Honda cautious on full year as competition heats up

Honda Motor Co <7267.T> forecast a smaller-than-expected 10 percent rise in full year operating profit and warned of stiffer competition as Korean and U.S. automakers roll out models to rival its fuel-efficient line-up.

Japan's No.2 automaker is benefiting from a recovery in U.S. sales with a fleet of gas-sipping models such as the Civic sedan, which will be joined by the CR-Z sporty hybrid in North America this summer.

But Executive Vice President Koichi Kondo said neighboring South Korea's Hyundai Motor Co <005380.KS> was rapidly raising its game, particularly in Honda's most profitable U.S. market, while the U.S. Big Three were also beefing up their offerings.

More and more, the passenger car segment, where we've traditionally been strong, is becoming a fierce battlefield, Kondo told a news conference.

For the year to end-March 2011, Honda forecast an operating profit of 400 billion yen ($4.3 billion), up from the 363.8 billion yen it made in the year to March 2010, but down on the 500 billion yen consensus forecast in a poll of 19 analysts by Thomson Reuters I/B/E/S.

Honda sees net profit growing 27 percent to 340 billion yen this year, after a near doubling last year.

It expects total sales to grow 6.6 percent to 3.6 million vehicles this year, led by a 14.1 percent rise in the North American market. Sales in Japan and Europe are expected to dip.

Naoki Fujiwara, a fund manager at Shinkin Asset Management in Tokyo, said the profit outlook appeared conservative.

It's got environmentally friendly auto technology. It's got cost-consciousness. And it focuses on compact cars, Fujiwara said. All of these are required of the auto industry today. I don't see Honda's competitiveness eroding any time soon.

HYBRID HURDLES

Others saw the competitive threat as more immediate.

It may be running ahead of competition in environmentally friendly cars, but this is the area all the world's major carmakers are focusing on, said Takeshi Osawa, senior fund manager at Norinchukin Zenkyoren Asset Management.

It needs a convincing strategy to maintain and boost its competitiveness in this field.

Among rivals in the United States, Ford Motor Co is due to launch the Fiesta compact car and General Motors Co will roll out its much-hyped Chevy Volt plug-in hybrid.

CEO Takanobu Ito, a 32-year Honda veteran and former chassis designer, has conceded that development of a new, more fuel-efficient hybrid system to power its bigger vehicles was an urgent task to compete with Toyota Motor Corp <7203.T> and a growing number of automakers launching full hybrid cars.

Honda's one-motor hybrid system has the advantage of being simple and cheaper, but lacks the power to be mounted on anything bigger than a CR-V crossover.

BENEFITING FROM U.S. RECOVERY

Honda, the first big Japanese automaker to report fourth-quarter results, is expected to have booked the biggest profits in 2009/10 among its peers, helped by a lucrative and fast-growing motorcycle business.

Operating profit for the January-March quarter just ended was 96.1 billion yen, compared with a loss of 272.1 billion yen a year earlier, when it cut back production to reduce inventory.

The result was slightly higher than the 94 billion yen average estimate in a poll of 19 brokers according to Thomson Reuters I/B/E/S.

Fourth-quarter net profit came to 72.2 billion yen versus a loss of 180 billion yen a year ago.

Falling sales in Europe remain a drag, but analysts expect strong growth in U.S. as well as China and other Asian markets to keep Honda on track.

Japanese carmakers are more oriented toward U.S. sales and will likely benefit more from the U.S. market recovery than Hyundai and Kia <000270.KS>, said Ahn Sang-Jun, an auto analyst at Tong Yang Securities in Seoul.

It looks right to buy Japanese carmakers now.

Kondo said inventory levels in the United States had normalized and would likely keep its spending on incentives per car at the same level this year despite generous discounts from Toyota and others.

Another threat for Honda and other Japanese automakers is a strengthening yen, which hits repatriated profits and makes their products less price competitive versus rivals'.

Honda forecast the yen to average 90 to the dollar and 120 to the euro, compared with current levels around 93 and 123.

Shares in Honda have gained 6.4 percent in the year to date, outperforming a 1.2 percent rise in Tokyo's transport subindex. Before the results, Honda ended down 1.5 percent, while the sector index fell 1.2 percent. (Additional reporting by Kim Yeon-hee in SEOUL, Kiyoshi Takenaka, Chikafumi Hodo and Rika Otsuka in TOKYO; Editing by Lincoln Feast)