June 16, 2017 9:16 pm JST

In crisis mode, Honda risks losing its originality

With cost cuts on the way, investors worry about carmaker's mojo

MASAMICHI HOSHI, Nikkei staff writer

Honda President Takahiro Hachigo speaks during a press briefing in Tochigi Prefecture on June 8.

TOKYO -- Honda Motor's plan to shift its focus to management efficiency may have provided a solution to the automaker's flagging profitability. However, some market participants worry that the new direction might rob Honda of its biggest appeal -- originality.

Honda on June 8 unveiled a long-term management plan, dubbed "2030 Vision," that breaks with the previous emphasis on quantity and advocates business growth based on the pursuit of "quality."

On June 12, Honda shares fell 9 yen from June 9's close, to 3,066 yen. This could mean that many investors are not swayed by Honda's efficiency thrust.

Kota Yuzawa, an analyst at Goldman Sachs Japan, said the long-term plan "reflects the management team's considerable sense of crisis." He noted that the plan calls for the establishment of the Automobile Cost Planning Division, which will usher in comprehensive cost reductions by coordinating with Honda's development, procurement and production divisions.

Yuzawa said this explains why Honda's "ratio of operating profit to sales in the North American market is not improving."

The company's operating margin for the year ended March 2017 in North America stood at 4.9%, far below the 7.4% of 10 years ago.

For Honda, the previous fiscal year was a good one. It sold a record number of cars in North America and introduced redesigned flagship models. Yet its profit did not mount as expected.

Yuzawa sees a number of possible reasons for this -- "higher fixed costs or lower ability to reduce costs or declining supplier capabilities."

The new division is intended to "cut deeply into structural problems that have prevented the operation from becoming more profitable," Yuzawa went on.

The buzz phrase in "2030 Vision" is "across-the-board optimization." The new division could be part of this -- in terms of cost reduction.

Takaki Nakanishi, the CEO of and an analyst at automobile-focused Nakanishi Research Institute, said Honda has been inefficient in certain areas, like developing region-specific models. But, he added, "this has brought originality to Honda."

With automotive technologies rapidly advancing, Nakanishi said, the company must have concluded that it needs to make a change.

In this sense, it is following in the footsteps of Toyota Motor, which had to move away from a management policy that stressed ever-expanding sales. This policy had been in place until sometime before U.S. investment bank Lehman Brothers collapsed in 2008.

With the Lehman shock sending the global economy into a tailspin, Toyota President Akio Toyoda called for producing higher-quality cars.

But the automaker has since made another turn, toward making cars "wisely," in which it is placing a focus on selling safe yet cheap small cars.

What now concerns investors is that management efficiency might trample Honda's originality.

"The major challenge," Nakanishi said, "is how much efficiency Honda can wring out of its operations without losing its originality."

Yoshiyuki Matsumoto, president of Honda's research and development unit, voiced a sense of crisis, saying, "If we cannot make creative products, there would be no value to Honda's existence."

No clear earnings target

When Honda June 8 pledged to enhance management efficiency, it did not provide specific mid- to long-term earnings and financial goals.

It did, however, present a reference target of achieving a return on equity of 8% and an operating margin of 7%, albeit without disclosing the exchange rate forecast it based these figures on.

But there are some voices urging the company to present numerical targets and maintain management discipline toward achieving them. They said doing so could help the company show how it intends to balance efficiency and originality.

Sony could be a guide here. The Japanese corporate icon was able to revive its brand by going through a reorganization in which responsibilities and authority were clearly defined.

The electronics maker set targets for return on invested capital at all of its spinoffs, which were also charged with boosting the quality of products and services as well as profitability. As a result, the company has more competitive products in the camera and digital single-lens reflex camera segments. Its operating profit is expected to hit a record high for the year ending March 2018.

Honda Motor Co., Ltd.

Japan

Market(Ticker): TKS(7267)
Sector:
Industry:
Consumer Durables
Motor Vehicles
Market cap(USD): 49,892.41M
Shares: 1,811.42M

Toyota Motor Corp.

Japan

Market(Ticker): TKS(7203)
Sector:
Industry:
Consumer Durables
Motor Vehicles
Market cap(USD): 171,184.21M
Shares: 3,262.99M

Sony Corp.

Japan

Market(Ticker): TKS(6758)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 48,820.15M
Shares: 1,264.00M

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