Honda Banking On Booming SUV, Crossover Segment To Grow Its U.S. Sales Numbers
Honda Motors (NYSE:HMC) revealed the 2015 version of its all new entry-level crossover SUV, the HR-V, at the Los Angeles International Show on November 21. The HR-V is a small crossover, one-size down from the Honda CR-V, and developed like the CR-V on the platform developed for Honda’s subcompact Fit. The 2015 CR-V was one of the two fastest selling cars in the U.S. auto market for the month of October. The HR-V will reach dealers sometime this winter and is expected to be priced around $20,000. The U.S. market version of the car is likely to be made on the company’s assembly line in Mexico and expected to share the 1.5-liter four-cylinder engine with the Honda Fit. The new crossover SUV will join a rapidly growing segment of the market and is expected to boost the company’s top line.
We have a $41 price estimate for Honda Motors, which is higher than the current market price.
SUVs and Crossovers Form A Fast Growing Segment
U.S. light vehicles rose by 6% in the month of October compared to October, 2013. However, the more striking data point to emerge from the October auto sales was that consumer spending rose by 8% in the month, according to figures reported by J.D. Power. [1] The rise in revenue outpaced the gains made in volumes as consumers have been shifting from lower priced sedans to expensive SUVs and crossovers. For the first ten months of the year, total consumer spending on new vehicles was $334 billion, putting the figure on course to surpass $400 billion for the first time ever. [1] Even though, total vehicle unit sales are still lower than those five years ago or before the recession, and even compared to ten years ago, a trend towards larger and more expensive cars is driving the auto market. Lower gasoline prices can provide a further boost to the auto market in the U.S., as consumers move to trade in their older, fuel-inefficient cars for more expensive, fuel-efficient vehicles in order to lower their overall cost of owning a vehicle. Lower fuel costs should mean that over a long period, the amount of money spent on the operation and maintenance of a car comes down. The price of gasoline fell below the $3 mark for the first time since 2010 earlier this month. [2]
Honda Motors is one of the companies that seems to be profiting the most from this trend. In the month of October, Honda, along with Fiat Chrysler, contributed nearly 41% of the total gains made in overall revenues made by the auto industry. For Honda’s America division, the CR-V was the highest selling vehicle for the first time in over two years. The company delivered over 5,100 more CR-Vs than Civics in the month of October. The average price of a CR-V is 25,729 compared to Civic’s 19,597, therefore the higher presence of CR-V in its overall sales mix should boost the company’s margin. [2]
The growth in these numbers is driven by the trend towards SUVs and crossovers and away from sedans in the U.S. auto market. Subcompact SUVs, which were virtually unknown until a few years ago in the U.S., have emerged as another strong favorite of consumers in this new auto market environment. In the last decade, big, truck-like SUVs were quite popular with consumers, but now vehicles like the CR-V, which offers car-like handling and fuel-economy, but the same space and all-weather capability as those earlier cars, are taking their place.
Highly Competitive Segment
The HR-V might be new to the U.S. market but the car is modeled on Honda’s Vezel, which has already been tried successfully in markets like Japan. Small SUVs have been popular in markets where the roads are smaller, consumer budgets are low and gas is expensive. A number of auto makers already have small SUVs in their global product portfolios and a number of these cars might soon make their way to the U.S. too. For example, General Motors has posted good sales numbers with two near-identical cars, the Opel Mokka and the Buick Encore, in Europe and North America respectively. The company is expected to bring the Chevrolet Trax, another car that the company has been selling for a few years in international markets, to the U.S. showrooms in early 2015. Similarly, Nissan’s Juke crossover, Fiat’s Jeep Renegade and Ford’s EcoSport might also be introduced with small variations to the U.S. market.
Accord Still Important For Honda
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. In the month of August, Accord sales grew by nearly a third as the company sold over 51,000 units of the vehicle. [4] 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. [5] 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.
The Accord is extremely important for the company and the new 2015 model will face competition from the newly re-designed 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 a 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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- Sales are up and the mix is rich, Automotive News, November 2014 [↩] [↩]
- Sales are up and the mix is rich, Automotive News, November 2014 [↩] [↩]
- Honda Accord Tops Camry in U.S. as Asian Brands Lose Share, Bloomberg, January 2014 [↩]
- New Auto Sales Forecast August 2014: Chrysler Surpasses Honda As Jeep Sales Soar; Hyundai, Kia Grow Market Share, IB Times, September 2014 [↩]
- September Midsize Sales: Honda Accord Beats Toyota Camry Again, Motor Trend, October 2014 [↩]