Honda Wagers $800M That Americans Will Embrace "Subcompact" Cars
On the face of it, Honda's decision to build an $800 million plant in Mexico for 200,000 subcompacts annually seems like a home run, since the yen is soaring against the dollar (and the peso), production in Mexico is much cheaper, and the North American market looks set to explode in demand for small cars.
But in fact, the automaker's decision is something of a gamble that will pay off handsomely only if the economy stays sour and gas prices remain high. Americans are embracing small cars, but not yet really small ones. The subcompact segment is likely to grow, but it's only around 3.5 percent of the U.S. market now. And, given half a chance, a lot of people thinking small now would go back to crossovers and trucks should the economy pick up or fuel prices drop.
A bigger small market
IHS Global Insight predicts that the U.S. subcompact market will double by 2015, but even if that comes to pass it still won't be huge -- maybe a million cars annually and seven percent of the market. You have to contrast that with the ultra-hot segment of crossover utility vehicles, which were 25 percent of the market in 2010, when sales grew by 24 percent. The CUV growth was double that of the overall new car and truck market.
Analysts remain somewhat cautious about what will happen with small car sales, even if they work for the company that predicts a doubling of the market. George Magliano, senior economist at IHS, told me:
Subcompacts are still too small for American consumers to feel safe in, especially given all the big trucks on the highway. I don't believe the subcompact market will just keep getting bigger -- for that to happen, you need not only economic uncertainty but gas prices that are accelerating, not just staying in place.For Jack Nerad, executive market analyst at Kelley Blue Book, the Honda plant is being driven by exchange rates:
The critical reason has to do with currency. If you build a small car like the Honda Fit in Japan, given the appreciation of the yen against the dollar, it makes sense that you wouldn't make much money on it. Honda gets lower labor costs by producing cars in Mexico, without necessarily lesser quality -- I haven't seen any bad Hondas out of Mexico. I do think the segment will grow, but I doubt that it will grow enough to double by 2015.Better value ahead?
One opportunity Honda has with cheaper-to-build Mexican-built subcompacts is adding features without raising the price. The new Civic has taken some heavy blows, including from Consumer Reports, for building to a price and cheapening the new model. The Japanese earthquake is just one reason Honda sales are down 10 percent in the U.S. so far this year.
Honda is increasing North American production from 1.63 million to 1.83 million by 2014. The car most likely to be built in Mexico (where Honda will employ 3,200) is the Fit, and I would expect the new station wagon version, the Shuttle, to be built there as well. The Fit sells well, but only about a third as much as the mostly North America-built Civic, indicating Americans still prefer compacts. Also possibilities for the new Mexican Honda plant (one of eight when built) are two hybrids â€" the CR-Z and the Insight. Something entirely new could be headed for production there, too.
American Honda Motor President Tetsuo Iwamura said that the new plant will allow the company "to more flexibly respond to changing market conditions from within the region." He has that right. The company has to be flexible in guessing what consumers will want in the showrooms as the economy (and gas prices) fluctuate wildly.
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Photo: Honda