Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Is Honda Making Money?

People buy different cars for diverse reasons. Generally, individuals buy General Motors (NYSE: GMC) for the price because Chevy is usually cheap, Dodge for power; Mercedes Benz and BMW for performance, and Jaguar for the style or prestige.

People purchase Honda and its rival Toyota (NYSE: TMC) for reliability. Honda buyers simply want dependable transportation and good value, and little else from a car. That means checking the sales and financial reports of Honda Motor Corporation (NYSE: HMC) is a great way to measure the economic health of the American middle class.

The Honda yardstick indicates the American middle class is doing well, American Honda broke an all times sales record for the third year in a row, a press release indicates. Honda sold 1.641 million vehicles in 2017, and some of its models including the Civic, CR-V, and HR-V hit sales records.

Honda’s sales fell for the first two months of 2018, for the first time in years, figures from Carsalesbase indicate. Honda’s sales were 95,634 in January 2018, down from 97,178 a year earlier, and 104,588 in February 2018, down from 110,822 in February 2017.

It looks as if Honda is facing serious sale slump. Many will wonder if this is an indication of the beginning of an economic downturn or at least nervousness among the middle class which is discouraging big-ticket purchases like new cars.

Is Honda Making Money?

Cynics will note that sales do not automatically generate revenue in the auto business. Most vehicles are sold on credit, or financing which almost anybody with a pulse can obtain in modern America. So we need to ask the all-important question is Honda making money?

After all Honda’s main market in the United States is among those hardest hit by income inequality and wage stagnation: middle-class professionals. People like school teachers, salesmen, secretaries, office workers, store managers, etc.; many of whom have not seen a meaningful pay raise Bill Clinton (D-Arkansas) was in the White House.

Unfortunately, it is hard to get current financial data on Honda because it is a Japanese company. The most recent numbers I could find were from March 2017 so they are a year old.

Honda reported revenues or net sales of $130.19 billion in March 2017 up from $121.19 billion in March 2016, Amigo Bulls reported. That gave the company a gross profit of $29.14 billion, and a pretax income for the 2016 to 2017 fiscal year.

My prediction is that Honda’s numbers will be better for 2017 to 2018 based on the sales figures, but worse for 2018 to 2019. Honda’s revenues and income are likely to fall because its sales are falling.

What Future Does Honda Have?

Honda’s problem in the US is that it is basically a middle-class brand in a country where the middle class is shrinking and making less money.

The number of middle-class households (those making between $42,000 to $125) a year fell in 203 of 229 American metropolitan areas surveyed by the Pew Research Center in 2016. Pew found that found that the percentage of Americans living in middle-class households fell from 55% in 2000 to 41% in 2014. The same survey found that the average middle-class household income fell from around $77,828 in 1999 to $72,919 in 2014.

This phenomenon is not entirely bad because a lot of people leaving the middle class are migrating up the economic ladder. Census data indicates that around 27.7% of U.S. households now earn more than $100,000 a year, Mark J. Perry of the Foundation for Economic Education (FEE) pointed out.

The increases in income are bad news for Honda because that make more money usually upgrade to a better class of vehicle. They trade the Civic in for a Tesla; or a BMW, or a Lexus. That is good for Honda’s luxury brand Acura, but terrible for Honda’s traditional economy cars. After all, nobody wants to be seen parking a Civic at the country club.

What Honda can do to Survive?

A growing problem for Honda is that the Americans most likely to have more disposable income are not the kind of people who buy Hondas. The company will have to retool its lineup which is expensive to expand sales. An obvious solution here would be more investment in Acura.

The company will need to build snazzier and fancier cars with more features. Obvious ways to cater to the growing upper middle class are with electric vehicles, self-driving cars, and more features.

Growing markets Honda can tap include ride sharing. A potentially big moneymaker for Honda is the Odyssey Minivan which would be ideal for Uber or Lyft drivers. Developing a self-driving Odyssey might be critical. Fiat Chrysler (NYSE: FCAU) is testing an autonomous Chrysler Pacifica which utilizes Waymo technology from Alphabet (NASDAQ: GOOG).

Honda has a difficult future ahead of it because the traditional market for its vehicles is collapsing. This automaker will have to change dramatically to survive in a fast-evolving market. Whether a conservative company like Honda is capable of that kind of rapid evolution is unknown.