Honda Motor Co. Ltd. Risk Analysis

Introduction

Honda Motor Co. Ltd. together with its subsidiaries, engages in the development, manufacture, and distribution of motorcycles, automobiles, and power products primarily in North America, Europe and Asia. The company was founded in 1946 and is based in Tokyo, Japan. Its motorcycle line consists of business and commuter models, as well as sports models, including trial and motor-cross racing; all-terrain vehicles; personal watercrafts; and multi utility vehicles. The company also produces various automobile products, including passenger cars, minivans and multi-wagons, sport utility vehicles, and mini cars; and power products comprising tillers, portable generators, general-purpose engines, grass cutters, outboard marine engines, water pumps, snow throwers, power carriers, power sprayers, lawn mowers and lawn tractors, home-use cogeneration units, thin film solar cells home use, and public and industrial uses. (Honda, 2018) In addition, it sells spare parts and provides after sales service are through retail dealers, as well as involves in retail lending, leasing to customers and other financial services, such as wholesale financing to dealers.

[pic 1]

Figure 1: Worldwide unit sales the fiscal year ended March 31, 2018

Source: Honda Sustainability Report 2018

This figure shows the units of products sold in the subsidiaries of Honda. As you can observe, Asia and Oceania have contributed most of the sales especially the motorcycle segment, which is around 50% of the global total units. These sales are mostly generated from Thailand, which is the regional headquarter of the Asia and Oceania region.

Honda in Thailand

Asian Honda Motor Co., Ltd. was established in Thailand in October 1964 as a motorcycle distributor. Honda only began assembling cars in Thailand in 1984, by a company called Bangahn General. Banghan continued to do so under license until 2000, even though Honda established their own parallel production by Honda Car Manufacturing Thailand in 1992. This company, with 91.4% Honda ownership, then changed its name to Honda Automobile (Thailand) in 2000. The famous model of Honda Thailand is the 1996 City, a small sedan developed especially for the ASEAN markets and not intended for sale in Japan. Nonetheless, the second-generation City (2002) has been exported to Japan as the Honda Fit Aria since its introduction.

In 1996, the company took on the role of Honda’s ASEAN Regional Headquarters. Due to the Asia and Oceania region’s fast growth and diverse markets, and Honda’s focus on localizing its operation to be closer to customers, the company appointed Asian Honda Motor its Asia and Oceania Regional Headquarters in 2004, with responsibility for coordinating Honda’s activities in 12 countries and supporting Honda operations in several additional countries within the region. The responsibilties includes:

• Conducting strategic planning production and purchaisng control of Honda products in the Asia and Oceania region
• Supporting strategic planning for the production, export, distribution and sale of Honda products in the Asis and Oceania region
• Exporting of Honda motorcycles, automobile, power products and components manufactured in Thailand to over 80 countries around the world
• Marking and selling Honda power products in Thailand
• Managing the distribution and sale of parts, including the increased procurement of loacl parts, and improved logisical managememnt of parts supply serving all countried in the region (Honda, 2018)

Overview of Thailand

Thailand has made remarkable progress in social and economic development, moving form a low-income country to upper-income country in led than a generation. Thailand’s long-term goals are laid out in the country’s 20-Year National Strategy (2017-2036) for attaining developed country status. According to the plan, the country will see to achieve this through broad reforms including addressing economic sustainability, competitiveness and effective governance. The sustained pace and quality reforms, as well as sound implementation, will be crucial for translating the reform effort into desired economic outcomes.

Risk Involved in Honda’s Thailand Strategy

        Analyzing risk correctly is essential for successful expansion into international markets. I have divided the risks for potential venture into the following categories: economic risks, financial risks, political/social risks and other risks that should be considered.

Economic Risks

1. GDP Growth

GDP domestic product (GDP) measures the economic performance of a country over a given period, typically a year or a quarter. It is therefore the most important economic indicator to evaluate the country’s economy. In the 10 years before the global financial crisis, from 1999 to 2008, Thailand’s GDP grew on average 4.7%. In 2009, the economy recorded a contraction of 2.3%, which was the strongest GDP drop in 12 years. Afterward, the economy experienced ups and downs. After having gown an impressive 7.8% in 2010, mainly due to an increase in export volume, the economy expanded a meager 0.1% in 2011. This significant slowdown was due to the severe floods which occurred during the 2011 monsoon. The economy managed to bounce back in 2012 and grew 6.5%. However, political turmoil that emerged in the country last year caused weaker growth of 2.9% in 2013. Based on the data from 2015 to 2017, the GDP has been moving along the average which is near 5%. This may seem relatively stable for investors but there has not been any improvement and it was fluctuating in the past 10 years. I could not predict how will the GDP move with the current economy that would seem to crash.  To conclude, I believe this is one of the concerns that Honda should be aware if they are interested in expanding their current business in Thailand. (Bank, 2018)

[pic 2]

Figure 2: Thailand GDP Growth Since 1994

Source: Data in World Bank 2018

1. Unemployment Rate

Thailand has one of the lowest unemployment rates in the world, which does not always fit the picture of an emerging-market economy that’s struggling to get growth going. Unemployment in Thailand remains consistently low as far as 1.1% in 2014. In the last few years, the average income has increased in 11% with the highest average income being centered in Bangkok. Wages are anticipated to grow between 5% and 6.5% in the following years. With growing wages and low unemployment, Thailand is focusing on improving its educational system to encourage a base of skilled workers. This may be a good opportunity for investing companies as we could seek for talents and professionals. (Economics, 2018)

1. Disposable Income

Thailand’s rising economy, coupled with urbanization and conducive economic policies, has resulted in a consistent growth of real household incomes that is expected to continue into the future (based on Figure 3). In 2010, middle-income households accounted for 69% of total households. By 2015, this number had grown to 73% and is expected to increase to 75% in 2020, supporting a growing demand for luxury and non-essential products. With the increasing disposable income, Thai consumers are willing to spend more on goods, such as vehicles. (Thailand, 2018)

[pic 3]

Figure 3: Real Household Disposable Income, THB billion

Source: The Economist Intelligence Unit 2016

Financial Risks

1. Exchange Rate Risks

        Exchange rate volatility is unpredictable since there are so many factors that affect the movement of the exchange rate. The exchange volatility poses foreign exchange risk which is bad to the multinational companies. The baht has become volatile in the recent years due to both domestic and external factors such as natural disasters and financial crisis in Europe and US. The currency fluctuation is inevitable as the Bank of Thailand has adopted the Managed Float Exchange rate regime, letting the baht reflect economic conditions, and allowing market to determine its value without fixing the exchange rate.

[pic 4]

Figure 4: Thai Baht to Japanese Yen Exchange Rate From 1999 to 2018

Source: Retrieved from Bloomberg Finance

As shown in the Figure 4, Thai Baht has a relatively high volatility against Japanese Yen. However, since 2012, there is a decrease in value for Thai Baht and has never strengthened in the last 5 years. This is beneficial to Honda as less cost is needed to expand its business in Thailand.

1. Inflation Rates

[pic 5]

Figure 5: Thailand Consumer Price Index since 2004 to 2018

Source: Retrieved from Bloomberg Finance

        The inflation rate in Thailand has moved over the past years between -0.9% and 19.7%. For 2017, an inflation rate of 0.7% was observed. During the observation period from 1980 to 2017, the average inflation rate was 4.0% per year. Overall, the price increase was 311.30%. An item that cost 100 Thai Baht in 1979, was charged 411.30 Thai Baht in 2017.  In only a few countries negative inflation rates are achieved. This means that the general price level is declining, and consumer prices get cheaper. This is called deflation. This is a sign of political and economic turmoil, and would greatly harm companies that are operating in Thailand. Lower prices can mean reduced revenues and profits for businesses. Consumers also tend to hold back their spending and postpone demand as they expect prices to fall in the future. In this case, it will not be benefitial to Honda as demand will be reduced which causes sales to decrease even further as well. (Economics F. , 2018)