Honda sets sales reduction target to move away from expansion

TOKYO – Honda has set a lower auto sales target for fiscal year 2019 than the previous year, as the company strives to streamline its operations by reverting to an earlier expansion strategy that ultimately detracted from profits.

The automaker announced on Wednesday its intention to sell 5.16 million four-wheeled vehicles during that year, up from 5.32 million in 2018. This would mark the first year-over-year sales decline since FY 2011. when sales suffered from the devastating earthquake that hit eastern Japan.

The unusual sales strategy was adopted as the company continued to benefit from its past expansion. Auto production will be reduced in the United Kingdom, the United States and elsewhere to combat inefficiency. But society will probably have to face a bumpy road because it does not have the long-term vision to succeed in a rapidly changing industrial landscape.

Honda expects its turnover to decline 1.2 percent to 15.7 billion yen ($ 143 billion) during this fiscal year, but its operating profit leaps from 6% to 770 billion yen, according to estimates released Wednesday with the results of fiscal year 2018.

The company had built new factories around the world and introduced regional models to achieve its ambitious goal, announced in 2012, to raise the annual business figure to 6 million euros by now. FY 2016. But this ambitious goal has resulted in inefficiencies and constrained Honda's automotive business.

Since taking office in 2015, President Takahiro Hachigo has attacked this negative legacy. It has decided to close some production lines in Thailand, as well as factories in Japan, the United Kingdom and Turkey. Production capacity is expected to fall by 10% from 2016 to reach about 5.07 million units in 2022, while the overall utilization rate, excluding China, is expected from 90% in 2018 to 100% in 2022.

"We are on track to reach appropriate production levels," Hachigo said Wednesday.

Now that Honda is seeing the end of its production problem, it is now focusing on sales. The automaker said it would reduce variations in the versions and options of global models, such as the Civic sedan, to one-third by 2025. It is making cuts in North America, its Larger market, while also reducing the production of an Ohio plant starting in August in order to be able to adjust inventories in response to declining demand for sedans.

Honda's efforts will not fully bear fruit until at least 2022, when production cuts are finalized. "The reduction in automotive production capacity will lead to a recovery in Honda's profits," said Koichi Sugimoto of Mitsubishi UFJ Morgan Stanley Securities.

But not all market players seem so optimistic. Honda's share price is down 18% year-on-year, compared with 6% for General Motors and 8% for Ford Motor, according to QUICK-FactSet.

Many investors are wary of what is at the end of rationalization efforts. Wednesday's Hachigo speech, which preceded the planned shareholder meeting, was a rare case of the President describing the direction given by Honda in person.

But Hachigo has devoted much of his time to short-term projects in existing technologies, such as Honda's exclusive hybrid system and electric vehicles. He had little to say about long-term ideas such as autonomous cars, on which competitors have already begun to compete, providing no clear idea of ​​the manufacturer's direction.

Honda's business turnover for the 2018 fiscal year increased 3.4% to 15.89 billion yen, while operating profit decreased 13% to 726.3 billion yen yen. The automotive business particularly suffered, with a 43.9% drop in operating profit to 209.6 billion yen.