How Honda Motor Co. Plans to Tap the Monstrous Asian Car Market?

Progressive and ambitious political leadership in power in the three biggest Asian economies could deliver a new era of economic reforms and growth. Honda’s busy making plans already.

Jul 12, 2014 at 2:05PM

Japanese automaker Honda (NYSE:HMC) forecasts that in its current fiscal year, Asia will account for 90% of its automotive sales growth. The company is building new factories, establishing collaborations, and rolling out new cars to boost its growth in the region. With Honda's sales moderating in the key North American market of late, growth in Asia becomes critical for the company's overall sales. Let's check out how the automaker plans to generate sales momentum from the growing Asian markets.

The all-new City, Source: Honda.

Asia's biggest growth drivers
Asia's urban population could touch 2.7 billion by 2030, constituting 55% of its entire populace, compared with only 17%, or 232 million, in 1950. Increasing urbanization positively impacts economic expansion, thereby enhancing GDP -- an important growth driver. Better GDP suggests increasing income levels that leave people with higher disposable income, which boosts demand for consumer durables. 

The latest Asia and Pacific Regional Economic Outlook from the International Monetary Fund says that the Asian economy could grow 5.5% annually through 2015. The IMF expects the continent to play a crucial role in furthering the global economy, fueled by firm credit growth, increasing export demand, and availability of skilled labor forces.

Automakers are attracted by Asia's low car ownership rates, high population, and rising disposable income. The continent lags way behind advanced economies in car ownership rate, which provides huge room for growth. In developed nations generally more half the population own cars, while in China the car ownership rate is only 80 for every 1,000 people. India's rate is an even lower 50 vehicles per 1,000 people. 

Honda derived 38% of its auto sales from the Asian market in the last fiscal year. In fiscal 2015, the company expects its auto sales in Asia outside Japan to grow to 640,000 units, up almost 21% from last year, while sales in Japan are set to grow 20.69% from the previous year, to 980,000 units. 

Expansion will boost growth
Honda produced 840,650 units in Japan last year, and added capacity with the newly built Yorii plant that can roll out 250,000 vehicles annually.

Honda collaborates with two Chinese auto companies, Guangqi and Dongfeng, and has a 50% stake in each joint-venture partnership. The joint ventures aim to increase the company's annual production capacity in China to 1.01 million units from the present 870,000. The automaker also plans to begin research and development operations in the country.

India is another market that's becoming increasingly important for Honda thanks to the ever-growing demand for the new City and Amaze models. The automaker has a sales target of 300,000 units in India by 2017. The company's plants in Tapukara and Greater Noida can presently roll out 60,000 units and 120,000 units each year, respectively. 

Source: Honda.

Honda is also aggressively adding capacity in Southeast Asian countries like Thailand, Indonesia, and Malaysia. It is building a new factory in Thailand that is estimated to manufacture 120,000 units per year, taking the country's total capacity to 420,000 units, once it starts production in 2015. Its other Thailand facility,in Ayutthaya, will also ramp up production. 

Honda's second production line at its Malaysian facility started operations in January and will churn out 100,000 cars every year. Honda also has two plants in Indonesia, one of which is the new Karawang facility, inaugurated this past January. This plant produces the multipurpose Brio and Jazz vehicles.

New launches to augment sales
Honda has figured out that it needs to keep releasing new cars in order to keep the sales momentum going. In fiscal 2014, the automaker launched several popular models in the Asian market. In 2013 it launched the third-generation Fit in Japan, and it was an instant hit. Honda also launched the mini-vehicle N-WGN, the fully remodeled Odyssey, and the compact SUV Vezel in Japan. 

Source: Honda.

The newly introduced 2014 Honda sedans -- City and Amaze -- have sold big in India, with Amaze hitting the 88,000 unit mark. The company is expected to release the Mobilio in India this month, while its variant was unveiled in Indonesia last month. Honda plans to launch 20 new cars over the next couple years in China after the successful Crider and Jade launches there in fiscal 2014. Another revamped model, the Jazz, is lined up for launch in the Thai and Indian markets. 

Foolish takeaway
Despite the weakening yen and the Thai crisis, expanding in Asia seems to be a good idea for Honda. The CIJ and ASEAN countries offer ample growth opportunities, and Honda is aggressively adding capacity in the region and rolling out new cars, to capitalize on this.

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