Honda (NYSE: HMC) Releases New Cars for India
A New Approach to India's Weakening Economy
India's economy isn't doing well at all, and Honda is hoping to resist the trends with its fourth-generation Honda City.
In the last ten years, millions of Indians moved to urban areas as the country's middle class blossomed. The number of Indians propelled out of poverty totaled more than 300 million, and growth was stellar. But the boom has faded, growth projects are drying up, and many people are moving back out to rural areas to sustain themselves.
India's CRISIL Research project recently released a report indicating 12 million people will return to low-productivity farm jobs through 2019.
It's a significant retreat.
Inflation, high interest rates, rising fuel costs, a reduction in global demand for Indian exports, and infrastructure issues were all factors in India's economic woes. Prime minister Manmohan Singh said today that the economy is unlikely to pick up at all in this fiscal year.
Despite this, Honda wants to continue focusing on India. The Japanese carmaker has adequately repositioned itself for the market and will go full-bore against its competitors in the region.
Honda began to downsize its product line last year, and focused more on compact cars. Last month, Honda reported that sales of the Accord were so weak in India that it would phase out the world famous model entirely.
The City, a car designed for developing markets, seems a more appropriate focus for India these days, so Honda is introducing a diesel variant in addition to the standard model.
Hironori Kanayama, president and chief executive of Honda Cars India, said:
"With the best of both petrol and diesel technologies available in Honda City, we are very confident about the success of the model which will significantly contribute to our business growth in India."
Diesel fuel is much cheaper in India than petroleum, so Honda is mitigating some of the adverse effects of fuel prices. The company's prior versions of the City have been successful in India, and with this launch, it is hoping to resist weakness.
Once Honda's new sedan grows feet in India, it will then start being sold in 60 markets. This will hopefully grow the company's market share.
This reorganization could mark big gains for Honda in the coming months. There's been a lot of talk about these new vehicles, and it won't be any surprise if they do very well with car sales in India this year.
Once they ground themselves and move out from India, it's probable the revenue will grow, and that will just boost prices.
The Risks of Indian Auto Investing
Before you leap on Honda as an investment though, consider some of the factors that may hold them back.
According to the Society of Indian Automobile Manufacturers (SIAM), in October, passenger car sales fell 4 percent. From April to October, they fell 4.5 percent. This came as a huge surprise to automakers because that time is usually a good one for sales with the two-month festival season.
On top of the decline in sales in India, there's also competition that is going to hurt Honda. Maruti Suzuki takes up 50% of the Indian car market, and they are coming out with new cars as well. It's expected that they will release new technology, which will enable drivers to have manual gears that operate like automatic transmission. It won't have a clutch. The improved technology won't just make driving a manual easier, it's going to remain fuel efficient and the price will remain the same.
How these factors will compare to Honda's new sedan is yet to be seen, but it's likely there will be a fair amount of competition with the two automakers.
As an investor, you have to think about what will matter more to Indians. Would they rather have a clutchless manual transmission or a fuel efficient car that will enable them to save a lot of money, despite rising fuel costs? It's likely in this dire situation in India, new buyers will go towards the Honda sedan and away from Suzuki.
The only problem is that the decision may not need to be made if not many people can afford to buy. If car sales in India continue to decline, it's likely Honda and Suzuki will suffer. They will be able to overcome India's economy if they either price their vehicles lower, or export more of them earlier than planned.
This may actually happen, which is why as an investor, you should always keep your eyes on the news. Watch how Honda and Suzuki market their products in India. Then, gauge news and social media response. If they aren't working, find out what they are going to do to help the situation.