Now Honda Is Feeling the Pain, Too

Honda (HMC) had been tipped to weather the storm engulfing the auto sector better than most other carmakers. Analysts cited its penchant for fuel-efficient small cars and the absence of unpopular large models in its lineup. And while Honda trimmed earnings forecasts at its half-year earnings announcement on Oct. 28, it was by less than rivals, and the company still planned on making $5.5 billion this year.

All that changed Dec. 17. Speaking at a hastily arranged press conference in Tokyo, Honda Chief Executive Officer Takeo Fukui, flanked by solemn-looking fellow executives, announced a huge downward revision in the company's earnings. Honda now says it will earn $2.1 billion this fiscal year, 62% less than it said just six weeks ago. Sales are now expected to plunge $4.5 billion, to $131 billion, 10.3% worse than previously expected. That means Honda expects to lose more than $2.1 billion in the six months through March 2009 after making $4.2 billion during the first half. "The situation is worsening every day in all regions," Fukui told a packed press conference at the company's Tokyo headquarters.

In an earlier announcement, Nissan (NSANY) said it would cut production in Japan by a further 78,000 from January, which means it has now announced cuts of 238,000 vehicles in Japan. Nissan, which started the fiscal year in April with 2,000 temporary employees, also said it will employ none by March 2009. Toyota (TM) is delaying the opening of a new Prius plant in Mississippi.

Yen Troubles

While slumping auto sales and a surging yen remain the causes of Japanese automakers' problems, their combined impact has grown rapidly in recent weeks. The yen is now below 89 to the dollar, a 13-year high, after the U.S. Federal Reserve cut its target interest rate to a range from zero to 0.25%. The strong yen reduces the profitability on cars exported from Japan and reduces the value of earnings made overseas when converted back into the Japanese currency.

Sales, meanwhile, are falling in the U.S., Europe, and Japan and slowing in emerging markets. In the U.S., where Honda traditionally makes most of its profits, its pace of sales has fallen at a remarkable rate in the past few weeks. Honda's sales year-to-date are down only 5.4%. That's not good, but it's much better than the declines at Nissan, Toyota, and the Detroit Three. However, as the financial crisis has worsened, Honda's sales have fallen into line. In November, sales plunged 32%. "The impact of November says everything," Honda Senior Managing Director Koichi Kondo said at the press conference when asked why Honda had slashed its projections so soon after the last revision.

To avert more red ink, Honda is undertaking a series of measures, most aimed at cutting costs. Among them, a new flagship plant in Yorii, outside Tokyo, and a minicar plant in western Japan will be delayed by at least one year, while planned capacity increases in India and Turkey have been postponed. Honda has dropped a plan to release the Acura luxury marque in Japan in 2010 and has axed the development of the successor to the NSX sports car, scheduled to have been equipped with a new V10 engine. And the company's plans to use diesel engines in larger models are now on hold. All new projects will be "reassessed from scratch," Fukui added. Earlier in December, Honda had already pulled out of Formula One in order to save the company about $500 million a year.

"Dramatic Action"

Management will take its share of the pain. In January all Honda directors will take a 10% pay cut and Fukui expects executive bonuses to be "cut dramatically." So far, Honda has avoided laying off full-time workers in Japan, but 760 temporary employees have been told that their current contracts won't be renewed beyond December. Next year, a further 460 will be released after their contracts expire. "We need to take dramatic action to avoid losses at any cost," Kondo added.

Still, amid the rapid-fire restructuring, Honda isn't skimping on small-car or hybrid plans, which it insists are the key to its long-term health. Within three years, Honda plans to introduce a new entry-level small car that will be smaller than its Fit subcompact. While diesels for bigger cars are on hold, Honda is now developing new diesels for smaller cars.

And more greener, gas-sipping models are in the pipeline. Fukui confirmed the new Insight model will go on sale in spring 2009 as planned and that it will be priced below 2 million yen in Japan, or $22,000 at the current exchange rate. The U.S. price is expected to be below $20,000. The CR-Z sports hybrid will follow by the end of 2010, and, breaking away from the plan to use diesels for larger models, Honda now says it is considering applying hybrids to larger models. In a second press conference, Honda revealed that it will team up with battery company GS Yuasa to form a new company that will develop and manufacture lithium ion batteries for future hybrids.