Where Is Honda Motor Co. Headed in 2015?

By Markets Fool.com

Japanese auto behemothHonda is going through a churning of sorts in 2015. CEO Takanobu Ito resigned, leaving the company's reins and his reforms in the hands of his replacement, Takahiro Hachigo. The company has given up on its target of selling six million vehicles globally through 2017, and reported a 5% sales drop in March in the U.S. -- its biggest market. The juggernaut is losing steam, but could it come out stronger than ever?

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Honda CR-V. Source:Honda.com.

The CEO switch and more...
Ito's resignation came as a surprise to many since his planned changes were just starting to take shape. He had laid the groundwork for making Honda's six operating regions autonomous and accountable. By localizing development, production and purchase, Ito wanted to have a more regional approach for individual markets.But the numerous recalls last year put the brakes on his ambitious plans and damaged the company's reputation.

To set things right, Honda bent a few rules and chose Hachigo -- he will be the first Honda CEO who did not head the company's R&D arm and is a non-director. Hachigo will start his new role in late June. Under his new leadership, Honda plans to go back to basics.

Quality versus quantity
The quality slip-ups that happened in 2014 -- it had to recall 60 million vehicles during the year --hurt Honda's image.First, it was Takata Corp's flawed air bag inflators used in the cars, and then the debacle with the redesigned Fit. Fit was recalled repeatedly in a span of a year because of problems with the new hybrid system installed in the cars. The fifth recall, though mostly concerning Japan, delayed new launches in the U.S. and hit sales.

Ito admitted that part of the problem with the Fit recalls was the aggressive sales target. No wonder then, a couple of days before announcing the new CEO, Ito also announced that the company has forgone its global target of selling six million vehicles annually through 2017. Honda won't even set a target in its next mid-term plan.

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Honda also plans to cut back on the number of model variants and get the quality back to top notch. Without naming specific models, the company told the Wall Street Journal that it's looking to reduce model variants by 20% in the next couple of years. After the fifth Fit recall in the second half of 2014, Honda recruited a senior executive, Koichi Fukuo, to look after quality, and added another level of quality checks.

Scrapping of the sales target and more focus on quality could help Honda reclaim its lost glory as far as quality and innovation is concerned. In 2015, Honda's new CR-V for Europe will feature the world's first predictive cruise control system -- Intelligent Adaptive Cruise Control (i-ACC). It predicts the movement of other cars on the road and helps to react quickly.

The U.S. dynamics
The growth rate of the U.S. auto industry could be slowing down. In March, industry-wide sales increased just 0.5% and most major automakers, including General Motorsand Ford, witnessed a sales drop.

Several experts believe that the slowdown is inevitable, as people cannot go on buying cars at the same pace forever, and March also had some weather-related issues. So, Honda's 5% sales decline in March may not be alarming, especially since the company reported increases of 11.5% and 5% in the first two months of the year.


2015 Civic sedan. Source: Honda.com.

But if the U.S. industry slows down, it would mean stiffer competition among automakers, and it's crucial for Honda to get its act together. The company's hopes are tied to three key models -- Accord, Civic, and CR-V -- that together account for roughly 68% of Honda's U.S. sales.

To make its best sellers more attractive, Honda will launch the all-new sportier Civic in the second half of 2015. The redesigned CR-V rolled out in September and has been doing pretty well as SUVs find greater favor with Americans because of lower fuel prices.


Accord, Civic, and CR-V sales in the U.S. Data source: Goodcarbadcar. Chart by author.

Back to basics
Under CEO Ito, Honda witnessed an era of expansions (setting up manufacturing facilities in India, Mexico, and China) and aggressive sales push. Hachigo time in power could be one where the automaker goes back to basics. In the U.S., it will continue to face stiff competition, but the company's focus on quality could make Honda look within and rediscover the strengths that have made it a loved brand for millions.

The article Where Is Honda Motor Co. Headed in 2015? originally appeared on Fool.com.

ICRA Onlineand Eshna Basuhave no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.