What Honda Is Doing To Overcome The Slowdown In The Chinese Auto Market

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Honda Motor

Things seem to be going wrong again for Honda Motors (NYSE:HMC) in China. The Japanese auto maker reported a 4.1% increase in unit sales in 2014, 150 basis points higher than the 2.6% growth in 2013, but its growth slowed to only 0.6% in the first quarter of calendar year 2015. [1] The last two years came as a relief for the company after the 2011-2012 period when sales were abysmally low, following the tensions that were sparked between China and Japan on claims over the disputed islands. The islands are known as Senkaku in Japan and Diaoyu in China. To remedy this situation, the company is planning on looking to introduce a dealer advisory system similar to the ones in the U.S. and European car markets. [2] Below, we detail why the company is taking this measure.

We have a $34 price estimate for Honda Motors, which is in line with the current market price.

Losing Market Share

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Japanese automakers have lost quite a bit of 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.

The global recession, however, never really affected the Chinese automotive market. In the last few years, the Chinese automotive market has more than doubled to 20 million units. Western auto companies, which continued to pour money into China, gained market share at the expense of Japanese automakers. The situation was exacerbated by the unfortunate natural disasters in Japan 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.

When the situation stabilized, Japanese automakers once again started generating solid profits. But now that seems to have come to a halt. So once again, Honda has to start afresh in the world’s biggest car market. 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 one-sixth of its total sales.

China Market Slow Down

The Chinese car market has grown at a startling pace over the last few years. In 2014, volumes in the world’s biggest auto market grew by close to 10%, but that rate is expected to slow to 8% in 2015. [3] As a result of a slowdown in the Chinese construction market, the economic growth rate of the country has fallen. Consumers are now looking for bigger discounts in the car market, making it tougher to sell cars for many dealerships. This is especially visible in a segment such as sedans, in which sales growth has almost stalled in recent months, as buyers in this segment are most exposed to the economic situation. Comparatively, the commercial vehicle market offers a brighter picture, as it is tied to the property market. Industry wide sales are slowing down and the increase in average inventory turnover rate from 45 days to 53 days in recent months is evidence of the same. [4]

Honda must take the problem seriously because there is the potential threat of dealers dropping out of the company’s network as the recent events at Toyota show. In the last few months of 2014, a number of dealers at Toyota threatened to drop out of the company’s network citing poor sales and a lack of profits. According to the China Automobile Dealers Association, as many as 10% of the dealers could abandon the brand. Out of a total 523 distributors for Toyota’s vehicles in the country, as many as 95% are losing money. [5] A number of dealers have already either stopped sales, or shutdown already because of the losses, as well as a tough economic environment, which saw vehicle sales slowing in tandem with the country’s slowest economic growth in 24 years.

In response to these emerging trends, Honda is planning to launch a dealer advisory system similar to the one it has in place in its U.S. and European operations. Recent surveys of dealers point out that when the car market was growing rapidly, it was easy for them to sell cars. This meant that the situation was favorable for car companies to dictate terms to dealerships, but now the situation is changing. Dealers have complained in recent months that inventory levels are too high and sales targets set by companies are unrealistic. The new system basically will offer dealerships advice on both marketing and after-sales strategy. Under this system, dealerships will also undergo a review to decide whether showrooms and shops are located in the right places or whether they need to be relocated. Dealership owners will also get a chance to offer more feedback to line managers appointed by the company, making it easier for them to air their grievances as well as share their findings.

See our complete analysis for Honda stock here

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Notes:
  1. Foreign Car Makers Hit China Sales Speed Bump, Wall Street Journal, May 2015 []
  2. Global Car Makers Get Savvier in China, Wall Street Journal, April 2015 []
  3. Ref: 1 []
  4. Ref: 2 []
  5. Toyota may lose global sales lead to VW without new China strategy, Automotive News, January 2015 []