How Honda’s New Innovation Gives It A Huge Edge

Recently, Honda Motors‘ (NYSE:HMC) announced that it became one of the first companies in the world to develop a motor for a hybrid vehicle without using any heavy rare earth metals and yet with high heat resistance properties and high magnetic performance.  This reduces the company’s dependence on China to procure heavy rare earth metals, thus avoiding resource related risks and diversifying channels of procurement. According to National Center for Policy Analysis, China controls about 95% of global rare earth metals production and holds half of the worlds reserves of these metals. The policies of the Chinese government play a significant role in the supply of these metals, especially for export.  Honda’s hybrid vehicle motors without these metals significantly reduce risks related to policy changes ensuring steady production, free of political influences.

Lower Costs, Reducing Risks Of Procurement And Price Fluctuations

China has been controlling the exports of rare earth metals through its policies, such as export tariffs to boost the local industry and prevent depletion of natural resources. In 2010 the country reduced its export quota and blocked exports to Japan for two months over a territorial dispute. These policies impact the supply of these minerals significantly, impacting production of companies relying on these metals. With its latest innovation, Honda Motors has reduced this risk of procurement disruption and can produce hybrid vehicles as per its own schedule by diversifying supply channels.  While gas-electric hybrids currently account for around 5% of Honda’s sales, the company hopes that hybrids and plug-ins will account for half of its sales by 2030 and electric vehicles will take another 15%. The company has a very strong focus on hybrids and its CEO hopes that these vehicles will account for  two-thirds of the company’s global sales by 2030. Given increasing demand for electric and hybrid vehicles, we believe Honda is working on developing automobiles for the future. A critical component of this production is the motor of these vehicles which was heavily dependent on the heavy rare earth metals to be procured from China. Through the current technology Honda has eliminated this dependency, giving it a huge competitive edge in production of hybrid vehicles.  The technology is also likely to reduce costs and save the company from price fluctuations.  As Honda Motors prepares itself for the new phase in the automotive industry with more hybrid and electric vehicles, the first mover in this technology will give the company a competitive edge, in our view.

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