Honda Motor Co., Ltd.

Company Profile
Publication Date: 28 May 2010

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TABLE OF CONTENTS

TABLE OF CONTENTS
Company Overview..............................................................................................4 Key Facts...............................................................................................................4 SWOT Analysis.....................................................................................................5

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Honda Motor Co., Ltd.

Company Overview

COMPANY OVERVIEW
Honda Motor (Honda) is the world's largest motorcycle manufacturer and one of the leading automakers. The company develops, manufactures, and markets automobiles, motorcycles, and power products. It operates all over the world. Honda is headquartered in Tokyo, Japan and employs about 182,000 people. The company recorded revenues of JPY10,011,241 million ($100,112.4 million) during the financial year ended March 2009 (FY2009), a decrease of 16.6% compared to FY2008. This was primarily due to foreign currency translation effects and decreased net sales in the automobile business. The operating profit of the company was JPY189,643 million ($1,896.4 million) during FY2009, a decrease of 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
Head Office Honda Motor Co., Ltd. 1-1, 2-chome Minami-Aoyama Minato-ku Tokyo 107-8556 JPN 81 3 3423 1111 81 3 5412 1515 http://world.honda.com

Phone Fax Web Address

Revenue / turnover 10,011,241.0 (JPY Mn) Financial Year End Employees New York Ticker Tokyo Ticker March 181,876 HMC 7267

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SWOT Analysis

SWOT ANALYSIS
Honda Motor (Honda) is one of the largest vehicle manufacturers in the world. The company is well diversified 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 results of operations. Strengths Diversified operations R&D and engineering capabilities Leading market position and brand strength Weaknesses Employee productivity Relatively weak performance in North America Sluggish cash flows Lapses in product quality Threats Competition in the global automotive market Tightening emission standards Appreciating Japanese yen against the US dollar

Opportunities Poised to benefit from increasing demand for hybrid electric vehicles Opportunities in Asian markets Auto industry on road to recovery

Strengths

Diversified operations Honda is well diversified both geographically as well as in terms of the customer end markets that it 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, North America, Europe, Asia and other countries. In FY2009, the company earned 45.3% of its revenues from 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 but also enable it to benefit from opportunities available in various markets. R&D and engineering capabilities

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SWOT Analysis

Honda has strong research and development (R&D) and engineering capabilities. The company is known 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 Honda invested JPY563,100 ($5,651 million) in the R&D activities. Major development in FY2009 include the development of Japans first built-in type navigation system for motorcycles. Additionally, Honda implemented full model changes for the Odyssey and Accord and equipped these models with its motion adaptive electric power steering assist system. Strong R&D and engineering capabilities enable the company to develop innovative products, which allow it to remain at the forefront of its respective 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 annual J.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, Honda figured in the eighteenth position. According to the survey, Honda's brand value reached $17.8 billion in 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 its competitors like Ford, Volkswagen, Audi, Hyundai, Porsche, and Nissan. The company's strong brand image gives it significant competitive advantage and helps it to register higher sales growth in 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, the company recorded total revenues of JPY10,011,241 million ($100,112.4 million) with a total of 181,876 employees. The revenue per employee of the company stood at JPY55 million ($0.55 million), 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) for FY2009, significantly higher than the revenue per employee of Honda. The revenue per employee of Suzuki Motor, another competitor, stood at JPY210.6 ($2.1 million). The weak revenue per employee of Honda compared to its competitors indicates its weaker productivity and operational inefficiency.

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SWOT Analysis

Relatively weak performance in North America Honda witnessed a weak performance in its North America geographical market, which is the companys largest market in terms of revenue generation. The North American market, which mainly consists 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 negative foreign currency translation effects and a decrease in revenue in automobile business. Weak performance 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 FY2008 to JPY690,369 million ($6,903.7 million) in FY2009. The decline was primarily due to lower unit sales in the automobile business in North America and an increase in inventories. Hondas declining cash position 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 and Civic, as well as certain 2002 Acura TL sedans. Worldwide, Honda has recalled about 514,000 vehicles 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 affects more 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. Significant product recalls like these negatively affect the consumer confidence in Hondas products and impact brand 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 by 2015. Rising energy costs and increased emissions regulations are likely to increase the demand for HEVs, as hybrid engines are more fuel efficient and less polluting than conventional gasoline and diesel engines. Cost disparities between HEVs and conventional light vehicles are expected to decline as production volumes increase. The primary markets for HEVs will be within the US, Western Europe, and Japan, although the rapidly growing Chinese market is also expected to experience relatively strong demand for these fuel efficient and environmentally friendly vehicles.

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SWOT Analysis

Honda is keen to capitalize on the growing demand for hybrid electric vehicles. The company has spent a large amount of money for the development of hybrid vehicles over the years. Honda has introduced the Insight, its new model hybrid car, equipped with Hondas lightweight, compact hybrid system 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 cell vehicle, 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. The company's emphasis on hybrid technology will enable it to capitalize on the positive market trends in 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 of this decade. China, India, and ASEAN (Association of South-East Asian Nations) countries are the major driving markets for Asian automotive industry. For instance, the Chinese new cars market consumption volumes increased by 17.8% to reach a total of 7.4 million units in 2008. The market's volume is expected to rise to 13 million units by the end of 2013. The Indian new cars market consumption volumes increased by 11.3% to reach a total of 1.7 million units in 2008. The market's volume 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 will help 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 yearlong slump. The recovery is forecasted to be gradual, extending into 2010 and beyond. The performance of the global automobiles industry is forecast to accelerate, with an anticipated compound annual growth rate of 4.4% for the five-year period 200813, which is expected to drive the industry to a value of $1,831 billion by the end of 2013. The market is forecast to reach a volume of 129.9 million vehicles in 2013, an increase of 36.4% since 2008. Passenger car sales proved the most lucrative for the global automobiles industry in 2008, generating total revenues of $1,028.7 billion, equivalent to 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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SWOT Analysis

The worldwide automotive market is highly competitive. Honda faces strong competition from automotive manufacturers in its various markets. The competition among various auto players is likely to intensify in light of continuing globalization and consolidation in the worldwide automotive industry. The factors affecting competition include product quality and features, the amount of time required for innovation and development, pricing, reliability, safety, fuel economy, customer service, and financing terms. Increased competition may lead to lower vehicle unit sales and increased inventory, which may result in a further downward price pressure and adversely affect the company's financial condition and results of operations. Tightening emission standards The European Union (EU) Commission and the EU Parliament have adopted a directive that establishes increasingly stringent emission standards for passenger and light commercial vehicles for model years 2005 and thereafter (EURO 4). Under the directive, manufacturers will be responsible for the emission performance of these vehicles for five years or 100,000 kilometers, whichever occurs first. A more stringent emission standard (EURO 5) was adopted by EU legislative bodies and is effective 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 Emission Vehicle (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 more stringent emission standard than those meeting the national standard. In addition, several Asian countries adopted regulations which are similar to EURO 2 and EURO 3. In Australia, EURO 4-equivalent regulation was implemented in 2008. The emission standards adopted across various regions can result in additional costs for product development, testing, and manufacturing operations of Honda. Appreciating Japanese yen against the US dollar Honda is sensitive to the fluctuations in foreign currency exchange rates and is principally exposed to fluctuations in the value of the Japanese yen, the US dollar, and the Euro. The company's consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations.The changes in foreign currency exchange rates may affect Honda's pricing of products sold and materials purchased in foreign currencies. Most of the company's business transactions are conducted in the US dollars.The payments received in the US dollars are converted to Japanese yen. In the recent period, the Japanese yen appreciated significantly against the US dollar. For instance, the average exchange rate for Japanese yen in the first half of FY2010 (from April 1, 2009 to September 30, 2009) stood at $1= JPY95.6, a decrease of 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 also affect 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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SWOT Analysis

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 cash dividends. The strengthening of the Japanese yen against the US dollar can have a material adverse effect on the company's reported operating results, which may in turn affect its valuation.

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