World's Most Respected Companies / Companies
A will to remain independent
By David Ibison
Published: December 13 2000 16:17GMT | Last Updated: December 13 2000 16:20GMT
It is a testament to Honda Motor that its name has remained the same and not turned into a hybrid such as DaimlerHonda, FordHonda or RenaultHonda.
Of Japan's top five auto groups, only Honda and Toyota have managed to avoid being rescued by an overseas rival and to retain their independence.
Nissan and Mitsubishi - synonymous with Japan's post-war auto industry - are now controlled by Renault and DaimlerChrysler respectively, while Mazda is controlled by Ford.
That is not to say that Daimler, Ford and Renault did not try. All three drew up lists of their favoured Japanese partner and in all three cases Honda was on the list. But quietly and insistently, it rejected the overtures.
The primary reason Honda did not need an overseas partner was that it is in good financial shape, while Nissan, Mazda and Mitsubishi would in all likelihood have gone bust if they had not found a foreign partner.
All had huge debts - Nissan's were Y2,000bn when Renault took its stake. They had not been profitable for years and they were making cars fewer and fewer people wanted to drive.
At Honda, the opposite was the case. Numbers were pretty good,the company having reported a net profit of Y305bn in 1998, Y262bn in 1999 and Y121bn for the first six months of this year. Forecast net profit for the full year is Y220bn.
Meanwhile, its debt-to-equity ratio has been declining from 1993's level of 115 per cent - still low by Japanese corporate standards - to 73 per cent last year and is forecast to drop further in the next two years.
While the numbers are sound, in the auto industry it is product that counts, and it is in this area that Honda ensured its independence.
Honda has gone against the more traditional Japanese grain and encouraged a creative working environment at its head office, which is described by one western analyst as being similar in attitude to a Silicon Valley internet venture.
The result has been products such as the Accord, the world's best selling car, the Civic, the CR-V, as well as light trucks, such as the Acura MDX and the Odyssey - all combined with top class powertrain engineering.
In addition, in Honda's largest market, the US, demand is so healthy for some products that it is unable to fill orders until next March, helping average incentives in the US during the last month of the first half of the year to hit $279, compared to an average of $450.
Ironically, the secrets of its success could also be key factors behind possible future problems - although the company appears to be aware of this and has taken action to avoid it.
Sales of one product, the Accord, in North America account for between 25 and 30 per cent of the company's global operating profit, so that any dramatic downturn in sales could have a large negative impact.
However, as Howard Smith, auto analyst at ING Barings, the investment bank, pointed out in a recent research note: "Profits on the Accord can halve between now and 2002 and still be covered by the enrichment of the [product] mix."
Another potential weakness is Honda's reliance on the US market, from which it derives more of its profit than any of its Japanese competitors. In the six months to September, 72.6 per cent of sales were made outside Japan with 52.4 per cent coming from the US.
This is a double-edged sword. On one side, there is the pending slowdown in the US market, which has already started to correct and is expected to move further towards a soft landing throughout next year.
On the other, it has opened Honda up to currency fluctuations. The yen strength against both the dollar and the euro are expected to wipe about Y90bn off Honda's full year 2001 operating profit, according to company estimates.
However, the decline in the US market is expected to leave Honda relatively unscathed compared to its global rivals. While sales will go down, it is thought by analysts that the brunt of the hit will be taken by US and European manufacturers.
They argue that Honda's cars are competitively priced, fuel efficient and well designed. "Even after auto demand in the US has peaked out, we believe that demand for the mid-sized sedans that are Honda's bread and butter will remain comparitively strong," says Akira Tanaka, auto analyst at SG Securities.
The currency problem is more tricky. Honda's European operations are not doing well, generating an operating loss of Y18bn in the first half as well as a Y30bn hit purely from the weakness of the euro.
While the currency loss was offset by cost cutting and increased revenues elsewhere, the region remains the company's biggest headache. Management is trusting its recovery in Europe to a reversal of the euro's fortunes which, while possible, still means Honda's European operations remain a currency play.
Nevertheless, despite the fact that overseas buyers keep one eye on Honda just in case, there is nothing to indicate that the Honda name will be undergoing any changes any time soon.
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