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Honda Profits Tank, Maker Hints at Further Troubles Ahead

Japanese maker withdraws sales guidance for rest of year.

by on Oct.31, 2011

Shortages of the 2012 Honda Civic were a significant drag on the maker's earnings.

Honda saw profits for the second quarter of its fiscal year plunge by 68%, well beyond what analysts had been anticipating – and the maker is hinting the situation may not improve as quickly as it originally anticipated.

Honda had been hoping to begin a much-anticipated turnaround as it finally got its plants back up to speed in the wake of the March 11 Japanese earthquake and tsunami. But the maker is warning it now faces another serious setback as the disastrous floods in Thailand knock a critical plant out of action.

“To put it bluntly, we’re in a really tough spot,” said Honda Chief Financial Officer Fumihiko Ike,” during a briefing on the second quarter results.  “We’re in a much more difficult position because our car factory is inundated.”

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While the maker’s U.S. dealers do no market any vehicles sold in Thailand, that doesn’t mean Honda of America is out of the woods.  The loss of the Thai plant could have a significant global impact, as it produces parts and components used at Honda plants around the world.  Making matters worse, about 10% of Honda’s Tier-One suppliers in Thailand have also been flooded and so have others down the supply chain.

“We’re still studying the situation,” John Mendel, the maker’s top U.S. executive, told  Where possible, he noted, the maker will look for alternative sources but that is not always possible in short order, he warned.

(For more on Honda from John Mendel, Click Here.)

Shortages related to Japan’s March natural disaster all but shut down Honda’s global operations for more than a month and continued to limit production until just recently.  In the U.S. alone the maker lost 200,000 units of production during the cutbacks.  Global production losses ran several times greater – which drove sales for the second-quarter along down by 14%.

The maker today said it can no longer ensure its ability to meet a sales forecast of 3.512 million vehicles during the fiscal year that end next March 31.

The crisis in Thailand appears to be all the more frustrating because Honda had been hoping to make up as much of the production lost in the wake of the Japanese disaster as possible in the coming months by ramping up output across its global network to 125% of normal capacity.  In the U.S., for example, it plans to boost line rates, add overtime and even add second shifts where possible.

While the Thai flooding did not impact Honda’s second-quarter results the maker had other issues to deal with that could become even more of a challenge in the months ahead.  Notably, the dollar continues to lose strength against the yen, tumbling to a low of 75.31 on Monday before rebounding to 78.  Most Japanese industry insiders warn that it is difficult to break even on most products when the yen is below 80 to the dollar.

That led the maker to recently announce plans to add a new assembly plant in Mexico that will be able to take on a variety of products – such as the subcompact Honda Fit and midsize Ridgeline pickup – currently imported from Japan.

Honda’s operating profit dropped 68% for the July-September quarter, to 52.5 billion yen, or $693 million.  A consensus of 13 analysts surveyed by Reuter forecast a 63.5 billion yen profit for the quarter.  Net profits, meanwhile, dipped 55.5%, to 60.43 billion, after a 16% plunge in revenues, which dropped to 1.9 trillion yen.

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