Honda Motor SWOT Analysis

Strategic and SWOT Analysis on Honda Motor Co. Ltd

COMPANY OVERVIEW

Honda Motor Co., Ltd. (Honda or "the company") is one of the leading manufacturers of automobiles and motorcycles in the world. The company also provides financial services, power products, and other products and services. It primarily operates in North America, Asia, and Europe. Honda is headquartered in Tokyo, Japan and employed 190,338 people as of March 31, 2013.

The company recorded revenues of JPY9,877,947 million ($119,523.2 million) during the financial year ended March 2013 (FY2013), an increase of 24.3% over FY2012. The operating profit of the company was JPY544,810 million ($6,592.2 million) in FY2013, as compared to JPY231,364 million ($2,799.5 million) in FY2012. Its net profit was JPY367,149 million ($4,442.5 million) in FY2013, an increase of 73.6% over FY2012.

SWOT ANALYSIS

Honda is one of the leading manufacturers of automobiles and motorcycles in the world.The company develops, manufactures and markets automobiles, motorcycles, and power products. Honda has a broad product portfolio, which reduces business risks and also provides a future growth platform for the company. However, the price volatility in any of Honda’s markets could adversely impact its results of operations.

Strengths

Broad product portfolio provides a future growth platform

Honda has a broad product portfolio, which cushions it from business risks. The company offers a number of products, including automobiles, motorcycles, power products and others products. Honda's automobiles business offers passenger cars, light trucks and mini vehicles. Honda's automobiles use gasoline engines of three, four or six-cylinder, diesel engines and gasoline-electric hybrid systems. Honda also offers alternative fuel-powered vehicles such as natural gas, ethanol, and fuel cell vehicles.

The company's motorcycle business offers a wide range of motorcycles, ranging from 50cc class to 1,800cc class in cylinder displacement. Honda's motorcycles use internal combustion engines

developed by Honda that are air or water-cooled, four-cycle, and single, two, four or six- cylinder. Honda's motorcycle line consists of sports, including trial and moto-cross racing, business and commuter models. Honda also produces all-terrain vehicles (ATVs) and multi utility vehicles (MUVs). Honda's power products and others businesses manufactures a variety of power products, including tillers, portable generators, general-purpose engines, grass cutters, outboard marine engines, water pumps, snow throwers, power carriers, power sprayers, lawn mowers and lawn tractors (riding lawn mowers). Additionally, the company also offers compact home-use cogeneration units and thin film solar cells made of crystalline silicon for home use, public and industrial use. Broad product portfolio not only reduces business risks of Honda, but also provides a future growth platform for the company.

Robust production and sales network provides a wider reach

The company has as robust production and sales network. Honda's automobiles are produced at two sites in Japan, which include the Saitama factory and the Suzuka factory. Honda's major production sites overseas include those located in Ohio (the US), Alabama (the US), Indiana (the

US), Ontario (Canada), Swindon (the UK), Ayutthaya (Thailand), Greater Noida (India) and Sao

Paulo (Brazil). In addition, Yachiyo Industry, a consolidated subsidiary of the company  assembles mini vehicles for the Japanese market. Similarly, Honda's motorcycles are produced at the Kumamoto factory in Japan and at production facilities in Thailand, Vietnam, India, Brazil and Argentina. Honda sells automobiles through a network of 750 retail dealers (2,170 shops) in Japan; 1,310 dealers in the US; 1,490 dealers in Asia (excluding Japan); and 1,300 dealers in Europe. In Japan, Honda distributes motorcycles through approximately 6,900 outlets, including approximately 600 "PRO'S" shops and approximately 110 Honda Dream authorized dealerships. Overseas, the company sells motorcycles through a network of 1,050 independent local dealers in the US, 13,700 independent local dealers in Asia (excluding Japan), and 1,550 independent dealers in Europe. Similarly, the company's power products are distributed in Japan through approximately 1,310 retail dealers; in the US through 8,200 independent local dealers; in Asia (excluding Japan) through 2,800 independent local dealers; and in Europe through a network of approximately 2,900 independent local dealers. With the help of this network, the company sold 4,014,000 units of automobiles, 15,494,000 units of motorcycles, and 6,071,000 units of power products, worldwide during FY2013. While the company's extensive production base diversifies business risks, its robust distribution network provides a wider reach, thus boosting revenues.

Strong focus on research and development allows differentiating its product offering

The company has been focusing on research and development (R&D) to create distinctive products.  To achieve this goal, the company's primary R&D divisions operate independently as subsidiaries, allowing technicians to pursue their tasks with significant freedom. The company's product-related R&D is led by Honda R&D in Japan; Honda R&D Americas in the US; and Honda R&D Europe (UK) in the UK. Honda's R&D on production technologies is led by Honda Engineering in Japan and Honda Engineering North America in the US. In FY2013, the company spent JPY560.2 billion (approximately $6.7 billion) on R&D.

Due to the significant R&D efforts, the company has been able to launch new products and technologies in the recent past. For instance, in July 2013, the company and the National Institute

of Advanced Industrial Science and Technology (AIST) jointly developed a remotely controlled survey robot at Fukushima Daiichi Nuclear Power Station of Tokyo Electric Power Company. This survey robot was developed to support the actual needs based on information provided by TEPCO concerning conditions inside the reactor building. AIST developed the high-area accessible crawler work platform and Honda developed the survey-performing robot arm, which is installed on top of the platform. Earlier in December 2012, Honda launched the Honda Smart Ecological Paint (Honda S.E. Paint) process, a new painting technology that eliminates a middle coating process from a commonly used 4-coat/3-bake auto body painting process to realize a 3-coat/2-bake water-based painting process. The company believes that this process will result in a 40% reduction in the number of processes required for painting, thus resulting in a 40% reduction in CO2 emitted during the painting process. Earlier, in November 2012, Honda unveiled the Sport Hybrid Intelligent Dual Clutch Drive system, a lightweight one-motor hybrid system optimized for small-sized vehicles. Furthermore, as of March 2013, the company owned more than 19,400 patents in Japan and more than 25,200 patents abroad. Honda also had  applications pending for more than 10,800 patents in Japan and for more than 15,800 patents abroad. Strong focus on R&D and engineering 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.

Weaknesses

High pension costs and other postretirement benefit obligations impact the financial condition and results of operations

Honda has pension plans and provides other post-retirement benefits. The amounts of pension benefits, lump-sum payments and other post-retirement benefits are primarily based on the combination of years of service and compensation. The funding policy makes periodic  contributions as required by applicable regulations. In FY2013, the company's benefit obligations stood at JPY1,283,216 ($15,526.9 million) as compared to the benefit obligations of JPY1,193,566 ($14,442.1 million) in FY2012, Benefit obligations and pension costs are based on assumptions of many factors, including the discount rate, the rate of salary increase and the expected long-term rate of return on plan assets. The differences in actual expenses and costs or changes in assumptions could impact the company’s pension costs and benefit obligations, including Honda’s cash requirements to fund such obligations. Thus, these obligations could materially influence the financial condition and results of operations.

Product recalls influences brand reputation

The company’s plants are both inside and outside Japan and it manufactures products according

to the strictest globally accepted quality control standards. However, the company has recalled some vehicles in the past year due to quality issues. For instance, in October 2013, Honda found a defect in certain 2014 model year Honda CTX700ND motorcycles which relates to motor vehicle safety exists.. In the same month, American Honda Motor Co., Inc. recalled all model year 2012 and certain model year 2013 TRX500FE and TRX500FM ATVs. A small number of ATVs within the affected range had a steering shaft that was slightly bent during assembly. A bent shaft also had a small crack that could result in the steering shaft separating while the ATV is in operation. Furthermore, in April 2013, Honda had recalled 204,169 certain model year 2012-2013 CR-V, Odyssey, and model year 2013 Acura RDX vehicles. During the sub-freezing temperatures, the brake-shift interlock blocking mechanism is slowing down and is allowing the gear selector to be moved from the Park position without pressing the brake pedal. Thus, in the unusual event of a large-scale recall or product liability award could have a negative impact on the company’s performance and financial position. In addition, it would also negatively impact the company’s brand reputation in the market place.

Opportunities

Strong outlook for the global motorcycle manufacturing provides a growth opportunity

The global motorcycle manufacturing industry has fluctuated between strong growth and decline in value and volume in recent years, and dropped into decline in 2012. The industry is, however,

expected to grow strongly over the forecast period to 2017. According to MarketLine (a unit of Informa plc), the global motorcycle manufacturing market is expected to have a value of $70.7 billion in 2014, representing a growth of 8.5% compared to 2013. Additionally, MarketLine estimates the performance of the market is forecast to accelerate, with an anticipated CAGR of 9% for the three-year period 2014-17, which is expected to drive the industry to a value of $92.7 billion by the end of 2017. Furthermore, in 2017, the global motorcycle manufacturing industry is forecast to have a volume of 72.4 million units, an increase of 21% since 2014. The compound annual growth rate of the industry in the period 2014-17 is predicted to be 7%.

Honda is the leading player in the global motorcycle market and thus, the strong outlook for the

global motorcycle manufacturing market coupled with the company's new product launches provides a growth opportunity for the company.

Expansion through new production plants and increased production capacities

The company is focused on increasing its presence through new production plants and increasing

existing production capacities. For instance, in May 2013, Honda Motorcycle and Scooter India Pvt. Ltd. inaugurated its most advanced and third motorcycle production plant at Narsapura Area, District is Kolar in Karnataka. Honda's new plant is expected to have 1,200,000 units production capacity in Phase I. Aiming at market leadership, Honda also announced additional increase of 600,000 units capacity in Phase 2 of this plant taking its annual capacity to 1,800,000 units by end of FY2014. With its three plants, Honda will significantly increase its cumulative annual production capacity by 64% in just one fiscal year. Furthermore, in February 2013, Honda established a new motorcycle production and sales subsidiary in Kenya, where future market growth is expected. The new company in Kenya is the third Honda subsidiary in Africa, following South Africa and Nigeria, and the new plant will become the second Honda plant in Africa, after only the plant in Nigeria. Combining the two plants together, Honda's annual motorcycle production capacity in Africa will be 175,000 units. The new plant is expected to

have an initial production capacity of 25,000 units. Similarly, in January 2013, Honda announced

plans to invest additional $23 million at Honda of America Manufacturing plant to add  production for the new two-motor Accord Hybrid Sedan. While the shift of production bases from Japan to other countries decreases business risk, increase in production capacities provides the company an opportunity to meet growing customer demands. Growing global automotive industry helps to gain more customers and increase revenues The global automotive industry was severely impacted by the economic downturn, with a decline in revenues being recorded in 2008 and 2009. However, 2011 saw a strong rebound which has continued into 2012. Moreover, the industry is expected to perform positively in the coming years. According to MarketLine, the global automotive manufacturing industry grew by 5.9% in 2013 to reach a value of $1,681.5 billion.The cars segment was the largest segment of the global automotive manufacturing

industry. Further, the performance of the industry is forecast to accelerate, with an anticipated

compound annual growth rate (CAGR) of 8% for the four-year period 2013-17, which is expected to drive the industry to a value of $2,276.9 billion by the end of 2017.

Honda is one of the leading automobile companies in the world. The company offers a wide range of automobiles, including passenger cars, light trucks and mini vehicles. The recovery of global automotive industry thus provides Honda an opportunity to gain more customers and increase revenues.

Threats

Volatile raw material prices could adversely disturb the results of operations

The company uses various raw materials in its production process. The principal raw materials used by Honda are steel plate, aluminum, special steels, steel tubes, paints, plastics and zinc, which are purchased from several suppliers. The most important raw material purchased is steel plate, accounting for approximately 45% of Honda’s total purchases of raw materials in FY2013.

The prices of these materials have been very volatile over the past few years. For example, the average price of global composite carbon steel declined to $686 per tonne in July 2013 from $736 per tonne in February 2013. Moreover, the price rose to $714 per tonne in October 2013. Due to pricing pressure or other factors, the company may not be able to pass along the volatile raw material prices to its customers in the form of price increases or its ability to do so could be delayed.Therefore, the company’s results of operations could be adversely affected. In addition, volatile raw material prices could impact the purchasing costs of Honda and thus strain its margins.

Relying on external suppliers impacts the production and increases costs

The company purchases raw materials and parts from numerous external suppliers. It relies on

certain suppliers for some of the raw materials and parts which it uses in the manufacture of its

products. Honda’s ability to continue to obtain these supplies in an efficient and cost-effective manner is subject to a number of factors, some of which are not within Honda’s control.These factors include the ability of its suppliers to provide a continued source of raw materials and parts and Honda’s ability to compete with other users in obtaining the supplies. Therefore, loss of a key supplier in particular affects the production and increases the costs. Intense competition in the global automotive market influence the financial condition 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 impacting 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.

Some of the company's competitors include Ford, Volkswagen, Audi, Hyundai, Porsche, Ferrari,

Toyota, BMW, Nissan, among others. Increased competition may lead to lower vehicle unit sales

and increased inventory, which may result in a further downward price pressure and adversely impact the company's financial condition and results of operations. Stringent environmental and governmental regulations affect the operations The automobile, motorcycle and power product industries are subject to extensive environmental and other governmental regulations, including with respect to global climate changes. The regulations  regarding vehicle emission levels, fuel economy, noise and safety and noxious substances, as well as levels of pollutants from production plants, are extensive within the automobile, motorcycle and power product industries.

For instance, in 2008, to strengthen the enforcement of laws in Japan, the 2009 Exhaust Emission

Standards were created after the passage of long-term regulation. Long-term targets for gasoline

vehicles remained unchanged except those for direct injection gasoline vehicles, which were also

required to meet the particulate matter (PM) standard. New long-term emissions targets for diesel

vehicles were lowered by more than 60% from the 2005 level of NOx and PM standards. Additionally, the Central Environmental Council in the Ministry of Environment reviewed on the current JC08 mode for emission test mode in 2010 and began to take the introduction of WLTP (Worldwide harmonized Light vehicle Test Procedure) into consideration. These regulations are subject to change, and are often made more restrictive, particularly in recent years, due to an increasing concern with respect to possible global climate changes. The costs to comply with these regulations can be significant to Honda’s operations. Moreover, any significant change in the regulation structure in any of the countries Honda is operating may have a serious impact on its operations.

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