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Honda Profits Jump 36% – But Maker Lowers Full-Year Forecast

Honda anticipates problems due to Chinese boycott.

by on Oct.29, 2012

The success of the new Honda Accord will be critical to the maker's earnings turnaround.

Honda came roaring back with a 36% increase earnings for the July – September quarter, marking a significant turnaround from the hammering it took a year earlier in the week of Japan’s devastating earthquake and tsunami.

The maker delivered an 82.2 billion yen net profit – which works out to an even $1 billion – with sales climbing 20% for the quarter to 2.27 trillion yen.

But the near-term future may not be quite so rosy. Honda sales tumbled more than 40% in the key Chinese market during September, and the maker expects an ongoing boycott to hammer both sales and earnings in the months ahead.

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Warning it must factor in the “recent situation in China,” Honda officials warned that overall sales for the current fiscal year – which ends next March 31 – will likely reach just 4.1 million. That’s about 180,000 less than originally anticipated – though it would still be a 1 million unit increase over 2011.

Japanese makers, as a group, have been hard hit by a backlash over the decision by their government to purchase a chain of uninhabited islets in the South China Sea.  That move touched off angry protests across China, including one that saw a Toyota dealership torched. While the Chinese government quickly suppressed such riots it has tacitly supported an ongoing boycott of Japanese-made goods. Honda’s chief rival, Toyota Motor Co., suffered a 48.5% sales decline during September.

Despite that hit in China, Honda still sold 996,000 vehicles during the latest quarter compared to 678,000 the year before.  The July – September 2011 quarter saw the devastating impact of the Japanese natural disaster play out as most of the maker’s plants were forced to operate well below capacity due to severe shortages of key parts.

While the impact of the Chinese boycott remains an uncertainty hanging over Honda in the months ahead, the maker faces some other serious challenges.  There’s the lopsided yen/dollar exchange rate, for one thing, that has severely reduced earnings on exports from the home market.  Like its key competitors, Honda has been moving production away from Japan to overcome that problem.

Meanwhile, the maker is waiting to see how well critical new products will perform – notably including the all-new version of the midsize Honda Accord just launched in the U.S.  That model has routinely been one of the American market’s best sellers.

Another key offering will be unveiled at the upcoming L.A. Motor Show, an “emergency refresh” of the Honda Civic.  The compact model’s 2011 redesign was poorly received – even normally import-friendly Consumer Reports pulling the Civic off its Recommended Buy list.  The new mid-cycle update is intended to address critical concerns such as the excessive use of cheap plastics in the Civic’s interior.

(For more on the Honda Civic “emergency refresh,” Click Here.)

Honda needs to fix a number of product problems, especially niche models like the Insight and CR-Z, analysts caution, if it is to maintain the momentum of recent months.

The maker is playing things cautiously in terms of near-term forecasts, predicting a 375 billion yen ($4.7 billion) profit for the full fiscal year, down from its original estimate of 470 billion yen, or $5.9 billion.

Nonetheless, that would still mark a significant turnaround from last year when shortages caused by the Japanese earthquake and tsunami drove Honda’s earnings down 78%, to just 211.4 billion yen.

(Honda designs special version of Fit subcompact specifically for women. Click Here for more.)

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