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Morningstar | Honda Seeks More Scale by Reducing Its Complexity the Next Several Years

Honda's products and strong financial position should keep it on solid ground, but the competition is fierce and the U.S. market's move to light trucks may last for a long time. Tariff risk exists from the Trump administration as well.Honda's brand and reputation for quality drive demand for its vehicles, but its longtime niche in fuel-efficient cars historically positioned the company well to take advantage of consumers seeking more fuel-efficient vehicles. Over 2003-09, the U.S. car/light-truck mix moved to 55%/45% from 46%/54%, but as gas prices fell and light-truck fuel economy improved, cars have lost share to just 31% in 2018. In 2018, cars made up 45% of Honda's U.S. sales mix, compared with 37% for Toyota, and 20% for General Motors and Ford. Honda’s car focus gives it an advantage whenever the critical U.S. market has high gas prices, but with cheap oil, we think Honda leaves share on the table in segments such as full-size pickups and large SUVs, as it does not have product in these segments. Companies such as GM have also dramatically improved their car models, so we’d like to see Honda attain a more complete vehicle lineup. The company instead seems to be focusing on efficiency by targeting a two thirds reduction of vehicle trim and option choices across its five global models, such as Civic and Accord, by 2025.Despite a strong car and crossover lineup, Honda still operates in an industry with formidable threats. If steel prices increase again, it will hurt profits for Honda and all other automakers. Honda can mitigate this problem by using more common-size vehicle platforms to reduce costs, but even that is no guarantee. A weak dollar relative to the yen can also hurt profits. In addition, Brexit raises foreign exchange risk until Honda closes its U.K. plant in 2021. Expanding business outside the triad of Japan, North America, and Europe is critical for Honda and all other automakers, as original-equipment manufacturers should produce where they sell to mitigate exchange risk. Honda's long-term outlook seems solid to us, but the near term will see problems from possible foreign exchange volatility, and a highly competitive U.S. sales environment.