Global Economics

Toyota? Fine, But Don't Forget Honda


The headlines have been about Toyota overtaking GM, but don't dismiss the No. 9 carmaker. It's set to post record sales and has ambitious growth goals

What with Detroit's continuing woes, Toyota's (TM) imminent accession as the world's No. 1 automaker and Nissan-Renault's flirtation with GM (GM), Honda (HMC) perhaps hasn't gotten the attention it deserves of late. Indeed, it's easy to forget that Honda, the world's No. 9 automaker by unit sales, boasts the third best operating profit margin in the business and has a market cap more than four times greater than that of Ford (F).

Speaking at a press conference in Tokyo today Honda president Takeo Fukui went some way toward putting the record straight. In a wide-ranging, end-of -year roundup, Fukui discussed everything from Honda's expansion plans in the world's fast-growing auto markets, to details of a new $211 million engine plant in Japan. He also revealed that Honda will likely post its highest ever sales of 3.55 million units for 2006, a rise of 5% over last year.

He gave an update on Honda's ambitious plans to launch its own range of jet planes. The small business jets will be 30% more fuel efficient than rival offerings, he said, pointing out that Honda has already received 100 orders. By 2010, "Honda will also be providing fuel-efficient engines in the sky," quipped Fukui.

U.S. Sales Due to Rise

One thing Fukui didn't talk about was Honda's profits, but they too are flying. According to Merrill Lynch analyst Koichi Sugimoto, the company's operating profits will grow by 11.1% during the current quarter, to $1.88 billion. For the next financial year he's even more bullish. Through March, 2008, Sugimoto reckons operating profits will reach $7.8 billion, a rise of 8.4% over the current financial year. "Honda's earnings are moving into the growth phase," he says.

One big reason will be continuing growth in the vital North American market, which analysts estimate accounts for around 70% of Honda's operating profits—a higher proportion than either Toyota or Nissan. This year, Honda expects U.S. sales to rise 3% to 1.51 million. In 2007, the target is 1.56 million, also a rise of 3%, which would mark the 11th consecutive record year. The launch of a remodeled Fit subcompact in the spring and an eighth generation Accord and Pilot sport-utility vehicle in the fall should help profitability.

Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo, says Honda may also benefit from the fact that it's not Toyota in the year ahead. Sometime in 2007, Toyota will almost certainly overtake GM as the world's biggest carmaker. That's something Toyota seems keen to play down for fear of a backlash in North America, which accounts for about 60% of profits (see BusinessWeek.com, 12/13/06, "Top Spot In Sight, Toyota's Not Slacking").

Europe Demand is Rising

Honda, though, while more reliant on the U.S. from a profit perspective, has no such worries. "Honda can go on its own way. It doesn't need to worry about irritating Detroit by taking the No. 1 spot," says Matsumoto.

Another bonus for Honda is its growing European business. Although struggling just a few years ago, sales in Europe are set to rise 8% this year to 310,000 units and by a further 40,000 in 2007. To meet rising demand in the region, Honda's British plant will increase production by 50,000 to 250,000 by the end of next year, while Honda Automobile (China) will increase exports of the Jazz subcompact (known as the Fit in the U.S. as well as in China where it is also a popular model) to 50,000. "In two or three years, Europe will be a factor in lifting the profitable growth of Honda," adds Merrill Lynch's Sugimoto.

But what makes Honda's profitability all the more impressive is that it's posting record numbers despite struggling at home. This year, the company expects Japan sales to fall 2% to 700,000 and doesn't expect a recovery anytime soon. Like other automakers, Honda is struggling to persuade Japanese car buyers to go back to buying new cars as regularly as they used to. Especially since when they do buy cars, they increasingly prefer low-margin minicars (see BusinessWeek.com, 8/31/06, "A Tough Ride For Japan's Automakers").

Lagging GM in China

Another factor afflicting Honda, though, is that increased competition from domestic rivals has eaten into its traditional strength in the minivan sector. "We've not been able to grow volumes the way we wanted to," admitted Satoshi Dobashi, a senior managing director at Honda, sitting alongside Fukui.

Small wonder, then, that Honda is looking to increase sales in the world's fastest growing markets. In 2007, Fukui says that Asia sales outside Japan and China are expected to rise by 13% to 360,000 units. Honda didn't give a forecast for China in 2007 but the company says sales will rise 23% to 320,000 during 2006.

Rival Toyota is also desperate to expand in China (see BusinessWeek.com, 3/9/06, "Toyota: Full Speed Ahead in China") but Honda, which opened a new factory in Guangzhou in September, remains the biggest Japanese automaker in the country. Both trail market leader GM.

In India and Brazil—two more of the so-called BRIC countries (which include Russia as well as China, hence the acronym)—Honda is also raising its game. In Brazil this past November and December, Honda began selling flexible, fuel-powered Civics and Fits capable of running on various mixtures of ethanol and gasoline or pure ethanol.

Value for Money

Meanwhile, the company plans to double local car production to 100,000 midway through next year. In India, the company aims to double auto-production capacity to 100,000 units by the end of 2007. By 2010, it may also introduce a new, small vehicle, build a second auto plant, and increase sales to 150,000 units.

However, with several other automakers reportedly planning low-cost models for India, Fukui suggested Honda would avoid competing purely on price. "Automobiles come in different categories," he says. "It's not just about competing for the lowest price but also providing value for money." Honda is hoping its ambitious growth goals start earning it the attention it deserves.


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