Honda_SWOT_2010

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Honda Motor Co., Ltd.

Company Profile

Publication Date: 28 May 2010

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ABOUT DATAMONITOR

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Honda Motor Co., Ltd. Page 2 Datamonitor

Honda Motor Co., Ltd.

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TABLE OF CONTENTS

Company Overview..............................................................................................4

Key Facts............................................................................................................... 4

SWOT Analysis.....................................................................................................5


Honda Motor Co., Ltd.TABLE OF CONTENTS
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COMPANY OVERVIEW

Honda Motor (Honda) is the world's largest motorcycle manufacturer and one of the leadingautomakers.The company develops, manufactures, and markets automobiles, motorcycles, andpower products. It operates all over the world. Honda is headquartered in Tokyo, Japan and employsabout 182,000 people.

The company recorded revenues of JPY10,011,241 million ($100,112.4 million) during the financialyear ended March 2009 (FY2009), a decrease of 16.6% compared to FY2008. This was primarilydue to foreign currency translation effects and decreased net sales in the automobile business.Theoperating profit of the company was JPY189,643 million ($1,896.4 million) during FY2009, a decreaseof 80.1% compared to FY2008.The net profit was JPY137,005 million ($1,370.1 million) in FY2009,a decrease of 77.2% compared to FY2008.

KEY FACTS

Honda Motor Co., Ltd.Head Office1-1, 2-chomeMinami-Aoyama Minato-kuTokyo107-8556

JPN81 3 3423 1111Phone

81 3 5412 1515Fax

http://world.honda.comWeb Address

10,011,241.0Revenue / turnover(JPY Mn)

MarchFinancial Year End

181,876Employees

HMCNew York Ticker

7267Tokyo Ticker


Honda Motor Co., Ltd.Company Overview

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SWOT ANALYSIS

Honda Motor (Honda) is one of the largest vehicle manufacturers in the world. The company is welldiversified both geographically as well as in terms of the customer end markets that it serves.However, intense competition may and adversely affect the company's financial condition and resultsof operations.

WeaknessesStrengths

Employee productivityDiversified operationsRelatively weak performance in North

America

R&D and engineering capabilities

Leading market position and brand strengthSluggish cash flowsLapses in product quality

ThreatsOpportunities

Competition in the global automotive marketPoised to benefit from increasing demandfor hybrid electric vehicles Tightening emission standardsOpportunities in Asian markets Appreciating Japanese yen against the US

dollarAuto industry on road to recovery

Strengths

Diversified operations

Honda is well diversified both geographically as well as in terms of the customer end markets thatit serves. The company operates a total of 396 subsidiaries, and 105 affiliates all over the world.The company manages its operations through five reportable geographic markets: Japan, NorthAmerica, Europe, Asia and other countries. In FY2009, the company earned 45.3% of its revenuesfrom North America, predominantly the US, 18.7% from Japan, 13.3% from Asia, 11.9% from Europe,and 10.8% of revenues from other regions.

Further, the company diversifies its revenue streams by serving a number of customer end markets,including automobile business (76.7% of the total revenues during FY2009), motorcycle business(14.1%), financial services businesses (5.8%) and power product and other business (3.4%).Diversified operations not only provide protection against unfavorable forces in specific market butalso enable it to benefit from opportunities available in various markets.

R&D and engineering capabilities


Honda Motor Co., Ltd.SWOT Analysis

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Honda has strong research and development (R&D) and engineering capabilities. The company isknown for its engineering excellence across its businesses, from automobiles to humanoid robots.The companys R&D divisions operate in the US, Japan, and Germany. In FY2009, the Hondainvested JPY563,100 ($5,651 million) in the R&D activities. Major development in FY2009 includethe development of Japans first built-in type navigation system for motorcycles. Additionally, Hondaimplemented full model changes for the Odyssey and Accord and equipped these models with itsmotion adaptive electric power steering assist system. Strong R&D and engineering capabilitiesenable the company to develop innovative products, which allow it to remain at the forefront of itsrespective businesses and differentiate its offerings in a highly competitive market.

Leading market position and brand strength

Honda is one of the leading manufacturers of light vehicles in the world. It is the second largest

vehicle manufacturer in Japan with renowned brands like Acura, Civic, and Accord, among others.In FY2009, the company delivered 3,517,000 vehicles and 10,114 motorcycles. Four Honda models,more than any other single automaker, topped the rankings for their vehicle segments in an annualJ.D. Power and Associates customer satisfaction survey of US drivers in 2008.

Furthermore, in the annual ranking of top 100 global brands by BusinessWeek in 2009, Hondafigured in the eighteenth position. According to the survey, Honda's brand value reached $17.8 billionin 2009, higher than its competitors like Ford ($7.0 billion), and Volkswagen ($6.5 billion). Further,it is one of the highest ranking automotive brand names in the world. It is ranked well ahead of itscompetitors like Ford, Volkswagen, Audi, Hyundai, Porsche, and Nissan. The company's strongbrand image gives it significant competitive advantage and helps it to register higher sales growthin domestic, as well as in international markets. Brand recognition allows Honda to charge premium

prices than its competitors and thus register relatively higher margins.

Weaknesses

Employee productivity

Honda posted weak revenues in proportion to the total number of its employees. In FY2009, thecompany recorded total revenues of JPY10,011,241 million ($100,112.4 million) with a total of181,876 employees. The revenue per employee of the company stood at JPY55 million ($0.55million), significantly lower when compared to that of its competitors such as Toyota Motor and

Suzuki Motor.

For instance, the revenue per employee of Toyota Motor stood at JPY64 million ($0.64 million) forFY2009, significantly higher than the revenue per employee of Honda. The revenue per employeeof Suzuki Motor, another competitor, stood at JPY210.6 ($2.1 million). The weak revenue peremployee of Honda compared to its competitors indicates its weaker productivity and operationalinefficiency.



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Relatively weak performance in North America

Honda witnessed a weak performance in its North America geographical market, which is thecompanys largest market in terms of revenue generation.The North American market, which mainlyconsists of the US, contributed 54.1%, 50.8%, and 45.3% of the total revenues in FY2007, FY2008,and FY2009 respectively. In FY2009, North America witnessed net sales of JPY4,535,684 million($45,356.8 million) in 2008, a decrease of 25.5% compared to FY2008.This is mainly due to negativeforeign currency translation effects and a decrease in revenue in automobile business. Weakperformance in North America may eventually affect the financial performance of the company.

Sluggish cash flows

The company has witnessed declining cash flows in FY2009 when compared to FY2008. The net

cash flow from operating activities decreased from JPY1,050,902 million ($10,509 million) in FY2008to JPY690,369 million ($6,903.7 million) in FY2009.The decline was primarily due to lower unit salesin the automobile business in North America and an increase in inventories. Hondas declining cashposition implies ineffectual cost management and unrewarded decision making by the management.A continuation of this trend could reduce availability of resources to pursue growth plans.

Lapses in product quality

Honda recalled 4,000 2001 Accords and Civics in November 2008 for air bag inflation problems.The recall was expanded in July 2009 to 440,000 vehicles including the 2001 and 2002 Accord andCivic, as well as certain 2002 Acura TL sedans.Worldwide, Honda has recalled about 514,000vehicles globally due to the airbag problem. Furthermore, in February 2010, Honda added more

than 378,000 cars to the existing safety recall for air bag inflation problems. The recall now affectsmore than 892,000 vehicles, including certain 2001 and 2002 Accord sedans, Civic compacts,Odyssey minivans, CR-V small sport utility vehicles, and some 2002 Acura TL sedans. Moreover,Honda has recorded 12 accidents linked to the problem, with 11 injuries and one death. Significantproduct recalls like these negatively affect the consumer confidence in Hondas products and impactbrand image.

Opportunities

Poised to benefit from increasing demand for hybrid electric vehicles

Worldwide demand for light hybrid electric vehicles (HEV) is estimated to reach four million units by2015. Rising energy costs and increased emissions regulations are likely to increase the demandfor HEVs, as hybrid engines are more fuel efficient and less polluting than conventional gasolineand diesel engines. Cost disparities between HEVs and conventional light vehicles are expected todecline as production volumes increase.The primary markets for HEVs will be within the US, WesternEurope, and Japan, although the rapidly growing Chinese market is also expected to experiencerelatively strong demand for these fuel efficient and environmentally friendly vehicles.



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Honda is keen to capitalize on the growing demand for hybrid electric vehicles. The company hasspent a large amount of money for the development of hybrid vehicles over the years. Honda hasintroduced the Insight, its new model hybrid car, equipped with Hondas lightweight, compact hybridsystem and Eco Assist (Ecological Drive Assist System), which offers superior eco-performance.Additionally, the company commenced the production of the FCX Clarity, a new model fuel cellvehicle, and began to lease these vehicles in Japan in November 2008 and in the US in July 2008.

Moreover, the company is also developing an electric-powered motorcycle that will run on batteries,and, taking advantage of special features of this power source, will have zero carbon dioxide (CO2)emissions. Honda plans to introduce these electric powered motorcycles in about two years. Thecompany's emphasis on hybrid technology will enable it to capitalize on the positive market trendsin this segment to enhance its market position.

Opportunities in Asian markets

The Asian automobile market is expected to drive global demand for light vehicles through much ofthis decade. China, India, and ASEAN (Association of South-East Asian Nations) countries are themajor driving markets for Asian automotive industry. For instance, the Chinese new cars marketconsumption volumes increased by 17.8% to reach a total of 7.4 million units in 2008. The market'svolume is expected to rise to 13 million units by the end of 2013. The Indian new cars marketconsumption volumes increased by 11.3% to reach a total of 1.7 million units in 2008. The market'svolume is expected to rise to 2.5 million units by the end of 2013.

Honda has a strong manufacturing and marketing operations in Asian markets, which in turn willhelp the company to achieve higher market share in this growing market.

Auto industry on road to recovery

After months of decline in sales, the auto industry has offered signs of recovery from its yearlongslump.The recovery is forecasted to be gradual, extending into 2010 and beyond. The performanceof the global automobiles industry is forecast to accelerate, with an anticipated compound annualgrowth rate of 4.4% for the five-year period 200813, which is expected to drive the industry to avalue of $1,831 billion by the end of 2013. The market is forecast to reach a volume of 129.9 millionvehicles in 2013, an increase of 36.4% since 2008. Passenger car sales proved the most lucrativefor the global automobiles industry in 2008, generating total revenues of $1,028.7 billion, equivalentto 69.5% of the industry's overall value. Honda manufactures and sells a range of passenger cars.An expanding market is likely to drive the demand for companys products and services.

Threats

Competition in the global automotive market



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The worldwide automotive market is highly competitive. Honda faces strong competition fromautomotive manufacturers in its various markets. The competition among various auto players islikely to intensify in light of continuing globalization and consolidation in the worldwide automotiveindustry. The factors affecting competition include product quality and features, the amount of timerequired for innovation and development, pricing, reliability, safety, fuel economy, customer service,and financing terms. Increased competition may lead to lower vehicle unit sales and increasedinventory, which may result in a further downward price pressure and adversely affect the company'sfinancial condition and results of operations.

Tightening emission standards

The European Union (EU) Commission and the EU Parliament have adopted a directive thatestablishes increasingly stringent emission standards for passenger and light commercial vehicles

for model years 2005 and thereafter (EURO 4). Under the directive, manufacturers will be responsiblefor the emission performance of these vehicles for five years or 100,000 kilometers, whichever occursfirst. A more stringent emission standard (EURO 5) was adopted by EU legislative bodies and iseffective from 2009. The EU Commission intends to define even more stringent emission standards(EURO 6), which, if adopted, will become mandatory around 2014 or 2015.

In 2005, the states of New York, Massachusetts, and Vermont adopted the California Zero EmissionVehicle (ZEV) regulation. The state of Maine adopted the ZEV regulation starting from 2009.Accordingly, some manufacturers shall be required to sell low emission vehicles which meet a morestringent emission standard than those meeting the national standard. In addition, several Asiancountries adopted regulations which are similar to EURO 2 and EURO 3. In Australia, EURO4-equivalent regulation was implemented in 2008. The emission standards adopted across various

regions can result in additional costs for product development, testing, and manufacturing operationsof Honda.

Appreciating Japanese yen against the US dollar

Honda is sensitive to the fluctuations in foreign currency exchange rates and is principally exposedto fluctuations in the value of the Japanese yen, the US dollar, and the Euro.The company'sconsolidated financial statements, which are presented in Japanese yen, are affected by foreigncurrency exchange fluctuations.The changes in foreign currency exchange rates may affect Honda'spricing of products sold and materials purchased in foreign currencies.

Most of the company's business transactions are conducted in the US dollars.The payments receivedin the US dollars are converted to Japanese yen. In the recent period, the Japanese yen appreciatedsignificantly against the US dollar. For instance, the average exchange rate for Japanese yen in thefirst half of FY2010 (from April 1, 2009 to September 30, 2009) stood at $1= JPY95.6, a decreaseof 9.9% (per $1) compared to the first half of FY2009 (whose average was $1=JPY106.1).

Further, fluctuations in the exchange rate between the Japanese yen and the US dollar may alsoaffect the dollar equivalent of the price of the shares on the Japanese stock exchanges. As a result,exchange rate fluctuations are likely to affect the market price of the American Depositary Shares



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on the New York Stock Exchange. Honda declares any cash dividends on shares in Japanese yen.Exchange rate fluctuations can also affect the US dollar amounts received on conversion of cashdividends.The strengthening of the Japanese yen against the US dollar can have a material adverseeffect on the company's reported operating results, which may in turn affect its valuation.



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