By Daniel Leussink and Maki Shiraki
TOKYO (Reuters) -Honda’s downgrade to its full-year profit outlook underscores the immediate pressure from U.S. tariffs and global chip shortages – but the deeper, longer-term challenge lies in intensifying competition from Chinese electric vehicle makers.
Japan’s second-largest automaker cut its full-year outlook by a fifth after the market closed on Friday, citing one-off EV costs and a shortage of components using chips from Netherlands-based Nexperia. The Dutch government took control of the company, owned by China’s Wingtech, on September 30.
It also estimated a 385 billion yen ($2.6 billion) hit from U.S. tariffs, although that was less than the 450 billion yen originally flagged.
Its shares tumbled 4.7% on Monday. Yet the more pressing concern for Honda – and by extension, other Japanese carmakers – is the steady erosion of market share in Southeast Asia, a region where they once dominated virtually unchallenged.
Until recently, Japanese automakers believed they could shield their Asia businesses outside of China from the kind of slump they were experiencing in the world’s largest car market. That assumption no longer holds.
“In markets like Thailand, the competitive landscape is quite intense and overall we have lost our competitive edge in terms of pricing,” Executive Vice President Noriya Kaihara said at a briefing on Friday.
The challenge goes beyond declining sales. Automakers are responding by ramping up incentives and cutting prices to attract buyers, Kaihara said. That means leaner profits on new sales.
CHINESE RIVALS ACCELERATE IN ASIA
Honda now expects to sell 925,000 vehicles in Asia, including China, in the current financial year, a decline of more than 10% from its previous target of 1.09 million cars.
It had previously forecast to sell 5,000 fewer cars in Asia outside of China than it did last year; that figure has now ballooned to 75,000 fewer.
Competition from Chinese EV makers such as BYD is becoming increasingly difficult for Japan’s automakers across Southeast Asia, including Thailand and Indonesia, said one industry source, who declined to be identified so he could speak openly.
“Southeast Asia is starting to be significantly impacted by Chinese players,” said the source, speaking before Honda reported its results. “The growth of Chinese EVs in Thailand over the past two years has been extraordinary.”
The advance by BYD and others comes as China’s own auto industry faces a brutal price war at home, prompting its EV makers to expand aggressively overseas.
Honda’s retail sales plunged nearly 30% in Indonesia over the first nine months compared with the same period last year, according to company data. In Malaysia, they fell 18% and in Thailand they were down 12% over the period.
The company has no new models planned for the region from this fiscal year into the next, apart from an overhaul of the City compact sedan – a delay that could risk ceding more ground to Chinese manufacturers.
INDIA INCREASINGLY ATTRACTIVE
Japanese automakers are now turning to India, a market that remains all but closed to Chinese EV makers. Honda said last month it will make the world’s third-largest auto market a production and export base for one of its planned electric cars, a sign of the country’s growing importance as a manufacturing hub for the company.
Toyota and Suzuki have separately announced investments totalling $11 billion to beef up manufacturing and export capabilities.
But experts say Honda faces a deeper structural challenge.
Its automotive division reported an operating loss for the third straight quarter on Friday, lagging behind the performance of its motorcycle division, which delivered record profits.
Yoshio Tsukada, founder of Tsukuda Mobility Research Institute, called the profitability gap between the businesses “unbalanced.”
“If Honda were to split its four-wheel and two-wheel businesses, the motorcycle side could thrive globally,” he said, adding that the automotive business remains in a dire situation under the current structure.
Overall, Honda lowered its forecast for this fiscal year’s vehicle sales to 3.34 million, down from 3.62 million expected previously. That includes a 110,000-unit reduction attributed to decreased production caused by a chip supply shortage from Nexperia.
HONDA FACES NORTH AMERICAN HEADWINDS
The U.S. remains Honda’s top market by volume, accounting for 42% of global sales, up 4% year-on-year. But even apart from U.S. tariffs, Honda faces headwinds in North America.
The chip shortage forced a factory shutdown in Mexico and production adjustments in the U.S. and Canada, contributing to a 150 billion yen ($994.83 million) hit to Honda’s operating profit outlook.
Shares have fallen 1.4% this year, underperforming the benchmark Nikkei 225, which has risen almost 28%.
Honda and Nissan had been exploring a merger until talks collapsed in February.
Tsukada said the weak positions of Honda, Nissan and Mitsubishi Motors, which might otherwise benefit from economies of scale, make a revival of those discussions unlikely.
“A merger of Honda with Nissan or Mitsubishi would currently be an alliance of the weak,” he said.
($1 = 150.7800 yen)
(Reporting by Daniel Leussink and Maki Shiraki; Editing by David Dolan and Louise Heavens)
