Honda Aims to Profit from Rivals' Woes

The "Lehman shock" signaled perhaps the worst year in the history of Japanese carmakers, but Honda is having a better crisis than big rivals

By Ian Rowley

Takanobu Ito, CEO of Honda Motor Co. KAZUHIRO NOGI/AFP/Getty Images

While none of Japan's automakers has followed General Motors and Chrysler into the bankruptcy courts, it is hard to overestimate the sense of crisis triggered by Lehman Brothers' collapse last fall. For Japanese carmakers, plunging sales around the world were compounded by a surge in the value of the yen against the dollar and other currencies, eroding competitiveness at the worst possible moment. In January, Toyota's (TM) new president, Akio Toyoda, called the downturn "a once-in-a-hundred-year crisis." A few months later, Toyota announced its first annual loss in six decades. Meanwhile, carmakers and suppliers have contributed to Japan's unemployment rate reaching a postwar high and, on Aug. 30, an almost unprecedented change of government.

Yet, for all the many headwinds battering Japan's car industry, the pain hasn't been shared equally among Japan's nine major vehicle makers. Among Japan's Big Three, Toyota, Honda (HMC), and Nissan (NSANY), Honda looks like the winner, at least in terms of financial performance.

For the fiscal year that ended in March, Honda made a profit of $1.5 billion. That compares favorably with Toyota and Nissan, which both fell into the red, losing a combined $7 billion. What's more, with auto sales still struggling and the yen gaining ground once again, the trend looks set to continue. For the current year, Honda expects modest earnings of around $579 million, but Toyota and Nissan reckon they will lose another $4.7 billion and $1.9 billion, respectively. "We're taking the view that sales will continue to be slow, but compared to the others we are perhaps better off," said Takanobu Ito, Honda's new president and CEO, in an interview with BusinessWeek at the company's offices in Tokyo.

What separates Honda from its rivals? One big factor, of course, is a lack of gas guzzlers. When U.S. auto sales first began to weaken amid high gasoline prices and the fallout from the subprime crisis, big SUVs and pickups suffered first. Honda, with its lineup of gas sippers, was positioned to benefit from the downsizing trend, and its sales initially fared well. Only after the sales plunge spread to smaller models last fall did its numbers really start hurting.

Focusing on Green

Nevertheless, that focus on fuel-efficient small cars and hybrids continues to prop up the profit and loss statement. Smaller, more fuel-efficient models have benefited from cash-for-clunkers schemes. In Japan, the Insight hybrid, introduced in February, is a big seller as customers rush to take advantage of subsidies for green cars.

Then there's Honda's motorbike business—the largest in the world—which the company expects could account for half of operating profit during the current financial year on solid sales in emerging Asia and Brazil. "The bike business is going quite well and offsetting the weakness in car sales," says Ito, 55, who replaced Takeo Fukui as Honda chief in June.

For all that, industry watchers say that Honda's relative success amid the crisis in auto sales is about more than just a favorable product mix.

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