Honda Targets Toyota's Hybrid Dominance

The carmaker's CEO wants to boost profits with a new, economical, 2009 hybridand with emerging market sales to offset weakness in Japan

Considering the environment for auto sales in Honda's (HMC) two largest markets, Japan and North America, company chief Takeo Fukui looked remarkably relaxed as he delivered his outlook for the year ahead in Tokyo Dec. 19. It didn't take long to understand why. During the address in Tokyo's Shinagawa district, a confident Fukui predicted another year of overall expansion at the automaker in 2008, including a 3% increase in U.S. auto sales to 1.59 million vehicles despite concerns about the sub-prime crisis and stubbornly high fuel prices. He also predicted spectacular growth in several other key markets.

And in another sign of the Tokyo-based automaker's burgeoning strength, Fukui also promised to give Toyota (TM) a tougher run for its money in the battle for eco-supremacy in the years ahead. Honda was an early mover in hybrids. But so far it hasn't been able to benefit with a breakthrough like Toyota's Prius, which dominates the hybrid sector. For instance, Toyota had 79% of hybrid sales in the U.S. in November, compared to just 10% for Honda, the No. 2 hybrid maker. The Prius alone accounted for 50% of all hybrid sales in the U.S. last month.

That's why Fukui says that the battle is only now beginning. According to the Honda chief executive, the last decade was just the first phase for hybrids, a time when automakers focused on marketing a green image. The next phase, he argues, will focus on improving the economics of buying a hybrid. "The price needs to be reasonable and fuel efficiency higher so the [premium] the consumer pays [for a hybrid car] can be returned in a short period of time," he says.

New Hybrid Model Announced

To achieve that goal, he confirmed that Honda will launch a long-awaited, hybrid-only model in 2009. Honda plans on producing 200,000 of the new hybrids per year from the company's Suzuka plant in western Japan and will sell them initially in North America, Europe and Japan. They'll be equipped with a new lightweight motor which will assist the gasoline engine and be offered at a "more affordable price level" than currently available hybrids such as Honda's own Civic and Toyota's Prius.

That's just the beginning. Fukui also said that Honda is planning to launch its first-ever hybrid sports car, based on the CR-Z concept car that Honda first unveiled at the Tokyo Motor Show in October. "The real full-scale hybrid competition will start from now," Fukui told reporters. He added that by 2010 around 10% of Honda's sales would come from hybrids.

Further into the future, the company continues to look to fuel cell technology. Next summer the company will also begin leasing a small number of it's FCX Clarity hydrogen fuel-cell vehicles in Southern California. For $600 a month, customers will be able to drive the emission-free vehicle, which has a range of 270 miles.

One clean hybrid tech that Honda remains at best ambivalent about is plug-in hybrids, which can be charged overnight using a home electricity supply. Echoing comments made by Honda execs at the Tokyo Motor Show, Fukui reiterated that Honda doesn't have high expectations for the tech. [See: 11/20/2007, GM's Plug-In Push,] One problem, Fukui points out, is that while an electric car is possible with a "dramatic evolution in batteries" a plug-in hybrid "requires a full size engine and fuel tank on top of that." That's something which would increase weight, decrease fuel efficiency and add to the cost. "I'm not convinced why you would want to have that in the first place," he says.

Growth Everywhere But Japan

Even without the hybrid assault, Honda is lining up plenty of growth for 2008 and beyond. Indeed, the company is projecting growth in 2008 in every market except Japan, where Honda sales are set to close the year down by 12% at 620,000 units this year. Honda expects its overall auto sales to rise 6% to 3.76 million vehicles during 2007.

In November, it produced more cars in a single month, 363,532, than at any time in its history. "We think Honda looks attractive from a long-term investment perspective," Tatsuo Yoshida, an analyst at UBS (UBS) noted in a recent research note. Yoshida, who projects Honda's net earnings will rise 9.6% to $7.9 billion this year, rates Honda a "buy".

In the U.S., which accounts for about 41% of Honda's global auto sales, the new Accord, introduced in September, and the opening of new factory in Indiana next fall (the company's seventh U.S. plant) will help Honda continue to gain sales in an otherwise shrinking market. One factor: stubbornly high gasoline prices will help sales of Honda gas sippers. "If you look at the overall trend there's a shift towards smaller cars and fuel efficiency. Those are the customer requirements that will support our products," says Koichi Kondo, Honda's North American chief, who sat alongside the CEO at the Shinagawa conference. Fukui also reiterated that Honda will introduce its new, clean, diesel engine technology into the U.S. in 2009—around the same time it begins launching new hybrids.

But other regions of the world will be Honda's biggest source of growth in the months ahead. In Europe, Asia and South America, the company is set to post strong gains this year and, aided by numerous new plants, expects to do so again in 2008. In China, where sales rocketed 30% this year, the company projects further growth of 17% to 490,000 units in 2008. In the rest of Asia, not including Japan, it's a similar story with sales predicted to rise 20% to 415,000. In India, Honda doubled capacity to 100,000 this year and has begun building a second auto plant, which will be operational from 2009. Another new plant in Thailand will begin production in the second half of next year.

In Europe, fueled by rising demand in Russia and Central Europe, sales are expected to end 2007 23% higher than a year earlier at 380,000 and should reach 420,000 by the end of 2008. And in South America, where sales are projected to rise 30% in 2007 at 118,000, Honda is adding capacity at its Brazilian plant and, last month, began construction of new factory in Argentina. With so much activity across the globe, the Honda chief's vision of overall growth despite localized weakness makes a lot of sense.

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