Honda’s 2015 Accord Can Help The Company Overcome Difficulties In Its Other Businesses

-10.93%
Downside
36.43
Market
32.45
Trefis
HMC: Honda Motor logo
HMC
Honda Motor

Honda Motors (NYSE:HMC) had seen its share of the U.S. auto market drop from 9.7% to 9.1% through the first seven months of 2014. In the mean time, competitors managed to capitalize on a recovering auto market by offering incentives such as discounts and no-interest deals in order to attract buyers. However, the recent surge in the sales of the Honda Accord might help Honda arrest the decline. In the month of August, Accord sales grew by nearly a third as the company sold over 51,000 units of the vehicle. [1] For the month, the company’s total vehicle sales exceeded 151,000 units. Honda repeated its performance in September by selling nearly 33,000 units of the Accord, implying a near 33% increase compared to last year’s 25,171 units sold in September. [2]

The Accord is a very significant model for the Japanese car manufacturer, having accounted for nearly a fourth of the company’s sales in the U.S. in 2013. [3] The model accounted for 26% of the company’s overall sales through the month of September, this year. The recent spike in sales of the Honda Accord is likely a result of the shift in focus from retail sales to individuals by the company. Additionally, Honda offered attractive discounts on the model, making it attractive to owners who own an older model vehicle. The success of this model is highly important to Honda’s prospects in the U.S., its biggest market, especially as other divisions are stagnating. Below, we take a closer look at both these aspects.

The Accord is extremely important for the company and the launch of the 2015 Accord is highly important to the company for the same reason. The new model will face competition from the 2015 version of Toyota’s Camry. The new Accord, which comes with better fuel efficiency and operational features such as the Homelink Wireless Control, will go on the market at cheaper price than the new Camry. If the lower price can persuade consumers to buy the Accord instead of the Camry, it will go a long way to improving the company’s profitability.

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We have a $43 price estimate for Honda Motors, which is slightly more than the current market price.

Motorcycles Division Struggling

The global demand for motorcycles has been declining. However, this issue is cyclical rather than structural. A company like Honda relies on improving economic conditions in emerging markets like Brazil, India and Thailand for sales growth. As the disposable incomes of consumers in these economies rise and as they get easier access to cheap financing, it is easier for Honda to be able to sell more motorcycles. However, demand in recent times has been flat due to uncertain economic conditions in these markets. There are bigger issues in Brazil and Thailand, where financing for motorcycle has been made difficult to procure, thus impacting volumes even though the company has knocked several price points off its models to lure back customers. It is estimated that about half of the consumers use debt to finance their motorcycle purchases, making tighter loan requirement a significant drag on motorcycle sales. Additionally, as interest rates are raised, consumers are likely to prefer paying down their debts instead of taking on loans. To combat this difficult environment, Honda has responded by increasing incentives and discounts, which has resulted in increased competition for prices among the manufacturers of original equipments, which is another factor putting pressure on the company’s finances.

Loss of Market Share in China

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. [4]

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.

Honda’s sales were down 5.5% in August from a year earlier, even as the industry wide sales grew by 6.7%. [5] 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.

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Notes:
  1. New Auto Sales Forecast August 2014: Chrysler Surpasses Honda As Jeep Sales Soar; Hyundai, Kia Grow Market Share,IB Times, September 2014 []
  2. September Midsize Sales: Honda Accord Beats Toyota Camry Again, Motor Trend, October 2014 []
  3. Honda Accord Tops Camry in U.S. as Asian Brands Lose Share, Bloomberg, January 2014 []
  4. Japanese carmakers rue lost lead in China, November 21, 2013, ft.com []
  5. Honda says August China auto sales down 5.5 percent year-on-year, Reuters, September 2014 []