Detailed narrative
Tariff Impact and Mitigation Strategy
Honda revised its full-year gross tariff impact🌐 forecast down to JPY 400 billion from JPY 650 billion, attributing the change to a review of the U.S.-Japan agreement and strategic production reallocations. Management acknowledged the reduction from 25% to 15% tariff between the U.S. and Japan as a positive development.
The company's strategy involves increasing local production in the U.S., potentially moving to a three-shift operation, and localizing core hybrid components like motors, batteries, and ECUs. The current forecast assumes a 15% tariff will apply from September.
Automobile Segment Performance and EV Strategy
The Automobile segment recorded an operating loss of JPY 29.6 billion in Q1 FY26, the first since FY2020. This was significantly impacted by JPY 113.4 billion in EV-related nonrecurring expenses, including JPY 60 billion for write-offs of development assets due to product range changes and JPY 50 billion for provisions for losses on U.S.-sold EVs, which were affected by changes in IRA subsidies and California ACC II credits.
Despite these losses, the company plans to launch its 0 Series EVs next term, aiming for full preparedness.
Motorcycle Operations' Record Profitability
Motorcycle operations delivered a record high operating profit of JPY 189 billion in Q1 FY26, an increase of JPY 11.3 billion year-on-year, with an impressive operating profit margin of 19.9%. This strong performance was primarily driven by robust sales expansion in Brazil and Vietnam, which compensated for some slowdowns in India.
The company noted high demand exceeding supply in markets like Brazil, leading to plans to increase production capacity from 1.3 million to 1.6 million units.
Challenges in the China Market
Honda continues to face significant difficulties in the Chinese market, with unit sales declining for the 17th consecutive month. The total market is expected to remain below 24 million units, with NEVs comprising over 50%. The company has adjusted its capacity by 0.5 million units over the past 2-3 years, with current capacity at 1.24 million units (1 million ICE, 0.2 million BEV).
EV sales, particularly the e:N Series, are underperforming initial plans due to intense market competition, aggressive discounting, and unmet customer expectations for intelligent functionalities. Honda plans to expedite actions like deep seek with OTA and ADAS collaborations to address these issues.
Regional Sales Performance Outside North America
Beyond North America, unit sales declined year-on-year in Asia, Europe, and Japan. In Asia, increased competition from Chinese OEMs and challenges in launching hybrid models in certain markets (due to subsidy variations) contributed to the decline. Europe has been a struggling market for several years, with unit sales trending around 100,000 units.
Management indicated a need to revisit its strategy for the European market, focusing efforts on more promising regions like the U.S., Japan, and India.
Capital Allocation and Shareholder Returns
Honda reiterated its commitment to shareholder returns, with JPY 936.5 billion of the JPY 1.1 trillion share buyback authorization already acquired as of July 31. The full-year dividend forecast remains unchanged at JPY 70 per share. The company also provided an update on its capital expenditure, depreciation, amortization, and R&D expenditures for FY26, indicating continued investment in future growth areas despite current challenges.