Honda Fans, Beware -- All Is Not Well at This Japanese Automaker

When Honda Motors (HMC -0.17%) came out with its latest second-quarter results, it became quite clear that the Japanese automaker is looking at tough times ahead. The company has lowered its sales forecast for Japan and China, and things are not quite well in its biggest market, North America. Will it be able to turn things around and take control of the situation? Let's find out.

2015 Accord. Source: Honda.

Forecast dilemma
Honda has been going back and forth on its fiscal year forecasts. After the first quarter ended in June, the automaker raised its sales forecast from 12.75 trillion yen to 12.80 trillion yen ($107.7 billion to $108.1 billion at current rates). And now it's gone back to the 12.75 trillion yen figure, as it sees competition in China and Japan pressuring growth. The unit sales forecast for the two countries has been cut by 100,000 each, and global has come down to 4.620 million, a 4.3% drop in estimates. Consequently, the profit forecast has taken a cut from the 600 billion yen ($5.07 billion) estimated in July to 565 billion yen ($4.77 billion) now. In the beginning of the fiscal year, profit was forecast to be 595 billion yen ($5.03 billion).

Reasons behind the dilemma
Japan: Honda did brisk business in Japan in the first quarter of fiscal year 2015 and the fourth quarter of fiscal year 2014, during which sales leaped 44% and 41%, respectively, egged on by the then-impending sales tax hike from 5% to 8%. Launch of new models, the N-WGN minicar and Vezel subcompact, and the refurbished Fit also acted as sales catalysts. But with the tax increase already in effect and a number of recalls, sales have taken a U-turn, declining more than 2% from last year's corresponding quarter. Honda probably would have to make do with shipment volumes of 950,000 units in the fiscal year -- a steep decline from the record 990,000 unit sales it was aiming for.

North America: In the first quarter, the Japan sales surge had more than taken care of the 3% sales slide in North America. But another 3% volume decline in North America in the latest quarter is hurting the carmaker dearly as the region makes up for over 40% of Honda's total sales units. Honda sales in the U.S. are being bogged down by three things: competitors like Nissan closing in, delayed launches, and recalls.

China: In China, though Honda's unit sales have gone up by 44% in the quarter from year-ago, sales have declined for four consecutive months from July through October. The U.S. and European auto companies are putting pressure on Japanese carmakers in China by eroding their market share. Honda executive vice president Tetsuo Iwamura said, "The overall market in China is growing, but that growth has slowed a bit. We, as well as some other carmakers, have not been able to keep pace with the overall growth."

Recalls hurting sales, launches, and image
The innumerable recalls are rubbing salt in Honda's wounds. The Fit subcompact has been recalled five times since its launch in September 2013. Though the latest recall was in Japan alone, it could affect Honda's image worldwide. The recalls have been due to issues ranging from a faulty transmission system to noise issues. The company has apologized to its customers, and slashed the salary of the CEO and a bunch of other officials, but the damage may have been done.

2015 Fit. Source: Honda.

Separately, Honda recalled 5 million-plus cars in the U.S. due to faulty airbags, made by Takata Corp. This is almost half of the 12 million-odd vehicles that were recalled globally due to faulty Takata airbags. Reports of inflator failure in places with hot and humid weather prompted the recall. Nearly 50% of Honda cars rolled out in 2014 had Takata airbags fitted in them.

The most far-reaching ill effect of the recalls could be possible delays in new launches, as the U.S. safety department's investigation isn't likely to die down soon. "Our multiple recalls have caused a nuisance for our customers. As a result of this recall, we have had to do a full inspection of all the new models [in the pipeline]. This has caused a delay ... some by as much as six months," Iwamura said at the quarter's conference call. Since automakers depend on new arrivals to boost sales, delay on this front is not desirable.

A few good things
Amid all this gloom, Honda's had some success in the U.S. The Accord pulled off a 33% sales hike in the second quarter, perked up by interest-free deals and discounts. A look beyond the quarter tells us that the Honda brand has set a new October record by selling 105,745 vehicles. The surge has been on the back of Accord and CR-V sales, increasing almost 8% and 30%. The 2015 Honda CR-V model hit stores in October.

More good news is that the luxury brand Acura seems to have finally revived. The company has a lot of hopes tied to the redesigned 2015 Acura TLX, and they seem to be coming true if the initial response to the car is anything to go by. Launched in August, the car has shown three months of solid growth, and in October, it came in fifth in the small/midsize luxury car sales tally in the U.S.

2015 Acura TLX. Source: Acura.

An analyst at Barclays commented that "the near term is going to be tough for them, but from a mid-term to long-term perspective I'm still bullish on Honda." That says it all. Honda is a solid company, and there's no reason to believe it cannot bounce back, but investors should expect some potholes in the next few months.