Honda Might Have To Spend More On Promoting Its Cars Following China Setbacks
Things seem to be going wrong again for Honda Motors (NYSE:HMC) in China. Its sales were down 5.5% in August from a year earlier, even as the industry wide sales grew by 6.7%. [1] The August decline followed a 22.7% year-on-year fall in July. Honda’s sales in 2011-2012 were abysmally low, following the tensions that sparked off between China and Japan on claims over the disputed islands. The islands are known as Senkaku in Japan and Diaoyu in China. Overall, Honda’s sales in China are up 5.2% for the first eight months of the year.
We have a $43 price estimate for Honda Motors, which is slightly more than the current market price.
Losing Market Share
Japanese automakers have lost a quite a bit off market share in China over the last five years. In 2008, Toyota, Honda and Nissan boasted a combined market share of 25% but the figure dropped to 15% by 2012. Following the global market crash in 2008, Japanese autos held off their expansion plans in the country and focused on cost cutting instead. [2]
The global recession however, never really affected the Chinese automotive market. In the last few years, Chinese automotive market has more than doubled to 20 million units. Western auto companies, which continued to pour in investments into China, gained market share at the expense of Japanese automakers. The situation was exacerbated by the unfortunate natural disasters in 2011, which constrained the production of Japanese companies. Things were only normalizing before tensions flared up between China and Japan and negatively impacted the sales of Japanese companies.
With the situation now stabilizing and Japanese automakers once again generating solid profits, Honda is looking to start afresh in the world’s most populous nation. The automaker feels that if it is able to offer cars tailored to the needs of the Chinese customers, it can grow its sales significantly. China is one of the biggest markets for Honda, accounting for about a sixth of its total sales.
China-Specific Models To Invigorate Product Portfolio
In the second half of last year, Honda opened a new R&D center in Guangzhou in order to increase the localization of its product portfolio. Honda plans to introduce a total of 12 models in China within the 2013-2015 period. [3] Out of these, five will be developed exclusively for China.
In addition to Chinese specific models, Honda also introduced the refreshed Fit in China earlier this year. The Fit received an encouraging response initially. When the company launched the compact hatchback in China in June, its sales of the model nearly tripled to 8,200 units, on the back of high demand from younger consumers. [4] However, the falling sales of a key model like Accord in the face of increased competition from entry-level premium cars from German automakers, have dented Honda’s sales and cast a doubt over whether the company will be able to achieve its sales target for the year. [5] Honda was pretty bullish about the success of its upcoming models, including Odyssey, Spirior and Vezel, in China and estimates the sales to double to 1.3 million units annually by 2015. [6] Following these results, the company might also have to expand promotion for these cars, which would impact its overall profitability.
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Notes:- Honda says August China auto sales down 5.5 percent year-on-year, Reuters, September 2014 [↩]
- Japanese carmakers rue lost lead in China, November 21, 2013, ft.com [↩]
- Honda launches R&D centre in China to tailor cars for local drivers, November 5, 2013, reuters.com [↩]
- Nissan, Honda China Car Sales Accelerate, Wall Street Journal, July 2014 [↩]
- Japan’s Auto Makers Hit Wall in China, Wall Street Journal, September 2014 [↩]
- Honda plans more R&D in China, June 16, 2013, china.cn.org [↩]