What Honda Is Doing To Protect Its Margins Amid A Challenging FX Environment
As part of its measures to address margin erosion caused by a strong dollar, Honda Motors (NYSE:HMC) is undertaking changes in its North America operations. Currently, 97% of Honda’s cars sold in North America are manufactured in the region. However, the automaker is reshuffling production in its U.S. assembly plant. Honda will discontinue manufacturing its slow selling Crosstour crossover in the U.S., move the production of the Accord Hybrid to Japan and launch the HR-V, the company’s smallest crossover, at its new plant in Mexico. [1] Below we take a look at how these changes fit into the broader picture of Honda’s current position in the U.S. car market.
We have a $34 price estimate for Honda Motors, which is in line with the current market price.
Made in America
Since a significant portion of Honda’s cars are locally produced, a weak Yen is hurting the margins, as having to pay for goods in the U.S. dollar makes manufacturing cars more expensive. Currently, the U.S. dollar will fetch you around 123 yen. [2] One year ago, the U.S. dollar would have got you 100 yen. [3] This means that the North American operations have to either survive on thin margins or be priced higher, thereby losing their competitive edge. An aspect that could work in favor of Honda is that there has been an increased focus on better customer targeting inside the company.
Take the example of the Honda CR-V. Ever since the car was launched in 1997, the CR-V has found buyers in the U.S. The compact SUV was one of the first cars to offer a combination of a four-cylinder engine, fuel-efficiency and sedan-like comfort. The fourth generation version of the CR-V retains those features but has been remodeled in several key ways to make it more attractive to the consumer demographic that represents its largest target audience. The new version is sleeker and trendier looking but also retains its utilitarian appeal, making it attractive to young buyers, small families, and mothers. The 2015 version offers a number of features that attract these buyers, such as wide doors, easily collapsible rear seats, conversation mirrors, adaptive cruise control, strong braking, and lane assist system. Fuel efficiency has increased by about 12%, allowing the car to run 27 miles per gallon on city roads and 34 on the highway. This puts consumers at ease because even though oil prices are low for the time being, they may not stay low forever. If Honda uses this fact carefully as part of its marketing, it might just be able to sell those few extra vehicles.
Margins Already Improving
Honda’s margins were hurt badly in 2014 as the triple whammy of a weak yen, slowing real wage growth in Japan and an increase in sales tax impacted sales negatively. On the brighter side, Honda can pin its hopes on new car launches from the higher margin Acura luxury brand to come later this year.
In 2015, the U.S. luxury car market is expected to grow by around 10%. Gas prices are low, interest rates are low, and consumer confidence is at a seven-year high. All these factors should contribute to increase sales of luxury vehicles and Acura is in a good position to cash in on these trends. The brand is set for more car launches. The company introduced the 2016 NSX super-sportscar at the North America International Auto Show, and the car will go on sale late in 2015. The 2016 ILX, Acura’s entry level sedan, will go on the market in the first half of 2015. Entry level luxury cars are some of the hottest selling cars in the segment and new car launches are known to be sales drivers. Additionally, Honda will continue to manufacture the Acura TLX Sedan in the U.S. and also added the ILX Sedan to its manufacturing roster in North America. [4] These factors, combined with the strong momentum of RDX, MDX, and TLX, could make 2015 a record year for Acura sales.
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- Honda Ends Crosstour, Shuffles North America Production, Detroit Free Press, April 2015 [↩]
- USD to JPY, Bloomberg [↩]
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- Ref: 1 [↩]