Honda Ups Its Game In China As Japanese Autos Rebound

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China is back on Honda's ( HMC ) radar. After eight to nine months of tepid sales in the world's largest automotive market, things seem to be picking up for the automaker. Honda's sales rose 4.6% in May. It wasn't just Honda alone who recorded a positive growth. Sales of Nissan and Toyota also rebounded in May. This suggests that the general sentiment about Japanese products is improving in China. China is one of the biggest markets for Honda, accounting for about a sixth of its total sales.

Since September last year, sales of the Japanese automakers have suffered due to a wave of anti-Japanese sentiment present across the general public. This sparked tensions between China and Japan over claims on the disputed islands, known as Senkaku in Japan and Diaoyu in China. Other automakers such as Ford Motors ( F ) and Volkswagen have gained market share at the expense of Japanese automakers.

See our complete analysis for Honda stock here

Betting On Localization

Honda also announced that it will increase its R&D expenses in China in order to develop vehicles tailored to the needs of Chinese public. Before the end of 2015, the automaker will roll out 12 new models in the country. In 2013, Honda will introduce the Crider, a mid size sedan, and the Jade, a multi-purpose vehicle. Within the next three years, Honda will also start the production of hybrid vehicles in the country. In fact, Honda is so confident about the success of its upcoming models that the automaker intends to double the sales to 1.3 million units annually by 2015.

Besides the mainstream car market, Honda is also looking to grow its presence in the luxury car market through its Acura brand. The company announced that the cars under the Acura brand will soon be manufactured locally along with its already existing partner, Guangzhou Automotive Corporation. Producing locally will allow Honda to circumvent the high import duties on foreign cars and lower the prices of its models. This should attract interest from a greater number of Chinese customers. Acura does not have much of a presence in China. It only sold 2,300 cars in 2012.

The Chinese luxury car market is set to grow at a brisk pace, even outpacing the overall auto industry. In 2012, the market grew more than 20% to 1.25 million cars. Currently, the market is dominated by the German autos BMW, Audi and Mercedes, which together account for three-fourth of the market. According to a report by McKinsey & Co, China's luxury car market will rise to 2.25 million by 2016 and to 3 million units by 2020, making it the biggest luxury car market in the world.

Given the sanguine prospects of the automaker in China and a general optimism arising due to a weak yen, we have a $42 price estimate for Honda Motors , which is about 10% higher than the current market price.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: F , GM , HMC , TM

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