Honda Is Investing in Electric Vehicles While Recovering From the Chip Shortage

Sector Strategist

David Whiston

Honda's products and strong financial position should keep it on solid ground, but the competition is fierce and the U.S. market's increased move to light trucks, where Honda's lineup is not as complete as competitors', may be permanent. Ongoing risks include foreign-exchange volatility, a highly competitive U.S. market, and rising input costs for Honda and suppliers.

Honda's brand along with its reputation for quality drives demand for its vehicles, but its longtime niche in fuel-efficient cars historically positioned the company well to take advantage of consumers seeking more fuel-efficient vehicles. Over 2003-09, the U.S. car/light-truck mix moved to 55%/45% from 46%/54%, but as gas prices fell and light-truck fuel economy improved, cars have lost share to nearly 20% in 2023. In 2022, cars made up 33% of Honda's U.S. sales mix, compared with 31% for Toyota, 11% for GM, and 3% for Ford. Honda’s car focus gives it an advantage whenever the critical U.S. market has high gas prices, but with cheap oil, we think Honda leaves share on the table in segments such as full-size pickups and large SUVs, as it does not have product in these segments. We’d like to see Honda attain a more complete vehicle lineup. The company instead seems to be focused on efficiency by targeting a two thirds reduction of vehicle trim and option choices across its five global models, such as Civic and Accord, by 2025 versus 2018 levels. As of April 2022, it had achieved a reduction of over 50%.

Despite a strong car and crossover lineup, formidable threats remain, such as rising commodity prices and inflation making input costs expensive while hurting consumers' purchasing power. Honda can mitigate this problem by using more common-size vehicle platforms to reduce costs, but that is no guarantee. Honda does a good job producing where it sells to mitigate exchange risk. In 2020, Honda announced it will buy EV batteries from GM's Ultium battery line, and in April 2021 CEO Toshihiro Mibe said Honda targets a 100% global zero emission (electric and hydrogen fuel cell) vehicle lineup by 2040. Many Honda and Acura all-electric offerings go on sale in 2024-26 across China, Japan, and North America.

Business Strategy & Outlook

Honda does not have a moat, and we do not expect that to change. Vehicle manufacturing is a very capital-intensive business, but barriers to entry are not as high as in the past. The industry is already full of strong competition, so it is nearly impossible for one firm to gain a maintainable advantage. Foreign automakers from China and India may one day enter developed markets such as the U.S., South Korea's Hyundai and Kia has quickly become a formidable competitor, and Tesla is growing rapidly. Furthermore, the auto industry is so cyclical that in bad times even the best automakers cannot avoid large declines in returns on invested capital and profit. Cost-cutting helps ease the pain, but it does not restore all lost profit.

None

Economic Moat

Honda

Acura is the luxury vehicle marque of Japanese automaker Honda. The brand was launched in the United States and Canada in March 1986, marketing luxury, performance, and high-performance vehicles.

Acura

ASIMO is a humanoid robot created by Honda in 2000. It is currently displayed in Miraikan museum in the Japanese capital city of Tokyo.

ASIMO

Honda Motor Co., Ltd. engages in the manufacture and sale of automobiles, motorcycles, and power products. It operates through the following segments: Automobile, Motorcycle, Financial Services, and Power Product and Other Businesses. The Automobile segment manufactures and sells automobiles and related accessories. The Motorcycle segment handles all-terrain vehicles, motorcycle business, and related parts. The Financial Services segment provides financial and insurance services. The Power Product and Other Businesses segment offers power products and relevant parts. The company was founded by Soichiro Honda on September 24, 1948 and is headquartered in Tokyo, Japan.

Earnings data Q2 2023

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TOKYO , May 13, 2022 /PRNewswire/ --  Despite certain unfavorable factors such as the resurgence of COVID-19, a decrease in automobile unit sales due to the semiconductor supply shortage and an increase in the cost of raw materials, consolidated operating profit for the fiscal year amounted to 871.2 billion yen, a year-on-year increase by 211.0 billion yen, due primarily to success in reducing costs and controlling incentives, and favorable currency effects. Consolidated profit for the year attributable to owners of the parent amounted to 707.0 billion yen, a year-on-year increase of 49.6 billion yen.

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