As Nissan Takes Separate Path, Going Gas-Free at Wrong Timing Could Be Critical for Honda

On April 23, Honda announced all its global new car sales will consist of electric vehicles (EVs) and fuel cell vehicles (FCVs) by 2040. Their target is 40% EV/FCV sales ratio by 2030 in developed countries, 80% by 2035, and 100% by 2040, including emerging countries.

Honda is the first Japanese automaker to announce the policy of eliminating gasoline-powered vehicles, including hybrid vehicles (HV). At that point, U.S. General Motors (GM) was the only major auto company expressing similar policies (zero gasoline-powered cars except medium to large vehicles by 2035). On July 22, Germany’s Daimler announced its plan to go all-electric by 2030 “where market conditions allow.”

Honda’s unexpected announcement came as a surprise, but there had been signs. When they announced last October they are pulling out of Formula One, the company clearly stated the need to funnel its corporate resources on research and development of FCVs and EVs. Under the leadership of former CEO Takahiro Hachigo, Honda thrashed out a series of business restructuring plans, such as discontinuing automobile productions in the U.K., Turkey, Argentina, and the Philippines, aggregating automobile plants in Mexico and India, and introducing an early retirement program in April 2021.

With the appointment of the new CEO Toshihiro Mibe, Honda must have felt urged to announce a new growth strategy. The simple average of the company’s automobile business operating income margin for the past 10 years (FY ended March 2012 to FY ended March 2021) was 2.5%, much lower than Toyota’s 6.7%. Especially for the last three years (FY ended March 2019 to FY ended March 2021), the figure is only 1.5% (Toyota 7.2%).

Not Joining the Fuel Efficiency Race

In recent years, Honda kept a distance from the fuel-efficiency race. Fit Hybrid launched in February 2020 travels maximum 29.4 km per 1 liter of gasoline (based on WLTP international standard), while Toyota’s Yaris Hybrid runs 36.0 km per liter. Honda seems to have already shifted its corporate resources several years ago to next-generation EV/FCV development.

I understood Honda is serious about achieving carbon neutrality (zero greenhouse gas emission) by 2050. However, the stock market only gave a modest response. The closing price of Honda shares on the next business day (April 26) was 3,290 yen (up 1.8% from April 23 closing) and ended the following week (April 30) at 3,232 yen (down 1 yen from April 23). The day GM made a similar announcement (January 28), their shares closed at 51.04 USD (up 3.4% from previous day January 27), and rose to 54.25 USD (up 10% from January 27) one week later.

The main reason for the meager gain in Honda shares following the announcement is the considerable time it takes before producing results from the ambitious EV/FCV shift. The strategic EV with Honda taking development initiative will be launched in the late 2020s. It would take some more time until the automaker reaps profits from the EV. Besides, Honda did not mention specific measures on how to produce or procure the vast amount of batteries, which is the key device. GM and Germany’s Volkswagen (VW) have already announced plans to increase the battery procurement substantially through collaboration with battery manufacturers. More than any other company, Honda needs to speed up creating its EV business model.

The other issue in Honda’s EV/FCV shift is the technological strategy during the transition. At least for the next five years, the competitors, mainly Japanese, are sure to launch high-performance next-generation HVs in succession. In regions other than Europe, including emerging countries, such rapid progress in HVs may continue for over 10 years. So far, there is no clear explanation on the counterplans Honda has in place. Insufficient cash flow during the transition is highly likely to lead to a limited budget for the next-generation EV/FCV development.

Half-Million e-POWER Units

Nissan is recently strengthening HVs. In its fifth year since launch, Nissan HV featuring the original e-POWER system has sold over 500,000 units almost solely in the domestic market. It took almost a decade for Nissan’s EVs such as Leaf to reach total global sales of 500,000.

Nissan plans to sell over a million EV units annually by FY 2022. The majority is likely to be HVs including those for the Chinese and European markets. From the end of last year, the transfer to the second generation e-POWER began. The new e-POWER has evolved significantly, with enhanced quietness and 40% smaller inverter. With the third-generation e-POWER to be launched in a few years, Nissan aims to secure profitability equivalent to gasoline-powered cars by achieving the world’s highest fuel efficiency and cost reduction.

From a global perspective, those that follow Toyota and Nissan in HVs are Lynk & Co (China’s Geely Auto Group), Mazda, Mitsubishi Motors, Suzuki, Daihatsu, Subaru, and Renault of France. Automakers can expect synergies between HVs and EVs for motors and control systems, which also encourages the HV strategies of these companies.

The U.S. transition to EV/FCV will take at least 15 years. President Biden is eager to promote EVs. However, the Republicans have not approved his proposal for the 100 billion USD (about 11 trillion yen) in EV subsidies, leaving it in midair. It is uncertain whether the August 5 executive order targeting 50% of new cars sold in the U.S. to be EVs or plug-in hybrid vehicles (PHV) by 2030 can be attained. Wide spread use of EVs in the U.S. will depend on the ability of the ruling party. To close up on carbon neutrality, the only way is to expand sales of HVs steadily for the time being.

Compared to gasoline-cars, the selling price of EVs will probably be higher for a while, and EV product life cycle will probably be much shorter. There is also the recycling cost burden for EV batteries, various subsidies and taxation referral, and concerns for EV battery quality. Ultimately, consumers or taxpayers will bear these costs. Putting aside early adopters (daring customers who accept new products like EVs), would the majority of people take on such a burden? Including Europe, it seems we still need careful examination.

(Koichi Sugimoto, Mitsubishi UFJ Morgan Stanley Securities senior analyst)