Honda's Dream of U.S. Production Protects Profits as Yen Surges
Honda Motor Co. became the first Japanese automaker to build cars in the U.S. 28 years ago in part to fulfill a long-held goal of founder Soichiro Honda. The company’s success in shifting production is shielding profits from the yen’s advance to a 15-year high against the dollar.
A record 89 percent of Honda and Acura-brand autos sold in the U.S. through July were built in Tokyo-based Honda’s plants in the U.S., Canada and Mexico, up from 82.2 percent a year earlier, the company said. Japanese rivals Toyota Motor Corp. and Nissan Motor Co. each made 68 percent of vehicles sold in the U.S. at North American plants, according to the carmakers.
“Honda’s high rate of local production in the U.S. is a clear advantage,” said Yoshihiro Okumura, who helps manage the equivalent of $365 million at Chiba-Gin Asset Management Co. in Tokyo. “They’ll benefit even more in the U.S. as the market recovers.”
Japan’s carmakers and other exporters are scrambling to cut costs, boost efficiency and shift production to cheaper regions to combat the yen’s rise of at least 4.4 percent against the world’s 16 major currencies this year. The yen traded at 85.33 against the U.S. dollar at 3:08 p.m. in Tokyo, down from 84.73 on Aug. 11, when it reached the highest since July 5, 1995.
Japan’s currency has gained about 8 percent against the dollar this year. North America, led by U.S. sales, is Honda’s biggest market, generating nearly half its global revenue and operating income, according to the company.
Sales of Honda models imported from Japan plunged 35 percent to 75,357 during the first seven months of the year.
Honda fell 1.6 percent to 2,820 yen in Tokyo. The shares have dropped about 9 percent this year, compared with Toyota’s 21 percent decline and Nissan’s 18 percent slide.
Every 1-yen gain by the Japanese currency against the dollar reduces annual operating profit by 16 billion yen ($187 million) at Honda and by 30 billion yen at Toyota, the world’s biggest carmaker, according to the companies. Both carmakers are basing their full-year earnings forecast on a rate of 90 yen per dollar.
Even as the high yen erodes overseas earnings that are repatriated to Japan, Honda raised its full-year profit forecast last month. It now expects net income of 455 billion yen in the year ending in March, compared with an earlier estimate of 340 billion yen. Toyota expects net income of 340 billion yen and Nissan forecasts net income of 150 billion yen.
Since opening its first U.S. auto plant in Marysville, Ohio, in 1982, Honda has grown to become the fourth-largest automaker in the U.S. by sales, trailing General Motors Co., Ford Motor Co. and Toyota. Its six North American auto plants built 754,807 cars and light trucks in 2010’s first seven months, up 43 percent from a year ago.
“For us, manufacturing in America was a long-term business decision,” said Edward Miller, a Detroit-based spokesman for the company. “We don’t make investment decisions based on short-term changes in business conditions.”
Three decades ago, Honda didn’t anticipate that opening U.S. plants would lead to long-term economic benefits, said Toshikata Amino, a former executive who helped set up the carmaker’s first U.S. plants in the early 1980s.
“In the middle 1970s, Honda started a feasibility study about whether it could build vehicles -- motorcycles or cars -- in the U.S.,” said Amino, who retired as Honda’s executive vice president for North American manufacturing in 1995. “The yen was 280 or 300 to the dollar, so the currency situation was much more favorable for Japanese exporters. There was no economic incentive to come to the U.S. and set up manufacturing.”
While there was some concern the U.S. might eventually restrict Japanese auto exports, Honda’s main motivation was that it viewed local plants as necessary to maintain customer satisfaction and to fulfill an ambition of its founder, who died in 1992.
“It was his dream to have a U.S. auto plant,” Amino said. “Many in Japan at that time thought it was a bad idea.”
Along with boosting the regional production rate and importing fewer models to the U.S. from Japan, Honda also continues to expand purchases of auto parts and materials from North American suppliers, Miller said.
Last year, Honda bought $13.3 billion of vehicle components from 590 North American suppliers, most in the U.S., according to company data. Within Ohio, home to two auto plants and Honda’s main North American engine and transmission factories, the company bought $5.5 billion of parts last year.
As a long-term strategy to ease the strong yen, Honda plans to boost the percentage of parts purchased overseas for car production in Japan from about 17 percent currently, Yoichi Hojo, Honda’s chief financial officer, said in an interview this month. He declined to give a target for such purchases.
“Honda doesn’t have that much more room to boost U.S. production,” said Hiroshi Ataka, an analyst at consulting company IHS Global Insight in Tokyo. “The next step is cutting costs by bringing in more parts from developing countries,” though tariffs and regulations may limit those efforts.
Honda’s Japan-based competitors are also trying to scale back exports of lower-priced models to the U.S. and boost auto production within North America.
“Given the current exchange-rate situation, it isn’t feasible, in terms of a business model, for us to produce Corolla or Yaris in Japan and export them,” Atsushi Niimi, Toyota’s executive vice president for global manufacturing, said in an interview this month.
Toyota sold 325,398 Toyota, Lexus and Scion models exported to the U.S. through July, 15 percent fewer than a year earlier.
Nissan, Japan’s third-largest automaker, recently moved production of its March small car out of Japan due in part to the nation’s rising currency. The company for the first time is making the March in Thailand for sale in Japan, and plans to build the car in Mexico in 2011. Yokohama-based Nissan is also investing $600 million in its plants in Mexico to boost exports from that country to Latin America and the U.S.
As for Honda, “localizing in the U.S. was just something it was much more aggressive with much earlier on, and now it’s an advantage,” said economist Michael Smitka at Washington and Lee University in Lexington, Virginia, who studies Japan’s industrial policy. “Honda as far back as the 1960s, when it first started selling motorcycles abroad, learned about exchange-rate swings.”