Honda Motor Europe: Losses

14bn yen 1999/00 full year 50bn yen 2000/01 full year 18.4bn yen 2000/01 first half

Honda Motor Europe, which is based in Swindon in the UK, saw its losses widen to 50bn yen (�252m, $405m) for the year from 14bn yen during the previous year.

The losses widened because the European subsidiary found it difficult to export into the eurozone.

Honda's sales in Europe are now expected to have fallen 24% to about 190,000 cars in the last 12 months.

No surprise

Honda Motor Europe's profit warning hardly came as a shock.

Four months ago the company said it would not have invested so much in the UK if it had foreseen that the value of the euro would decline so much.

That statement came after losses of �18.4bn for the first half of the year rocked the company.

On Tuesday, Honda executive vice president Koichi Amemiya said:

"We had initially hoped to turn our European operation to profit in the year ending in March 2002, but such a recovery will have to be delayed into the next year."

Swindon will boost exports

But despite the strong UK currency and the resulting difficulties in exporting; Honda will stay put in the UK.

"We're not at all considering moving our European output site. Rather, we aim to raise its production for the region," said Mr Amemiya.

Plans to build a second factory in the UK will go ahead, and the company will produce new models such as Stream and CR-V in the UK for exports to Japan and North America.

However, Honda will reduce its component sourcing in the UK from 75% to 50%.

US market

The losses suffered in Europe have forced the Japanese parent company to slash its profit forecast for the year.

As its recent share performance tells us, Honda has not lost its edge in the United States

Koshi Kumagai HSBC Asset Management

However, what investors are watching most closely is the company's performance in the US which accounts for 90% of its operating profits.

"When you talk about Honda, you have to look at the North American market, which is Honda's main battle field and where it is doing quite well compared with its competitors," said HSBC Asset Management senior fund manager Koshi Kumagai.

In the US, Honda's car sales rose almost 10% during the first two months of 2001 compared to the same period last year.

This was in stark contrast to its US competitors which have seen their sales slump due to the economic slowdown.

More cars sold

Rising sales in the US, as well as at home in Japan, have compensated for the weakness in Europe, not least since the yen is weak against the US dollar.

The weakness of the yen makes Honda's cars cheaper in the US, and it boosts the value of dollar earnings when measured in yen.

After the market closed, Honda raised its group net profit forecast to 6.35 trillion yen from its 6.22 trillion yen in November.

Prior to Tuesday's announcement, the group's shares ended down 2.06% at 5,240 yen.

The slip followed a remarkable 18% rise in the group's share price over the last two weeks.

"There is a tug-of-war for Honda, with the US economic slowdown on the negative side and a weak yen on the other side. But as its recent share performance tells us, Honda has not lost its edge in the United States," said Mr Kumagai.