What's happening: Honda (NYSE:HMC) announced this week that it will invest $52 million in its Indiana factory to support additional production of the hot-selling CR-V crossover. The move will create 100 new jobs, the company said.
What Honda said: Honda's Greensburg, Indiana factory currently manufactures the Civic sedan. That production will continue: Honda is adding tooling to allow the same production line to also make the CR-V, which shares its basic architecture and some underpinnings with the Civic.
The Indiana plant is expected to start manufacturing the CR-V early next year. Honda also makes CR-Vs for the U.S. market at factories in Ohio, Mexico, and Japan.
"This new investment in our Indiana facility will enhance our manufacturing flexibility and better position Honda to meet customer demand for our lineup of innovative and fuel-efficient passenger cars and light trucks," said Bob Nelson, the president of the Honda business unit that operates the Indiana factory.
What it means for Honda: Simply put, it means that Honda will have the opportunity to show that CR-V sales in the U.S. have been limited by supply, not by demand.
In what must have been a frustrating situation for Honda's U.S. dealers, sales of sedan models slumped last year while demand for small crossover SUVs like the CR-V soared. An all-new Civic and a revamped Accord have helped give Honda's sedan sales a modest boost so far in 2016, but the overall trend is clear: More and more of Honda's longtime fans are choosing crossovers over sedans.
Honda isn't the only automaker facing that situation. For rivals like Ford (NYSE:F), which has a full and well-regarded lineup of crossover SUVs and ample production capacity, that's not a big deal: All things considered, Ford would probably prefer to sell a crossover versus a sedan, because the profit margin is most likely a little higher. But for a rival like Toyota (NYSE:TM), which (like Honda) has a limited SUV lineup, the trend has been a challenging one to confront.
The CR-V has been posting very strong monthly sales totals in the U.S. for some time. But its sales growth has stalled, apparently because the existing production lines that can build U.S.-spec CR-Vs are maxed out. Demand for the CR-V and its compact crossover rivals has been extremely strong in many markets around the world, and it appears that Honda's existing production lines can't quite keep up.
In fact, despite monthly sales totals that continue to be very impressive, and a healthy market, sales of the Honda CR-V in the U.S. are actually down slightly in 2016. That suggests a supply problem, and that's the problem that Honda hopes to solve by adding the CR-V to the Indiana factory's output.
The upshot for Honda: We obviously won't know until next year (at the earliest) whether this investment was warranted. But as factory overhauls go, this one is modestly priced -- and given current market trends, adding another Honda factory to the global CR-V production mix seems like a smart bet.
John Rosevear owns shares of Ford. The Motley Fool owns shares of and recommends Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.