Here’s How Honda Plans to Cash in on Growth of Asian Auto Market

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Honda Motors (NYSE:HMC) expects at least 90% of its automotive sales growth in the current fiscal year to come from Asia. The Japanese auto maker is building factories and introducing a number of new cars to grow its revenues in the region. As Honda’s sales cool in North America, Asia is rapidly becoming the key market for the company. Following the fall in demand in U.S. and Europe brought about by the global recession, emerging markets grew in importance to these companies. Rising demand for vehicles in China, Southeast Asia and Latin America helped to offset the dip in U.S., European and Japanese sales. As the contribution of new cars in the overall fleet of cars in the U.S. continues to drop, the developing economies of Asia, like China, India and Indonesia, are becoming critical to Honda’s sales.

See our complete analysis for Honda stock here

We have a $43 price estimate for Honda Motors, which is about 10% above the current market price.

Population Growth

By 2030, Asia’s urban population could touch 2.7 billion, which would be about 55% of the world’s entire population. Increasing urbanization not only creates economic growth but also creates a growing need for mobility. Higher GDP leads to higher income levels and hence higher disposable incomes, thus allowing people to meet their growing demand for mobility. The International Monetary Fund’s(IMF) latest Asia and Pacific Regional Economic Outlook  says that the Asian economy could grow 5.5% annually through 2015, on the back of increasing export demand, credit growth of firms and availability of skilled labor forces. [1]

All these factors coupled with Asia’s low car ownership rates make Asia an attractive market for auto makers. The continent stands way behind advanced economies in car penetration rates, which leaves huge room for growth. In developed nations generally more than 50% of the population owns cars, while in China the car penetration rate is only 87 for every 1,000 people and India’s rate is as low as 50 vehicles per 1,000 people. Honda, which derived 38% of its auto sales from the Asian market in the last fiscal year, expects its auto sales in Asia to grow to 1.62 million units, up almost 21% from last year.

Improved Production Capacity

In 2013, Honda produced ~850,000 units in Japan. To this, the company has added a capacity of 250,000 more vehicles with the newly built plant in Yorii. [2] In China, Honda collaborates with two Chinese auto companies, Guangqi and Dongfeng. Honda has a 50% share in each joint-venture partnership. These joint ventures aim to increase the company’s annual production capacity in China to 1.01 million units from the present level of 870,000. [3] In India, a market that’s becoming increasingly important for Honda because of the growing demand for the new City and Amaze models, the automaker has a sales target of 300,000 units by 2017.  Honda currently has a production capacity of 180,000 units per year in its two plants in India currently. Honda is also aggressively adding capacity in Southeast Asian countries like Thailand, Indonesia, and Malaysia. It is building a new factory in Thailand that will manufacture 120,000 units per year, improving the country’s capacity by 40% to 420,000 units, once it starts production in 2015. Honda recently opened a second manufacturing facility in Malaysia, that will churn out 100,000 units a year. [4]

New Car Launches

Honda has released a number of new models in Asia in the last two countries. As income levels in these countries grow, offering a wide variety of options to potential buyers is a surefire way of sustaining sales growth. In 2013, Honda introduced the Fit in Japan, which was an instant success. A similar fate was met by the launches of the sedans City and Amaze in India. The auto maker also launched the mini-vehicle N-WGN, a fully remodeled version of the Odyssey minivan, and the compact SUV Vezel in Japan. Honda plants to launch 20 new cars in China in the next two years, following the success of Crider and Jade, both launched in 2013, in the country. The company also plans to launch the Mobilio and Jazz in India. A variant of the Mobilio was introduced in Indonesia last month.

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Notes:
  1. REGIONAL ECONOMIC OUTLOOKSustaining Asia’s Momentum: Time for Vigilance and Reform, IMF, April 2014 []
  2. Honda’s new plant takes manufacturing to the next level, Automotive News, December 2013 []
  3. Honda Expanding China Output With Local JV Partner, Wards Auto, May 2013 []
  4. Honda: Growing beyond Japan, Automotive Manufacturing Solutions, May 2014 []
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