Honda Survived the Storms to Become Stronger
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Honda’s (NYSE: HMC) global market share has been slipping. In 2011 its US sales fell by 7% over 2010. Even in India, their most important market, Honda saw its sales decline 8.5% to 54,427 vehicles in their last fiscal year. Sales were limited during the period due to constraints in the supply of components from Japan and Thailand, as the natural disasters in both countries hit Honda in particular very hard.
The most important issue Honda has is a lack of diesel engines in the Indian market, where almost 40% of the four-wheelers sold are diesels. The state subsidy on the price of diesel fuel has driven sales and usage to the point of nearly breaking the Indian government’s back. Even in China sales fell 5% from 2010 to 621,000 vehicles—the first drop suffered since it started producing locally in 1999 even though the Chinese passenger-car market was up 5.2% last year to more than 14 million vehicles on top of a 33% leap in 2010. Again, both the floods and Thailand and the after-effects of the tsunami in northern Japan wreaked havoc with Honda’s supply chain.
A Passage to India
Honda has realized that India will be its largest market for two-wheeler business by 2015; expecting it to grow to almost 30% market share versus its present 13%. For FY 2011 its unit sales increased by 29% to approximately 11.3 million units. Honda has been able to increase its sales of the Activa and Shine models in 2012 despite stiff competition from Suzuki, Bajaj and its old partner Hero group. Honda has launched the 110cc Dream Yuga in India, its cheapest motorbike ever, to increase its market share.
In the four wheeler segment despite being present in the country for past 14 years, they hold a less than 2% of the car market in India, whereas new entrants like Volkswagen (NASDAQOTH: VLKAY), which entered India just 4 years ago, holds a market share of 3%. In Jan 2012, Honda accounted for just 0.74% of total Indian car sales; selling less than 1,800 cars. However, its recent release of the Brio has been well received in the country.
Not content with its poor performance Honda has shuffled its top leadership team. Honda recently sold its 500,000th car in India, which took almost 15 years. It is the new managements mandate to double that total figure in the next 4 years. Honda is also planning to make India a global hub for its diesel engine cars which should help them hit those targets. Right now they sell zero diesels in India.
What Chinese Wall?
In China, Honda missed the opportunity for booming demand for cheap cars in inland cities and for luxury vehicles with engines small enough to avoid the higher tax rates based on fuel consumption. For a company that prides itself on having the most fuel efficient fleet in the U.S. this should come as a surprise to American readers. They were caught unprepared for the soaring demand after the 2008 financial crisis with all the wrong models and the wrong supply chain. Now to bridge the gap Honda has started construction of a second plant in China to increase its capacity to 340,000 cars.
In continuation of its plans for Asia Honda will be investing $328 million to construct a new automobile plant in Indonesia to boost production of its multi-purpose vehicles, once functional, it will triple Honda’s output to 180,000 vehicles from 60,000 currently with 80% of the parts sourced locally to serve that rapidly growing market. 2011 saw Honda’s sales drop 18% while the Indonesian market boomed, rising 19%. However it is not alone Toyota (NYSE: TM) and Suzuki are planning to invest $143 million and $700 million to scale up the production. Toyota is by far the market leader in both Thailand and Indonesia where they enjoy market share north of 30%. Both of those markets love light duty pickup trucks and that has never been a strong part of Honda’s portfolio. On the other hand, their strong presence in the two-wheel market has seen strength in Thailand; owing to introduction of the new Click125i and Wave 110i models.
But the effects of 2011’s wrath of Mother Nature seem to be over for Honda, as it has commenced delivery of vehicles to customers across the world, with its Ayutthaya plant in Thailand in late March going back on line after having to in effect ignore more than 60,000 orders. However, Honda’s dealers are facing further pressure as the credit period for them to pay for their inventory has been dropped from 1 month to just 10 days. Expect dealers to be selling vehicles at near to invoice under those conditions.
Picking up the Pieces
Honda is gearing itself to regain its lost market share with its main focus on Asia. Honda Vietnam has also announced they will increase the capacity to meet the growing demand. If the world is headed for another global slowdown or even recession in 2013 based on further deterioration of the U.S.’s fiscal situation and continued dithering over how to fix the Euro, then Honda may benefit from some substitution effects as people forego automobile purchases for motorcycles instead. Regardless, the bulk of the emerging market volume in the next five years will come from small, fuel-efficient cars as first time car buyers will be able to afford entry-level vehicles.
For Honda, their financials look very healthy, having weathered the storms of 2011. Four quarters of sequential revenue, operating income and profit margin growth is all you can ask for from a $60 billion multinational. Honda’s trading at a P/E of 22 while carrying a 2.3% yield. With year over year EPS growth of 60% Honda looks positioned to take advantage of all of the current trends in both energy and global economics. Their introduction of the Civic Natural Gas in the U.S. is the first such practical car that can take advantage of the structural change in the U.S. energy market.
Honda’s production figures are promising for both in Japan and outside Japan. As 2012 ramps up, Honda appears to be leaving its supply chain problems in the dust.
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