehicle profitable
Launching the HEV CR-Z and the Fit Hybrid in 2010 and developing a HEV system for medium...
Launching a new small car in Thailand and India in 2011 and using Indian steel for the first time
Developing a greater number of global models for higher efficiency and reducing the product...
Increasing the local content to minimize the foreign exchange impact and keep small vehicles...
Expanding operation in emerging countries such as China, India, Thailand and Brazil
Fiscal 2009 consolidated sales units revised upwards by 190,000 to 3.4 million
Collaborative report with IHS Global Insight
Mid-term Production Forecast
Honda is focusing its corporate resources on HEVs and new small cars in its product development program. The automaker will expand its HEV lineup by launching two vehicles (the CR-Z and the Fit Hybrid) in 2010 and developing a HEV system for medium and large vehicles. It will introduce an A-segment new small car based on the Honda New Small Concept in India and Thailand in 2011.
The automaker aims to recover its profitability while increasing the ratio of small vehicles. To make it happen, it will increase the number of global models while reducing the product portfolio in Japan, which is disproportionately large relative to the sales volume; increase the local content and share more components, paving the way for the introduction of global purchasing, which will allow the automaker to buy more components from fewer globally competitive suppliers.
The automaker expects to produce 910,000 vehicles in Japan in fiscal 2009 against its annual capacity of 1.3 million. Against this backdrop, it reportedly requested its component suppliers to restructure themselves to be able to make profits even if its production level in Japan goes down to around 700,000 a year. For the future, the automaker is aiming at building an ultimately flexible production system, in which it will focus production on its optimum plant, which is to be chosen from within its global network of production bases in accordance with shifts in foreign exchange trends and demands in the markets.
■Launching the HEV CR-Z and the Fit Hybrid in 2010 and developing a HEV system for medium and large vehicles
Honda's product strategy prioritizes the expansion of the HEV lineup. In Japan, the CR-Z, a sports HEV, will be released in February 2010 and the Fit Hybrid by the end of the year. A HEV system for medium and large vehicles is under development, which will allow the automaker to significantly expand its HEV lineup. EVs will be launched in the United States in the first half of the 2010s.
■Honda: Launching two HEV models in 2010 and developing a HEV system for medium and large vehicles
|Small HEV||Insight||The Insight, developed as a dedicated HEV, was put on the Japanese market in February 2009. It comes with 1300cc engine, CVT and IMA (Integrated Motor Assist) in the Japanese "five number" (small) size and is priced at 1.89-2.21 million Yen (including consumption taxes). It was launched in Europe at the end of March and in the United States in early April. The model's annual global sales are targeted at 200,000 (60,000 in Japan, 100,000 in North America and 40,000 in Europe).|
|The Insight's 2009 Japanese sales exceeded the plan to reach 93,000 but fell far short of those of the new Toyota Prius, which numbered 209,000 (including the previous model), although the rival car was introduced in May.|
|The Insight's 10-15 mode fuel consumption is 30km/L while that of the Toyota Prius is 38km/L. Honda is currently making development efforts to improve the vehicle's fuel efficiency.|
|The Insight's 2009 North American sales were only 21,000 (versus the Toyota Prius's 145,000 including the previous model). The poor sales are said to be due to the vehicle's Japanese "five number" size, which is not big enough in the United States (the Prius's size changed to the Japanese "three number" (medium and over) size in 2003 when the second generation was launched).|
|CR-Z||The sports HEV CR-Z's mass production model made its world premiere at the Detroit Auto Show 2010 held in January 2010. It comes with 1500cc engine, CVT or six-speed manual transmission, and IMA system. The size is 4080mm in overall length, 1740mm in overall width and 1395mm in overall height. Honda says that the vehicle is capable of both powerful acceleration and 10-15 mode fuel efficiency of 25km/L (CVT version). It will be launched in Japan in February 2010, with North America and Europe getting the model later.|
|Fit HEV||The Fit HEV will be introduced in Japan by the end of 2010.|
|After 2011||The new Civic HEV (note 2) and the minivan Freed HEV will also be launched beyond 2011 to expand the HEV lineup.|
|Medium and large HEV||Honda is developing a HEV system for medium and large vehicles such as the Accord and will put it in vehicles to be launched after 2011. The new system, which may include two-motor system, will be different from the IMA for small cars featuring engine as the main power source with motor in a supportive role.|
|EV (Electric vehicle)||Honda is developing EV as a commuter car due to its limited battery performance. The EV-N Concept, with the overall length of 2860mm which is shorter than that of a minicar, was exhibited at the 2009 Tokyo Motor Show.|
|EVs will be launched in the United States in the first half of the 2010s in order to meet California's ZEV regulations, regarded as the most stringent in the world.|
|Source: Honda's press releases dated 2008.12.17/2009.10.21/2010.1.12|
|Notes 1:||Honda estimates that over 10% of its global sales will be HEVs in the first half of the 2010s.|
|2:||The next-generation Civic HEV is expected to come with lithium-ion battery to be produced by Blue Energy, a joint venture between Honda and GS Yuasa. The automaker is looking at the vehicle's production in the United States (in possible parallel with Japan at Suzuka).|
|3:||Honda's minicar market share in Japan decreased from 14.1% in 2006 to 9.6% in 2009. The automaker is looking to establish a fuel saving technology that will boost its minicars' appeal dramatically to arrest the decline. Among the technologies it is looking at is idling stop that is expected to achieve a fuel consumption of 30km/L. It is reportedly developing a HEV system dedicated to minicar to realize a fuel consumption of over 35km/L.|
■Launching a new small car in Thailand and India in 2011 and using Indian steel for the first time
Honda exhibited the Honda New Small Concept, a new small car, at the Delhi Auto Expo 2010 held in India in January 2010. It is positioned as a key car for emerging markets and will first be launched in Thailand and India in 2011.
The automaker will increase the new car's local content through various measures such as its first use of Indian steel to help it keep its sales price low while securing profitability.
■The Honda New Small Concept was exhibited at Delhi Auto Expo 2010 in India. The car will be launched in India and Thailand in 2011.
|Honda Siel Cars India, Honda's Indian subsidiary, displayed the Honda New Small Concept, an A-segment new small car, at the Delhi Auto Expo 2010 held in January 2010 (the world premiere). The car will be produced in India and Thailand from 2011 and sold in an increasing number of markets, mainly emerging countries (in Thailand, it will be produced and sold as an Eco-car promoted by the Thai government).|
|The new car, being developed as a global car in Japan, is for family use and spacious enough to accommodate five adults comfortably. It will come with 1000cc class gasoline engine. A small diesel engine that is expected to meet Euro 6 regulations is also under development.|
|Honda is expected to sell the new car at a price below 500,000 rupees in India. To keep the car's price down, the automaker aims to achieve an over 80% local content at the start of production by using Indian steel for the first time, to be supplied by Tata Steel and other Indian steel makers.|
|Source: Honda's press release dated 2009.12.21, Honda Siel Cars India's press release dated 2010.1.5|
|Notes 1:||Honda's India-produced cars' local contents are: 76% for the Jazz/City, 71% for the Civic and 28% for the Accord whose V6 engine is imported from Japan. Components coming from Japan, except V6 engine, will increasingly be sourced from India and ASEAN countries to reduce the cost.|
|2:||The automaker will review the new car's development standards-quality standards of the components and structural requirements-to give itself greater pricing flexibility to be able to price the car competitively in its segment, thus securing greater profitability.|
■Developing a greater number of global models for higher efficiency and reducing the product lineup in Japan
A significant portion of Honda's global sales is created by global models, contributing to higher operational efficiency. In 2008, four vehicles together-the Civic, the Accord, the CR-V and the Fit-took 71% of the global sales. The new small car to be launched in India and Thailand in 2011 is being developed as a global car.
On the other hand, 28 different models are sold in a shrinking Japanese market by the automaker as of January 2010. To improve operational efficiency, the automaker plans to scale down the number of Japan-only models to its best ability.
■Honda: Increasing the number of global models and reducing the number of Japan-only models
|Honda's 2008 global sales numbered 3.767 million, out of which 2.691 million or 71% of the total came from four global models; the Civic with 909,000, the Accord with 759,000, the CR-V with 512,000 and the Fit with 511,000. Because the same four vehicles occupied 56% of the 2004 global sales, this indicates the automaker's increasing operational efficiency.|
|The four models are joined by the City, which is produced in seven countries and sold in 39 countries (as of September 2008). Honda plans to increase the number of global models which will include the Honda New Small, now under development, to be released in India and Thailand in 2011.|
|Honda sold 625,509 in Japan in 2009, out of which 330,132 or 52.8% of the total came from three small models-the Fit (157,324), the Insight (93,283) and the Freed (79,525). Excluding minicars brings the automaker's Japanese sales down to 463,356, with the three models' share boosting to 71.2% of the total.|
|Honda sells 28 different models (not including adapted vehicles and the FCX Clarity, a fuel cell electric vehicle) in Japan as of January 2010, making its development and production less efficient. Under its strategy to cut the number of models sold in Japan, the Fit Aria's sales were terminated in January 2009 and the S2000's and the minivan Edix's production came to an end in June. The automaker will continue to scale down the number of models sold in Japan.|
|Source: Nihon Keizai Shimbun 2009.11.10, Nikkei Sangyo Shimbun 2009.11.17|
|Notes 1:||Toyota and Nissan are also reducing their product portfolio in Japan. At Toyota, the Hilux Surf's Japanese sales came to an end in August 2009 and the Ipsum's production was terminated at the end of 2009. The Raum, the Porte and the Sienta, all sold only in Japan, will be merged into one successor.|
|2:||Nissan terminated the Presage's production in summer 2009 and is looking at the Lafesta in the same light.|
■Honda's new vehicles launched in Japan from the second half of 2008 to the end of 2009
|The model features low floor and low center of gravity contributing to high performance and spacious interior. It comes with 2400cc engine, with FWD vehicle (CVT version) boasting a class-leading fuel consumption of 13.2km/L. In September 2009, the automaker made available a version which is eligible for reduced taxes as an eco-car.|
|The model is a "minicar" wagon with high roof. It features improved visibility and comfort with expanded interior space. The announced monthly sales target was 13,000 but the average monthly sales in January-November 2009 were only 6,272. A version eligible for tax reductions as an eco-car was introduced in October 2009.|
|The model is the eighth-generation, with improved equipment which includes VSA as standard equipment on all the versions. It comes with 2400cc engine and five-speed automatic transmission. Sedan and station wagon (the Tourer) are available for sales.|
|The model is sold as a dedicated hybrid model.|
|Honda says that the model boats the largest interior space in its class. It comes with 2000cc engine. FWD vehicle (CVT version) boasts a class-leading fuel consumption of 14.2km/L. All the versions are eligible for tax reductions as an eco-car.|
|The model has undergone the first major change in 10 years. It features a wide cabin and the smallest turning radius of 3.6 meters in the mini truck category. The biggest seller SDX Type's price was cut by 42,000 Yen compared to the previous model's corresponding version.|
■Increasing the local content to minimize the foreign exchange impact and keep small vehicles profitable
Honda has adopted a strategy to increase the local content in its overseas production. A higher local content will enable the automaker to minimize the foreign exchange impact by exporting fewer components from Japan and keep its profitability even if the ratio of low-priced cars goes up. The motor cycle business unit's global purchasing, in which it gives a larger portion of its business to a limited number of suppliers, will be introduced into the vehicle business unit as well.
■Honda: Increasing the local content and accelerating global purchasing
|Honda's American operation has a high local content at over 80%, which includes engines for vehicles. However, its ASEAN and European operations are vulnerable to higher Yen because they still import main components such as engine from Japan. Honda has put in place a policy to increase the local content, which the automaker believes will enable it to minimize the foreign exchange impact by exporting fewer components from Japan and improve its profitability. Furthermore, it will use more overseas components in Japan-produced vehicles (the current Fit, sold in Japan, has increased its Chinese content to 17%).|
|The motor cycle business unit is accelerating global purchasing, in which it buys every component in bulk from a limited number of globally competitive suppliers. The vehicle business unit will follow the example by starting to buy small components in the same way.|
|Source: Nihon Keizai Shimbun 2010.1.5, Nikkan Kogyo Shimbun 2009.2.5/2009.4.8/2009.5.15|
|Notes 1:||Honda's motor cycle business unit is accelerating global purchasing. Although it has already achieved an almost 100% local content in Thailand and India, it still purchases most of its components in each country where it has a manufacturing operation, preventing it from building up a larger volume, which would have been the case if the components had been shared across the countries.|
|2:||Because of the situation, the business unit will both reduce the number of the components to a quarter and share them to make it easier for them to be supplied across the countries.|
|3:||The business unit will, as a rule, limit the number of suppliers for every component to three across the world and purchase 80% of its components in this way in five years to enjoy volume efficiency. It will also increase the portion of imported components used in Japan-made motor cycles from the current single digit to 80% in a few years (the new Super Cub, launched in Japan in June 2009, has increased the foreign content from around 5% to 60% by importing many components including engine from Thailand and other countries).|
■Honda's suppliers requested to restructure themselves to be able to make profits at Honda's production level of 700,000 in Japan
Honda is currently capable of producing 1.3 million a year in Japan. It exported more than half of its production in fiscal 2006-fiscal 2008 but only 115,000 in the first half of fiscal 2009 (April-September), with the export rate dropping to 29%. The automaker expects to produce 910,000 in Japan in fiscal 2009, indicating it is burdened with an excess capacity of 400,000.
Honda is considering restructuring its production system, taking into account foreign exchange trends on one hand and employment level in Japan and the importance of the country as a production base for technologically advanced vehicles on the other. Against the backdrop, the new Yorii plant's planned start of the operation, scheduled for 2010, has been pushed back beyond 2012 (the automaker says that it is more important now to increase the utilization rates of the existing plants-Saitama and Suzuka).
The automaker reportedly requested its suppliers to restructure themselves to be able to make profits even if its Japanese production declines to the 700,000 level a year.
|■Honda: Vehicle production and exports||(units)|
|Source: Honda's Financial Results (Unconsolidated)|
|Note:||Honda's expected production for fiscal 2009 is drawn from articles of Nikkan Jidosha Shimbun of October 28, 2009 and January 7, 2010 and other sources.|
■Honda: Requested its suppliers to restructure themselves to be profitable even at the Japanese production level of 700,000 a year
|Honda will expand overseas production, with one eye on foreign exchange trends, as it transforms its export-oriented production system to the one less dependent on exports. The automaker, assuming that the current level of production will continue even if the economy rebounds, reportedly asked its suppliers to restructure themselves to be able to make profits at the Japanese production level of 700,000 a year (which is equivalent to the automaker's current sales in Japan). See note below.|
|For the future, Honda is aiming to achieve an ultimately flexible production system. It will supposedly enable the automaker: to reduce the current export rate from Japan to around 20%; to drastically increase the commonization of components across the world by examining the model mix from the development phase; to accelerate global purchasing; to shift production to an optimum plant to be chosen from the automaker's global network of plants, looking at foreign exchange trends and demands in the markets.|
|Source: Nihon Keizai Shimbun 2009.11.8, Nikkan Kogyo Shimbun 2009.10.19/2009.10.29|
|Note:||For example, H-one, one of the leading suppliers in the Honda group which produces body frame parts, will reduce its annual production capacity in Japan from over 1 million components worth of components to 700,000 components worth in the second half of fiscal 2009 (on a two-shift basis). Surplus welding robots and others will be shipped to its plants in India, Thailand and China. It says that it will work overtime or on some Saturdays and Sundays when it has to ramp up production in Japan.|
■Expanding operation in emerging countries such as China, India, Thailand and Brazil
Honda increased its Dongfeng Honda's annual production capacity at the Wuhan plant from 120,000 to 200,000 (boosting its total capacity in China from 530,000 to 610,000) and started to produce the Spirior, a sedan, in August 2009. The automaker will have the Chinese company build a second plant capable of producing 100,000 a year, which will be operational in 2011.
■Honda: Increasing its production capacity in China to 700,000 a year in 2011
■Increased Dongfeng Honda's production capacity to 200,000 a year to produce the Spirior, a sedan
|Dongfeng Honda started to produce the Spirior in August 2009 and put it on the market in September. The model, which is called the Accord in Japan (the Acura TSX in the United States), is positioned as a premium sporty sedan, in a different segment from the Accord (the Inspire in Japan) produced by Guangzhou Honda for the Chinese market, and comes with 2400cc engine. It is the Chinese company's third production model after the CR-V and the Civic.|
|Dongfeng Honda increased its Wuhan plant's annual production capacity from 120,000 to 200,000 to produce the new sedan. The latest expansion will push Honda's production capacity in China from 530,000 to 610,000, which includes Guangzhou Honda's 360,000 and Honda Automobile's 50,000 (export only).|
|Dongfeng Honda will soon start to build its second plant capable of producing 100,000 a year. It will be operational in 2011 to produce a model along the same line as the CR-V, the Civic and the Spirior. The new plant will boost Honda's production capacity in China to roughly 700,000.|
|■Honda: Production and sales in China||(units)|
|Sales units||Dongfeng Honda||26,244||63,373||127,042||164,035||189,441|
|Honda Automobile (China)||9,697||24,600||43,124||45,500||25,924|
|Source: Honda's press release dated 2009.12.22|
|Notes 1:||Honda produced 2.73 million globally in January-November 2009, a year-on-year decrease of 25.9% But its Asian production increased by 2.6% in the same period, with Chinese production growing by 12.5%. The automaker produced in China 308,505 in April-September, 53,152 in October and 60,303 in November, the highest ever for each period.|
|2:||Dongfeng Honda produces the Civic, the CR-V and the Spirior and Guangzhou Honda the Accord, the Odyssey, the City and the Fit. Honda Automobile (China) produces the Jazz only for export.|
In India, the Fit (the Jazz in India), with the start of the production, was launched in June 2009. An A-segment car, to be newly developed, will be introduced in 2011.
In Thailand, the production of the new City (the Fit Aria in Japan) started in September 2008. An A-segment car, to be newly developed, will be produced and marketed in 2011.
In Brazil, the City FFV's production started in July 2009, followed by the exports to neighboring countries in September.
■India: The Jazz with 1200cc engine was launched in June 2009
|Honda Siel Cars India, Honda's Indian subsidiary, launched the Jazz with 1200cc engine in June 2009. The car, locally produced, is the first one put on the market by the automaker with an engine smaller than 1200cc. It is priced at 698,000 Rupees (roughly 1.4 million Yen), one of the high-priced small hatchbacks in India.|
|In 2011, Honda will launch a small car based on the Honda New Small Concept shown at the Delhi Auto Expo 2010. The automaker will reportedly keep the price low below 500,000 Rupees (slightly over 1 million Yen).|
|Source: Honda's press release dated 2009.6.10, Nihon Keizai Shimbun 2010.1.5/2010.1.6|
|Notes 1:||In addition to the Jazz, Honda markets the City, the Civic, the Accord and the CR-V (all with engine larger than 1500cc) in India. The automaker sold only 58,276 in January-November 2009 for a market share of 2.8%.|
|2:||Honda doubled its Indian plant's annual capacity from 50,000 to 100,000 at the end of 2007. It planned further expansion by building its second Indian plant capable of producing 60,000 a year, with the operation scheduled for 2010, but has put the plan on hold.|
■Thailand: A production hub for the new City for other Asian countries producing the same model
|Honda began to produce the new City in Thailand in September 2008, with the local content of 93% (increased from the previous model's 83%). At the same time, the function of creating production and purchasing strategies for the Southeast Asia shifted from Japan to Thailand to improve the quality of vehicles and increase the local content. Furthermore, the Thai plant has been positioned as a production hub for the City to help other plants in the ASEAN countries, India and China produce the car efficiently.|
|Honda finished building its second Thai plant capable of producing 120,000 a year in October 2008 to produce the Accord. The expansion has doubled the automaker's production capacity in the country to 240,000, which includes the first plant's capacity of 120,000 a year. The second plant will also produce a Honda New Small Concept-based small car in 2011.|
|Source: Honda's press releases dated 2008.9.10/2008.10.12, Nihon Keizai Shimbun 2008.9.8|
|Note:||The City is a sedan based on the Fit and also a core model following the Civic, the Accord, the CR-V and the Fit. It was imported into Japan and sold as the Fit Aria in 2002-2008.|
■Brazil: Production of the City FFV began in July 2009, followed by the exports to Mexico and other countries
|Honda Automoveis do Brazil, Honda's Brazilian subsidiary, launched the City FFV (Flexible Fuel Vehicle) in July 2009. The car is the automaker's third production model in Brazil after the Civic and the Fit and comes with 1500cc engine and five-speed automatic or manual transmission. Its exports to Mexico and other Central and South American countries started in September.|
|Source: Honda's press release dated 2009.7.24|
|Note:||The Brazilian plant is capable of producing 120,000 a year. Honda's Brazilian sales are brisk: the automaker sold 84,573 in 2007, 111,388 in 2008 and 125,900 in 2009.|
■Fiscal 2009 consolidated sales units revised upwards by 190,000 to 3.4 million
Compared to the previous year's corresponding period, Honda's April-September fiscal 2009's sales amount dropped by 28.7% and operating profit decreased by 74.8% to 90.7 billion Yen. The Automobile business unit experienced a year-on-year decrease of 29.3% in sales units to post an operating loss of 7.7 billion Yen, which was more than compensated for by operating profits of 94 billion Yen and 15 billion Yen in Financial services and the Motorcycle business unit, respectively.
Honda forecasts that its consolidated sales will be 3.4 million vehicles in fiscal 2009, a drop of 117,000 from the previous year. The automaker announced in April 2009 that its sales for the fiscal year would be 3.21 million vehicles but has now revised the figure upwards to reflect better sales in Japan and other Asian countries.
According to Honda's forecast for fiscal 2009, its sales amount will drop by 15.6% but operating income will remain on the same level as in fiscal 2008, at 190 billion Yen (10 billion Yen when the original forecast was announced in April 2009). Net income is forecast to be 155 billion Yen, an increase on the previous year as well as on the original forecast of 40 billion Yen made for the current year in April 2009.
|■Honda: Consolidated vehicle sales||(1,000 units)|
|FY2005||FY2006||FY2007||FY2008||Forecast for FY2009||Apr.-Sep.
|Source: Honda's Consolidated Financial Results|
|Note:||Consolidated vehicle sales combine Honda's and its subsidiaries' CBU sales with the vehicle component sales accounted for the equity method companies.|
|■Honda's consolidated financial results||(million Yen)|
|FY2005||FY2006||FY2007||FY2008||Forecast for FY2009||Apr.-Sep.
|Equity in income
|Source: Honda's Consolidated Financial Results|
|Note:||Honda's motorcycles are now indispensable in people's daily life in emerging countries. They have a high share in the market and are less exposed to price competition. Besides, they are hardly influenced by foreign exchange fluctuations because their local content is almost 100% where they are produced.|
|■Honda: Sales amount and operating profit by region||(million Yen)|
1. Data indicate figures of only small-size vehicles, including passenger cars and light commercial vehicles with a gross vehicle weight of under 6 tons. Trucks and buses in the segment of larger than medium-size vehicles are not included.
2.Data for 2009 are based on estimated figures, in countries other than the U.S., Canada and Mexico.
3. All rights reserved. Reproduction of any data will require permission of IHS Global Insight.
IHS Global Insight Report (Released on 01 Feb 2010)
Japan: Honda Posts 56.2% Y/Y Decline in Net Profits During Q2, Raises FY 2009/10
Earnings Forecast Again
Honda Motors has announced that it recorded a net profit during the second quarter of fiscal year 2009/10 despite the collapse in global vehicle demand and unfavourable currency translation effects.
IHS Global Insight Perspective
Honda's revenues fell by 27.2% year-on-year (y/y) in the second quarter of fiscal year (FY) 2009/10, taking a severe toll on its profitability as net income slumped by 56.2% y/y.
The decline was caused by a higher-than-expected strengthening of the Japanese yen
Anticipating strong sales in the months to come on the back of various government
Honda has announced its financial results for the second quarter of fiscal year (FY) 2009/10, showing the benefits of swift cost-cutting measures and improved global vehicle demand on the back of various government industry support measures. It posted a second successive net profit for the three months ending 30 September, of ¥54.0 billion, a 56.2% year-on-year (y/y) decline on the ¥123.3 billion recorded at the same point last year. The automaker also reported that its revenues for the period declined by 27.2% y/y from ¥2.827 trillion (US$30.7 billion) to ¥2.057 trillion, as a result of a significant decline in automotive business and unfavourable currency translation effects. The company added that had the exchange rate remained the same as in the previous year, it would have witnessed a decline of around 16.1% in revenues for the quarter. The company also registered a 56.0% y/y decline in its operating income to ¥65.5 billion during the period, despite lower selling, general, and administrative (SG&A) and research and development (R&D) expenses. The reasons for this were increased fixed costs per unit as a result of reduced production volumes and a stronger yen, causing unfavourable translation effects.
The company also reported that global sales at its passenger car unit fell during the three months by a significant 10.4% y/y to 838,000 units from 962,000 units, mainly due to a decline in the North American market, where it witnessed a 25.2% y/y reduction in sales to 300,000 units. However, vehicle sales in Japan during the period jumped 3.9% y/y, thanks to stronger demand for Freed multi-purpose vehicle (MPV) and Insight hybrid, and higher-than-expected sales of its Zest and Fit subcompacts, which receive preferential tax subsidies and incentives. In addition, Honda witnessed a significant increase in developing markets, and in Asia it recorded a rise of 22.1% y/y to 249,000 units, helped by strong demand in China and India. European sales decreased almost 16.1% y/y to 73,000 units, while in the rest of the world there was a 36.3% y/y drop in sales to 58,000 units.
Outlook and Implications
Although Honda's second-quarter profit declined y/y, the result marks a significant improvement from the previous quarter.
Honda has emerged as one of the few global automakers to post significant profits during the first half of FY 2009/10: for the six months ending 30 September, Honda posted a net profit of ¥61.5 billion, down 79.2% y/y, on sales revenues of ¥4.058 trillion, down 28.7% y/y. Honda estimates that had the exchange rate remained at the levels seen during the same period in 2008, it would have witnessed a decline of only 18.4% y/y in revenues. Its operating income for the six-month period was down 78.4% y/y to ¥90.7 billion.
Honda has clearly benefited from the market stimulus packages in place across the world, especially in Japan, where the government has been offering tax subsidies and incentives on fuel-efficient and next-generation vehicles since 1 April. The company recently raised its FY 2009/10 Japanese sales forecast by 12.9%, to 655,000 units. In order to take further advantage of this increased demand, it plans to begin sales of a gasoline (petrol)-electric hybrid CR-Z sports car in February 2010 and a hybrid version of its Fit B-segment model before the end of 2010. The company also expects to be helped by its fourth-generation Step WGN in Japan and is eyeing monthly sales of 6,000 units for all versions of this model. These vehicles will all qualify for preferential tax breaks and incentives for fuel-efficient cars in Japan. In addition, Honda is aiming to cut its domestic annual production capacity to around 1 million units and shift more production overseas in order to counter the higher exporting costs resulting from the stronger yen against other major global currencies.
The automaker is also considering expanding its presence in Asian countries such as China, India, and Thailand as the economies in these countries are recovering at a fast pace.
Apart from this regional focus, Honda reportedly aims to reduce its global vehicle line-up in a bid to focus on smaller and more fuel-efficient vehicles, as almost three-quarters of its global sales are accounted for by just eight models. This follows a recent ruling by the U.S. government that automakers in the United States must meet an average efficiency standard of 15 kilometres per litre (km/l) by 2016. In addition, the Japanese government is seeking to reduce greenhouse gas
emissions by 25% by 2020 compared with 1990 levels. Honda has started working on the development of fuel-efficient models and has already shown some concepts and production models at the 2009 Tokyo Motor Show.
Although the automaker has been suffering from the rise in the Japanese yen against the U.S. dollar, it has again upgraded its full-year earnings outlook for FY 2009/10, anticipating a strong recovery in the global automotive market on the back of the industry support measures. Honda now anticipates the yen to stand at an average of ¥90:US$1 and ¥129:1 euro for the year, up from the ¥95:US$1 and ¥125:1 euro it predicted when announcing its FY 2008/09 results. Nevertheless, Honda believes that the increase in demand, along with its swift cost-cutting measures, including unit cost reductions and reduced SG&A expenses, will negate the unfavourable currency translation effects. As a result, it now expects its sales revenues to decline by a reduced 15.6% y/y to ¥8.450 trillion. Operating earnings are expected to rise by 0.2% y/y to ¥190.0 billion, while pre-tax income is estimated to be ¥170 billion, up 5.1% y/y. Net income is also projected to rise by 13.1% y/y to ¥155.0 billion, almost three times the earlier estimate.
In terms of sales volumes, Honda will still see declining sales across all of its businesses in FY 2009/10. It is now anticipating that demand for its passenger cars will fall by a relatively slower rate of 3.3% y/y to about 3.4 million units for the full year, against an earlier forecast of 3.3 million units. Motorcycle sales are forecast to decline of 5.4% y/y to 9.57 million units. However, Honda is still likely to see higher fixed unit costs because production will not return to the levels seen last year.