TOKYO – Honda is revising its approach to next-generation electric vehicles and will pursue a vertically integrated approach that brings everything from batteries and software to vehicle production in-house, as the company races to rein in costs as it wrestles with new technologies.
The shift to a more vertical supply chain is driving Honda’s R&D spending to record levels.
Honda, Japan’s second-largest automaker, needs to adopt this approach to better compete, CEO Toshihiro Mibe said Friday while announcing financial results. Honda’s push was on full display last month, when it announced it would invest $11 billion in battery and EV production in Canada.
“We changed our strategy a little bit in terms of electrification, especially batteries,” Mibe said. “We are shifting to a vertical-type system to sustain a total electrification business. To do that, we must internalize these technologies. The software too must also be supported by Honda itself.”
Mibe said Honda would give more details of the strategy on Thursday in an annual business update.
The strategy is a throwback to the earliest days of the auto industry when Ford Motor Co. tried to make everything from rubber to glass under its own umbrella. The approach is seeing a resurgence with its adaption to EVs by emerging players from China such as the EV heavyweight BYD. BYD has been able to control cost and technology by organizing its own supply chain vertically.
In Europe, Renault Group, Volvo and Stellantis are among the automakers that have brought production of electric motors and batteries in-house.
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Pushing hybrids
Honda plans to ramp up hybrid sales to generate cash to finance a shift to next-generation pure electric vehicles, Mibe said. The shift is critical to Honda’s plan to phase out internal-combustion engines in its vehicles by 2040.
The profitability of hybrid models is already on par with gasoline-only models, executives said. Their cost is also dropping rapidly, Honda said.
Honda, the first automaker to launch a hybrid in the U.S., sold about 800,000 hybrids worldwide in the fiscal year that ended March 31. It wants to boost that to 1.2 million in the current fiscal year and reach 2 million hybrid sales worldwide by 2030 as it phases out internal combustion.
Toyota also said this week that it was emphasizing sales of hybrid models.
“If we can do this, we will have more power to generate cash and charge the transition to electrification,” Mibe said. Honda is already pouring its profits into development. This fiscal year, it budgeted record spending on R&D at 1.19 trillion yen ($7.65 billion), a 23 percent increase over the previous year.
Next-generation EVs
Honda is working on a next-generation EV platform that will be launched in the U.S. and other global markets from 2026. That platform, called the 0 Series, was unveiled at this year’s CES in Las Vegas and is crucial to Honda’s plan to become a relevant player in the global EV market, despite a relatively slow start.
Honda sold 19,115 EVs globally in 2023, down from 22,256 the year before. To date, most of Honda’s EV sales come from China. The carmaker offered no EVs in the U.S. until last month, when it began selling the Prologue crossover, jointly developed with General Motors.
Mibe’s assessment came as Honda announced record fiscal year operating income. Operating profit at Honda surged 77 percent to 1.38 trillion yen ($8.87 billion) in the 12-month period, while net income jumped 70 percent to 1.12 trillion yen ($7.20 billion).
Revenue grew 21 percent to 20.43 trillion yen ($131.29 billion). Global sales increased 11 percent to 4.11 million.
Honda benefited from pent-up demand in the U.S. as the global semiconductor shortage eased. The company’s focus on hybrids is also stoking profits.
Hybrid demand in the critical U.S. market is rising. That boosts earnings because hybrids command relatively higher margins and also require fewer incentives.
Deliveries in North America, Honda’s second-biggest market, rose 36 percent to 1.63 million in the fiscal year.
Sales in Asia, the company’s top market, dipped 5.3 percent to 1.65 million on weaker demand in China. Deliveries in Europe increased 23 percent to 103,000 vehicles.
U.S. models boost sales mix
Fast-selling large-sized vehicles in the U.S. tilted Honda’s product mix toward higher-margin models. Honda’s U.S. truck sales grew 20 percent to 220,853 in the January-March quarter. Today, about 66 percent of Honda and Acura sales in the U.S. come from crossovers such as the CR-V, HR-V and Pilot, and its Ridgeline pickup and Odyssey minivan.
At the same time, Honda is getting a boost from foreign exchange rates. The weakening of the Japanese yen against the U.S. dollar and euro added an additional 151.1 billion yen ($971.0 million).
The foreign exchange rate has been a boon for Japan’s exporters because it makes their products more affordable overseas. The yen’s implosion also inflates the value of dollar-denominated sales that are repatriated to headquarters in Japan and converted into yen.
Over the past year, the yen has lost 14 percent of its value against the dollar. Still, Honda hasn’t benefited as much as its Japanese competitors.
For years, Honda restructured its global manufacturing footprint to localize production so it could insulate itself from volatility in foreign exchange rates. The result was that that in the U.S., Honda imports only about 2 percent of all the vehicles it sells. The rest are made locally.
Looking ahead to the current fiscal year ending March 31, 2025, Honda expects global retail sales to remain flat at 4.12 million vehicles.
North America is seen as anchoring the increase, as sales there increased 2.8 percent to 1.68 million vehicles. Deliveries in Europe are forecast to decline 2.9 percent to 100,000 vehicles.Honda predicts operating profit will rise 2.8 percent to 1.42 trillion yen ($9.13 billion), while net income declines 9.7 percent to 1.00 trillion yen ($6.43 billion).
Source: autonews.com