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Is Honda Losing Steam?
Failure to Refresh its Offerings has Cost Honda dear, which has Lost Sales and its Leadership Position in The Executive and Premium Cars.
Issue Date - 09/06/2011
After the earthquake and tsunami ravaged Japan on March 11, the loss to the country has been beyond thousands of innocent lives. The Fukushima nuclear crisis triggered a loss of 1.25 trillion yen ($15 billion), forcing the exit of Masataka Shimizu as the President of Tokyo Electric Power Co., Sony Corporation faces a loss of a possible $3.2-billion in the just-ended fiscal and Japanese automakers have announced production cuts that is certain to bleed their bottom lines. Indeed, the past few months have proved to be one of the worst in the history of Japanese business. Out of all, the Japanese automobile industry, famous the world over for its just-in-time manufacturing, has been one of the worst hit. While Toyota lost its numero uno position as the world’s biggest seller of cars to GM — it sold 1.79 million vehicles worldwide in the first three months of the year (down 12% from the first quarter of 2010) as compared to GM’s 2.22 million — Honda was struggling to keep its business together in many major markets, including India.

Honda’s Indian arm, Honda SIEL, sold 1,990 units in the month of April 2011 logging a negative growth of 43% as compared to 3,507 units sold in the corresponding period in 2010. Following in the footsteps of its Japanese peers, Honda also announced a production cut in the Indian market necessitated by the limited availability of critical auto components from Japan. It was Toyota, which first announced a 70% cut in production. Honda followed with a 50% cut in production as both companies depend hugely on the imports of critical components like transmission systems and engines. Honda produced 3,530 cars in the month of April 2011 with a negative growth of 6.2% as compared to 3,767 units produced in the same period in 2010.

However, for Honda SIEL, the bad news is not limited to only the adverse impact on its supply chain due to the natural calamity in Japan. In fact, it also continues to lose ground to the competition in India. Much before the natural tragedy struck Japan, Honda’s Civic and Accord models had already lost their leadership positions in the executive and premium sedan segments to Toyota Corolla and Skoda Superb respectively. For the month of April 2011, Civic sold 253 units as compared to 776 units sold by Corolla. The situation for Accord is slightly better as it is still the second-largest selling car in its segment. Honda sold 194 units of Accord in April 2011 and trails behind Skoda Superb, which sold 243 units in the same period.

The current sales situation is a matter of concern for Honda which, after having established its presence in the sedan segment during 16 years of its existence in the Indian market, is now seeing its dominant position slip away to rivals. Its experiments in the hatchback and SUV segments have not been able to fetch high volumes for the company. Its hatchback Jazz failed to excite consumers, largely because of the hefty price tag as compared to the competition, which offered similar benefits at a lower price point. Honda sold 4,862 units of the Jazz in FY 2010-11 while relatively new products like Volkswagen Polo and Nissan Micra sold 28,904 and 12,302 units respectively. Similarly, CR-V, with its petrol only variant on offer, was not able to attract consumers for long amidst the rising competition in the SUV segment. The 22 units of CR-V sold by Honda in the month of April 2011 was worth peanuts as compared to 739 units sold by the segment leader, Toyota Fortuner.

Above all, it’s the rising demand for diesel cars and the new product offerings in the mid-size sedan segment that has caught Honda unawares. Even the Johnnie-come-lately Volkswagen’s Vento has outsold Honda City, selling 3,994 units as against City’s 2,773 units at the end of March 2011. What’s worse, the beleagured Japanese automaker has no back-up plan to make up for the loss of volumes on account of the tremblor disaster. In a scenario where 65% of the total cars sold in the mid-size sedan segment are powered by a diesel engine, Honda paid the price of completely ignoring the diesel engine car market and then waking up too late by when competitors had already charged ahead. As such Honda is still two years away from developing a diesel engine for its cars in the Indian market. “Keeping in mind the price differential between petrol & diesel, it is expected that the demand for diesel cars will go up even further,” says Kapil Arora, Partner (Automotive), Ernst & Young. Going by market estimates, close to 40-50% of the total sales of products like Vento and SX4 come from the diesel variants. The sudden dieselisation of the Indian sedan market has only added to the woes of the Japanese auto major. “The rise in demand for diesel cars is because of the gap in the price of petrol & diesel. As diesel is comparatively cheaper and gives better mileage, consumers are preferring diesel cars in the light of the rising petrol prices,” says Jnaneswar Sen, VP – Marketing, Honda SIEL. He adds that Honda will take another two years to come up with a diesel engine for the Indian market. The question is: Will Honda be too late to in waking up to the call by 2013?

Going by the market standing at the end of FY 2010-11, Honda SIEL has a 2.36% share in the Indian passenger car market, as compared to the 14.26% share of Hyundai Motor India. The latter entered India in 1996 (almost a year after Honda’s entry into India). Even players like Ford, General Motors and Toyota have inched ahead of Honda even though they started their Indian journey around the same time. For the record, GM today has a market share of 4.25% while Ford is the sixth-largest player with a 3.91% market share. Taking into account the success of products like Figo, Beat and Spark, Honda seems to have ceded the space in the hatchback segment to its rivals. But for the earthquake, the launch of Honda’s Brio, which is expected to debut in the high-volume fetching sub Rs.5 lakh segment, has just got a little longer. The product was expected to be running on Indian roads by August 2011, but now it will be launched during the last quarter of this year. “Apart from the metros, we see huge growth potential in Tier-II & Tier-III cities for this car and therefore we have been expanding our sales network to reach out to newer cities and markets in the last 2 years. The potential to increase sales from the rest of the country is huge,” says Sen.

In the meantime, Honda will have to ramp up its marketing efforts to make up for the lost volumes due to the production cuts. As the Brio will make its debut during the festive season, Honda will be pinning a lot of hopes to pull off high volumes. Considering that Honda will not make its presence felt in the diesel segment until 2013, Brio will be the only hope for the company to make it count in the highly-competitive Indian market. One hopes that Honda’s extensive research on the Indian hatchback market and the lessons it learnt from the Jazz episode will help the Japanese carmaker to get it right this time around with the Brio.

Pawan Chabra           

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