SWOT

Honda SWOT analysis

Strengths Weaknesses

1. Competence in engine 1. Dependence on North America to

manufacturing - company’s core product generate most of the revenue
2. Diversified product portfolio 2. Low investments in research and
3. Dominance in motorcycle and development (R&D) leading to innovative
engine industries leading to a high brand products
awareness
4. Strong position in Asia’s motorcycle
markets

Opportunities Threats

1. Increasing government regulations 1. Increased competition

2. Improving U.S. economy 2. Rising Japanese Yen exchange rates
3. Timing and frequency of new model3. Natural disasters
releases
4. Low fuel prices are increasing the
demand for pickup trucks and SUVs

Strengths
1. Competence in engine manufacturing - company’s core product

All Honda’s businesses are built around the engines - its core product. The
company’s first engines were built for motorcycles and power equipment, but were
later produced for cars and marine vehicles. Honda is the world’s largest engine
manufacturer, which produced over 27 million units of engines for automotive,
motorcycle, marine, and power equipment products, in 2015. [3]

The company has lots of experience in manufacturing quality and well-performing

engines. Its engines are praised for their durability, easiness to start, quietness, fuel
efficiency and reliability. According to Reliability Index, [4] Honda’s car engines are
some the most reliable in the industry.

Engines are the key to motor products and the company’s competence in
manufacturing engines is a competitive advantage few rivals can match.
2. Diversified product portfolio

Honda operates 4 different divisions:

 Motorcycle business (12.3% revenue)

 Automobile business (72.8% revenue)
 Power product and other business (2.3% revenue)
 Financial Services (12.6% revenue)

Honda offers many products to consumers including engines, cars, motorcycles, jets,
robots, generators, lawnmowers, water pumps, as well as many other power
equipment products. While the cars generate the most revenue for Honda, its overall
product portfolio is fairly diversified, when compared to Volkswagen, Toyota, General
Motors, or Briggs and Stratton (in an engine industry).

Figure 1. Percentage of Sales Revenue by Business

Source: Honda’s Financial Report[1]

3. Dominance in motorcycle and engine industries leading to a high brand

awareness

Honda is a huge company dominating in most of the markets it operates in, including
engines and motorcycles.

The company is the leading manufacturer of small, general purpose engines for
commercial, rental industry, and consumer applications. [5] Honda is also the leading
global manufacturer of motorcycles having 22.1% of the total market share in the first
half of 2016.[1] Company’s dominance in both of these markets have increased its
brand recognition and reputation.

According to Interbrand[6] and Forbes,[7] Honda is the 21st and 23rd most valuable

brand in the world, worth US$22.1 billion and US$25.2 billion, respectively. Brand
value is closely related to brand awareness and its reputation and only few other
companies, such as Toyota, BMW and Mercedes-Benz, can compare with Honda in
terms of a brand value.

4. Strong position in Asia’s motorcycle markets

Motorcycle business generates 12.3% of total Honda’s sales and is the third largest
revenue group for the company. The company has sold 17,592 units of motorcycles
and all-terrain vehicles in 2016 alone and captured 22.1% of the world’s motorcycle
market in the first half of 2016.

Asia is the main geographic segment for Honda’s motorcycle business, where the
company has sold 15.1 million units or over 88.7% of its total motorcycles,
generating ¥1,107.6 billion in revenue.

Asia-Pacific region, which includes such countries as China, India, Vietnam,

Thailand, the Philippines, Malaysia, Indonesia, Australia and Japan, is the largest
motorcycle region in the world and Honda’s strong position in it is a powerful
competitive advantage.

Weaknesses
1. Dependence on North America to generate most of the revenue

Honda depends on North America region, which mainly includes the U.S. and
Canada, to generate 55.6% of the company’s total revenue.

Figure 2. Percentage of Sales Revenue by Region

Source: Honda’s Financial Report[1]

Honda’s reliance on North America grew from 49.3% of the total sales in 2014 to
55.6% of the total sales in 2016. At the moment, North America is the main driver
behind company’s growth where the motorcycle revenue grew 20% and the
automobile revenue grew by 19%. Nonetheless, the U.S. and Canada are saturated
markets and Honda will find it hard to maintain the same level of growth in these
markets.

The company is also becoming more vulnerable to overall negative changes in North
America’s markets.

2. Low investments in research and development (R&D) leading to fewer

innovative products

Honda has spent US$5.4 billion for R&D in 2015. This amounted to 4.5% of the
company’s total revenue.
 Figure 3. Comparison of R&D expenditure – Honda and selected major competitors (in US$
billions)

Company 2015 R&D As a % of revenues 2014 R&D As a % of revenues

Honda 5.4 4.5 5 4.5

Toyota 8.4 3.7 7.6 3.5

Volkswagen 14 6.9 14 7.1

General Motors 7.5 4.9 7.4 4.7

Source: The respective companies’ financial reports [1][5][6][7]

Low investments in R&D lead to fewer innovative products and significantly

undermine the company’s abilities to compete in the future. The company should
focus its US$5.4 billion R&D investments to certain areas (like Hyundai does), which
would erase company’s low R&D budget disadvantage and would result in innovative
products.

Opportunities
1. Increasing government regulations

Many governments around the world are committed to reducing the greenhouse gas
emissions and are encouraging fuel efficiency initiatives. Such environmental
initiatives may increase production costs for the car manufacturers and these costs
will be either passed to price sensitive consumers or will decrease the company’s
profits. Honda may take advantage of this by introducing more car models running
only Hydrogen fuel cells and bypassing all the government regulations associated
with the greenhouse gas emissions.

2. Improving U.S. economy

Signs of an improving economy and rising consumer confidence have been reflected
in the strongest increase in new vehicle sales for more than a decade in the U.S.
market. 17.5 million new units were sold in 2015, a 5.7% increase over 2014.
Interest rates in the U.S. have been low for several years and are forecast to remain
that way for the foreseeable future. In such economic conditions, Honda has an
opportunity to capture higher market share and increase sales in the U.S. automotive
market.

3. Timing and frequency of new model releases

The market share of the automotive companies is significantly impacted by the

timing and frequency of new model releases. Historically, new models have tended
to have major upgrades every 4 or 5 years with only minor modifications in between.
However, due to the rising consumer expectations in relation to in-car technology
and the competitive nature of the industry, there is an argument to release upgraded
models more frequently. Honda is well-positioned to be able to do this.

4. Low fuel prices are increasing the demand for pickup trucks and SUVs

Currently, fuel prices are the lowest in a decade. Such situation has encouraged
consumers to buy big fuel-inefficient vehicles such as SUVs and pickup trucks.
Traditionally, Honda’s main focus was on smaller cars like Honda Civic and sedans
such as Honda Accord, but in the current situation, where fuel prices are low, the
company has introduced its next generation pickup truck Ridgeline and redesigned
its CR-V sport utility vehicle to meet the demand for the bigger vehicles.

The trend of low fuel prices is likely to stay and Honda should introduce more models
of pickup trucks and SUVs to take an advantage of the growing market for these
vehicles and to increase company’s profitability.

Threats
1. Increased competition

Honda is faced with an ever increased competition from the traditional automotive
companies, the new players and saturation of its main markets. In Asia, the
company’s key motorcycle region, markets are nearly saturated. In 2016, Honda’s
motorcycle revenue grew by only 5.4% in Asia, compared to 20.3% growth in North
America region. The company faces many new entrants in India and China, which
offer similar quality motorcycles and scooters for lower price than Honda.

Honda’s automotive business is also experiencing the slowing growth of the

automotive markets and the increased competition from the new Chinese
manufacturers. The company’s international rivals, such as Toyota, Ford, General
Motors, Volkswagen and Hyundai, all have larger budgets and could use them to
aggressively take market share from Honda.

New companies, such as Tesla and even Google, which tries to build self-driving
cars are also threatening the traditional automotive industry. The competition is
further fueled by the fact that the global automotive production capacity far exceeds
the demand. In 2015, there was an estimated global excess production capacity of
31 million units.[11]

2. Rising Japanese Yen exchange rates

More than 88% of Honda’s revenue come from international markets, which means
that the company has to convert foreign currencies to Japanese Yen in order to
calculate its revenues and send the profits back to Japan. Currency rates are volatile
and the company’s profits and revenue highly depend on the fluctuating exchange
rates. The company cannot control the currency exchange rates, therefore it is at
risk, if Japanese Yen exchange rates would start to rise. In such case, the
company’s profits would decrease significantly. The company itself identifies this as
a key threat that will negatively affect the company over the next few years.

3. Natural disasters

Honda has manufacturing facilities in Japan, Thailand, China and Indonesia. These
countries, including others, are often subject to natural disasters that disrupt
manufacturing processes and result in lower production volumes and profits.