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Honda revs up profit forecast, but China, U.S. sales growth sluggish

FILE PHOTO: Newly manufactured cars of the automobile maker Honda await export in a port in Yokohama, Japan May 30, 2017. REUTERS/Toru Hanai/File Photo

By Naomi Tajitsu

TOKYO (Reuters) - Honda Motor Co raised its annual operating profit forecast on expectations of a weakening yen and strong sales of its motorcycles, even as demand for its cars in the key China and U.S. markets slowed.

Japan's No. 3 automaker lifted its profit forecast by 11.3 percent to 790 billion yen ($7.0 billion) for the year ending in March 2019, betting that the yen will trade around 110 yen to the U.S. dollar compared to its previous estimate of 107 yen.

The upgraded profit would still be a 5.2 percent fall from last year, marking the second consecutive year of easing profits for Honda following a record high 840.7 billion yen in the year ended March 2017.

Lower profits could make it tougher for Honda to fund investments to launch new cars to suit changing tastes of buyers and harder for it to catch up with global rivals in the intensifying race to develop self-driving cars.

Earlier this month, Honda announced it would invest $2.75 billion in General Motors Co's Cruise self-driving vehicle unit.

Investments could also be needed as Japan's auto industry considers ways to increase production of parts in North America following last month's agreement on an updated trade pact between the United States, Canada and Mexico. The industry is also bracing for likely higher tariffs on exports to the United States.

The yen, which has steadily weakened against the U.S. dollar since March, is giving Honda and others some respite.

But Honda still expects that currency fluctuations will knock 173 billion yen off its operating profit in the year to March.

Currency fluctuations can hurt Honda and other Japanese automakers as cars and components exported between countries can become more expensive, while it can also impact the value of earnings made overseas.


CHINA SLOWDOWN

Global automakers are starting to feel the pinch of slowing demand for cars in China, the world's biggest auto market. Last week, Ford Motor Co posted a slide in third-quarter profit due in part to a sales slump in the country.

Of Japan's top three automakers, Honda has enjoyed the biggest jump in sales in China in the past few years compared to its larger rivals Toyota Motor Corp and Nissan Motor Co, with sales roughly doubling since 2013.

But its sales in China have been dented since the start of 2018 by a quality issue with the Civic, the CR-V SUV and other popular models.

(Graphic: Japanese automakers' monthly vehicles sales in the U.S. and China https://tmsnrt.rs/2RjnBuA)

Honda's retail sales in China have slid nearly 8 percent in January-September from a year ago as cooling economic growth has hit the country's car sales, which fell the most in nearly seven years in September.

Honda said that new models to be released this year including the Accord, Crider, and Inspire sedans would help the automaker maintain record high sales of around 1.5 million units hit in calendar 2017.

"We want to hit similar sales levels as last year, and we think this will be possible," Vice President Seiji Kuraishi told reporters at a briefing.

Sales in the United States, Honda's biggest market, eased 4.7 percent year on year in the three months to September as sales of the Civic and Accord sedans were sluggish.

In the July-September period, Honda's global automobile sales slipped 3.6 percent to 1.25 million units due to lower sales in North America and Asia.

(Graphic: Japanese automakers' annual global vehicle sales https://tmsnrt.rs/2RnFOr2)

One bright spot for Honda has been motorcycles, which make up about 14 percent of its total revenues.

In the July-September quarter, Honda's operating profit was boosted by cost reductions and by higher motorcycle sales, particularly in Asia where a growing middle class is becoming more mobile. Global motorcycle sales rose 1.5 percent on the year.

Honda posted a stronger-than-expected 40 percent jump in second-quarter operating profit to 214.4 billion yen. Its profit had slumped a year ago when earnings were hurt by pension accounting changes and litigation settlements.

(Graphic: Honda's operating profit https://tmsnrt.rs/2Ro1enH)

($1 = 112.8300 yen)


(Reporting by Naomi Tajitsu; Editing by Muralikumar Anantharaman)