Honda Boosts SUV Production in a Bid to Boost Profits

By Markets Fool.com

Sales growth of Honda's CR-V has been limited by tight supplies. Honda is making changes to its production plan to get more CR-Vs to its U.S. dealers. Image source: Honda Motor Company.

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Imagine that you're an automaker with some very popular models. In fact, they're much more popular than you expected -- your dealers can't get enough of them.

What do you do?

Well, if you're Honda Motor Company (NYSE: HMC), and the popularity of your crossover SUVs has caught you by surprise while sales of your longtime mainstay sedan have slumped, you do the obvious: You shift things around to make more SUVs.

As a Honda executive said this past week, that's exactly what's going to happen.

What Honda said about making more SUVs

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Toshiaki Mikoshiba is CEO of American Honda Motor Company, Honda's business unit for North America. In an interview with Reuters, Mikoshiba said that Honda will make several changes to its North American production plan early next year in order to get more SUVs to U.S. dealers.

  • Honda's factory in Lincoln, Alabama currently makes the Honda Pilot crossover, Ridgeline pickup truck, and Odyssey minivan, and the Acura MDX crossover. It will stop making the MDX so that it can make more of the other three models.
  • At about the same time, Honda's Marysville, Ohio, plant will begin producing the MDX.
  • Honda's plant in Greensburg, Ind., currently makes the Civic sedan. It will add production of the white-hot CR-V crossover, which shares the Civic's architecture. The Civic and CR-V are also made at Honda's plant in Alliston, Ontario.
  • Honda's factory in El Salto, Mexico, currently makes the Fit subcompact, the small HR-V crossover, and about 63,000 units of the CR-V a year. It will stop making CR-Vs so that it can make more HR-Vs.
  • If it turns out that Honda needs even more CR-Vs (or Civics), it will import them from Japan.

Why Honda is making these changes

It's pretty simple.

Honda's existing production plan for North America has a roughly 50/50 split between car models and what Honda calls "truck" models, meaning its SUVs, the Odyssey minivan, and the Ridgeline pickup. But through October, about 59% of Honda's U.S. sales have been trucks, up from 55% a year ago.

Here are two numbers that tell much of the story: Through October, sales of the small HR-V crossover are up 92.3% from a year ago. But sales of the one-size up CR-V are up just 1.8%.

Civics roll off the assembly line at Honda's Ontario factory. Thatassembly line will probably be making more CR-Vs than Civics in 2017. Image source: Honda Motor Company.

The problem with the CR-V isn't demand -- it's now Honda's best-seller in the U.S., handily outselling Honda's longtime top-sellers, the Civic and Accord sedans. The CR-V's sales growth has been constrained by supply: Honda's existing CR-V production lines are maxed out. That will change soon.

That's good news for Honda shareholders: Because SUVs generally carry higher profit margins than similarly sized sedans, these changes could give Honda's bottom line a boost. Honda reported strong results in the third quarter thanks in part to its already-good sales of SUVs; if demand stays strong, Honda's profits could grow further in 2017.

What's next for Honda

If Honda makes these changes in January, we should start to see the effects showing up in Honda's U.S. sales numbers by spring, and in its profits in the second quarter of 2017. We'll be watching.

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