20-F 1 d20f.htm ANNUAL REPORT Annual Report
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report            

For the transition period from              to             

 

Commission file number 1-7628

 

HONDA GIKEN KOGYO KABUSHIKI KAISHA

(Exact name of Registrant as specified in its charter)

 

HONDA MOTOR CO., LTD.

(Translation of Registrant’s name into English)

 

JAPAN

(Jurisdiction of incorporation or organization)

No. 1-1, Minami-Aoyama 2-chome, Minato-ku, Tokyo 107-8556, Japan

(Address of principal executive offices)

Mitsuhiro Okayama, American Honda Motor Co., Inc.,

mitsuhiro_okayama@ahm.honda.com, (212)707-9920, 156 West 56th Street, 20th Floor, New York, NY 10019, U.S.A.

(Name, Telephone, E-mail, and/or Facsimile number and Address of Company Contact Person)

 

Securities registered pursuant to Section 12(b) of the Act.

Title of each class

 

Name of each exchange on which registered

Common Stock*   New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Title of each class

 

Outstanding as of March 31, 2010

Common Stock   1,814,602,736**

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act,    Yes  x    No  ¨

If this report is an annual or transmission report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such file).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or, a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x             Accelerated filer  ¨             Non-accelerated filer  ¨            

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S.GAAP  x    International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨    Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

* Not for trading purposes, but only in connection with the registration of American Depositary Shares, each representing one share of Common Stock.
** Shares of Common Stock include 71,107,703 shares represented by American Depositary Shares.

 

 


Table of Contents

PART I

  

Item 1. Identity of Directors, Senior Management and Advisors

   1

Item 2. Offer Statistics and Expected Timetable

   1

Item 3. Key Information

   1

A. Selected Financial Data

   1

B. Capitalization and Indebtedness

   3

C. Reason for the Offer and Use of Proceeds

   3

D. Risk Factors

   3

Item 4. Information on the Company

   7

A. History and Development of the Company

   7

B. Business Overview

   8

C. Organizational Structure

   25

D. Property, Plants and Equipment

   26

Item 4A. Unresolved Staff Comments

   28

Item 5. Operating and Financial Review and Prospects

   28

A. Operating Results

   28

B. Liquidity and Capital Resources

   55

C. Research and Development

   56

D. Trend Information

   58

E. Off-Balance Sheet Arrangements

   58

F. Tabular Disclosure of Contractual Obligations

   59

G. Safe Harbor

   60

Item 6. Directors, Senior Management and Employees

   60

A. Directors and Senior Management

   60

B. Compensation

   72

C. Board Practices

   73

D. Employees

   73

E. Share Ownership

   74

Item 7. Major Shareholders and Related Party Transactions

   74

A. Major Shareholders

   74

B. Related Party Transactions

   75

C. Interests of Experts and Counsel

   75

Item 8. Financial Information

   75

A. Consolidated Statements and Other Financial Information

   75

B. Significant Changes

   76

Item 9. The Offer and Listing

   77

A. Offer and Listing Details

   77

B. Plan of Distribution

   78

C. Markets

   78

D. Selling Shareholders

   78

E. Dilution

   78

F. Expenses of the Issue

   78

Item 10. Additional Information

   78

A. Share Capital

   78

B. Memorandum and Articles of Association

   78

C. Material Contracts

   86

D. Exchange Controls

   86

E. Taxation

   86


Table of Contents

F. Dividends and Paying Agents

   90

G. Statement by Experts

   90

H. Documents on Display

   90

I. Subsidiary Information

   90

Item 11. Quantitative and Qualitative Disclosure about Market Risk

   90

Item 12. Description of Securities Other than Equity Securities

   93

PART II

  

Item 13. Defaults, Dividend Arrearages and Delinquencies

   95

Item 14. Material Modifications to the Rights of Security Holders and Use Proceeds

   95

Item 15. Controls and Procedures

   95

Item 16A. Audit Committee Financial Expert

   96

Item 16B. Code of Ethics

   96

Item 16C. Principal Accountant Fees and Services

   96

Item 16D. Exemptions from the Listing Standards for Audit Committees

   97

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

   98

Item 16F. Change in Registrant’s Certifying Accountant

   98

Item 16G. Corporate Governance

   98

PART III

  

Item 17. Financial Statements

   100

Item 18. Financial Statements

   100

Item 19. Exhibits

   101


Table of Contents

PART I

 

Unless the context otherwise requires, the terms “we”, “us”, “our”, “Registrant”, “Company” and “Honda” as used in this Annual Report each refer to Honda Motor Co., Ltd. and its consolidated subsidiaries.

 

Item 1. Identity of Directors, Senior Management and Advisors

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A. Selected Financial Data:

 

The selected consolidated financial data set out below for each of the five fiscal years ended March 31, 2010 have been derived from our consolidated financial statements that were prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).

 

You should read the U.S. GAAP selected consolidated financial data set out below together with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements contained in this Annual Report.

 

    Fiscal years ended March 31,
    Yen
(millions)
  U.S. dollars
(millions)
    2006   2007   2008   2009   2010           2010        

Income statement data:

           

Net sales and other operating revenue

  ¥ 9,907,996   ¥ 11,087,140   ¥ 12,002,834   ¥ 10,011,241   ¥ 8,579,174   $ 92,210

Research and development

    510,385     551,847     587,959     563,197     463,354     4,980

Operating income

    868,905     851,879     953,109     189,643     363,775     3,910

Income before income taxes and equity in income of affiliates

    829,904     792,868     895,841     161,734     336,198     3,613

Equity in income of affiliates

    99,605     103,417     118,942     99,034     93,282     1,003

Net income

    612,320     612,439     627,347     150,933     282,611     3,038

Net income attributable to Honda Motor Co., Ltd.

    597,033     592,322     600,039     137,005     268,400     2,885

Balance sheet data:

           

Total assets

  ¥ 10,631,400   ¥ 12,036,500   ¥ 12,615,543   ¥ 11,818,917   ¥ 11,629,115   $ 124,990

Long-term debt

    1,879,000     1,905,743     1,836,652     1,932,637     2,313,035     24,861

Honda Motor Co., Ltd. shareholders’ equity

    4,125,750     4,488,825     4,550,479     4,007,288     4,328,640     46,525

Total equity

    4,213,210     4,611,732     4,692,285     4,130,344     4,456,430     47,898

Common stock

    86,067     86,067     86,067     86,067     86,067     925

Cash flow data:

           

Depreciation excluding property on operating leases

  ¥ 262,225   ¥ 361,747   ¥ 417,393   ¥ 441,868   ¥ 401,743   $ 4,318

Depreciation of property on operating leases

    —       9,741     101,032     195,776     227,931     2,450

Total depreciation

    262,225     371,488     518,425     637,644     629,674     6,768

Capital expenditures

    460,021     597,958     668,228     635,190     392,062     4,214

Purchase of operating lease assets

    —       366,795     839,261     668,128     544,027     5,847

Total capital expenditures

    460,021     964,753     1,507,489     1,303,318     936,089     10,061

 

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Weighted average number of shares outstanding

 

     (Thousands of shares)
         2006            2007            2008            2009            2010    

Weighted average number of common shares outstanding

   1,840,799    1,824,675    1,815,356    1,814,560    1,814,605

 

Net income attributable to Honda Motor Co., Ltd. per common share

 

     (Yen)    (US$)
         2006            2007            2008            2009            2010            2010    

Basic

   ¥ 324.33    ¥ 324.62    ¥ 330.54    ¥ 75.50    ¥ 147.91    $ 1.59

Diluted

     324.33      324.62      330.54      75.50      147.91      1.59

 

Net income attributable to Honda Motor Co., Ltd. per common share has been computed by dividing net income attributable to Honda Motor Co., Ltd. available to common shareholders by the weighted average number of common shares outstanding during each year.

 

Dividends declared during the period per common share

 

     (Yen)    (US$)
         2006            2007            2008            2009            2010            2010    

Dividends declared during the period per common share

   ¥ 38.50    ¥ 77.00    ¥ 84.00    ¥ 77.00    ¥ 34.00    $ 0.37

 

Additionally, a year-end dividend of ¥12 ($0.13) per common share aggregating ¥21.7 billion ($234 million) relating to fiscal 2010 was determined by our board of directors in April 2010 and approved by our shareholders in June 2010. This dividend will be paid in June 2010.

 

Stock Split

 

The Company executed a two-for-one stock split for the Company’s common stock effective July 1, 2006. All per share information has been adjusted retroactively for the fiscal year ended March 31, 2006 to reflect this stock split.

 

Reclassification Adjustments

 

As described in Note (1)(u) to our consolidated financial statements, certain reclassifications have been made to the consolidated financial statement periods presented above to conform to the presentation used for the fiscal year ended March 31, 2010.

 

Noncontrolling Interests in Consolidated Financial Statements

 

Honda adopted Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”, which is now codified in the FASB Accounting Standards Codification (ASC) 810 “Consolidation”, effective April 1, 2009. Upon the adoption of this statement, Honda has changed the prior consolidated financial statements to conform to the presentation used for the fiscal year ended March 31, 2010. See Note (1)(c).

 

Exchange Rates

 

In this Annual Report, yen amounts have been translated into U.S. dollars for the convenience of readers. Unless otherwise noted, the rate used for these translations was ¥93.04 =$1.00, which represents the approximate exchange rate quoted on the Tokyo Foreign Exchange Market on March 31, 2010. No representation is made that yen amounts could have been, or could be, converted into U.S. dollars at that rate or any other rate on this or any other data or at all.

 

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The following table sets out information regarding the noon buying rates for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York expressed in yen per $1.00 during the periods shown. On May 28, 2010, the noon buying rate was ¥90.81 =$1.00. The average exchange rate for the period shown is the average of the month-end rates during the period.

 

     (Yen)

Years ended March 31,

   Average    Period end    High    Low

2006

   113.67    117.48    120.93    104.41

2007

   116.55    117.56    121.81    110.07

2008

   113.61    99.85    124.09    96.88

2009

   100.85    99.15    110.48    87.80

2010

   92.49    93.40    100.71    86.12

2011 (through May 28, 2010)

   92.53    90.81    94.68    89.89

Dec-2009

         93.08    86.62

Jan-2010

         93.31    89.41

Feb-2010

         91.94    88.84

Mar-2010

         93.40    88.43

Apr-2010

         94.51    92.03

May-2010

         94.68    89.89

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reason for the Offer and Use of Proceeds

 

Not applicable.

 

D. Risk Factors

 

You should carefully consider the risks described below before making an investment decision. If any of the risks described below actually occurs, Honda’s business, financial condition or results of operations could be adversely affected. In that event, the trading prices of Honda’s common stock and American Depositary Shares could decline, and you may lose all or part of your investment. Additional risks not currently known to Honda or that Honda now deems immaterial may also harm Honda and affect your investment.

 

Risks Relating to Honda’s Industry

 

Honda may be adversely affected by market conditions

 

Honda conducts its operations in Japan and throughout the world, including North America, Europe and Asia.

 

A sustained loss of consumer confidence in these markets, which may be caused by continued economic slowdown, recession, changes in consumer preferences, rising fuel prices, financial crisis or other factors could trigger a decline in demand for automobiles, motorcycles and power products that may adversely affect Honda’s results of operations.

 

Prices for automobiles, motorcycles and power products can be volatile

 

Prices for automobiles, motorcycles and power products in certain markets may experience sharp changes over short periods of time.

 

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This volatility is caused by many factors, including fierce competition, which is increasing, short-term fluctuations in demand from underlying economic conditions, changes in tariffs, import regulations and other taxes, shortages of certain supplies, high material prices and sales incentives by Honda or other manufacturers or dealers. There can be no assurance that such price volatility will not continue or intensify or that price volatility will not occur in markets that to date have not experienced such volatility. Overcapacity within the industry has increased and will likely continue to increase if the economic downturn continues in Honda’s major markets or worldwide, leading, potentially, to further increased price pressure. Price volatility in any or all of Honda’s markets could adversely affect Honda’s results of operations in a particular period.

 

Risks Relating to Honda’s Business Generally

 

Currency and Interest Rate Risks

 

Honda’s operations are subject to currency fluctuations

 

Honda has manufacturing operations throughout the world, including Japan, and exports products and components to various countries.

 

Honda purchases materials and sells its products in foreign currencies. Therefore, currency fluctuations may affect Honda’s pricing of products sold and materials purchased. Accordingly, currency fluctuations have an effect on Honda’s results of operations and financial condition, as well as Honda’s competitiveness, which will over time affect its results.

 

Since Honda exports many products and components from Japan and generates a substantial portion of its revenues in currencies other than the Japanese yen, Honda’s results of operations would be adversely affected by an appreciation of the Japanese yen against other currencies, in particular the U.S. dollar.

 

Honda’s hedging of currency and interest rate risk exposes Honda to other risks

 

Although it is impossible to hedge against all currency or interest rate risk, Honda uses derivative financial instruments in order to reduce the substantial effects of currency fluctuations and interest rate exposure on our cash flow and financial condition.

 

These instruments include foreign currency forward contracts, currency swap agreements and currency option contracts, as well as interest rate swap agreements. Honda has entered into, and expects to continue to enter into, such hedging arrangements. As with all hedging instruments, there are risks associated with the use of such instruments.

 

While limiting to some degree our risk fluctuations in currency exchange and interest rates by utilizing such hedging instruments, Honda potentially forgoes benefits that might result from other fluctuations in currency exchange and interest rates. Honda is also exposed to the risk that its counterparties to hedging contracts will default on their obligations.

 

Honda manages exposure to counterparty credit risk by limiting the counterparties to major international banks and financial institutions meeting established credit guidelines. However, any default by such counterparties might have an adverse effect on Honda.

 

Legal and Regulatory Risks

 

The automobile, motorcycle and power product industries are subject to extensive environmental and other governmental regulations, including with respect to global climate changes

 

Regulations regarding vehicle emission levels, fuel economy, noise, safety and hazardous substances, as well as levels of pollutants from production plants are extensive within the automobile, motorcycle and power

 

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product industries. These regulations are subject to change, and are often made more restrictive, particularly in recent years, due to an increasing concern with respect to possible global climate changes. The costs to comply with these regulations can be significant to Honda’s operations.

 

Honda is reliant on the protection and preservation of its intellectual property

 

Honda owns or otherwise has rights in a number of patents and trademarks relating to the products it manufactures, which have been obtained over a period of years. These patents and trademarks have been of value in the growth of Honda’s business and may continue to be of value in the future. Honda does not regard any of its businesses as being dependent upon any single patent or related group of patents. However, an inability to protect this intellectual property generally, or the illegal breach of some or a large group of Honda’s intellectual property rights, would have an adverse effect on Honda’s operations.

 

Honda is subject to legal proceedings

 

Honda is subject to a number of suits, investigations and/or proceedings under relevant laws and regulations of various jurisdictions. A negative outcome in one or more of these pending legal proceedings could adversely affect Honda’s business, financial condition or results of operations.

 

Risks Relating to Honda’s Operations

 

Honda’s financial services business conducts business under highly competitive conditions in an industry with inherent risks

 

Honda’s financial services business offers various financing plans designed to increase the opportunity for sales of its products and to generate financing income. However, customers can also obtain financing for the lease or purchase of Honda’s products through a variety of other sources that compete with our financing services, including commercial banks and finance and leasing companies. The financial services offered by us also involve credit risk as well as risks relating to lease residual values, cost of capital and access to funding. Competition for customers and/or these risks may affect Honda’s results of operations in the future.

 

Honda relies on various suppliers for the provision of certain raw materials and components

 

Honda purchases raw materials, and certain components and parts, from numerous external suppliers, and relies on some key suppliers for some items and the raw materials for manufacturing of its products. Honda’s ability to continue to obtain these supplies in an efficient and cost-effective manner is subject to a number of factors, some of which are not within Honda’s control. These factors include the ability of its suppliers to provide a continued source of supply and Honda’s ability to compete with other users in obtaining the supplies. Loss of a key supplier in particular may affect our production and increase our costs.

 

Honda conducts its operations in various regions of the world

 

Honda conducts its businesses worldwide, and in several countries, Honda conducts businesses through joint ventures with local entities, in part due to the legal and other requirements of those countries. These businesses are subject to various regulations, including the legal and other requirements of each country. If these regulations or the business conditions or policies of these local entities change, it may have an adverse affect on Honda’s business, financial condition or results of operations.

 

Honda may be adversely affected by wars, use of force by foreign countries, terrorism, multinational conflicts, natural disasters, epidemics and labor strikes

 

Honda conducts its businesses worldwide, and its operations may variously be subject to wars, use of force by foreign countries, terrorism, multinational conflicts, natural disasters, epidemics, labor strikes and other events beyond our control which may delay or disrupt Honda’s local operations in the affected regions, including the purchase of raw materials and parts, the manufacture, sales and distribution of products and the provision of

 

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services. Delays or disruptions in one region may in turn affect our global operations. If such delay or disruption occurs and continues for a long period of time, Honda’s business, financial condition or results of operations may be adversely affected.

 

Honda may be adversely affected by inadvertent disclosure of confidential information

 

Although Honda maintains internal controls through established procedures to keep confidential information including personal information of its customers and relating parties, such information may be inadvertently disclosed. If this occurs, Honda may be subject to, and may be adversely affected by, claims for damages from the customers or parties affected.

 

Also, inadvertent disclosure of confidential business or technical information to third parties may result in a loss of Honda’s competitiveness.

 

Risk related to Pension and Other Postretirement Benefits

 

Honda has pension plans and provides other post-retirement benefits. The amounts of pension benefits, lump-sum payments and other post-retirement benefits are primarily based on the combination of years of service and compensation. The funding policy is to make periodic contributions as required by applicable regulations. Benefit obligations and pension costs are based on assumptions of many factors, including the discount rate, the rate of salary increase and the expected long-term rate of return on plan assets. Differences in actual expenses and costs or changes in assumptions could affect Honda’s pension costs and benefit obligations, including Honda’s cash requirements to fund such obligations, which could materially affect our financial condition and results of operations.

 

As a holder of ADSs, you will have fewer rights than a shareholder has and you will have to act through the depositary to exercise those rights

 

The rights of shareholders under Japanese law to take various actions, including exercising voting rights inherent in their shares, receiving dividends and distributions, bringing derivative actions, examining a company’s accounting books and records, and exercising appraisal rights, are available only to holders of record. Because the depositary, through its custodian agents, is the record holder of the Shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited Shares. The depositary will make efforts to vote the Shares underlying your ADSs as instructed by you and will pay to you the dividends and distributions collected from us. However, in your capacity as an ADS holder, you will not be able to bring a derivative action, examine our accounting books and records or exercise appraisal rights through the depositary.

 

Rights of shareholders under Japanese law may be more limited than under the law of other jurisdictions

 

Our Articles of Incorporation, Regulations of the Board of Directors, Regulations of the Board of Corporate Auditors and the Japanese Company Law govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors’ and officers’ fiduciary duties, and shareholders’ rights may be different from those that would apply if we were a U.S. company. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the laws of the United States. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a U.S. corporation. In addition, Japanese courts may not be willing to enforce liabilities against us in actions brought in Japan that are based upon the securities laws of the United States or any U.S. state.

 

Because of daily price range limitations under Japanese stock exchange rules, you may not be able to sell your shares of our Common Stock at a particular price on any particular trading day, or at all

 

Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price fluctuation

 

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limits for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell his or her shares at such price on a particular trading day, or at all.

 

Cautionary statement with respect to forward looking statements in this Annual Report

 

This Annual Report includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements included in this Annual Report are based on the current assumptions and beliefs of Honda in light of the information currently available to it, and involve known and unknown risks, uncertainties, and other factors. Such risks, uncertainties and other factors may cause Honda’s actual results, performance, achievements or financial position to be materially different from any future results, performance, achievements or financial position expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors are generally set forth in Item 3.D “Risk Factors” and include, without limitation:

 

   

the political, economic and social conditions in Japan and throughout the world including North America, Europe and Asia, including economic slowdowns, recessions, changes in consumer preferences, rising fuel prices, financial crises and other factors, as well as the relevant governments’ specific policies with respect to economic growth, inflation, taxation, currency conversion, imports and sources of supplies and the availability of credit, particularly to the extent such current or future conditions and policies affect the automobile, motorcycle and power product industries and markets in Japan and other markets throughout the world in which Honda conducts its business, and the demand, sales volume and sales prices for Honda’s automobiles, motorcycles and power products;

 

   

the effects of competition in the automobile, motorcycle and power product markets on the demand, sales volume and sales prices for Honda’s automobiles, motorcycles and power products;

 

   

Honda’s ability to finance its working capital and capital expenditure requirements, including obtaining any required external debt or other financing;

 

   

the effects of economic stagnation or recession in Honda’s principal markets and of exchange rate and interest rate fluctuations on Honda’s results of operations; and

 

   

the effects of environmental and other governmental regulations and legal proceedings.

 

Honda undertakes no obligation and has no intention to publicly update any forward-looking statement after the date of this Annual Report. Investors are advised to consult any further disclosures by Honda in its subsequent filings pursuant to the Securities and Exchange Act of 1934.

 

Item 4. Information on the Company

 

A. History and Development of the Company

 

Honda Motor Co., Ltd. is a limited liability, joint stock corporation incorporated on September 24, 1948 under the Commercial Code of Japan as Honda Giken Kogyo Kabushiki Kaisha. It was formed to succeed to the business of an unincorporated enterprise established in 1946 by the late Soichiro Honda to manufacture motors for motorized bicycles.

 

Honda develops, produces, and manufactures a variety of motor products, ranging from small general-purpose engines and scooters to specialty sports cars that incorporate Honda’s highly efficient internal combustion engine technology.

 

Honda’s principal executive office is located at 1-1, Minami-Aoyama 2-chome, Minato-ku, Tokyo, 107-8556, Japan. Its telephone number is 81-3-3423-1111.

 

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Principal Capital Investments

 

In the fiscal years ended March 31, 2008, 2009 and 2010, Honda’s capital expenditures were ¥1,493.2 billion, ¥1,302.0 billion, and ¥893.0 billion, respectively, on an accrual basis. Also, capital expenditures excluding those with respect to property on operating leases were ¥654.0 billion, ¥633.9 billion, and ¥348.9 billion, respectively, on an accrual basis. For further details of Honda’s capital expenditures during fiscal 2010, see “Property, Plants and Equipment” included as “Item 4.D” of this Annual Report.

 

B. Business Overview

 

General

 

Honda’s business segments are the motorcycle business, automobile business, financial services business, and power product and other businesses.

 

The following tables show the breakdown of Honda’s revenues from external customers by category of activity and by geographical markets based on the location of the customer during the fiscal years ended March 31, 2008, 2009 and 2010:

 

     Fiscal years ended March 31,
         2008            2009            2010    
     Yen (billions)

Motorcycle Business

   ¥ 1,558.6    ¥ 1,411.5    ¥ 1,140.2

Automobile Business

     9,489.3      7,674.4      6,554.8

Financial Services Business

     533.5      582.2      606.3

Power Product and Other Businesses

     421.1      343.0      277.6
                    

Total

   ¥ 12,002.8    ¥ 10,011.2    ¥ 8,579.1
                    

 

     Fiscal years ended March 31,
         2008            2009            2010    
     Yen (billions)

Japan

   ¥ 1,585.7    ¥ 1,446.5    ¥ 1,577.3

North America

     6,068.4      4,514.1      3,736.4

Europe

     1,519.4      1,186.0      764.7

Asia

     1,577.2      1,595.4      1,543.3

Other Regions

     1,251.9      1,269.0      957.2
                    

Total

   ¥ 12,002.8    ¥ 10,011.2    ¥ 8,579.1
                    

 

Motorcycle Business

 

In 1949, Honda began mass production of motorcycles with the Dream D-Type, followed by other models such as the Benly and the Cub F-Type. By 1957, Honda became the top domestic manufacturer in terms of motorcycle production volume. Honda expanded its business overseas by establishing American Honda Motor Co., Inc. in the United States in 1959. Honda’s first overseas production started in Belgium in 1963.

 

Honda produces a wide range of motorcycles, ranging from the 50cc class to the 1800cc class in cylinder displacement. Honda’s motorcycles use internal combustion engines developed by Honda that are air- or water-cooled, two or four-cycle, and single, two, four or six-cylinder. Honda’s motorcycle line consists of sports (including trial and moto-cross racing), business and commuter models. Honda has also produced all—terrain vehicles (ATVs) since 1984, personal watercraft (PWC) since 2002 and multi utility vehicles (MUVs) since 2008.

 

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The following table sets out unit sales for Honda’s motorcycle business, including motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC), and revenue from Motorcycle Business, and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2008, 2009 and 2010:

 

     Fiscal years ended March 31,  
     2008     2009     2010  
     Units    Revenue     Units    Revenue     Units    Revenue  
     (thousands)    (billions)     (thousands)    (billions)     (thousands)    (billions)  

Japan

   311    ¥ 93.5      232    ¥ 81.8      190    ¥ 70.4   

North America

   453      265.6      320      182.2      189      103.9   

Europe

   313      226.6      276      178.6      199      124.6   

Asia

   6,633      484.4      7,523      460.4      7,628      461.0   

Other Regions

   1,610      488.3      1,763      508.3      1,433      380.1   
                                       

Total

   9,320    ¥ 1,558.6      10,114    ¥ 1,411.5      9,639    ¥ 1,140.2   
                                       

Motorcycle revenue as a percentage of total sales revenue

        13        14        13

 

Motorcycles are produced by Honda in Japan at the Kumamoto factory. Honda’s motorcycles are also produced by subsidiaries in countries around the world including Italy, Thailand, Vietnam, the Philippines, India, Brazil, and Argentina.

 

For further information on recent operations and a financial review of the motorcycle business, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”.

 

Automobile Business

 

Honda started the automobile business in 1963 with the T360 mini-truck and the S500 small sports car, and subsequently launched a series of mass-produced models including the Civic in 1972, the Accord in 1976, which established a base for its automobile business. In 1969, production of the mini-vehicles N600 and TN600 began in Taiwan using component parts sets. In 1982, Honda became the first Japanese automaker to begin local automobile production in the United States (with the Accord).

 

Honda’s automobiles use gasoline engines of three, four or six-cylinder, diesel engines and gasoline-electric hybrid systems. Honda also offers alternative fuel-powered vehicles such as natural gas, ethanol, and fuel cell vehicles.

 

Honda’s principal automobile products include the following vehicle models:

 

Passenger cars:

 

Legend, Accord, Inspire, Civic, Insight, City, Acura RL, Acura TL, Acura TSX, Acura CSX

 

Minivans, Multi-wagons, Sport Utility Vehicle:

 

Elysion, Odyssey, Step Wagon, Stream, FREED, FR-V, Airwave, Fit/Jazz, Partner Pilot, Ridgeline, CR-V, Element, Crossroad, CR-Z, Acura RDX, Acura MDX, Acura ZDX

 

Mini cars:

 

Life, Zest, Vamos, Acty

 

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The following table sets out Honda’s unit sales of automobiles and revenue from Automobile Business and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2008, 2009 and 2010:

 

     Fiscal years ended March 31,  
     2008     2009     2010  
     Units    Revenue     Units    Revenue     Units    Revenue  
     (thousands)    (billions)     (thousands)    (billions)     (thousands)    (billions)  

Japan

   615    ¥ 1,321.0      556    ¥ 1,225.3      646    ¥ 1,383.8   

North America

   1,850      5,209.4      1,496      3,723.8      1,297      3,013.4   

Europe

   391      1,182.6      350      923.5      249      575.3   

Asia

   755      1,048.4      793      1,079.5      950      1,041.2   

Other Regions

   314      727.8      322      721.9      250      540.9   
                                       

Total

   3,925    ¥ 9,489.3      3,517    ¥ 7,674.4      3,392    ¥ 6,554.8   
                                       

Automobile revenue as a percentage of total sales revenue

        79        77        77

 

Automobiles are produced by Honda at two sites in Japan: the Saitama factory and the Suzuka factory. Our major production sites overseas include those located in Ohio (U.S.A.), Alabama (U.S.A.), Indiana (U.S.A.), Ontario (Canada), Swindon (U.K.), Ayutthaya (Thailand), Uttar Pradesh (India) and Sao Paulo (Brazil). Yachiyo Industry Co., Ltd., one of our consolidated subsidiaries, assembles Mini cars for the Japanese domestic market.

 

For further information on recent operations and a financial review of the automobile business, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”

 

Financial Services Business

 

We offer a variety of financial services to our customers and dealers through finance subsidiaries in countries including Japan, the United States, Canada, the United Kingdom, Germany, Brazil and Thailand, with the aim of providing sales support for our products. The services of these subsidiaries include retail lending, leasing to customers and other financial services, such as wholesale financing to dealers.

 

The following table sets out Honda’s revenue from Financial Services Business and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2008, 2009 and 2010:

 

     Fiscal years ended March 31,  
           2008                 2009                 2010        
     Revenue     Revenue     Revenue  
     (billions)     (billions)     (billions)  

Japan

   ¥ 23.4      ¥ 24.0      ¥ 24.6   

North America

     483.9        527.9        553.1   

Europe

     13.2        12.6        10.4   

Asia

     4.9        4.7        4.3   

Other Regions

     8.0        12.8        13.8   
                        

Total

   ¥ 533.5      ¥ 582.2      ¥ 606.3   
                        

Financial Service revenue as a percentage of total sales revenue

     4     6     7

 

For further information on recent operations and a financial review of the financial services business, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”.

 

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Power Product and Other Businesses

 

Honda’s power product business began in 1953 with the introduction of the model the H, its first general purpose engine. Since then, Honda has manufactured a variety of power products including tillers, portable generators, general-purpose engines, grass cutters, outboard marine engines, water pumps, snow throwers, power carriers, power sprayers, lawn mowers and lawn tractors (riding lawn mowers). In 2003, Honda introduced a compact home-use cogeneration* unit. In addition, Honda began sales of thin film solar cells made of crystalline silicon for home use in 2007 and for public and industrial use in 2008.

 

 

*

Cogeneration: Cogeneration refers to the multiple applications of energy derived from a single source, such as using the heat supplied during the combustion process that drives an engine for other heating or cooling purposes.

 

The following table sets out Honda’s revenue from Power Product and Other Businesses and the breakdown by geographical markets based on the location of the customer during the fiscal years ended March 31, 2008, 2009 and 2010:

 

     Fiscal years ended March 31,  
     2008     2009     2010  
     Units    Revenue     Units    Revenue     Units    Revenue  
     (thousands)    (billions)     (thousands)    (billions)     (thousands)    (billions)  

Japan

   550    ¥ 147.7      516    ¥ 115.2      322    ¥ 98.3   

North America

   2,415      109.4      1,893      80.1      1,818      65.8   

Europe

   1,693      96.8      1,306      71.1      1,066      54.3   

Asia

   915      39.4      970      50.7      1,069      36.7   

Other Regions

   484      27.6      502      25.8      469      22.3   
                                       

Total

   6,057    ¥ 421.1      5,187    ¥ 343.0      4,744    ¥ 277.6   
                                       

Power Product and other revenue as a percentage of total sales revenue

        4        3        3

 

 

*

Unit sales of Power product and other business include all trilateral trade transactions from the fiscal year ended March 31, 2010. The change in the presentation for unit sales of Power product and other business resulted in an increase of 54 thousand units as compared to the presentation used in the prior periods. Trilateral trade transactions represent the transaction in which the Company purchases products from the vendors overseas and sells them to third countries.

 

For further information on recent operations and a financial review of the power product and other businesses, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”

 

Marketing and Distribution

 

Most of Honda’s products are distributed under the Honda trademarks in Japan and/or in overseas markets.

 

Sales in Japan

 

Sales of Honda motorcycles, automobiles, and power products in Japan are made through different distribution networks. Honda’s products are sold to consumers primarily by independent retail dealers throughout Japan.

 

Motorcycles are distributed through approximately 7,600 outlets, including approximately 800 “PRO’S” shops and approximately 100 Honda Dream authorized dealerships.

 

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As for the automobile distribution network, at present, 785 retail dealers operate 2,191 shops and sell models including the Legend, Inspire, Accord, Civic, Insight, Elysion, Odyssey, Step Wagon, Stream, FREED, Airwave, Fit, CR-V, Crossroad, CR-Z, Partner, Life, Zest, Vamos, and Acty.

 

Power products are distributed in Japan to approximately 1,430 retail dealers throughout Japan, including affiliates of Honda. A number of small engines are also sold to other manufacturers for use in their products.

 

Service and Parts Related Operations in Japan

 

Sales of spare parts and after sales services are mainly provided through retail dealers. Training programs on automobile service technicians are provided for dealers regularly by Honda’s Automobile Sales Operations (Japan).

 

Overseas Sales

 

In fiscal 2010, approximately 96% of Honda’s overseas sales were made through its principal foreign sales subsidiaries, which distribute Honda’s products to local wholesalers and retail dealers.

 

In the United States, Honda markets its products through a sales network of approximately 1,200 independent local dealers for motorcycles, approximately 1,300 for automobiles and approximately 7,000 for power products. Many of the motorcycle dealers and some of the automobile dealers also sell Honda’s power products. In 1986, Honda opened the first Acura automobile dealerships in the United States. The Acura network in the United States totaled 269 dealerships at the end of fiscal 2010. The Acura network offers RL, TL, TSX, RDX, MDX, ZDX models, and CSX in Canada.

 

With regard to exports from North America, Honda is currently exporting such North American-built models as the Accord, Civic, Pilot, MDX, Odyssey, TL, Ridgeline, RDX, Element and ZDX to other markets. In fiscal 2010, Honda exported approximately 27,500 units from North America to 40 countries throughout the world.

 

In Europe, Honda’s products are distributed through approximately 1,800 independent local dealers for motorcycles, approximately 1,900 for automobiles and approximately 2,700* for power products.

 

 

*

Total number represents dealers in 10 countries where Honda has foreign sales subsidiaries.

 

In Asia, Honda’s products are distributed through approximately 13,700 independent local dealers for motorcycles, approximately 1,300 for automobiles and approximately 1,560* for power products.

 

 

*

Total number represents dealers in six countries where Honda has foreign sales subsidiaries.

 

The Company exports motorcycle components to 15 countries, including Indonesia, Vietnam, Thailand, and Brazil, where motorcycles are manufactured by its subsidiaries, joint venture firms and licensees. Some of the components used in the production of these vehicles are supplied locally.

 

The Company exports automobile components to 14 countries, including the United States, Canada, Thailand, China and Brazil, where automobiles are manufactured by its subsidiaries, joint venture firms and licensees. Some of the components used in the production of these vehicles are supplied locally.

 

The Company also exports power product components to seven countries, including Thailand and China, where power products are manufactured by its subsidiaries, joint venture firms and licensees. Some of the components used in the production of these products are supplied locally.

 

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Service and Parts Related Operations Overseas

 

Honda provides its overseas operations, joint venture firms, independent distributors and licensees with spare parts and necessary technical information, which they in turn supply to wholesale or retail dealers, either directly or through one or more spare parts distributors.

 

Components and Parts, Raw Materials and Sources of Supply

 

Honda manufactures the major components and parts used in its products, including engines, frames and transmissions. Other components and parts, such as shock absorbers, electrical equipment and tires, are purchased from numerous suppliers. The principal raw materials used by Honda are steel plate, aluminum, special steels, steel tubes, paints, plastics and zinc, which are purchased from several suppliers. The most important raw material purchased is steel plate, accounting for approximately 50% of Honda’s total purchases of raw materials.

 

No single supplier accounted for more than 5% of the Company’s purchases of major components and parts and principal raw materials during the fiscal year ended March 31, 2010.

 

Honda does not have and does not anticipate having any difficulty in obtaining its required materials from suppliers and considers its contracts and business relations with the suppliers to be satisfactory. The Company does not believe any of its domestic suppliers are substantially more dependent on foreign suppliers than are Japanese suppliers generally. However, it should be noted that Japanese industry in general is heavily dependent on foreign suppliers for substantially all of its raw materials.

 

Seasonality

 

Honda’s motorcycle and power product businesses have historically experienced some seasonality. However, this seasonality has not generally been material to our financial results.

 

Environmental and Safety Regulation

 

Outline of Environmental and Safety Regulation for Automobiles

 

1. Emissions

 

Japan

 

In 2005, to limit emissions into the environment and the impact on global climate changes, the Central Environment Council in the Ministry of Environment created new long-term targets and comprehensive requirements for gasoline and diesel vehicles which has become effective starting from 2008. New long term targets for gasoline vehicles remain unchanged except for direct injection gasoline vehicles which will be required to meet the particulate matter (PM) standard. New long-term emissions targets for diesel vehicles have been lowered by more than 50% from the current level of NOx and PM standards. Furthermore, in March 2008, to strengthen the enforcement of laws, the 2009 Exhaust Emission Standards were created after the passage of new long-term regulation. Long-term targets for gasoline vehicles remain unchanged except those for direct injection gasoline vehicles, which will also be required to meet the PM standard. New long term emissions targets for diesel vehicles have been lowered by more than 60% from the current level of NOx and PM standards.

 

The United States

 

Increasingly stringent emission regulations under the Clean Air Act have been enacted since the 1990s by the U.S. federal government. Under the Act, the Environmental Protection Agency (EPA) in February 2000 adopted more stringent vehicle emissions regulations applicable to passenger cars and light-duty trucks produced from model year 2004. Moreover, the new standard provides for gradual decreases in sulfur levels contained in fuel in the U.S. market.

 

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Under the Clean Air Act, the State of California is permitted to establish its own emission control standards to the extent they are more stringent than federal standards. Pursuant to this authority, the California Air Resources Board (CARB) adopted the “California Low Emission Vehicle Program” in 1990, aiming to establish the strictest emission regulation in the world. In late 1998, the CARB strengthened its regulatory standards through the introduction of new standards, known as the “California Low Emission Vehicle Program II” (LEV II). These new standards treat most light trucks the same as passenger cars and require both types of vehicles to meet the new emissions standards of LEV II. In January 2001, the CARB approved modifications to the “Zero-Emission Vehicles” (ZEV) requirement under LEV II, permitting gasoline Super Ultra Low Emission Vehicles (SULEV), hybrid vehicles (powered by gasoline engine and/or electric motor) and compressed natural gas (CNG) vehicles to partially meet zero-emission requirements by satisfying certain additional requirements. The modified requirements also provide incentives for continued technology development.

 

In April 2004, the CARB finalized its “ZEV” requirements. Under these requirements, beginning with 2005 model cars, 6% of vehicles sold in California by a car manufacturer must be Partial Zero Emission Vehicles (PZEV), which includes SULEV with warranties coverage up to the earlier of 15 years or 150,000 driven miles, 2% must be advanced technology PZEV and 2% must be ZEV. Required percentages have been gradually increased under the ZEV standards from the 2008 model cars.

 

In March 2009, the CARB amended “ZEV regulation”. The CARB requires 7,500 fuel cell vehicles (FCV) in the entire industry from 2009 to 2011 instead of current requirement of 2,500 FCV. In addition, the manufacturer should sell the significant number of Enhanced Advanced Technology Partial Zero Emission Vehicles (Enhanced AT-PZEV) in the market after the 2012 model year.

 

In 2010, the CARB began to discuss with the automobile industry, the next phase exhaust emission standard, “California Low Emission Vehicle Program III” (LEV III), which is expected to have more stringent standards.

 

Currently, many other states have also adopted or proposed to adopt the California ZEV regulation.

 

Europe

 

In each EU country, standards, such as those providing for preferential automobile tax treatment, have been established in respect of diesel vehicles that comply with the requirements prescribed in Euro4 for which the PM emission does not exceed 5mg/km. Honda has already introduced a considerable number of Euro4-compliant diesel models in Europe.

 

In 2005, the European Union created new emission standards (Euro5 and Euro6) and comprehensive requirements for gasoline vehicles and diesel vehicles. Euro5 was implemented in September 2009. Emission limits for gasoline vehicles and diesel vehicles were further lowered compared to the Euro4 level of HC, NOx and PM. Euro6 will be implemented in 2014. Emission limits for diesel vehicles will be lowered even more than the Euro5 level HC and NOx.

 

Additionally, Euro6 will require limits on the amount of PM allowed in diesel and petrol vehicles. A PM mass limit to gasoline vehicles which use direct injection engines has been implemented when Euro5 standards were introduced.

 

Russia

 

The Euro4 regulation has been in effect from January 2010. Additionally, the Euro5 regulation will be implemented in January 2014.

 

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China

 

China adopted Step3 and Step4 emission regulations for light-duty vehicles in 2005. These regulations are similar to European regulations (such as Euro3 and Euro4). Step3 was implemented in 2007 and Step4 will be implemented in July 2010. In addition, China is further contemplating the introduction of Step5 emission regulations.

 

In the city of Beijing, Step3 was implemented in December 2005 and Step4 was implemented in March 2008. In addition, the city of Beijing is studying introduction of Step5 emission regulations in the second half of 2012.

 

Other Regions

 

South Korea adopted the enforcement regulation of the Special Act on Capital Region Air Quality Improvement. Accordingly, some manufacturers will be required to sell low emission vehicles which meet a more stringent emission standard than those meeting the national standard from January 2005. In January 2009, an enhanced national emission standard was implemented.

 

Several other Asian countries have adopted regulations which are similar to the European regulations (such as Euro2 and Euro3). Some of these countries are studying introduction of Euro4 and Euro5.

 

Australia implemented Euro4-equivalent regulations in July 2008. In addition, Australia is studying introduction of Euro5 in 2013.

 

2. Fuel Economy / CO2

 

Japan

 

In 1998, an amendment was made to the Law Concerning Rationalization of Energy Usage that established a fuel efficiency standard based on weight class in Japan. This standard was tightened in 2005 for diesel-fueled automobiles. For gasoline automobiles, tighter standards are to be implemented during 2010.

 

In light of the CO2 reduction targets promulgated under the Kyoto Protocol in respect to concerns related to possible global climate changes, the Japanese government issued a fuel regulation for an interim ethanol blending limit (less than 3%) which became effective in 2003. The Japanese government intends to further increase this limit until the final target of 10% is achieved within a decade from 2003.

 

In 2005, discussions about the “POST-2010” standard took place among the applicable ministries and industries.

 

In February 2007, the final “POST-2010” target, or the “2015 standard”, was announced. Fuel consumption will be reduced by 29.2% compared to the 2010 target for passenger cars.

 

Ethanol blended fuel is a “biomass fuel”. Biomass fuel is regarded as an effective countermeasure for CO 2 reduction. CO2 emissions after burning ethanol fuel produced with biomass resources (such as plants or wood) are not counted as CO2 emissions under the Kyoto Protocol.

 

The United States

 

The Federal Motor Vehicle Information and Cost Savings Act requires automobile manufacturers to comply with the Corporate Average Fuel Economy (CAFE) standards. Under the CAFE standards, manufacturers are subject to substantial penalties if automobiles produced by them in any model year do not meet the average standards for each category. The CAFE standard for passenger cars has been set at 27.5 miles per gallon (mpg) starting from the 1990 model year and for light trucks at 20.7 miles per gallon standard was established for the

 

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1996-2004 model years. The standard for light trucks increased from the 2005 model year (21.0 miles per gallon) to the 2007 model year (22.2 miles per gallon). The National Highway Traffic Safety Administration (NHTSA) reformed the CAFE standard for light trucks in 2006. The new size-based CAFE standard for light trucks would have been implemented in the 2008 model year. However, on November 15, 2007, the United Stated Ninth Circuit Court of Appeals decided to revoke the CAFE regulation concerning light-duty trucks that the NHTSA had adopted. The court held that the NHTSA failed to (1) implement the cost conversion of CO2 emission when establishing the CAFE limit values concerning the 2008-2009 model year light-duty trucks, (2) establish the Backstop Requirements, (3) the requirements concerning classification of passenger automobiles and light-duty trucks and (4) prescribe the fuel economy limit values for all vehicles with the Gross Vehicle Weight Rating class of 8,500 to 10,000 pounds. The court held that the CAFE regulation was arbitrary and capricious and that, furthermore, it violated the U.S. Energy Policy and Conservation Act. In addition, former U.S. President Bush directed relevant U.S. federal agencies to take the first steps toward regulations that would reduce gasoline consumption and Green House Gas (GHG) emissions from vehicles by 20 percent over the next 10 years. Therefore, the NHTSA has to promptly establish new limit values conforming to the pertinent policy and to apply it in the earliest possible model year. The NHTSA issued a new CAFE regulation draft which applies to passenger cars and light trucks from the 2011 model year to the 2015 model year on May 2, 2008. The proposal requires 31.6 miles per gallon for the combined CAFE standard in the 2015 model year. However, on January 26, 2009, President Obama announced that he has directed the NHTSA to issue the CAFE standard of the 2011 model year initially, and issue the standard for the 2012 model year and subsequent model years after reconsidering the details of this standard. In March 2009, the NHTSA issued the CAFE regulation standard for passenger cars and light trucks for the 2011 model year. The CAFE standard calculation of passenger cars and light trucks for the 2011 model year use a footprint prescribed in the CAFE regulation issued in 2006. Industry-wide combined average for the 2011 model year is estimated to be 27.3 mpg. The EPA and the NHTSA jointly finalized the U.S. federal GHG regulation from 2012 model year in accordance with President Obama’s announcement. The EPA begins restricting carbon dioxide (CO2) emission, and the NHTSA restricts fuel economy (mile per gallon) as previously. The standard for the 2016 model year is 250 g-CO2/mile or 35.5 mpg over the industry average. In addition, a manufacturer is also deemed to comply with CARB GHG regulation if the manufacturer complies with EPA-GHG, based on an agreement among the White House, the CARB and the industry.

 

In August 2005, the CARB finalized its GHG regulation in response to concerns related to possible global climate changes. Under the GHG regulation, which became effective for the 2009 model year, automobile manufacturers have to improve fuel economy from the 2002 levels by more than 30% by the 2016 model year.

 

Many other states have adopted the GHG regulations.

 

In April 2007, the Supreme Court ruled that the EPA has the authority to regulate GHG emissions. However, the EPA decided not to grant enforcement of the GHG regulation by the State of California on December 19, 2007. The EPA concluded that the Federal unified standard can contribute to a significant reduction of GHG emitted in all states and will be more effective than California’s approach.

 

In March 2008, the EPA denied California’s GHG regulation waiver request against the CARB. On January 26, 2009, U.S. President Obama announced that he had directed the EPA to review California’s waiver request. The EPA approved the waiver on July 8th, 2009 because the CARB promised that a manufacturer was also deemed to comply with CARB GHG regulation if the manufacturer complied with EPA-GHG from the 2012 through 2016 model years.

 

Europe

 

In 2006, discussions about establishing targets for 2008 began among the European Commission, Member States and the automobile industry.

 

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In 2008, the European parliament adopted CO2 regulations in response to concerns related to possible global climate changes. The adopted CO2 regulations was published by Official Journal in June 2009.

 

Pursuant to those CO2 regulations, the European Commission set a more stringent target of 130 grams of carbon dioxide per kilometer for new passenger cars offered for sale in the EU from 2012. In addition, the CO2 regulations provided manufacturers with the necessary incentive to reduce the CO2 emissions of their vehicles by imposing an excess emissions premium if their average emission levels are above the limit value curve. This premium will be based on the number of grams per kilometer (g/km) that an average vehicle sold by the manufacturer exceeds the limit imposed by the curve, multiplied by the number of vehicles sold by the manufacturer.

 

China

 

China adopted a fuel consumption regulation for passenger vehicles in 2004. Step 1 of this regulation was implemented in 2005 and Step 2 was implemented in 2008. In addition, the Chinese Government is studying introduction of Step3 emission regulations in 2012.

 

Other Regions

 

South Korea adopted the regulation of Corporate Average Fuel Economy for passenger vehicles in 2005. Domestic vehicles have been required to adhere to these regulations starting from 2006 and imported vehicles have been required to meet the requirement from 2010. In addition, South Korea adopted a more stringent regulation in 2008 that will be implemented in 2012. However, as South Korea is reconsidering the implementation of these regulations, only selective regulation (Fuel Economy or CO2) will be implemented in 2012.

 

3. Recycling / End-of-Life Vehicles (ELV) / REACH

 

Japan

 

Japan enacted the Automobile Recycling Law in July 2002, which required manufacturers to take back air bags, fluorocarbon and shredder residue derived from end-of-life vehicles (ELV), which became effective on January 1, 2005. ELV processing costs are collected from owners of cars currently in use and purchasers of new cars.

 

Europe

 

In September 2000, the European Union approved a directive requiring its member states to promulgate regulations implementing the following by April 21, 2002:

 

Manufacturers must be financially responsible for taking back end-of-life vehicles offered for sale after July 1, 2002 and dismantle and recycle the vehicles. Beginning on January 1, 2007, the requirement has also been applied to all vehicles offered for sale in the European Union before July 1, 2002.

 

Manufacturers must not use specified hazardous materials in vehicles offered for sale in the European Union after July 2003, and 95% of vehicle parts in new vehicle types sold in the European Union after December 15, 2008, must be designed to be re-usable and recoverable.

 

On December 30, 2006, the European Union adopted the Regulation concerning the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), which became effective on June 1, 2007. From June 1, 2008, any manufacturer or importer of chemical substances is required to submit a registration to the Agency, based on annual production or import quantity levels. Submitting a pre-registration between June 1, and December 1, 2008 will allow the manufacturer or importer to extend the deadline for submitting the

 

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registration for existing chemical substances. The list of Substance of Very High Concern (SVHC) is amended periodically by adding substances. Currently, 30 substances are in the SVHC list. Upon a request by a consumer, a supplier of a product containing SVHC must provide the consumer with sufficient information, with at least the name of the substance, within 45 days.

 

Other Regions

 

Taiwan and Korea implemented automobile recycling laws from January 1, 2008 following the regulations established by the European Union and Japan. In addition, China has a plan to implement automobile recycling laws in the near future.

 

4. Safety

 

Japan

 

In November 2007, the Ministry of Land, Infrastructure and Transport (MLIT) issued safety standards which are applicable from July 1, 2012, for vehicles which use high voltage electric power such as electric vehicles or hybrid electric vehicles, to avoid electric shocks during normal operations and crashing.

 

In March 2008, the MLIT issued the technical standards for Event Data Recorders (EDRs). Installation of EDRs in vehicles and, if an EDRs is installed, compliance with MLIT’s technical standards, are both voluntary.

 

Japan Automobile Standards Internationalization Center (JASIC), which is organized by the MLIT and JAMA, among others, has started to review a proposal for the unification of Safety/Environment Standards, vehicle categories and certification in order to promote further internationalization of standards and certifications.

 

JASIC is planning to make the proposal to other contracting parties of the 58 / 98 Agreement by 2009 and aim at reaching an agreement among the contracting parties by 2015.

 

In January 2010, MLIT started preparing a guideline for some measures against the silent characteristic of hybrid vehicles and also started studying how to regulate this.

 

In March 2010, in the session of the World Forum for Harmonization of Vehicle Regulations (WP29) of the United Nations Economic Commission for Europe, Japan proposed the establishment of “a mutual certification system of international vehicle type certifications”, which was agreed upon.

 

In March 2010, triggered by a hit-and-run accident in the United States, the MLIT began research on introducing “brake-override-systems”.

 

The United States

 

In August 2006, the NHTSA issued a final rule revising performance requirements for advanced airbag systems. The rule upgrades the maximum speed for frontal barrier crash tests using a belted small adult female dummy. Manufacturer must comply with the upgraded requirements for 35% of all vehicles produced by 2009, 65% by 2010, and 100% by 2011.

 

In April 2007, the NHTSA issued a final rule regarding an electronic stability control system standard for light vehicles to reduce rollover crashes. The new standard requires installation of electronic stability control system. Manufacturers have had to comply with the standard for 55% of all vehicles produced by 2008, 75% by 2009, 95% by 2010, and 100% by 2011.

 

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In May 2007, the NHTSA issued a final rule to revise some performance requirements for head restraints, to delay the effective date, and to set a phase-in compliance schedule. For front seat requirements, manufacturer have had to comply with the revised requirements for 80% of all vehicles produced by 2009, and 100% by 2010. For voluntarily installed rear head restraints, manufacturers also must be in compliance for 80% of all vehicles by 2010, and 100% by 2011.

 

In January 2008, the NHTSA issued a final rule to revise some performance requirements for event data recorders and to delay the effective date. Manufacturers offering passenger cars and/or other light vehicles equipped with event data recorders must comply with the revised requirements on or after September 2012.

 

In February 2008, the Cameron Gulbransen Kids Transportation Safety Act was established, and the NHTSA issued some regulations to prevent accidents involving children based on the Act. In March 2009, the NHTSA issued a proposed rule to address backover accidents. In September 2009, the NHTSA issued a proposed rule to mandate the equipping of automatic reversal systems for side windows with an “express-up” mechanism. In March 2010, NHTSA issued a final rule to mandate the equipping of the Brake Transmission Shift Interlock (BTSI) mechanism for all vehicles with automatic transmission. Manufacturers must equip BTSI on and after September 2010.

 

In June 2008, the NHTSA issued a final rule to revise some performance requirements and phase-in compliance schedules in upgraded side impact occupant protection standards. For both the moving deformable barrier test and the oblique side pole impact test, manufacturers must comply with the revised requirements for 20% of all vehicles produced by 2010, 40% by 2011, 60% by 2012, 80% by 2013 and 100% by 2014.

 

In October 2008, the NHTSA issued a final rule to revise the definition of Designated Seating Position (DSP) and to newly introduce the procedure for determining the number of DSPs. These are not Federal Motor Vehicle Safety Standards (FMVSS), but manufacturers must comply with all requirements related to DSPs, such as the equipment requirement for 3-points safety belts, on and after September 1, 2011.

 

In May 2009, the NHTSA issued a final rule to upgrade vehicle roof crush standard. The rule newly introduces the “Two-sided Roof Test,” which imposes the strength tests for both sides of the vehicle roof, and increases the maximum applied load. For vehicles with GVWR of 2,722kg or less, manufacturers must comply with the upgraded requirements for 25% of all vehicles produced by 2012, 50% by 2013, 75% by 2014, and 100% by 2015. For heavier vehicles, manufacturers must comply with the standards on and after September 2016.

 

In December 2009, the NHTSA issued a proposed rule to prevent the ejection of occupants in rollover accidents. The rule requires “ejection mitigation countermeasure” (e.g. advanced glazing or head protection side airbag) equipment which meets with performance requirements. Manufacturers must comply with the new requirements from the first September which occurs after six years have elapsed since the issuance of the final rule.

 

Europe

 

The European Commission issued a new regulation for pedestrian protection, which includes installation requirements of the Brake Assist System. It required M1 (Passenger vehicles up to nine passengers) and N1 (Light commercial vehicles with gross vehicle weight up to 3.5 tons) vehicles to meet standards for the protection of pedestrians in the event of a collision with the front of a motor vehicle. The new regulation will be effective November 24, 2011 for new types of vehicles.

 

Additionally, the European Commission issued a new regulation for GSR (type approval requirements for the General Safety of vehicles). It includes an installation requirement for the advanced safety system (Electronic Stability Control System (ESC) and Tyre Pressure Monitoring Systems (TPMS)) and a tire performance requirement in order to improve the safety and environmental performance of vehicles.

 

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In September 2008, United Nation issued a revised Economic Commission for Europe (ECE) regulation relating to installation of lighting devices to require the installation of dedicated daytime running lamps (DRL). For M1 and N1 vehicles, manufacturers must equip DRL and comply with related requirements on and after February 2011, if certified as new type vehicle.

 

5. New Car Assessment Program (NCAP)

 

Programs that provide customers with assessments of car safety functions and promote the development of car safety by automobile manufacturers are conducted in countries such as the United States, Japan, Australia, the EU, Korea and China. The principal items assessed in these programs are passenger protection and braking power, which are typically assessed with stricter standards or criteria than those required by statute.

 

In July 2008, the NHTSA issued a final decision to upgrade NCAP testing and safety rating criteria with the revision of frontal and side impact tests, the introduction of an overall rating program, and the addition of ratings for crash avoidance technologies. These new tests and rating criteria will be used for vehicles tested as part of the NCAP beginning with model year 2011 vehicles.

 

Outline of Environmental and Safety Regulation for Motorcycles

 

1. Emissions

 

Japan

 

Japan has emissions regulations for motorcycles applicable to all classes of engine displacement. Some aspects of these requirements, such as standards for hydro-carbon levels and durability, are stricter than the current European regulations, namely the Euro3 regulations.

 

The United States

 

Emissions regulations regarding off-road motorcycles and ATVs were introduced in 2006. In addition, the EPA adopted the current California emissions standards regarding on-road motorcycles on a national basis two years behind the schedule of California. The new regulations include fuel permeation requirements rather than traditional evaporative emission standards.

 

Canada

 

The Canadian federal government has introduced emissions regulations generally equivalent to the U.S. EPA regulations for on-road motorcycles from the 2006 model year.

 

Currently, the Canadian federal government has proposed to introduce the emission regulations for off-road motorcycles generally equivalent to the U.S. EPA regulations.

 

Europe

 

The EU maintains emissions regulations (Euro3) for motorcycles, as well as the “Motor Cycle (& Moped)-Whole Vehicle Type Approval”, a uniform certification system for two and three-wheeled motor vehicles.

 

The Euro3 regulations are the most stringent class standard for motorcycles. Euro3 regulations have been in effect from January 2006.

 

Other Regions

 

Other countries, mainly in Asia, have implemented tighter emissions regulations based on European regulations.

 

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In Thailand, a sixth stage of emissions control, which is generally equivalent to or stricter than Euro3, has been implemented.

 

In Indonesia, Euro2-equivalent regulations have been in effect from January 2006.

 

In China, the National third stage of emissions control, which is generally equivalent to or stricter than Euro3 regulations, was introduced in 2008.

 

In Korea, Euro3-equivalent regulations were implemented in 2008.

 

In Brazil, Euro3-equivalent regulations have been in effect from the beginning of 2009.

 

In India, second stage regulations based on the Indian authorities’ own test method are in effect and enhanced regulations were enacted in 2005. The third stage of emission control will be implemented from 2010.

 

2. Safety

 

Japan

 

Japan introduced ECE R78—Braking system based on gtr (global technical regulation). It has applied the requirement to new type models from June 18, 2009, and will apply it to all models from June 18, 2011.

 

The United States

 

The Consumer Product Safety Improvement Act of 2008 was signed into law by former President Bush on August 14, 2008. In accordance with this, children’s products including ATVs and off-road motorcycles for children have had to comply with hazardous substance and other requirements (e.g. certificate, third party testing, tracking label requirements) after November 11, 2008, and ATVs products have had to comply with the ANSI standard from April 13, 2009.

 

Three wheeled all terrain vehicles, or ATVs (formerly referred to as “ATC”s) were a problem due to the youth- involved accidents in the 80s’, and ATVs regulations established at that time. However, it turned out that a voluntary standard, which was agreed to between the industry and regulators, was established. Although the number of accidents did not increase in the 90s’, the ATVs market in the US experienced a rapid development from 2000 and the problem of youth-involved accidents increasing continued to be a focal point.

 

The Consumer Product Safety Commission (CPSC) and ATVs industry updated the voluntary standard in 2007. That standard has been introduced in the regulation.

 

Europe

 

The number of ATVs designed to travel on four low pressure tires on non-paved surfaces has recently increased in the EU market. Because travel on public roads is necessary in Europe, manufacturers in China, Taiwan and U.S. have been receiving approval for their ATVs by the Whole Vehicle Type Approval (WVTA) Quadricycle category, and the vehicles are used in mixed traffic without safety measures. For that reason, the EU Commission is continuing discussions with each industry organization, recognizing the need for a review of the definition and the requirements of these vehicles.

 

The driving licenses directive was updated, and established on new category for mopeds, and changed the contents of each category. The new directive will be effective from January 19, 2013.

 

Other regions

 

The Brazil government issued a new regulation regarding anti-theft devices and has required installing an immobilizer and a vehicle tracking system on vehicles and motorcycles sold or registered from August 1, 2009.

 

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However, this regulation has not been implemented yet, because the Prosecutors Office had claimed it as unconstitutional and had asked the court to overturn it. The contents and the effective date of this regulation are under consultation between the government and the industry.

 

Many Asian countries, e.g. India, Thailand, and Vietnam, are introducing several regulations, e.g. lighting, braking, and anti-theft, based on ECE regulations.

 

The Canadian government revised the controls and display regulation in order to harmonize with U.S. – motor vehicle safety standards. It has applied to all motorcycle manufactured from February 22, 2008.

 

Outline of Environmental and Safety Regulation for Power Products

 

1. Emissions

 

The United States

 

The EPA introduced more stringent exhaust standards and new evaporative emission standards for fuel tanks and fuel lines used in the small non-road engines. The new regulation will apply starting in the 2011 model year for Class II engines (above 225 cc) and in the 2012 model year for Class I engines (less than 225 cc, used in non-handheld applications) and generally start in 2010 for handheld products. EPA also adopted a more stringent level of emission standards for outboard and personal watercraft engines starting with the 2010 model year. This new regulation includes new standards to control evaporative emissions for all vessels using marine spark-ignition engines.

 

China

 

An exhaust emission standard will be introduced in China on July 1, 2010. Its requirements are based on the European exhaust emission regulation, and are applicable to small spark ignition engines for non-road mobile machinery with 19 kW or less.

 

2. Safety

 

Japan

 

“The institute of Agricultural Machinery” amended the safety standard of backward speed requirement for walk-behind equipment from 1.8 km/h to 3.6 km/h, and the interpretation of splash protection guard requirements for brush cutters. New models have had to comply with the standard from April 2010, and all models will need to comply with it from April 2015.

 

The United States

 

Based on the “Consumer Product Safety Improvement Act of 2008”, walk-behind lawn mowers have had to comply with the certificate requirements from November 11, 2008. The CPSC has enhanced the recall system by this Act.

 

Europe

 

The Machinery Directive was changed on May 16, 2006, and a new directive has been effective from December 29, 2009. The main changes were to clarify the scope of the directive (e.g. partly completed machinery such as engine unit) and to add the concrete description of market survey and obligation to establish a penalty description for member states.

 

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China

 

The Chinese State Council has published the “Agricultural Machinery Safety Supervision and Management Regulations.” This regulation requires that defective agricultural machinery producers should conduct recalls in a timely manner. The producers should establish the quality assurance system for their products. In addition, agricultural machinery is required to comply with the applicable new technical standards. The new regulation was implemented on November 1, 2009.

 

Preparing for the Future

 

Honda aims to achieve global growth by further encouraging and strengthening innovation and creativity and creating quality products that please customers and exceed their expectations.

 

Therefore, in order to improve the competitiveness of its products, Honda will endeavor to enhance its R&D, production and sales capabilities. Furthermore, Honda will continue to enhance its social reputation in the community through companywide activities. Honda recognizes that further enhancing the following specific areas is essential to its success:

 

1. Research and Development

 

In connection with its efforts to develop the most effective safety and environmental technologies, Honda will continue to be innovative in advanced technology and products. Honda aims to create and introduce new value-added products to quickly respond to specific needs in various markets around the world. Honda will also continue its efforts to conduct research on experimental technologies for the future.

 

2. Production Efficiency

 

Honda will establish and enhance efficient and flexible production systems at its global production bases and supply high quality products, with the aim of meeting the needs of its customers in each region.

 

3. Sales Efficiency

 

Honda will remain proactive in its efforts to expand product lines through the innovative use of IT and will show its continued commitment to different customers throughout the world by upgrading its sales and service structure.

 

4. Product Quality

 

In response to increasing customer demand, Honda will upgrade its quality control by enhancing the functions of and coordination among the development, purchasing, production, sales and service departments.

 

5. Safety Technologies

 

Honda is working to develop safety technologies that enhance accident prediction and prevention, technologies to help reduce the risk of injuries to passengers and pedestrians from car accidents, and technologies that enhance compatibility between large and small vehicles, as well as expand its lineup of products incorporating such technologies. Honda will reinforce and continue to advance its contribution to traffic safety in motorized societies in Japan and abroad. Honda also intends to remain active in a variety of traffic safety programs, including advanced driving and motorcycling training programs provided by local dealerships.

 

6. The Environment

 

Honda will step up its efforts to create better, cleaner and more fuel-efficient engine technologies and to further improve recyclables throughout its product lines. Honda will also work to advance fuel cell technology

 

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and steadily promote its new solar cell business. In addition, Honda will further its efforts to minimize its environmental impact. To this end, Honda sets global targets to reduce the environmental burden as measured by the Life Cycle Assessment*, in all areas of business, spanning production, logistics and sales.

 

*

Life Cycle Assessment: A comprehensive system for quantifying the impact Honda’s products have on the environment at different stages in their life cycles, from material procurement and energy consumption to waste disposal.

 

7. Continuing to Enhance Honda’s Social Reputation and Communication with the Community

 

In addition to continuing to provide products incorporating Honda’s advanced safety and environmental technologies, Honda will continue striving to enhance its social reputation by, among other things, strengthening its corporate governance, compliance, and risk management as well as participating in community activities and making philanthropic contributions.

 

To this end, Honda will focus its limited company resources on necessary areas and undertake the following challenges for the purpose of improving business results.

 

- Creation of fuel efficient products that reduce our environmental footprint

 

- Further advancement of our motorcycle business

 

- Advancement of our global production system and capabilities

 

Through these Company-wide activities, Honda will strive to become a company whose presence is welcomed by our shareholders, customers and society.

 

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C. Organizational Structure

 

As of March 31, 2010, the Company had 112 Japanese subsidiaries and 278 overseas subsidiaries. The following table sets out for each of the Company’s principal subsidiaries, the country of incorporation, function and percentage ownership and voting interest held by Honda.

 

Company

   Country of
Incorporation
  

Function

   Percentage
Ownership
and
Voting Interest

Honda R&D Co., Ltd.

   Japan    Research & Development    100.0

Honda Engineering Co., Ltd.

   Japan    Manufacturing and Sales of machine tools, equipment and production techniques    100.0

Yachiyo Industry Co., Ltd.

   Japan    Manufacturing    50.5

Honda Finance Co., Ltd.

   Japan    Finance    100.0

American Honda Motor Co., Inc.

   U.S.A.    Sales    100.0

Honda North America, Inc.

   U.S.A.    Coordination of Subsidiaries Operation    100.0

Honda of America Mfg., Inc.

   U.S.A.    Manufacturing    100.0

American Honda Finance Corporation

   U.S.A.    Finance    100.0

Honda Manufacturing of Alabama, LLC

   U.S.A.    Manufacturing    100.0

Honda Manufacturing of Indiana, LLC

   U.S.A.    Manufacturing    100.0

Honda Transmission Mfg. of America, Inc.

   U.S.A.    Manufacturing    100.0

Honda R&D Americas, Inc.

   U.S.A.    Research & Development    100.0

Honda Canada Inc.

   Canada    Manufacturing and Sales    100.0

Honda Canada Finance Inc.

   Canada    Finance    100.0

Honda de Mexico, S.A. de C.V.

   Mexico    Manufacturing and Sales    100.0

Honda Motor Europe Limited

   U.K.    Coordination of Subsidiaries Operation and Sales    100.0

Honda of the U.K. Manufacturing Ltd.

   U.K.    Manufacturing    100.0

Honda Finance Europe plc

   U.K.    Finance    100.0

Honda Motor Europe (South) S.A.S.*1

   France    Sales    100.0

Honda Bank GmbH

   Germany    Finance    100.0

Honda Motor Europe (North) GmbH *2

   Germany    Sales    100.0

Honda Italia Industriale S.p.A.

   Italy    Manufacturing and Sales    100.0

Honda Motor (China) Investment Corporation, Limited

   China
  

Coordination of Subsidiaries Operation and Sales

   100.0

Honda Auto Parts Manufacturing Co., Ltd.

   China    Manufacturing    100.0

Honda Automobile (China) Co., Ltd.

   China    Manufacturing    65.0

Honda Siel Cars India Limited

   India    Manufacturing and Sales    97.4

Honda Taiwan Co., Ltd.

   Taiwan    Sales    100.0

Asian Honda Motor Co., Ltd.

   Thailand    Coordination of Subsidiaries Operation and Sales    100.0

Honda Leasing (Thailand) Company Limited

  

Thailand

  

Finance

  

100.0

Honda Automobile (Thailand) Co., Ltd.

   Thailand    Manufacturing and Sales    89.0

Thai Honda Manufacturing Co., Ltd.

   Thailand    Manufacturing    60.0

Honda Vietnam Co., Ltd.

   Vietnam    Manufacturing and Sales    70.0

Honda Motor de Argentina S.A.

   Argentina    Manufacturing and Sales    100.0

Honda South America Ltda.

   Brazil    Coordination of Subsidiaries Operation    100.0

Honda Automoveis do Brasil Ltda.

   Brazil    Manufacturing and Sales    100.0

Moto Honda da Amazonia Ltda.

   Brazil    Manufacturing and Sales    100.0

Honda Turkiye A.S.

   Turkey    Manufacturing and Sales    100.0

Honda Australia Pty. Ltd.

   Australia    Sales    100.0

 

*1

Honda Motor Europe (South) S.A.S. changed its name to Honda France S.A.S. effective April 1, 2010.

 

*2

Honda Motor Europe (North) GmbH changed its name to Honda Deutschland GmbH effective April 1, 2010.

 

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D. Property, Plants and Equipment

 

The following table sets out information, as of March 31, 2010, with respect to Honda’s principal manufacturing facilities, all of which are owned by Honda:

 

Location

   Number of
Employees
  

Principal Products Manufactured

Sayama, Saitama, Japan

   5,444    Automobiles

Hamamatsu, Shizuoka, Japan

   2,684    Power products and transmissions

Suzuka, Mie, Japan

   6,796    Automobiles

Ohzu-machi, Kikuchi-gun Kumamoto, Japan

   3,323    Motorcycles, all-terrain vehicles, power products and engines

Marysville, Ohio, U.S.A.

   4,776    Automobiles

Anna, Ohio, U.S.A.

   2,779    Engines

East Liberty, Ohio, U.S.A.

   2,652    Automobiles

Lincoln, Alabama, U.S.A.

   4,109    Automobiles and engines

Greensburg, Indiana, U.S.A.

   1,123    Automobiles

Alliston, Ontario, Canada

   4,100    Automobiles and engines

El Salto, Mexico

   2,031    Motorcycles and automobiles

Swindon, Wiltshire, U.K.

   3,200    Automobiles and engines

Atessa, Italy

   778    Motorcycles, power products and engines

Guangzhou, China

   921    Automobiles

Greater Noida, India

   1,923    Automobiles

Ayutthaya, Thailand

   3,510    Automobiles

Bangkok, Thailand

   3,092    Motorcycles and power products

Vinhphuc, Vietnam

   2,104    Motorcycles and automobiles

Buenos Aires, Argentina

   294    Motorcycles

Sumare, Brazil

   3,443    Automobiles

Manaus, Brazil

   8,254    Motorcycles and power products

Gebze, Turkey

   843    Automobiles

 

In addition to its manufacturing facilities, the Company’s properties in Japan include sales offices and other sales facilities in major cities, repair service facilities, and research and development facilities.

 

We believe our production facilities and other properties, including the principal manufacturing facilities above, are suitable and adequate for the development, manufacture and sales of Honda’s products and parts.

 

As of March 31, 2010, the Company’s property, with a net book value of approximately ¥20.4 billion, was subject to specific mortgages securing indebtedness.

 

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Capital Expenditures

 

Capital expenditures in fiscal 2010 were applied to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of sales and R&D facilities.

 

Total capital expenditures for the year amounted to ¥873.7 billion, down ¥393.4 billion from the previous year. Also, total capital expenditures, excluding property on operating leases, for the year amounted to ¥329.7 billion, down ¥269.3 billion from the previous year. Spending by business segment is shown below.

     Fiscal years ended March 31,  
     2009    2010    Increase
(Decrease)
 
     Yen (millions)  

Motorcycle Business

   ¥ 90,401    ¥ 38,332    ¥ (52,069

Automobile Business

     490,760      267,257      (223,503

Financial Services Business

     669,178      544,425      (124,753

Financial Services Business (Excluding Property on Operating Leases)

     1,050      398      (652

Power Product and Other Businesses

     16,920      23,748      6,828   

Total

   ¥ 1,267,259    ¥ 873,762    ¥ (393,497

Total (Excluding Property on Operating Leases)

   ¥ 599,131    ¥ 329,735    ¥ (269,396

 

Intangible assets are not included in the table above.

 

In the motorcycle business, we made capital expenditures of ¥38,332 million in the fiscal year ended March 31, 2010. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of sales and R&D facilities.

 

In the automobile business, we made capital expenditures of ¥267,257 million in the fiscal year ended March 31, 2010. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of sales and R&D facilities. A new engine plant in Ogawa-machi Hiki-gun, Saitama, Japan completed construction of its facilities for the production of engines in September 2009.

 

In the financial services business segment, capital expenditures excluding property on operating leases amounted to ¥398 million in the fiscal year ended March 31, 2010, while capital expenditures for property on operating leases were ¥544,027 million. Capital expenditures in power products and other businesses in the fiscal year ended March 31, 2010, totaling ¥23,748 million, were deployed to upgrade, streamline, and modernize manufacturing facilities for power products, and to improve R&D facilities for power products.

 

Plans after fiscal 2010

 

We set out our original capital expenditure plans for the period from the fiscal year ended March 31, 2010 during the preceding fiscal year. We have subsequently modified these plans as follows:

 

The planned timing of the start of operation in the latter half of 2009 on the new auto plant of Honda Motor De Argentina S.A., which is one of the Company’s consolidated subsidiaries, in Buenos Aires, Argentina has changed to in the first half of 2011. The investment amount is approximately ¥16,000 million.

 

Managements mainly consider economic trends of each region, demand trends, situation of competitors and our business strategy such as introduction plans of new models in determining the future of projects.

 

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The estimated amounts of capital expenditures for fiscal year ending March 31, 2011 are shown below.

 

     Fiscal year ending
March 31, 2011
     Yen (millions)

Motorcycle Business

   ¥ 43,900

Automobile Business

     324,200

Financial Services Business

     500

Power Product and Other Businesses

     11,400
      

Total

   ¥ 380,000
      

 

The estimated amount of capital expenditures for Financial Services Business in the above table does not include property on operating leases.

 

Intangible assets are not included in the table above.

 

Item 4A. Unresolved Staff Comments

 

We do not have any unresolved written comments provided by the staff of the Securities and Exchange Commission regarding our periodic reports under the Securities and Exchange Act of 1934.

 

Item 5. Operating and Financial Review and Prospects

 

A. Operating Result

 

Overview

 

Business Environment

 

Key trends in the economic environment surrounding the operations of Honda during the fiscal year 2010 include the following. In the United States, despite concern about economic stagnation due mainly to the continuation of the credit contraction and deterioration in the employment situation, conditions showed moderate recovery as a result of improvement in consumer spending, a bottoming out of private capital investment. In Europe, although there was concern about stagnation in the economy resulting from the credit contraction, the reactionary decline following measures to support purchases of new automobiles and deterioration in employment conditions, the economy appears to have bottomed out. In Asia, the Chinese economy recovered, and the outlook there appears to be for expansion. In India, economic conditions recovered, and the economies of other countries in the region generally appear to be recovery. In Japan, although economic conditions continued to be difficult, with unemployment rates remaining high, the economy showed a trend toward improvement, especially in consumer spending.

 

Overview of Fiscal Year 2010 Operating Performance

 

Honda’s consolidated net sales and operating revenues for the fiscal year ended March 31, 2010, decreased from the fiscal year ended March 31, 2009, due mainly to negative foreign currency translation effects and decreased net sales in automobile business. Operating income, however, increased from the previous fiscal year, due mainly to decreased selling, general and administrative expenses and R&D expenses and continuing cost reduction, which was partially offset by a decrease in income attributable to the decreased net sales, negative foreign currency effects and an increase in fixed costs per unit as a result of reduced production.

 

Motorcycle Business

 

Honda’s unit sales of motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC) on a consolidated basis decreased from the previous fiscal year, due mainly to a decrease in unit sales in Japan, North America, Europe and Other Regions, including South America, which was partially offset by an increase in units sales in Asia.

 

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In Asia, where markets are expanding, although the global economic downturn had an adverse effect during the first half of 2009, demand recovered throughout the region in the latter half. Unit sales in Asia rose, due mainly to expansion in sales of the Activa scooters in India and new types, including the CBTwister motorcycles in India, as well as to growth in sales in Thailand of the Cub-type Wave110iAT and the PCX scooters.

 

On the other hand, in North America, as a result of the economic downturn, unit sales of mid-size models including 750cc motorcycles and scooters as well as ATVs declined, especially in the United States. Also, unit sales in Other Regions, including South America, decreased, especially in the Brazilian market, because of the tightening of loan conditions for motorcycles triggered by the financial crisis.

 

Automobile Business

 

Honda’s unit sales of automobiles on a consolidated basis decreased from the previous fiscal year, due mainly to a decrease in unit sales in North America, Europe and Other Regions, including South America, which was partially offset by an increase in unit sales in Japan and Asia.

 

In Japan, during the first half of the fiscal year, conditions were difficult due to a weakness in corporate activity and stagnation in consumer spending accompanying the global economic downturn. During the second half of the fiscal year, the positive effects on demand of tax reductions and subsidies for eco-cars emerged, and sales of automobiles moved toward recovery and the number of units sold increased in Japan driven especially by robust sales of the Insight, Fit and STEPWGN. In addition, in Asia, the number of unit sales expanded mainly because of growth in demand in China and strong sales of the City mainly in Thailand and India.

 

On the other hand, in North America, despite growth in sales of the light truck models including the CR-V, the new Accord Crosstour and the new Acura ZDX, unit sales overall declined because of the shrinkage in demand. Moreover, in Europe, demand expanded in some countries because of government policies to encourage purchases of new cars, but more intense competition lead to an overall drop in unit sales.

 

Power Product and Other Businesses

 

Honda’s unit sales of power products on a consolidated basis decreased from the previous fiscal year, due mainly to a decrease in unit sales in Japan, North America, Europe and Other Regions, including South America, which partially offset by an increase in unit sales in Asia.

 

In Asia, unit sales of engines and pumps for agricultural use and brush cutters increased because of the effects of agricultural-support policies adopted by some countries and the effects of weather conditions.

 

On the other hand, in Japan, North America and Europe, unit sales of engines, mainly for OEM* use, decreased, and in Other Regions, including South America, unit sales of pumps and standard engines fell. These factors resulted in an overall decrease in unit sales.

 

*

OEM (Original equipment manufacturing): OEM refers to the manufacturing of products and components supplied for sale under a third-party brand.

 

Fiscal Year 2010 Compared with Fiscal Year 2009

 

Honda adopted Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”, which is now codified in the FASB Accounting Standards Codification (ASC) 810 “Consolidation”, effective April 1, 2009. Upon the adoption of this statement, Honda has changed the prior consolidated financial statements to conform to the presentation used for the fiscal year ended March 31, 2010. See Note (1)(c).

 

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Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenue (hereafter, “net sales”) for the fiscal year ended March 31, 2010, decreased ¥1,432.0 billion, or 14.3%, to ¥8,579.1 billion from the fiscal year ended March 31, 2009, due mainly to negative foreign currency translation effects and decreased net sales in automobile business. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥746.7 billion, or 7.5%, compared to the decrease as reported of ¥1,432.0 billion, which includes negative foreign currency translation effects.

 

Net sales in Japan increased ¥130.7 billion, or 9.0%, to ¥1,577.3 billion from the previous fiscal year and overseas net sales decreased ¥1,562.8 billion, or 18.2%, to ¥7,001.8 billion from the previous fiscal year.

 

Operating Costs and Expenses

 

Operating costs and expenses decreased ¥1,606.1 billion, or 16.4%, to ¥8,215.3 billion from the previous fiscal year. Cost of sales decreased ¥1,004.8 billion, or 13.5%, to ¥6,414.7 billion from the previous fiscal year, due mainly to a decrease in costs attributable to the decreased net sales, positive foreign currency effects and continuing cost reduction. Selling, general and administrative expenses decreased ¥501.4 billion, or 27.3%, to ¥1,337.3 billion from the previous fiscal year, due mainly to positive foreign currency effects, a decrease in provisions for credit losses and losses on lease residual values in financial services business and the impact of expenses in the previous year which related to withdrawal from some racing activities and cancellations of development new models. R&D expenses decreased by ¥99.8 billion, or 17.7%, to ¥463.3 billion from the previous fiscal year, due mainly to improving development efficiency, while improving safety and environmental technologies and enhancing of the attractiveness of the products.

 

Operating Income

 

Operating income increased ¥174.1 billion, or 91.8%, to ¥363.7 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses and R&D expenses and continuing cost reduction, which was partially offset by a decrease in income attributable to the decreased net sales, negative foreign currency effects and an increase in fixed costs per unit as a result of reduced production. Excluding negative foreign currency effects of ¥167.5 billion, Honda estimates operating income increased ¥341.7 billion.

 

With respect to the discussion above of the changes, management identified the factors and used what it believes to be a reasonable method to analyze the respective changes in such factors. Management analyzed changes in these factors at the levels of the Company and its material consolidated subsidiaries. “Foreign currency effects” consist of “translation adjustments”, which come from the translation of the currency of foreign subsidiaries’ financial statements into Japanese yen, and “foreign currency adjustments”, which result from foreign-currency-denominated sales. With respect to “foreign currency adjustments”, management analyzed foreign currency adjustments primarily related to the following currencies: U.S. dollar, Canadian dollar, Euro, British pound, Brazilian real and Japanese yen, at the level of the Company and its material consolidated subsidiaries.

 

Income before Income Taxes and Equity in Income of Affiliates

 

Income before income taxes and equity in income of affiliates increased ¥174.4 billion, or 107.9%, to ¥336.1 billion. Main factors of this increase except factors relating operating income are as follows:

 

Unrealized gains and losses related to derivative instruments had a positive impact of ¥22.2 billion. Other income(expenses) excluding unrealized gains and losses related to derivative instruments had a negative impact of ¥21.9 billion, due mainly to a decrease in foreign currency transaction gains, which was partially offset by a decrease of impairment losses on investment securities.

 

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Income Tax Expense

 

Income tax expense increased ¥37.0 billion, or 33.7%, to ¥146.8 billion from the previous fiscal year. The effective tax rate decreased 24.2 percentage points to 43.7% from the previous fiscal year. The decrease in the effective tax rate was due to (1) a decrease in tax expenses of ¥21.2 billion related to the dividend and royalty income from foreign subsidiaries and affiliates, net of foreign tax credit, because the Company did not utilize indirect foreign tax credit in the prior fiscal year due to lower taxable income and (2) a decrease in the valuation allowance of ¥7.0 billion recorded during the fiscal year ended March 31, 2010.

 

Equity in Income of Affiliates

 

Equity in income of affiliates decreased ¥5.7 billion, or 5.8%, to ¥93.2 billion, due mainly to an increase in expenses and tax expense at affiliates in certain countries in Asia, which was partially offset by a decrease in expenses at certain affiliates in Japan.

 

Net Income

 

Net income increased ¥131.6 billion, or 87.2%, to ¥282.6 billion from the previous fiscal year.

 

Net Income attributable to Noncontrolling Interests

 

Net income attributable to noncontrolling interests increased ¥0.2 billion, or 2.0%, to ¥14.2 billion from the previous fiscal year.

 

Net Income attributable to Honda Motor Co., Ltd.

 

Net income attributable to Honda Motor Co., Ltd. increased ¥131.3 billion, or 95.9%, to ¥268.4 billion from the previous fiscal year.

 

Business Segments

 

Motorcycle Business

 

Honda’s unit sales of motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC) totaled 9,639 thousand units, decreased by 4.7% from the previous fiscal year. Unit sales in Japan totaled 190 thousand units, decreased by 18.1%. Overseas unit sales totaled 9,449 thousand units, decreased by 4.4%, due mainly to a decrease in unit sales in Other Regions, including South America, and North America, which was partially offset by an increase in unit sales in Asia.

 

Revenue from external customers decreased ¥271.2 billion, or 19.2%, to ¥1,140.2 billion from the previous fiscal year, due mainly to decreased unit sales and the negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥141.2 billion, or 10.0%, compared to the decrease as reported of ¥271.2 billion, which includes negative foreign currency translation effects.

 

Operating costs and expenses decreased ¥230.1 billion, or 17.5%, to ¥1,081.4 billion from the previous fiscal year. Cost of sales decreased by ¥149.1 billion, or 15.3%, to ¥826.7 billion, due mainly to a decrease in costs attributable to the decreased net sales, the positive foreign currency effects. Selling, general and administrative expenses decreased by ¥60.2 billion, or 24.1%, to ¥189.9 billion. R&D expenses decreased by ¥20.7 billion, or 24.3%, to ¥64.7 billion, from ¥85.5 billion, which reflects a correction from the amount previously disclosed at Item 5. Operating and Financial Review and Prospects C. Research and Development.

 

Operating income decreased ¥41.0 billion, or 41.1%, to ¥58.8 billion from the previous fiscal year, due mainly to a decrease in income attributable to the decreased net sales and negative foreign currency effects, which was partially offset by decreased selling, general and administrative expenses and R&D expenses.

 

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Japan

 

Total industry demand for motorcycles in Japan in fiscal 2010 was approximately 410 thousand units*, about 25% lower than in the previous fiscal year. This decline was due mainly to the effects of the economic downturn, measures taken to respond to emission regulations and structural factors, such as the decrease in the percentage of younger people in the total population, decline in the number of persons obtaining new driver’s licenses and the shortage of parking places in urban areas.

 

Amid these operating conditions, Honda launched its Super-Cub110 business model, which is both economical and practically useful. In addition, Honda introduced its CB1100 Type I large sports bike, an easy-to-ride with a beautiful design that is equipped with a newly developed air-cooled, four-stroke engine.

 

Unit sales in Japan were down 18.1% compared with the previous fiscal year, to 190 thousand units. Despite the contribution to sales of the new Super-Cub110 business model and new CB1100 sports bike, this overall decline in unit sales was due mainly to intensifying competition.

 

*

Source: JAMA (Japan Automobile Manufacturers Association)

 

North America

 

Total demand for motorcycles and ATVs in the United States* during calendar 2009 declined approximately 37% from the previous year, to approximately 840 thousand units. This decline was due to the continuing credit contraction, deterioration in employment conditions, and shrinkage in leisure-related expenditures.

 

Amid this business environment, Honda launched the Fury large cruiser model, which features improved stable driving performance, through the incorporation of Honda’s original floating final gear.

 

Unit sales in North America declined 40.9% compared with the previous fiscal year, to 189 thousand units. Sales of the new Fury large cruiser model were strong, but in reaction to the decline in gasoline prices, sales of mid-size models including 750cc motorcycles and scooters decreased. As a result, Honda’s motorcycle sales in this market fell 47.9%, to 98 thousand units. Moreover, unit sales of ATVs and others dropped 31.1%, to 91 thousand units, despite steady demand for utility ATVs.

 

*

Source: MIC (Motorcycle Industry Council)

 

Europe

 

Total demand for motorcycles in Europe* during calendar 2009 declined approximately 16% from the previous year, to about 1.05 million units. Although demand in some countries rose because of government incentives to support the purchase of new motorcycles and changes in the driver’s license system, overall demand fell because of the impact of the economic downturn throughout Europe.

 

Amid this business environment, Honda introduced its VFR1200F sports tourer with a V4-stroke engine, which combines sporty performance with high-quality riding comfort.

 

In fiscal 2010, although the CB125, 125cc motorcycle that launched in previous fiscal year, the naked type CBF1000 leisure motorcycle and the new VFR1200F sports tourer had a positive effect, this was not enough to compensate a decrease in unit sales of large scooters and other bikes. As a result, unit sales in Europe were down 27.9% from the previous fiscal year, to 199 thousand units.

 

*

Based on Honda’s research, the motorcycle registration market includes 10 countries: the United Kingdom, Germany, France, Italy, Spain, Switzerland, Portugal, the Netherlands, Belgium and Austria.

 

Asia

 

Demand for motorcycles is continuing to expand in Asia, where they are an essential means of transportation. In calendar 2009, despite the unfavorable impact of the global economic downturn in the first half

 

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of the year, during the second half, demand recovered, and total demand for motorcycles*1 rose about 6% over the previous year, to approximately 40.2 million units. By country, sales in India rose about 19%, to approximately 8.8 million units; sales in Indonesia decreased about 8%, to approximately 6.0 million units; and sales in Thailand dropped about 10%, to approximately 1.5 million units.

 

Amid these business conditions, in India, Honda made a full model change in its Activa 110cc scooter and launched its CB Twister motorcycle, which incorporates low-friction technology and is equipped with a fuel efficient 110cc engine. In Thailand, Honda introduced the Wave110iAT, outfitted with a new type CV-matic automatic transmission that provides both practical and convenient performance. In addition, Honda began to manufacture and market its new type PCX 125cc scooter. A strategic global model, PCX is a 125cc-class scooter featuring a global standard design for major components, which enhances cost competitiveness and production efficiency.

 

Unit sales in Asia*2 for fiscal 2010 rose 1.4% compared with the previous fiscal year, to 7,628 thousand units. This increase was due to expansion in sales of the Activa scooters in India and new types, including the CBTwister motorcycles in India, as well as to growth in sales in Thailand of the Cub-type Wave110iAT and the PCX scooters.

 

With respect to production activities, in India, our consolidated subsidiary Honda Motorcycle & Scooter India (Private) Ltd. decided to build a second production plant to respond to sharply rising demand in that country. Along with the expansion in capacity of its existing plant, the second plant is scheduled to go into operation in the latter half of 2011, and this is expected to bring this company’s total annual production capacity to 2.2 million units.

 

*1:

Based on Honda’s research, the motorcycle registration market includes eight countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, India, Pakistan and China.

 

*2:

This total includes sales of completed products of the Company and its consolidated subsidiaries and unit sales of parts for use in local production to Honda’s affiliates accounted for under the equity method.

 

Other Regions

 

In Brazil, the principal market within Other Regions, total demand in calendar 2009 decreased about 16%, to approximately 1.61 million units* because of the tightening of loan conditions for motorcycles triggered by the financial crisis.

 

Amid these conditions, in Brazil, Honda made a full model change on its CB300R motorcycle.

 

In Other Regions (including South America, the Middle East, Africa and Oceania), unit sales decreased 18.7% compared with the previous fiscal year, to 1,433 thousand units, despite the contribution to sales of Brazilian CB300R and CG150Fan motorcycles within Other Regions.

 

*

Source: ABRACICLO (the Brazilian association of motorcycle, moped, and bicycle manufacturers)

 

Automobile Business

 

Honda’s unit sales of automobiles totaled 3,392 thousand units, decreased by 3.6% from the previous fiscal year. Unit sales in Japan totaled 646 thousand units, increased by 16.2%. Overseas unit sales totaled 2,746 thousand units, decreased by 7.3%, due mainly to a decrease in unit sales in North America and Europe, which was partially offset by an increase in unit sales in Asia.

 

Revenue from external customers decreased ¥1,119.5 billion, or 14.6%, to ¥6,554.8 billion from the previous fiscal year, due mainly to decreased unit sales and the negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥625.1 billion, or 8.1%, compared to the decrease as reported of ¥1,119.5 billion, which includes negative foreign currency translation effects.

 

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Operating costs and expenses decreased ¥1,221.7 billion, or 16.0%, to ¥6,428.0 billion from the previous fiscal year. Cost of sales decreased by ¥790.4 billion, or 13.5%, to ¥5,066.5 billion, due mainly to a decrease in costs attributable to the decreased net sales, the positive foreign currency effects and continuing cost reduction. Selling, general and administrative expenses decreased by ¥354.9 billion, or 26.3%, to ¥992.1 billion, due mainly to the impact of expenses in the previous year which related to withdrawal from some racing activities and cancellations of development of new models and the positive foreign currency effects. R&D expenses decreased by ¥76.3 billion, or 17.1%, to ¥369.3 billion, from ¥445.7 billion, which reflects a correction from the amount previously disclosed at Item 5. Operating and Financial Review and Prospects C. Research and Development, due mainly to improving development efficiency, while improving safety and environmental technologies and enhancing of the attractiveness of the products.

 

Operating income increased ¥102.2 billion, or 416.5%, to ¥126.7 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses and R&D expenses and continuing cost reduction, which was partially offset by a decrease in income attributable to the decreased net sales and negative foreign currency effects.

 

Japan

 

Total automobile demand in Japan* for the fiscal year 2010 rose approximately 4% over the previous fiscal year, to 4.88 million units. In the first half of the fiscal year, operating conditions were difficult because of weakness in company’s business activities as a result of the global economic downturn and stagnant consumer spending. During the latter half of the fiscal year, however, the positive effects of government incentives to provide tax breaks and subsidies for purchasing eco-cars emerged, and automobile sales began to recover.

 

Amid these business operating conditions, Honda made full model changes to its STEPWGN, which features a low floor and a low center of gravity as well as excellent fuel economy, and the ACTY truck, which now offers a wider cabin and an improved minimum turning radius. In addition, Honda launched its all-new CR-Z hybrid vehicle, which combines a nimble and exhilarating ride with excellent fuel economy.

 

Unit sales in Japan rose 16.2% over the previous fiscal year, to 646 thousand units, driven especially by robust sales of the Insight, Fit, STEPWGN and FREED.

 

With respect to production, the number of units manufactured in Japan during the fiscal year 2010 decreased 21.5%, to 902 thousand units, mainly because of the decline in the number of cars exported.

 

*

Source: JAMA (as measured by the number of regular vehicle registrations (661cc or higher) and mini-vehicles (660cc or lower))

 

North America

 

In calendar 2009, total demand in the United States* fell approximately 21% from the previous year, to about 10.4 million units, the second major consecutive year-to-year contraction in the market. This was because of lackluster consumer spending caused by the continuing credit contraction and the deterioration in employment conditions.

 

Under these circumstances, Honda introduced its new Accord Crosstour, which is a high-performance sedan, powered by a Honda V6 engine, and boasts strong utility car features, including more storage capacity in the rear section. Honda also launched its Acura ZDX, which comes with a newly-developed six-speed automatic transmission and combines a powerful ride with excellent fuel economy.

 

Although in the fiscal year 2010 unit sales of the CR-V and the new Accord Crosstour and ZDX models expanded, unit sales in North America decreased 13.3%, to 1,297 thousand units, because of the overall shrinkage in market demand.

 

With respect to production, Honda automobiles manufactured in North America declined 7.9%, to 1,152 thousand units.

 

*

Source: Ward’s Auto

 

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Europe

 

During calendar 2009, total demand in Europe*1 fell approximately 2%, to about 14.48 million units. Demand in major European markets, including Germany and France, expanded as the governments of these countries adopted measures to encourage purchases of new cars. On the other hand, demand in the United Kingdom and Spain, where such incentive measures were adopted in the middle of the year, failed to recover from the slump in the first half of the year, and remained below the prior year. Moreover, unit demand in Russia*2 dropped about 50%, to approximately 1.47 million units.

 

Amid this business environment, Honda began production and marketing of its Jazz in Europe, which offers excellent fuel economy, a superior ride, and high-level safety features.

 

Unit sales in Europe during the fiscal year 2010 decreased 28.9% from the previous fiscal year, to 249 thousand units because of the combined effects of shrinkage in demand and more intense competition.

 

With respect to production, Honda manufactured 99 thousand units at its U.K. plant during the fiscal year 2010, 43.1% fewer than in the previous year.

 

*1:

Source: ACEA (Association des Constructeurs Europeens d’Automobiles (the European Automobile Manufacturers’ Association) (New passenger car registrations cover EU27 and EFTA3.))

 

*2:

Source: AEB (The Association of European Businesses)

 

Asia

 

In Asia, total demand in the principal countries*1 in calendar 2009 increased to approximately 19.48 million units. This gain was due mainly to expansion in demand, principally in China and the adoption of measures to encourage new vehicle purchases by governments in the regions.

 

Amid this business environment, Honda began production in Indonesia of its FREED compact mini-van, which offers a spacious interior, and commenced the marketing of these units not only in Indonesia but also in Singapore and Thailand. Also, in China, manufacturing and sales of the Spirior, a premium sporty sedan featuring a nimble and pleasant ride, began at a Honda affiliate accounted for under the equity method.

 

During fiscal 2010, unit sales in Asia rose 19.8%, to 950 thousand units. Sales of the City in Thailand and India, and sales of the new FREED in Indonesia held strong. In China, the City, CR-V and the new Spirior recorded robust sales performances.

 

With respect to production, to meet rapidly rising demand for automobiles in China, Honda decided to build a second plant through Dongfeng Honda Automobile Co., Ltd. *2. This will bring total production capacity at Dongfeng Honda Automobile to 300 thousand units a year in the latter half of calendar 2012. In addition, Honda decided to expand production capacity at Guangqi Honda Automobile Co., Ltd. *2,3. This will bring total production capacity at Guangqi Honda Automobile to 480 thousand units from the current 360 thousands units a year by the latter half of 2011.

 

 

*1:

The total is based on Honda’s research and includes the following 11 countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Singapore, Taiwan, South Korea, India, Pakistan, and China.

 

*2:

Dongfeng Honda Automobile Co., Ltd. and Guangqi Honda Automobile Co., Ltd. are the manufacturing and marketing joint ventures accounted for under the equity method.

 

*3:

Guangqi Honda Automobile Co., Ltd. changed its name from Guangzhou Honda Automobile Co., Ltd. effective June, 2009.

 

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Other Regions

 

Total demand for automobiles in Brazil, one of the principal markets among the Other Regions, increased about 13% in calendar 2009, to approximately 3.01 million units *1. On the other hand, demand in Australia decreased approximately 7%, to 940 thousand units *2.

 

Amid this operating environment, in Brazil, Honda introduced its new City, a small sedan incorporating flexible fuel technology, that allows drivers to select any ratio of bioethanol and gasoline that meets their needs.

 

Unit sales in Other Regions decreased 22.4%, to 250 thousand units. Although unit sales were lifted by the new City in Brazil, this was offset by declines in unit sales in Australia and the Middle East.

 

 

*1:

Source: ANFAVEA (Associaçao Nacional dos Fabricantes de Veiculos Automotores (the Brazilian automobile association, includes passenger cars and light commercial vehicles))

 

*2:

Source: FCAI (Federal Chamber of Automotive Industries (the Australian automobile association))

 

Power Product and Other Businesses

 

Honda’s unit sales of power products totaled 4,744 thousand units, decreased by 8.5% from the previous fiscal year. Unit sales in Japan totaled 322 thousand units, decreased by 37.6%. Overseas unit sales totaled 4,422 thousand units, decreased by 5.3%, due mainly to decreased unit sales in Europe and North America, which was partially offset by increased unit sales in Asia.

 

Revenue from external customers decreased ¥65.3 billion, or 19.1%, to ¥277.6 billion from the previous fiscal year, due mainly to the decreased unit sales of power products and negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥52.2 billion, or 15.2%, compared to the decrease as reported of ¥65.3 billion, which includes negative foreign currency translation effects. Revenue including intersegment sales decreased ¥64.2 billion, or 17.4%, to ¥304.6 billion from the previous fiscal year.

 

Operating costs and expenses decreased ¥63.0 billion, or 16.4%, to ¥321.3 billion from the previous fiscal year. Cost of sales decreased by ¥46.1 billion, or 16.2%, to ¥239.3 billion, due mainly to a decrease in costs attributable to the decreased net sales. Selling, general and administrative expenses decreased by ¥14.1 billion, or 21.2%, to ¥52.7 billion. R&D expenses decreased by ¥2.7 billion, or 8.6%, to ¥29.2 billion, from ¥31.9 billion, which reflects a correction from the amount previously disclosed at Item5. Operating and Financial Review and Prospects C. Research and Development.

 

Operating loss increased ¥1.2 billion to ¥16.7 billion from the previous fiscal year, due mainly to a decrease in income attributable to the decreased net sales, which was partially offset by decreased selling, general and administrative expenses and R&D expenses.

 

Japan

 

In the power products field, in Japan Honda produces the BF60, a medium-sized, four-stroke outboard boat motor offering good acceleration and fuel economy, and has now launched this product in markets around the world. In addition, Honda manufactures the EU26i handy electric power generator, which is light in weight, compact and quiet, in Japan and has now launched this product globally. Marketed under the name EU3000iHandy in North America and EU30i in other markets around the world, this generator incorporates Honda’s original sine-wave inverter technology and supplies electricity comparable in quality to commercially generated power. Also, Honda made full model changes to its V-Twin general-purpose engines GX630, GX660 and GX690, which are manufactured in Japan and offer good fuel economy with low emissions. Honda has now launched these engines globally, and they are marketed as the GX630R, GX660R and GX690R in North America, Europe and Australia.

 

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During the fiscal year 2010, unit sales in Japan decreased 37.6% from the previous fiscal year, to 322 thousand units. Although sales of tillers and snow removal equipments rose, these increases were offset by lower sales of engines for OEM use.

 

North America

 

Unit sales in North America declined 4.0% from the previous fiscal year, to 1,818 thousand units. Despite increases in sales of lawn mowers and sales of engines for OEM use in lawn mowers, these increases were not enough to compensate a decrease in sales of engines for OEM use in construction machinery.

 

Europe

 

In Europe, unit sales fell 18.4% from the previous fiscal year, to 1,066 thousand units, as a result of a decrease in sales of engines for OEM use in construction machinery and electric power generators.

 

Asia

 

In Asia, unit sales rose 10.2%, to 1,069 thousand units, as sales of engines for use in agricultural machinery, pumps and brush cutters rose. This increase was due in part to the introduction of measures to support the agricultural sector in certain countries and to weather conditions.

 

Other Regions

 

Unit sales in Other Regions decreased 6.6% compared with the previous fiscal year, to 469 thousand units. This decline was due mainly to lower sales of pumps and general-purpose engines to the Middle East.

 

Financial Services Business

 

To support the sale of its products, Honda provides retail lending and leasing to customers and wholesale financing to dealers through our finance subsidiaries in Japan, the United States, Canada, the United Kingdom, Germany, Brazil, Thailand and other countries.

 

Total amount of finance subsidiaries-receivables and property on operating leases of finance subsidiaries decreased by ¥90.4 billion, or 1.9%, to ¥4,769.6 billion from the previous fiscal year. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, total amount of finance subsidiaries-receivables and property on operating leases of finance subsidiaries as of the end of the year would have increased by approximately ¥5.9 billion, or 0.1%, compared to the decrease as reported of ¥90.4 billion, which includes negative foreign currency translation effects.

 

Revenue from external customers in a financial services business increased ¥24.0 billion, or 4.1%, to ¥606.3 billion from the previous fiscal year. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, revenue for the year would have increased by approximately ¥71.9 billion, or 12.4%, compared to the increase as reported of ¥24.0 billion, which includes negative foreign currency translation effects. Revenue including intersegment sales increased ¥22.2 billion, or 3.7%, to ¥618.8 billion from the previous fiscal year.

 

Operating costs and expenses decreased ¥91.9 billion, or 17.8%, to ¥423.9 billion from the previous fiscal year. Cost of sales decreased ¥19.7 billion, or 5.8%, to ¥321.4 billion from the previous fiscal year, due mainly to a decrease in funding costs. Selling, general and administrative expenses decreased ¥72.1 billion, or 41.3%, to ¥102.4 billion from the previous fiscal year, due mainly to a decrease in provisions for credit losses and losses on lease residual values.

 

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Operating income increased ¥114.2 billion, or 141.6%, to ¥194.9 billion from the previous fiscal year, due mainly to a decrease in provisions for credit losses and losses on lease residual values and a decrease in funding costs.

 

Our finance subsidiaries in North America have historically accounted for all leases as direct financing leases. However, starting in the fiscal year ended March 31, 2007, some of the leases which do not qualify for direct financing leases accounting treatment are accounted for as operating leases. Generally, direct financing lease revenues and interest income consist of the recognition of finance lease revenue at inception of the lease arrangement and subsequent recognition of the interest income component of total lease payments using the effective interest method. In comparison, operating lease revenues include the recognition of the gross lease payment amounts on a straight line basis over the term of the lease arrangement, and operating lease vehicles are depreciated to their estimated residual value on a straight line basis over the term of the lease. It is not anticipated that the differences in accounting for operating leases and direct financing leases will have a material net impact on Honda’s results of operations overall, however, operating lease revenues and associated depreciation of leased assets do result in differing presentation and timing compared to those of direct financing leases.

 

Information about credit losses and losses on lease residual values is provided at Item 5. Operating and Financial Review and Prospects A. Operating Results, Application of Critical Accounting Policies. Information about finance subsidiaries-receivables and securitizations is described in Note (2) to the accompanying consolidated financial statements.

 

Geographical Information

 

Japan

 

In Japan, revenue from domestic and export sales decreased ¥856.8 billion, or 20.6%, to ¥3,305.7 billion from the previous fiscal year, due mainly to a decrease in export sales in automobile business. Operating loss decreased ¥132.4 billion, to ¥29.1 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses and R&D expenses and continuing cost reductions, which was partially offset by a decrease in income attributable to the decreased revenue and negative foreign currency effects.

 

North America

 

In North America, which mainly consists of the United States, revenue decreased ¥870.9 billion, or 18.2%, to ¥3,908.2 billion from the previous fiscal year, due mainly to a decrease in revenue in automobile business and negative foreign currency translation effects. Operating income increased ¥156.6 billion, or 196.6%, to ¥236.3 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses, including a decrease in provisions for credit losses and losses on lease residual values and continuing cost reductions, which was partially offset by a decrease in income attributable to the decreased revenue and an increase in fixed costs per unit as a result of reduced production.

 

Europe

 

In Europe, revenue decreased ¥453.4 billion, or 35.5%, to ¥825.4 billion from the previous fiscal year, due mainly to a decrease in revenue in the automobile business and negative foreign currency translation effects. Operating loss was ¥10.8 billion, a decrease of ¥21.0 billion of operating income from the previous fiscal year, due mainly to a decrease in income attributable to the decreased revenue and negative foreign currency effects, which was partially offset by decreased selling, general and administrative expenses.

 

Asia

 

In Asia, revenue decreased ¥89.6 billion, or 5.6%, to ¥1,518.5 billion from the previous fiscal year, due mainly to negative foreign currency translation effects, which was partially offset by an increase in revenue in

 

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motorcycle business. Operating income increased ¥9.4 billion, or 9.1%, to ¥113.0 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses and an increase in income attributable to the increased revenue, which was partially offset by negative foreign currency effects.

 

Other Regions

 

In Other Regions, revenue decreased ¥247.7 billion, or 21.7%, to ¥896.4 billion from the previous fiscal year, due mainly to a decrease in negative foreign currency translation effects and a decrease in revenue in motorcycle and automobile businesses. Operating income decreased ¥89.2 billion, or 66.1%, to ¥45.8 billion from the previous fiscal year, due mainly to a decrease in income attributable to a decrease in revenue and negative foreign currency effects, which was partially offset by decreased selling, general and administrative expenses.

 

Fiscal Year 2009 Compared with Fiscal Year 2008

 

Honda adopted Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”, which is now codified in the FASB Accounting Standards Codification (ASC) 810 “Consolidation”, effective April 1, 2009. Upon the adoption of this statement, Honda has changed the prior consolidated financial statements to conform to the presentation used for the fiscal year ended March 31, 2010. See Note (1)(c).

 

Net Sales and Other Operating Revenue

 

Honda’s consolidated net sales and other operating revenue (hereafter, “net sales”) for the fiscal year ended March 31, 2009, decreased ¥1,991.5 billion, or 16.6%, to ¥10,011.2 billion from the fiscal year ended March 31, 2008, primarily due to foreign currency translation effects and decreased net sales in the automobile business. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥795.8 billion, or 6.6%, compared to the decrease as reported of ¥1,991.5 billion, which includes negative foreign currency translation effects.

 

Net sales in Japan decreased ¥139.2 billion, or 8.8%, to ¥1,446.5 billion from the previous fiscal year and overseas net sales decreased ¥1,852.3 billion, or 17.8%, to ¥8,564.7 billion from the previous fiscal year.

 

Operating Income

 

Operating income decreased ¥763.4 billion, or 80.1%, to ¥189.6 billion from the previous fiscal year. Excluding negative foreign currency effects of ¥269.5 billion, caused by the appreciation of the Japanese yen, Honda estimates operating income decreased ¥493.8 billion, or 51.8%.

 

Factors contributing to the decrease of ¥493.8 billion in operating income excluding negative foreign currency effects can be summarized as follows: (i) changes in net sales and the model mix, (ii) cost reductions and the effect of raw material cost fluctuations, (iii) changes in selling, general and administrative (SG&A) expenses and (iv) R&D expenses. Details regarding these factors are as follows.

 

Changes in net sales and the model mix had a negative impact of ¥247.7 billion, due mainly to a decrease in income attributable to the decreased net sales and changes in the model mix caused by shift of customers’ demands towards more fuel efficient (compact) models in automobile business, which was offset by price increases and reduced sales incentives in automobile business in North America.

 

Cost reductions and the effect of raw material fluctuations had a negative impact of ¥182.5 billion, due mainly to increased raw materials costs, such as steel and precious grade metals, and an increase in fixed costs per unit as a result of reduced production, which was offset by continuing cost reductions.

 

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Selling, general and administrative expenses had a negative impact of ¥88.3 billion due mainly to expenses related to withdrawal from some racing activities and cancellations of development new models and an increase in provisions for credit losses and losses on lease residual values in the financial services business in North America, which was offset by a decrease in costs for product warranties.

 

R&D expenses also had a positive impact of ¥24.7 billion, due mainly to reduction of R&D expenses, which was offset by increased R&D expenses related to safety and environmental technologies and enhancement of the attractiveness of the products.

 

With respect to the discussion above of the changes in operating income, management identified the factors set forth below and used what it believes to be a reasonable method to analyze the respective changes in such factors. Each of these factors is explained below. Management analyzed changes in these factors at the levels of the Company and its material consolidated subsidiaries.

 

(1) “Foreign currency effects” consist of “translation adjustments”, which come from the translation of the currency of foreign subsidiaries’ financial statements into Japanese yen, and “foreign currency adjustments”, which result from foreign-currency-denominated sales. With respect to “foreign currency adjustments”, management analyzed foreign currency adjustments primarily related to the following currencies: U.S. dollar, Canadian dollar, Euro, British pound, Brazilian real and Japanese yen, at the level of the Company and its material consolidated subsidiaries.

 

(2) With respect to “cost reduction and effects of raw material cost fluctuations”, management analyzed cost reduction and effects of raw material cost fluctuations at the levels of the Company and its material foreign manufacturing subsidiaries in North America, Europe and other regions.

 

(3) With respect to “changes in net sales and the model mix”, management analyzed changes in sales volume and the mix of product models sold in major markets which resulted in increases/decreases in profit, as well as certain other reasons for increases/decreases in net sales and cost of sales.

 

(4) With respect to “selling, general and administrative expenses”, management analyzed reasons for increases/decreases in selling, general and administrative expenses from the previous fiscal year excluding currency translation effects.

 

Income before Income Taxes and Equity in Income of Affiliates

 

Income before income taxes and equity in income of affiliates decreased ¥734.1 billion, or 81.9%, to ¥161.7 billion. Main factors of this decrease, except factors relating to operating income, are as follows:

 

Unrealized gains and losses related to derivative instruments, such as interest rate swaps of finance subsidiaries, had a positive impact of ¥85.7 billion. On the other hand, realized losses related to derivative instruments and the losses associated with the revaluation of investment securities had a negative impact of ¥56.4 billion, which was offset by the effects of foreign currency transaction gains.

 

Income Tax Expense

 

Income tax expense decreased ¥277.6 billion, or 71.7%, to ¥109.8 billion from the previous fiscal year. The effective tax rate increased 24.7 percentage points to 67.9%, from the previous fiscal year. The increase in the effective tax rate was due to (1) an increase in tax expenses of ¥24.4 billion related to the dividend and royalty income from foreign subsidiaries and affiliates, net of foreign tax credit, because the Company did not utilize indirect foreign tax credit due to lower taxable income and (2) an increase in the valuation allowance of ¥23.1 billion recorded during the fiscal year ended March 31, 2009.

 

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Equity in Income of Affiliates

 

Equity in income of affiliates decreased ¥19.9 billion, or 16.7%, to ¥99.0 billion, due mainly to a decrease in income of affiliates that primarily manufacture components and parts for Honda’s products in Japan, because of a decrease in their revenues, which was partially offset by an increase in income of affiliates in Asia, because of an increase in their revenues resulting from further automobile market expansion.

 

Net Income

 

Net income decreased ¥476.4 billion, or 75.9%, to ¥150.9 billion from the previous fiscal year.

 

Net Income attributable to Noncontrolling Interests

 

Net income attributable to noncontrolling interests decreased ¥13.3 billion, or 49.0%, to ¥13.9 billion from the previous fiscal year.

 

Net Income attributable to Honda Motor Co., Ltd.

 

Net income attributable to Honda Motor Co., Ltd. decreased ¥463.0 billion, or 77.2%, to ¥137.0 billion from the previous fiscal year.

 

Business Segments

 

Motorcycle Business

 

Honda’s unit sales of motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC) totaled 10,114 thousand units, increased by 8.5% from the previous fiscal year. Unit sales in Japan totaled 232 thousand units, decreased by 25.4%. Overseas unit sales totaled 9,882 thousand units, increased by 9.7%, due mainly to an increase in unit sales of parts for local production at affiliates accounted for under the equity method in Asia and an increase in unit sales in Other Regions, including Brazil. Revenue from external customers decreased ¥147.1 billion, or 9.4%, to ¥1,411.5 billion from the previous fiscal year, due mainly to negative foreign currency translation effects, which was offset by increased overseas unit sales. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have increased by approximately ¥18.5 billion, or 1.2%, compared to the decrease as reported of ¥147.1 billion, which includes negative foreign currency translation effects.

 

Operating income decreased ¥51.3 billion, or 34.0 %, to ¥99.9 billion from the previous fiscal year, due mainly to increased raw material costs, the negative foreign currency effects and increased SG&A expenses, which was offset by price increases and decreased R&D expenses.

 

Japan

 

Total industry demand for motorcycles in Japan* in fiscal 2009 was approximately 550 thousand units. Although sales of motorcycles in the 51cc–125cc class were solid because of the increased use of motorcycles for commuting, overall demand was about 21% lower than in the previous year for a number of reasons. These included restrictions on emissions of motorcycles, demographic factors as the decline in the number of younger people, the decline in the number of people who acquire motorcycle driving licenses and the shortage of motorcycle parking spaces in city areas.

 

Amid these difficult operating conditions, Honda newly launched the CB223S, a road sports model and introduced the all-new Monkey, a 50cc recreational model for the first time in 30 years. In addition, Honda launched the all-new CBR1000RR and the CBR1000RR ABS, equipped with the world’s first electronically controlled “Combined ABS” for super sports models.

 

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In fiscal 2009, although unit sales of new models and the Lead110 scooter were strong, sales in all categories were lackluster because of more-intense market competition and other factors. As a result, sales for the year were down 25.4%, to 232 thousand units.

 

In production activities, based on its concept of a “people-friendly and environmentally-responsible plant,” Honda introduced its latest, highly efficient manufacturing technologies at its new Kumamoto Factory. Also, Honda began production at the Factory in April 2008, which will be a new leader plant for Honda motorcycle production on a global basis.

 

 

*

Source: JAMA (Japan Automobile Manufacturers Association)

 

North America

 

Total demand for motorcycles and all-terrain vehicles (ATVs) in the United States* during calendar 2008 declined 16% from the previous year, to approximately 1.33 million units. Although demand for medium-class motorcycles and scooters appears to have increased because of the increase in gasoline prices during the first half of the year, expenditures on recreational products had been shrinking along with the emergence of the subprime loan issue, and market conditions deteriorated sharply following the financial crisis in September.

 

Amid this operating environment, Honda entered a new market segment with the introduction of the Big Red multi-utility vehicle. In addition, in September 2008, Honda strengthened its product lineup by launching the FourTrax Rancher AT, a utility ATV.

 

Unit sales of motorcycles in North America declined 29.4% compared with the previous fiscal year, to 320 thousand units. Although sales of the Shadow cruiser model, the Ruckus scooter, and the Metropolitan scooter increased, sales of off-road and sports motorcycles decreased to 188 thousand units, a decrease of 22.3%. Moreover, unit sales of ATVs, including recreational-style sport use and utility types also declined to 132 thousand units, a decline of 37.4% from the previous fiscal year.

 

 

*

Source: MIC (Motorcycle Industry Council)

 

Europe

 

Total demand for motorcycles in Europe* during calendar 2008 declined 6% from the previous year, to about 1.25 million units as a result of the economic downturn, such as deterioration in consumer sentiment beginning in September 2008.

 

Amid this difficult operating environment, Honda newly introduced the CB1000R naked sports model offering a powerful and dynamic performance.

 

In fiscal 2009, although unit sales of the 110cc LEAD scooter, the XL700V dual-purpose sports model and the CB1000R were strong, unit sales of super sports models, small motorcycles and larger scooters declined. As a result, total unit sales in Europe were down 11.8%, to 276 thousand units.

 

 

*

The total for 10 European countries: including the United Kingdom, Germany, France, Italy, Spain, Switzerland, Portugal, the Netherlands, Belgium, and Austria.

 

Asia

 

Demand for motorcycles is continuing to expand in Asia, where motorcycles are an essential form of daily transportation. In calendar 2008, total demand*1 in the principal countries of Asia rose 6%, to about 37.9 million

 

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units, supported by favorable economic growth in the first half of the year offsetting negative impact of declines in agricultural product prices in the latter half of the year. By country, sales in India amounted to about 7.4 million units, approximately the same as in the previous year. In Indonesia, sales for the year were up 33%, to about 6.5 million units. Sales in Thailand increased 7%, to about 1.7 million units.

 

Amid these operating conditions, in Thailand, Honda launched the new CZ–i 110 Cub type model in Thailand, which offers an eco-friendly performance and low fuel consumption, followed by the introduction of the Wave110i.

 

Unit sales in Asia*2 for the fiscal 2009 increased 13.4%, to 7,523 thousand units, due mainly to the favorable sales of the all-new CBF Stunner in India, 125cc motorcycle and the all-new Air Blade, 110 cc scooter in Vietnam.

 

In India, an affiliate accounted for under the equity method, began operations at its third factory in April 2008, thus bringing the total annual capacity to 6.15 million units together with the capacity of Honda’s consolidated subsidiary. In Vietnam, Honda began the production of scooters and 125cc Cub-type motorcycles at its second motorcycle plant in that country, and had brought Honda’s total annual production capacity in Vietnam to 1.5 million units.

 

 

* 1:

The total for eight countries: including Thailand, Indonesia, Malaysia, the Philippines, Vietnam, India, Pakistan and China.

 

* 2:

This total includes sales of completed products of the Company and its consolidated subsidiaries and unit sales of parts for use in local production to Honda’s affiliates accounted for under the equity methods.

 

Other Regions

 

In Brazil, the principal market within Other Regions, the total demand in calendar 2008 amounted to approximately 1.91 million units, due to favorable economic growth in the first half of the year.

 

Also in Brazil, Honda newly launched its CG150 TITAN MIX small motorcycle, equipped with the world’s first Mix Fuel Injection System, which accommodates any ratio of bio-ethanol and gasoline fuels.

 

Unit sales in Other Regions (South America, the Middle & Near East, Africa and Oceania) increased 9.5% over the previous fiscal year to 1,763 thousand units, due mainly to the favorable sales of the all-new CG 125 FAN motorcycle and CG 150 TITAN in Brazil.

 

Automobile Business

 

Honda’s unit sales of automobiles totaled 3,517 thousand units, decreased by 10.4% from the previous fiscal year. Unit sales in Japan totaled 556 thousand units, decreased by 9.6%. Overseas unit sales totaled 2,961 thousand units, decreased by 10.5%, due mainly to a decrease in unit sales in North America, which was offset by an increase in unit sales in Asia and Other Regions including Brazil.

 

Revenue from external customers decreased ¥1,814.9 billion, or 19.1%, to ¥7,674.4 billion from the previous fiscal year, due to the negative foreign currency translation effects and decreased unit sales. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥889.9 billion, or 9.4%, compared to the decrease as reported of ¥1,814.9 billion, which includes negative foreign currency translation effects.

 

Operating income decreased ¥637.1 billion, or 96.3%, to ¥24.5 billion, from the previous fiscal year, due mainly to a decrease in income attributable to the decreased net sales in North America and Japan, the negative foreign currency effects, an increase in fixed costs per unit as a result of reduced production, increased raw material costs, changes in the model mix caused by shift of customers’ demands towards more fuel efficient

 

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(compact) models and expenses related to withdrawal from some racing activities and cancellations of development of new models, which was offset by continuing cost reduction, price increases, a decrease in costs for product warranties, decreased R&D expenses and reduced sales incentives in North America.

 

Japan

 

Total automobile demand in Japan* for the fiscal year showed approximately 12% decline compared with the same period of the previous year to 4.7 million units, reflecting the decline in demand as the financial crisis began to have an impact on the economy from September 2008 onward.

 

Amid these operating conditions, Honda worked to strengthen its product lineup and expand sales by introducing the new FREED, Life and Insight hybrid car, which features a lightweight, compact hybrid system that combines exceptional fuel economy with fun-to-drive performance.

 

Although registrations of the Honda Fit, FREED and Insight were strong, as a result of severe market conditions, overall unit sales dropped 9.6% below the level of the previous fiscal year, to 556 thousand units.

 

In production, Honda reduced output in response to the worldwide decline in unit sales and the need to make adjustments in inventories. As a consequence, the number of automobiles manufactured by Honda during the fiscal year was down 11.4%, to 1,148 thousand units in Japan. In response to sudden changes in global markets, Honda transferred all production of the Stream from the Suzuka Factory to the Saitama Factory. Also, production of the Fit for the North American market began at the Saitama Factory in addition to the Suzuka Factory. The start-up of production at the Yorii Factory, which was scheduled for 2010, has been postponed for two years or more. Also, plans for beginning the manufacturing of mini-vehicles at the Yokkaichi Factory of Yachiyo Industry Co., Ltd., which was scheduled for 2010, have been postponed for one year or more.

 

 

* :

Source: JAMA (as measured by the number of regular vehicle registrations (661cc or higher) and mini-vehicles (660cc or lower))

 

North America

 

In calendar 2008, total demand in the United States* declined 18% from the previous year, to about 13.19 million units. The automobile market experienced a major decline with the impact of the financial crisis on the economy, the deterioration in employment conditions, deterioration in consumer sentiment and other factors.

 

Amid this operating environment, Honda introduced new models such as the mid-size SUV Pilot, the Acura TL and the Insight hybrid car.

 

For the fiscal year, unit sales in North America as a whole declined 19.1%, to 1,496 thousand units. Although sales of the all-new TSX remained solid, the sales of the Odyssey, the Pilot and the Acura MDX, as well as the Acura TL declined.

 

Manufacturing activities started at the auto production plant in Indiana in October 2008 with the Civic. Although, because of the sudden slowing of automobile demand, Honda slashed production in all plants in North America. As a result, the number of automobiles manufactured declined 13.2% from the previous fiscal year, to 1,251 thousand units.

 

 

* :

Source: Ward’s Auto

 

Europe

 

During calendar 2008, total demand in Spain, Italy, and the United Kingdom declined along with the negative impact of the financial crisis from September 2008 onward. As a consequence, total demands in Europe*1 fell 8%, to about 14.71 million units. At the same time, total demand in Russia*2 for calendar 2008 rose 13%, to about 2.93 million units.

 

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Amid this environment, Honda introduced the all-new Accord. Unit sales in this region were down 10.5% from the previous year and amounted to 350 thousand units due to decreased total demands.

 

Honda made production adjustments in response to the sudden decline in automobile demand. As a result, production at Honda’s U.K. plant decreased 29.4%, to 175 thousand units compared to the same period of previous fiscal year.

 

 

* 1:

Source: ACEA (Association des Constructeurs Europeens d’Automobiles (the European Automobile Manufacturers’ Association) (New passenger car registrations cover EU27 and EFTA3.))

 

*2:

Source: AEB (The Association of European Businesses)

 

Asia

 

In Asia, total demand in principal countries* in calendar 2008 increased over the previous year to approximately 15,100 thousand units, despite the negative impact of the financial crisis from September 2008 onward.

 

Amid this environment, Honda introduced the all-new Fit in Taiwan. Honda also introduced the all-new City, a small sedan initially in Thailand and subsequently to India and other countries in Asia.

 

During fiscal 2009, total unit sales (comprised of finished automobiles of the Company and its consolidated subsidiaries and unit sales of parts to Honda’s affiliates accounted for under the equity method) rose 5.0% over the level of the previous fiscal year, to 793 thousand units. In the mean time, sales of the City and Jazz models held strong primarily in Thailand, Indonesia, Malaysia, and elsewhere. Similarly, sales of the all-new Accord and the CR-V were also strong in China.

 

With an eye to future growth in Asia, Honda began production at its second plant in Thailand in October 2008, which has an annual production capacity of 60 thousand units. Honda postponed its plan for the start-up of the final assembly line at its second plant in India, in view of the major changes in the market environment.

 

 

* :

The total for 11 countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Singapore, Taiwan, South Korea, India, Pakistan, and China)

 

Other Regions

 

Principal markets in the Other Regions increased due to economic expansion during the first half of 2008, although conditions became stagnant as a result of the financial crisis from September 2008. Overall demand for the region increased in 2008.

 

Total demand in Brazil*1 in calendar 2008 was approximately 2.67 million units, 14% higher than in the previous year. On the other hand, total demand in Australia*2 decreased 4% from the previous year, to about 1.01 million units.

 

Honda’s unit sales in Other Regions increased 2.5%, to 322 thousand units. During fiscal 2009, unit sales in Brazil and Argentina increased due to the launch of the all-new Fit although unit sales in Australia and the Middle East declined.

 

 

* 1:

Source: ANFAVEA (Associaçao Nacional dos Fabricantes de Veiculos Automotores (the Brazilian automobile association, includes passenger cars and light commercial vehicles)

 

* 2:

Source: FCAI (Federal Chamber of Automotive Industries (the Australian automobile association))

 

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Power Product and Other Businesses

 

Honda’s unit sales of power products totaled 5,187 thousand units, decreased by 14.4% from the previous fiscal year. Unit sales in Japan totaled 516 thousand units, decreased by 6.2%. Overseas unit sales totaled 4,671 thousand units, decreased by 15.2%, due mainly to decreased unit sales in North America and Europe. Revenue from external customers decreased ¥78.1 billion, or 18.5%, to ¥343.0 billion from the previous fiscal year, due mainly to the decreased unit sales and negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, net sales for the year would have decreased by approximately ¥49.0 billion, or 11.7%, compared to the decrease as reported of ¥78.1 billion, which includes negative foreign currency translation effects.

 

Operating loss was ¥15.4 billion, a decrease of ¥37.8 billion of operating income from the previous fiscal year, due mainly to a decrease in income attributable to the decreased net sales and increased in R&D expenses in other businesses, which was offset by decreased SG&A expenses.

 

Japan

 

In Japan, Honda newly launched the Yukios SB800, which is compact and lightweight and clears snow with a blade. Honda also newly introduced the Pianta FV200, a gas-powered mini tiller that uses the same butane gas canisters that are used in households for powering portable gas stoves. In addition, Honda introduced its original thin-film solar cells that reduce CO2 emissions in the manufacturing process, and satisfy specifications for use in public and industrial applications.

 

Unit sales were down 6.2%, to 516 thousand units for this fiscal year, because of lower sales of GX series engines for water pumps and generators sold to OEM, and other products.

 

North America

 

Unit sales in North America declined 21.6%, to 1,893 thousand units. Weakness in the sales of engines for OEM use in construction machinery, high-pressure washers, and lawn mowers as well as weakness in the sales of lawn mowers, mainly due to the downturn in the U.S. economy.

 

Europe

 

In Europe, unit sales declined 22.9%, to 1,306 thousand units. Sales of GX and GC series engines for OEM use in construction machinery and generators declined.

 

Asia

 

Honda newly launched engines specially designed for long tail boats, the GX160, GX200 and GX390. In addition, in China, Honda newly introduced HRJ196 lawn mowers that are compact, lightweight and easy to use.

 

Unit sales in Asia, excluding Japan, increased 6.0% from the previous fiscal year, to 970 thousand units, as a result of expansion in sales of WB20XT pumps in Indonesia and increases in sales of general-purpose engine, GX160 for OEM use in water pumps in China.

 

Other Regions

 

In Other Regions, unit sales rose 3.7% over the previous fiscal year, to 502 thousand units, as a result of higher unit sales in the Middle East of general-purpose engine, GX390 for OEM use in construction machinery and generators, increased sales in South America of general-purpose engine, GX series, and other factors.

 

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Financial Services Business

 

To support the sale of its products, Honda provides retail lending and leasing to customers and wholesale financing to dealers through our finance subsidiaries in Japan, the United States, Canada, the United Kingdom, Germany, Brazil, Thailand and other countries.

 

In North America, the financial crisis had a severe impact on the economy, the deterioration in employment conditions, deterioration in consumer sentiment and other factors. As a result, the environment for financial services business remained under pressure.

 

Total amount of finance subsidiaries-receivables and property on operating leases of finance subsidiaries decreased by 2.2%, to ¥4,860.1 billion from the previous fiscal year, due mainly to the currency translation effects.

 

Revenue from external customers in a financial services business increased ¥48.7 billion, or 9.1%, to ¥582.2 billion from the previous fiscal year, due mainly to an increase in operating lease revenue, which was offset by negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, revenue for the year would have increased by approximately ¥124.7billion, or 23.4%, compared to the increase as reported of ¥48.7 billion, which includes negative foreign currency translation effects.

 

Operating income decreased ¥37.1 billion, or 31.5%, to ¥80.6 billion from the previous fiscal year, due mainly to an increase in provisions for credit losses and losses on lease residual values in North America and negative foreign currency translation effects, which was offset by an increase in income attributable to higher revenue. In North America, prices of SUVs and minivans in the used car market dropped during the fiscal first half, and losses on lease residual values of these models increased. In addition, from September onward, losses on lease residual values of compact and mid-sized sedans and other passenger vehicles also increased. In addition, provisions for credit losses also increased as the ability of certain customers to pay their debts declined.

 

Our finance subsidiaries in North America have historically accounted for all leases as direct financing leases. However, starting in the fiscal year ended March 31, 2007, some of the leases which do not qualify for direct financing leases accounting treatment are accounted for as operating leases. Generally, direct financing lease revenues and interest income consist of the recognition of finance lease revenue at inception of the lease arrangement and subsequent recognition of the interest income component of total lease payments using the effective interest method. In comparison, operating lease revenues include the recognition of the gross lease payment amounts on a straight line basis over the term of the lease arrangement, and operating lease vehicles are depreciated to their estimated residual value on a straight line basis over the term of the lease. It is not anticipated that the differences in accounting for operating leases and direct financing leases will have a material net impact on Honda’s results of operations overall, however, operating lease revenues and associated depreciation of leased assets do result in differing presentation and timing compared to those of direct financing leases.

 

Information about credit losses and losses on lease residual values is provided at Item 5. Operating and Financial Review and Prospects A. Operating Results, Application of Critical Accounting Policies. Information about finance subsidiaries-receivables and securitizations is described in Note (2) to the accompanying consolidated financial statements.

 

Geographical Information

 

Japan

 

In Japan, revenue from domestic and export sales decreased 726.4 billion, or 14.9%, to ¥4,162.5 billion from the previous fiscal year, due mainly to a decrease in revenue in automobile business. Operating loss was ¥161.6 billion, a decrease of ¥354.1 billion of operating income from previous fiscal year, due mainly to negative

 

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foreign currency effects, a decrease in income attributable to the decreased revenue, increased raw material costs, an increase in fixed costs per unit as a result of reduced production and expenses related to withdrawal from some racing activities and cancellations of development of new models, which was offset by continuing cost reductions, decreased SG&A and R&D expenses.

 

North America

 

In North America, which mainly consists of the United States, revenue decreased ¥1,486.1 billion, or 23.7%, to ¥4,779.1 billion from the previous fiscal year, due mainly to negative foreign currency translation effects and a decrease in revenue in automobile business. Operating income decreased ¥352.9 billion, or 81.6%, to ¥79.7 billion from the previous fiscal year, due mainly to a decrease in income attributable to the decreased revenue, an increase in fixed costs per unit as a result of reduced production, negative foreign currency effects, and increased raw material costs, which was offset by continuing cost reductions and decreased SG&A expenses.

 

Europe

 

In Europe, revenue decreased ¥315.3 billion, or 19.8% to ¥1,278.9 billion from the previous fiscal year, due mainly to negative foreign currency translation effects and a decrease in revenue in the motorcycle business and automobile business. Operating income decreased ¥41.3 billion, or 80.2%, to ¥10.2 billion from the previous fiscal year, due mainly to a decrease in income attributable to the decreased revenue, increased SG&A expenses, an increase in fixed costs per unit as a result of reduced production and increased raw material costs, which was offset by continuing cost reductions.

 

Asia

 

In Asia, revenue decreased ¥30.0 billion, or 1.8% to ¥1,608.2 billion from the previous fiscal year, due mainly to negative foreign currency translation effects, which was offset by increase in revenue in automobile business. Operating income decreased ¥27.1 billion, or 20.7%, to ¥103.6 billion from the previous fiscal year, due mainly to negative foreign currency effects, increased raw material costs and increased SG&A expenses.

 

Other Regions

 

In Other Regions, revenue increased ¥51.4 billion, or 4.7%, to ¥1,144.2 billion from the previous fiscal year, due mainly to an increase in revenue in all businesses, which was offset by a decrease in negative foreign currency translation effects. Operating income increased ¥18.5 billion, or 16.0%, to ¥135.0 billion from the previous fiscal year, due mainly to an increase in income attributable to an increase in revenue and continuing cost reductions, which was offset by increased SG&A expenses and increased raw material costs.

 

Application of Critical Accounting Policies

 

Critical accounting policies are those which require us to apply the most difficult, subjective or complex judgments, often requiring us to make estimates about the effect of matters that are inherently uncertain and which may change in subsequent periods, or for which the use of different estimates that could have reasonably been used in the current period would have had a material impact on the presentation of our financial condition and results of operations. A sustained loss of consumer confidence which may be caused by continued economic slowdown, recession, changes in consumer preferences, rising fuel prices, financial crisis or other factors have combined to increase the uncertainty inherent in such estimates and assumptions.

 

The following is not intended to be a comprehensive list of all our accounting policies. Our significant accounting policies are more fully described in Note (1) to the accompanying consolidated financial statements.

 

We have identified the following critical accounting policies with respect to our financial presentation.

 

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Product Warranty

 

We warrant our products for specific periods of time.

 

Product warranties vary depending upon the nature of the product, the geographic location of their sales and other factors.

 

We recognize costs for general warranties on products we sell and product recalls. We provide for estimated warranty costs at the time products are sold to customers or the time new warranty programs are initiated. Estimated warranty costs are provided based on historical warranty claim experience with consideration given to the expected level of future warranty costs, including current sales trends, the expected number of units to be affected and the estimated average repair cost per unit for warranty claims. Our products contain certain parts manufactured by third party suppliers. Since suppliers typically warrant these parts, the expected receivables from warranties of these suppliers are deducted from our estimates of accrued warranty obligations.

 

We believe our accrued warranty liability is a “critical accounting estimate” because changes in the calculation can materially affect net income attributable to Honda Motor Co., Ltd., and require us to estimate the frequency and amounts of future claims, which are inherently uncertain.

 

Our policy is to continuously monitor warranty cost accruals to determine the adequacy of the accrual. Therefore, warranty expense accruals are maintained at an amount we deem adequate to cover estimated warranty expenses.

 

Actual claims incurred in the future may differ from the original estimates, which may result in material revisions to the warranty expense accruals.

 

The changes in provisions for those product warranties and net sales and other operating revenue for each of the years in the three-year period ended March 31, 2010 are as follows:

 

     Yen (millions)  
     2008     2009     2010  

Provisions for product warranties

      

Balance at beginning of year

   ¥ 317,103      ¥ 293,760      ¥ 233,979   

Warranty claims paid during the period

     (137,591     (123,509     (86,886

Liabilities accrued for warranties issued during the period

     136,355        79,576        79,520   

Changes in liabilities for pre-existing warranties during the period

     (1,476     2,233        (3,571

Foreign currency translation

     (20,631     (18,081     2,996   
                        

Balance at end of year

   ¥ 293,760      ¥ 233,979      ¥ 226,038   
                        

Net sales and other operating revenue

   ¥ 12,002,834      ¥ 10,011,241      ¥ 8,579,174   

 

Credit Losses

 

Our finance subsidiaries provide retail lending and leasing to customers and wholesale financing to dealers primarily to support sales of our products, principally in North America. We classify retail and direct financing lease receivables derived from those services as finance subsidiaries-receivables. Operating leases are classified as property on operating leases. Certain finance receivables related to sales of inventory are included in trade receivables and other assets in the consolidated balance sheets. Receivables on past due operating lease rental payments are included in other current assets in the consolidated balance sheets.

 

The majority of the credit risk is with consumer financing and to a lesser extent with dealer financing. Estimated losses on finance receivables due to customer or dealer defaults are recognized in the allowance for

 

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credit losses. Estimated losses on past due operating lease rental payments are also recognized in the allowance for credit losses. In the case of property on operating leases, estimated losses due to customer defaults are not recognized in the allowance for credit losses because a loss is realized on the disposition of the property. Therefore we present these losses as impairment losses on property on operating leases.

 

Our portfolio of customer finance receivables is collectively evaluated for credit losses. They are segmented into groups with common characteristics including product and collateral types, credit grades, and original loan terms. For each of these groups, we estimate losses primarily based on our historic loss experiences, delinquency rates, recovery rates, taking factors into consideration such as changing economic conditions and changes in operational policies and procedures. Our portfolio of dealer finance receivables is evaluated for the allowance for credit losses on an individual dealer basis. Similar to our portfolio of customer finance receivables, our portfolio of receivables on past due operating lease rental payments is collectively evaluated for the allowance for credit losses. Property on operating leases are also collectively evaluated for impairment losses to be realized upon early disposition.

 

We believe our allowance for credit losses and impairment losses on operating leases is a “critical accounting estimate” because it requires significant judgment about inherently uncertain items. We regularly review the adequacy of the allowance for credit losses and impairment losses on operating leases. The estimates are based on information available as of each reporting date. However actual losses may differ from the original estimates as a result of actual results varying from those assumed in our estimates.

 

As an example of the sensitivity of the allowance calculation, the following scenario demonstrates the impact that a deviation in one of the primary factors estimated as a part of our allowance calculation would have on the provision and allowance for credit losses. If we had experienced a 10% increase in net credit losses during fiscal 2010 in our North America portfolio, the provision for fiscal 2010 and the allowance balance at the end of fiscal 2010 would have increased by approximately ¥5.7 billion and ¥2.8 billion, respectively. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2010.

 

Additional Narrative of the Change in Credit Loss

 

The following tables summarize our allowance for credit losses on finance receivables and related information in our North American portfolio:

 

     Yen (billions)  

For the year ended March 31, 2008

   Direct
financing
lease
    Retail     Wholesale     Total  

Provisions for credit losses

        

Balance at beginning of year

   ¥ 4.9      ¥ 23.7      ¥ 0.0      ¥ 28.7   

Provision

     2.1        42.7        (0.0     44.8   

Charge-offs (Net of recoveries)

     (4.7     (35.2     (0.0     (39.9

Change due to securitization activity

     —          (0.5     —          (0.5

Adjustments from foreign currency translation

     (0.2     (4.3     (0.0     (4.5
                                

Balance at end of year

   ¥ 2.1      ¥ 26.3      ¥ 0.0      ¥ 28.4   
                                

Ending receivable balance

   ¥ 1,019.5      ¥ 2,522.2      ¥ 348.5      ¥ 3,890.4   

Average receivable balance, net

   ¥ 1,371.1      ¥ 2,616.0      ¥ 329.7      ¥ 4,317.0   

Net Charge-offs as a % of average receivable balance

     0.34     1.35     0.00     0.93

Allowance as a % of ending receivable balance

     0.21     1.04     0.01     0.73

 

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     Yen (billions)  

For the year ended March 31, 2009

   Direct
financing
lease
    Retail     Wholesale     Total  

Provisions for credit losses

        

Balance at beginning of year

   ¥ 2.1      ¥ 26.3      ¥ 0.0      ¥ 28.4   

Provision

     3.0        45.9        0.8        49.7   

Charge-offs (Net of recoveries)

     (3.7     (40.3     (0.3     (44.4

Change due to securitization activity

     —          (1.4     —          (1.4

Adjustments from foreign currency translation

     (0.1     (0.7     (0.0     (0.9
                                

Balance at end of year

   ¥ 1.2      ¥ 29.7      ¥ 0.4      ¥ 31.4   
                                

Ending receivable balance

   ¥ 544.2      ¥ 2,527.2      ¥ 324.9      ¥ 3,396.4   

Average receivable balance, net

   ¥ 799.4      ¥ 2,745.5      ¥ 319.8      ¥ 3,864.7   

Net Charge-offs as a % of average receivable balance

     0.47     1.47     0.11     1.15

Allowance as a % of ending receivable balance

     0.23     1.18     0.15     0.93
     Yen (billions)  

For the year ended March 31, 2010

   Direct
financing
lease
    Retail     Wholesale     Total  

Provisions for credit losses

        

Balance at beginning of year

   ¥ 1.2      ¥ 29.7      ¥ 0.4      ¥ 31.4   

Provision

     1.4        25.7        0.1        27.3   

Charge-offs (Net of recoveries)

     (1.6     (27.0     (0.1     (28.8

Change due to securitization activity

     —          —          —          —     

Adjustments from foreign currency translation

     0.1        (1.3     (0.0     (1.2
                                

Balance at end of year

   ¥ 1.1      ¥ 27.1      ¥ 0.4      ¥ 28.6   
                                

Ending receivable balance

   ¥ 372.9      ¥ 2,547.1      ¥ 292.1      ¥ 3,212.2   

Average receivable balance, net

   ¥ 417.7      ¥ 2,490.5      ¥ 274.1      ¥ 3,182.4   

Net Charge-offs as a % of average receivable balance

     0.41     1.08     0.06     0.91

Allowance as a % of ending receivable balance

     0.30     1.06     0.15     0.89

 

The following table provides information related to losses on operating leases due to customer defaults:

 

     Yen (billions)
         2008            2009            2010    

Provision for credit losses on past due rental payments

   ¥ 0.6    ¥ 2.0    ¥ 1.9

Impairment losses on operating leases due to early termination

   ¥ 5.8    ¥ 8.7    ¥ 3.3

 

Fiscal Year 2010 Compared with Fiscal Year 2009

 

The provision for credit losses on finance receivables decreased by ¥22.4 billion, or 45%, and net charge-offs decreased by ¥15.5 billion, or 35%. Impairment losses on operating leases due to early termination decreased by ¥5.4 billion, or 62%. The declines in losses and delinquencies reflect the improvement in the overall credit quality of our North American portfolio as a result of stricter purchasing standards implemented in prior years, focused collection efforts, stabilization of the economy, and improvements in used vehicle prices.

 

Fiscal Year 2009 Compared with Fiscal Year 2008

 

The provision for credit losses increased by ¥4.9 billion, or 11%, reflecting the continued deterioration of the U.S. economy which negatively affected certain customers’ ability to meet their contractual obligations despite the effect of exchange rate changes. Net charge-offs increased by ¥4.5 billion, or 11%. The ending allowance balance increased by ¥3.0 billion, or 11%, reflecting the higher estimate of losses incurred despite the effect of exchange rate changes.

 

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Losses due to customer defaults on operating leases are not recognized in the provision for credit losses. These losses are recognized as a component of impairment losses on operating leases. Impairment losses recognized totaled ¥8.7 billion and ¥5.8 billion for fiscal years 2009 and 2008, respectively. Higher losses were due to the increasing volume of leases that are accounted for as operating leases.

 

Losses on Lease Residual Values

 

Our finance subsidiaries in North America establish contract residual values of lease vehicles at lease inception based on expectations of future used vehicle values, taking into consideration external industry data. End-customers of leased vehicles typically have an option to buy the leased vehicle for the contractual residual value of the vehicle or to return the vehicle to our finance subsidiaries through the dealer at the end of the lease term. Likewise, dealers have the option to buy the vehicle returned by the customer or to return the vehicle to our finance subsidiaries. The likelihood that the leased vehicle will be purchased varies depending on the difference between the contractual residual value and the actual market value of the vehicle at the end of the lease term. We are exposed to risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values at the end of the lease term. For direct financing leases, our finance subsidiaries in North America purchase insurance to cover a portion of the estimated residual value.

 

Our finance subsidiaries in North America have historically accounted for all leases as direct financing leases. However, starting in the fiscal year ended March 31, 2007, some of the leases which do not qualify for direct financing leases accounting treatment are accounted for as operating leases.

 

We periodically review the estimate of residual values. For vehicle leases accounted for as operating leases, the adjustments to estimated residual values result in changes to the remaining depreciation expense to be recognized prospectively on a straight-line basis over the remaining term of the lease.

 

For vehicle leases accounted for as direct financing leases, downward adjustments are made for declines in estimated residual values that are deemed to be other-than-temporary. The adjustments on the uninsured portion of the vehicle’s residual value are recognized as a loss in the period in which the estimate changed.

 

The primary components in estimating losses on lease residual values are the expected frequency of returns, or the percentage of leased vehicles we expect to be returned by customers at the end of the lease term, and the expected loss severity, or the expected difference between the residual value and the amount we receive through sales of returned vehicles plus proceeds from insurance, if any. We estimate losses on lease residual values by evaluating several different factors, including trends in historical and projected used vehicle values and general economic measures.

 

We also test our operating leases for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable.

 

Recoverability of operating leases to be held is measured by a comparison of the carrying amount of operating leases to future net cash flows (undiscounted and without interest charges) expected to be generated by the operating leases. If such operating leases are considered to be impaired, impairment losses to be recognized is measured by the amount by which the carrying amount of the operating leases exceeds the estimated fair value of the operating leases.

 

We believe that our estimated losses on lease residual values and impairment losses is a “critical accounting estimate” because it is highly susceptible to market volatility and requires us to make assumptions about future economic trends and lease residual values, which are inherently uncertain. We believe that the assumptions used are appropriate. However actual losses incurred may differ from original estimates as a result of actual results varying from those assumed in our estimates.

 

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If future auction values for all Honda and Acura vehicles in our North American operating lease portfolio as of March 31, 2010, were to decrease by approximately ¥10,000 per unit from our present estimates, holding all other assumption constant, the total impact would be an increase in depreciation expense by approximately ¥2.3 billion, which would be recognized over the remaining lease terms. Similarly, if future return rates for our existing portfolio of all Honda and Acura vehicles were to increase by one percentage point from our present estimates, the total impact would be an increase in depreciation expense by approximately ¥ 0.5 billion, which would be recognized over the remaining lease terms. With the same prerequisites shown above, the impacts to the direct financing lease portfolio would be an increase in losses on lease residual values by approximately ¥ 0.3 billion and ¥ 0.2 billion. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2010. Also, declines in auction values are likely to have a negative effect on return rates which could affect the sensitivities.

 

Fiscal Year 2010 Compared with Fiscal Year 2009

 

During fiscal year 2010, used vehicle prices recovered from the severe declines that were experienced in prior years. The improvement in prices was attributable in part to lower used vehicle supplies and stabilization in the economy during the year. No impairment losses as a result of declines in estimated residual values were recognized during fiscal year 2010.

 

Incremental depreciation on operating leases due to the declines in estimated residual values increased by ¥0.6 billion, or 5%. Losses on lease residual values declined by ¥15.8 billion, or 69%, primarily due to the declines in direct financing leases.

 

Fiscal Year 2009 Compared with Fiscal Year 2008

 

Despite a declining portfolio of direct financing leases and the effect of exchange rate changes, losses on lease residual values increased by ¥11.1 billion or 94% as a result of the declines in used vehicle prices. Despite the effect of exchange rate changes, incremental depreciation increased by ¥11.6 billion or 545% due to the increase in operating lease assets and declines in estimated residual values.

 

As a result of declines in estimated residual values, certain operating lease assets met impairment conditions and impairment losses of ¥9.7 billion were recognized during the year.

 

Pension and Other Postretirement Benefits

 

We have various pension plans covering substantially all of our employees in Japan and certain employees in foreign countries. Benefit obligations and pension costs are based on assumptions of many factors, including the discount rate, the rate of salary increase and the expected long-term rate of return on plan assets. The discount rate is determined mainly based on the rates of high quality corporate bonds currently available and expected to be available during the period to maturity of the defined benefit pension plans. The salary increase assumptions reflect our actual experience as well as near-term outlook. Honda determines the expected long-term rate of return based on the investment policies. Honda considers the eligible investment assets under investment policies, historical experience, expected long-term rate of return under the investing environment, and the long-term target allocations of the various asset categories. Our assumed discount rate and rate of salary increase as of March 31, 2010 were 2.0% and 2.3%, respectively, and our assumed expected long-term rate of return for the year ended March 31, 2010 was 3.0% for Japanese plans. Our assumed discount rate and rate of salary increase as of March 31, 2010 were 5.6-6.5% and 1.5-5.3%, respectively, and our assumed expected long-term rate of return for fiscal 2010 was 6.5-8.0% for foreign plans.

 

We believe that the accounting estimates related to our pension plans is “critical accounting estimate” because changes in these estimates can materially affect our financial condition and results of operations.

 

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Actual results may differ from our assumptions, and the difference is accumulated and amortized over future periods. Therefore, the difference generally will be reflected as our recognized expenses in future periods. We believe that the assumptions currently used are appropriate, however, differences in actual expenses or changes in assumptions could affect our pension costs and obligations, including our cash requirements to fund such obligations.

 

The following table shows the effect of a 0.5% change in the assumed discount rate and the expected long-term rate of return on our funded status, equity, and pension expense.

 

Japanese Plans

 

      Yen (billions)

Assumptions

   Percentage
Point
Change (%)
   Funded
status
   Equity    Pension
expense

Discount rate

   +0.5/-0.5    -84.9/+95.7    +36.9/-47.7    -4.0/+4.2

Expected long-term rate of return

   +0.5/-0.5    —      —      -3.7/+3.7

 

Foreign Plans

 

     Yen (billions)

Assumptions

   Percentage
Point
Change (%)
   Funded
status
   Equity    Pension
expense

Discount rate

   +0.5/-0.5    -31.0/+34.2    +18.5/-20.2    -3.0/+3.3

Expected long-term rate of return

   +0.5/-0.5    —      —      -1.8/+1.8

 

(*1)

Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions at March 31, 2010.

 

(*2)

Funded status for fiscal 2010 is affected by March 31, 2010 assumptions.

     Pension expense for fiscal 2010 is affected by March 31, 2009 assumptions.

 

Income Taxes

 

Honda adopted the provision of Financial Accounting Standards Board (FASB) Interpretation (FIN) No.48, “Accounting for Uncertainty in Income Taxes” which is now codified in the FASB Accounting Standards Codification (ASC) 740 “Income Taxes” on April 1, 2007. Honda is subject to income tax examinations in many tax jurisdictions because Honda conducts its operations in various regions of the world. We recognize the tax benefit from an uncertain tax position based on the technical merits of the position when the position is more likely than not to be sustained upon examination. Benefits from tax positions that meet the more likely than not recognition threshold are measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate resolution. We performed a comprehensive review of any uncertain tax positions in accordance with this statement.

 

We believe our accounting for tax uncertainties is a “critical accounting estimate” because it requires us to evaluate and assess the probability of the outcome that could be realized upon ultimate resolution. Our estimates may change in the future due to new developments.

 

We believe that our estimates and assumptions of unrecognized tax benefits are reasonable, however, if our estimates of unrecognized tax benefits and potential tax benefits are not representative of actual outcomes, our consolidated financial statements could be materially affected in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution.

 

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New Accounting Pronouncements

 

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13 “Multiple—Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force”, which will amend the FASB Accounting Standards Codification (ASC) 605 “Revenue Recognition” for arrangements with multiple deliverables to allow vendors to account for products and services separately rather than as a combined unit. This standard requires allocation of the overall consideration to each deliverable in an arrangement with multiple deliverables using the estimated selling price in the absence of vendor-specific objective evidence or third-party evidence of selling price for deliverables and eliminate residual method of allocation. This standard is effective as of an entity’s fiscal year beginning after June 15, 2010. Management is currently evaluating the impact of this standard on the Company’s consolidated financial position or results of operations.

 

B. Liquidity and Capital Resources

 

Overview of Capital Requirements, Sources and Uses

 

The policy of Honda is to support its business activities by maintaining sufficient capital resources, a sufficient level of liquidity and a sound balance sheet.

 

Honda’s main business is the manufacturing and sale of motorcycles, automobiles and power products. To support this business, it also provides retail financing and automobile leasing services for customers, as well as wholesale financing services for dealers.

 

Honda requires operating capital mainly to purchase parts and raw materials required for production, as well as to maintain inventory of finished products and cover receivables from dealers and for providing financial services. Honda also requires funds for capital expenditures, mainly to introduce new models, upgrade, rationalize and renew production facilities, as well as to expand and reinforce sales and R&D facilities.

 

Honda meets its operating capital requirements primarily through cash generated by operations, bank loans and the issuance of corporate bonds. The year-end balance of liabilities associated with the Company and its subsidiaries’ funding for non-financial services businesses was ¥410.3 billion as of March 31, 2010. In addition, the Company’s finance subsidiaries fund financial programs for customers and dealers primarily from medium-term notes, commercial paper, corporate bonds, bank loans, securitization of finance receivables and intercompany loans. The year-end balance of liabilities associated with these finance subsidiaries’ funding for financial services business was ¥4,243.7 billion as of March 31, 2010.

 

Cash Flows

 

Consolidated cash and cash equivalents for the year ended March 31, 2010 increased by ¥429.5 billion from March 31, 2009, to ¥1,119.9 billion. The reasons for the increases or decreases for each cash flow activity are as follows:

 

Net cash provided by operating activities amounted to ¥1,544.2 billion of cash inflows. Cash inflows from operating activities increased by ¥1,160.5 billion compared with the previous fiscal year, due mainly to decreased payments for parts and raw materials primarily due to a decrease in automobile production and decreased payments for operating expenses, which was partially offset by a decrease in cash received from customers, primarily due to lower unit sales in the automobile business.

 

Net cash used in investing activities amounted to ¥595.7 billion of cash outflows, due mainly to the acquisitions of finance subsidiaries-receivables, the purchase of operating lease assets and capital expenditures, which was partially offset by collections of finance subsidiaries-receivables and proceeds from sales of operating lease assets. Cash outflows from investing activities decreased by ¥537.6 billion compared with the previous fiscal year, due mainly to a decrease in acquisitions of finance subsidiaries-receivables, capital expenditures and purchases of operating lease assets, which was partially offset by a decrease in collections of finance subsidiaries-receivables and proceeds from sales of finance subsidiaries-receivables.

 

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Net cash used in financing activities amounted to ¥559.2 billion of cash outflows, due mainly to repayments of long-term debts, a decrease in short-term debt and dividends paid, which was partially offset by proceeds from long-term debt. Cash outflows from financing activities increased by ¥1,090.1 billion compared with the previous fiscal year, due mainly to a decrease in short-term debt.

 

Liquidity

 

The ¥1,119.9 billion in cash and cash equivalents at the end of the fiscal 2010 year corresponds to approximately 1.6 months of net sales, and Honda believes it has sufficient liquidity for its business operations.

 

At the same time, Honda is aware of the possibility that various factors, such as recession-induced market contraction and financial and foreign exchange market volatility, may adversely affect liquidity. For this reason, finance subsidiaries that carry total short-term borrowings of ¥1,385.0 billion have committed lines of credit equivalent to ¥859.9 billion that serve as alternative liquidity for the commercial paper issued regularly to replace debt. Honda believes it currently has sufficient credit limits, extended by prominent international banks, as of the date of the filing of Honda’s form 20-F.

 

Honda’s short- and long-term debt securities are rated by credit rating agencies, such as Moody’s Investors Service, Inc., Standard & Poor’s Rating Services, and Rating and Investment Information, Inc. The following table shows the ratings of Honda’s unsecured debt securities by Moody’s, Standard & Poor’s and Rating and Investment Information as of March 31, 2010.

 

     Credit ratings for
     Short-term
unsecured debt securities
   Long-term
unsecured debt securities

Moody’s Investors Service

   P-1    A1

Standard & Poor’s Rating Services

   A-1    A+

Rating and Investment Information

   a-1+    AA

 

The above ratings are based on information provided by Honda and other information deemed credible by the rating agencies. They are also based on the agencies’ assessment of credit risk associated with designated securities issued by Honda. Each rating agency may use different standards for calculating Honda’s credit rating, and also makes its own assessment. Ratings can be revised or nullified by agencies at any time. These ratings are not meant to serve as a recommendation for trading in or holding Honda’s unsecured debt securities.

 

C. Research and Development

 

The Company and its consolidated subsidiaries use the most advanced technologies to conduct R&D activities aimed at creating distinctive products that are internationally competitive. The Group’s main R&D divisions operate independently as subsidiaries, allowing technicians to pursue their tasks with significant freedom. Product-related R&D is spearheaded by Honda R&D Co., Ltd.; Honda R&D Americas, Inc. in the United States; and Honda R&D Europe (Deutschland) GmbH in Germany. R&D on production technologies centers around Honda Engineering Co., Ltd. in Japan and Honda Engineering North America, Inc. All of these entities work in close association with our other entities and businesses in their respective regions.

 

Total consolidated R&D expenses for the year ended March 31, 2010 amounted to ¥463.3 billion. Total consolidated R&D expenses for the year ended March 31, 2009 amounted to ¥563.1 billion.

 

Motorcycle Business

 

In the motorcycle business, Honda is committed to developing products with new value-added features that meet the needs of customers around the world and to implementing the timely local development of products suited to specific regions at its overseas locations. Along with these activities, we are focusing on developing technologies that address safety and environmental issues.

 

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Major developments in Japan in fiscal 2010 included the development of the world’s first dual clutch transmission that converts a multispeed motorcycle transmission to fully automatic operation and gives both sportier riding performance and better fuel economy. In addition, in Japan and North America, by separating the swinger arm and final gear and adopting the Honda original floating final gear, which is the first of its kind in the world, we were able to launch the VT1300CX large cruiser model motorcycle (sold under the name Fury in North America). This new model takes the combination of stable driving performance and a beautiful design to new heights. Also, in Japan as well as North America, Europe, Oceania, and elsewhere, we launched the VFR1200F large sports tourer motorcycle incorporating a throttle-by-wire system, which is optimal for a wide range of driving scenes, equipped for the first time on Honda motorcycles with a newly developed, fully electronically operated throttle valve. In addition, in Japan and Thailand, we introduced the 125cc class PCX scooter, which is the first of its kind in the world to incorporate an ACG starter that offers a quieter engine start-up. The PCX scooter is also the first domestic scooter in its class to have an idling stop system that automatically cuts off the engine temporarily when stopping at traffic signals and in other situations. Additionally, in Thailand, we developed a new-type CV-matic automatic transmission, which can be combined with Cub-type engines, and installed it on the newly launched WAVE 100iAT cub-type bike.

 

R&D expenses in this segment in fiscal 2010 were ¥64.7 billion. R&D expenses in this segment in fiscal 2009 were ¥85.5 billion, which reflects a correction from the amount previously disclosed. No revisions have been made to the prior year’s consolidated financial statements or to the notes thereto.

 

Automobile Business

 

In the Automobile Business segment, we have substantially strengthened our drive to develop innovative and creative technologies as well as offer products with new value-added that exceed the expectations of our customers. We are also actively developing technologies that provide advanced safety performance and address environmental issues.

 

Major achievements in Japan during fiscal 2010 included a full model change on the STEPWGN. The new model lineup provides the largest possible interior space in the 2,000cc-or-lower five series number plate as well as greatly improved flexibility through the inclusion of a space for folding and storing the third row of seats under the floor, the first time for this feature to be made available on this vehicle class. The STEPWGN also delivers the top fuel economy performance in its class. We also made a full model change in the ACTY truck, improving its turning ratio and cornering performance. The new ACTY model features a bigger cabin, is easier to mount and dismount, and gives a more comfortable ride. We have also expanded the use of galvanized sheet iron in the new ACTY’s design to improve the vehicle’s resistance to corrosion. Also, we introduced a new sports-type hybrid car, the CR-Z, which combines the fun of driving with top-class fuel economy. The CR-Z is the first hybrid car in the world to offer a six-speed manual transmission, and it combines Honda’s 1.5-liter i-VTEC engine with Honda’s original integrated motor assist (IMA) hybrid system. The CR-Z offers a three-mode driving system to suit driver preferences and meet the needs of a broad range of driving scenes and styles. Moreover, in North America, we newly launched the Accord Crosstour, which combines excellent fuel economy through incorporation of variable cylinder management and a high degree of utility in use. We also introduced the Acura ZDX, which offers both our newly developed, six-speed automatic transmission for a powerful ride and top-class fuel economy.

 

R&D expenses in this segment in fiscal 2010 were ¥369.3 billion. R&D expenses in this segment in fiscal 2009 were ¥445.7 billion, which reflects a correction from the amount previously disclosed. No revisions have been made to the prior year’s consolidated financial statements or to the notes thereto.

 

Power Product and Other Businesses

 

In the Power Product Business, we are working to develop products that contribute to customers’ lifestyles, while strengthening our lineup of offerings that address environmental issues.

 

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Principal developments in this segment in Japan included the announcement of our enepoEU9iGB electric generators, which are powered by household LPG butane gas canisters. This fuel input method makes it easier for users to purchase fuel and use these generators as well as store the generator units for long periods without being concerned about fuel clogging. These generators also have large wheels, which make them easier to move, as well as fold-up handles, making them easier to put away and store. Also in Japan, we introduced the UMR425 backpack-style brush cutter, which retains the ease of use on slopes and in narrow spaces of portable brush cutters but helps to reduce accidents in farming work by allowing the immediate release of the device’s belt at the touch of a button. In addition, we implemented the global launch of the EU26i handy electric power generator. This generator is based on Honda’s original sine-wave inverter technology and supplies electricity comparable in quality and reliability to commercially-generated power, but is also light, compact and relatively quiet (This product is sold under the name EU3000iHandy in North America and in other areas as the EU30i).

 

R&D expenses in this segment in fiscal 2010 were ¥29.2 billion. R&D expenses in this segment in fiscal 2009 were ¥31.9 billion, which reflects a correction from the amount previously disclosed. No revisions have been made to the prior year’s consolidated financial statements or to the notes thereto.

 

Fundamental Research

 

In fundamental research, Honda is pursuing steady and broad-ranging research activities into technologies that may lead to the development of innovative, future products.

 

Principal fundamental research initiatives include the public announcement of the U3-X test-model, personal mobility unit. This compact, one-wheel personal mobility device combines the balance control technology developed for Honda’s ASIMO bipedal humanoid robot with the Honda Omni Traction Drive System, which is the first device of its kind in the world that can move not only back and forth but also right and left as well as at any angle. Looking ahead, we will continue R&D in this area, including the verification of the device in practical situations. In addition, Honda has announced success in synthesizing high-purity metal carbon nanotube compounds through joint research conducted by Honda Research Institute USA, Inc., Purdue University (in Indiana) and the University of Louisville (in Kentucky). This breakthrough is expected to open up new possibilities for the development of high-performance, high-efficiency, compact materials and compound materials that will find application in energy storage, solar batteries, fuel cells, power transmission systems, automobiles, aircraft, and other areas. We are moving ahead with R&D to make commercial use of these carbon nanotube compounds possible.

 

Expenses incurred in fundamental research are distributed among Honda’s business segments.

 

Patents and Licenses

 

At March 31, 2010, Honda owned more than 14,800 patents in Japan and more than 22,900 patents abroad. Honda also had applications pending for more than 16,500 patents in Japan and for more than 17,800 patents abroad. While Honda considers that, in the aggregate, Honda’s patents are important, it does not consider any one of such patents, or any related group of them, to be of such importance that the expiration or termination thereof would materially affect Honda’s business.

 

D. Trend Information

 

See Item 5. A “Operating and Financial Review and Prospects” for information required by this item.

 

E. Off-Balance Sheet Arrangements

 

(Securitization)

 

For the purpose of accelerating the receipt of cash related to our finance receivables, our finance subsidiaries periodically securitize and sell pools of these receivables. In these securitizations, our finance subsidiaries sell a portfolio of finance receivables to a special purpose entity, which is established for the limited

 

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purpose of buying and reselling finance receivables. Our finance subsidiaries remain as a servicer of the finance receivables and are paid a servicing fee for our services. The special purpose entity transfers the receivables to a trust which is newly structured for each securitization or bank conduit, which issues asset-backed securities or commercial paper, respectively, to investors. Our finance subsidiaries retain certain subordinated interests in the sold receivables in the form of subordinated certificates, servicing assets and residual interests in certain cash reserves provided as credit enhancements for investors. Our finance subsidiaries apply significant assumptions regarding prepayments, credit losses and average interest rates in estimating expected cash flows from the trust or bank conduit, which affect the recoverability of our retained interests in the sold finance receivables. We periodically evaluate these assumptions and adjust them, if appropriate, to reflect the performance of the finance receivables.

 

We have not historically consolidated trusts since these trusts meet the definitions of a qualifying special purpose entity (QSPE) . The trusts which were structured in North America in the fiscal year ended March 31, 2010 did not meet the conditions to be a QSPE. In addition, we deemed that the total equity investments of these trusts at risk were not sufficient to finance their activities without additional subordinated financial support provided by our finance subsidiaries. Accordingly we recognized these trusts as VIEs. Furthermore, as the finance subsidiaries retain certain subordinated interests of these trusts and it is expected that we would absorb the majority of the expected losses of these trusts, we have consolidated these trusts. Information about finance subsidiaries-receivables and securitizations is described in Note (2), information about variable interest entities is described in Note (3) to the accompanying consolidated financial statements.

 

(Guarantee)

 

At March 31, 2010, we guaranteed ¥31.7 billion of employee bank loans for their housing costs. If an employee defaults on his/her loan payments, we are required to perform under the guarantee. The undiscounted maximum amount of our obligation to make future payments in the event of defaults is ¥31.7 billion. As of March 31, 2010, no amount was accrued for any estimated losses under the obligations, as it was probable that the employees would be able to make all scheduled payments.

 

F. Tabular Disclosure of Contractual Obligations

 

The following table shows our contractual obligations at March 31, 2010:

 

Contractual Obligations

 

     At March 31, 2010
     Yen(millions)
     Payments due by period
     Total    Less than
1 year
   1-3
years
   3-5
years
   After
5 years

Long-term debt

   3,035,331    722,296    1,496,585    730,820    85,630

Operating leases

   117,027    22,556    28,892    17,362    48,217

Purchase commitments * 1

   47,436    47,436    —      —      —  

Interest payments *2

   337,573    146,794    155,062    33,597    2,120

Contributions to defined benefit pension plans *3

   81,544    81,544    —      —      —  

Total

   3,618,911    1,020,626    1,680,539    781,779    135,967

 

* 1

Honda had commitments for purchases of property, plant and equipment at March 31, 2010.

 

*2

To estimate the schedule of interest payments, the company utilized the balances and average interest rates of borrowings and debts and derivative instruments as of March 31, 2010.

 

*3

Since contributions beyond the next fiscal year are not currently determinable, contributions to defined benefit pension plans reflect only contributions expected for the next fiscal year.

 

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If our estimates of unrecognized tax benefits and potential tax benefits are not representative of actual outcomes, our consolidated financial statements could be materially affected in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Since it is difficult to estimate actual payment in the future related to our uncertain tax positions, unrecognized tax benefit totaled ¥109,473 million is not represented in the table above.

 

At March 31, 2010, we had no material capital lease obligations or long-term liabilities reflected on our balance sheet under U.S. GAAP other than those set forth in the table above.

 

G. Safe Harbor

 

All information disclosed under Item 5. E and F contains “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

 

Such statements are based on management’s assumptions and beliefs taking into account information currently available to it. Therefore, please be advised that Honda’s actual results could differ materially from those described in these forward-looking statements as a result of numerous factors, including general economic conditions in Honda’s principal markets and foreign exchange rates between the Japanese yen and the U.S. dollar, the Euro and other major currencies, as well as other factors detailed from time to time.

 

Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

 

Honda’s articles of incorporation provide for a Board of Directors of not more than 30 Directors and for a Board of Corporate Auditors of not more than seven Corporate Auditors. Directors and Corporate Auditors are elected by resolutions of the general meetings of shareholders. The Corporate Auditors are nominated by the Board of Directors as candidates for election with approval by the Board of Corporate Auditors. The normal term of office of a Director is one year and that of a Corporate Auditor is four years. Directors and Corporate Auditors may serve any number of consecutive terms.

 

The Board of Directors appoints one President and Director and may appoint one Chairman of the Board of Directors and several Executive Vice Presidents and Directors, Senior Managing Directors and Managing Directors from among its members. The President represents the Company. In addition, the Board of Directors may appoint, pursuant to its resolutions, Directors who shall each represent the Company. Under the Company Law of Japan, a representative director individually has authority to represent the Company generally in the conduct of its affairs. The Board of Directors has the ultimate responsibility for the administration of the affairs of the Company.

 

Under the Company Law, the Corporate Auditors of the Company have the duty to audit the Director’s execution of their duties. Corporate Auditors are not required to be, and the Corporate Auditors of the Company are not, certified public accountants, and may not at the same time be Directors or employees of the Company or any of its subsidiaries. They are entitled to participate in meetings of the Board of Directors but are not entitled to vote. Corporate Auditors of the Company form the Board of Corporate Auditors, which must consist of at least three Corporate Auditors. Not less than half of the members of the Board of Corporate Auditors must be outside Corporate Auditors, each of whom has never served as a director, accounting councilor, operating officer, manager or employee of the Company or any of its subsidiaries. Corporate Auditors are required to elect from among themselves at least one Standing Corporate Auditor. Corporate Auditors also have a statutory duty to provide their report to the Board of Corporate Auditors, which must submit its audit report to the Representative Director each year. A Corporate Auditor may note his or her opinion in the audit report if his or her opinion is different from the opinion expressed in the audit report. The Board of Corporate Auditors is empowered to

 

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establish audit principles, methods of investigation by Corporate Auditors of the status of the corporate affairs, and assets of the Company and other matters concerning the performance of the Corporate Auditors’ duties. In addition, the Company is required to appoint independent certified public accountants as accounting auditor. Such independent certified public accountants have as their primary statutory duties to audit the consolidated and non-consolidated financial statements of the Company prepared in accordance with the Company Law to be submitted by the Representative Director to general meetings of shareholders and to prepare an accounting audit report thereon and to notify the contents of such report to the specified Corporate Auditor and the specified Director in charge.

 

The following table provides the names of all Directors and Corporate Auditors of the Company and the current positions held by such persons.

 

Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Representative Directors

        

Takanobu Ito

(August 29, 1953)

  

Director of the Company from June 2000

 

President and Director of the Company,

appointed in June 2009

 

President and Director of Honda R&D Co., Ltd.,

appointed in April 2009

 

Senior Managing Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Automobile Operations,

appointed in April 2007

 

Managing Officer of the Company,

appointed in June 2005

 

General Manager of Suzuka Factory of Production Operations,

appointed in April 2005

 

General Supervisor, Motor Sports,

appointed in April 2004

 

Managing Director of the Company,

appointed in June 2003

 

Motor Sports,

appointed in June 2003

 

President and Director of Honda R&D Co., Ltd.,

appointed in June 2003

 

Senior Managing Director of Honda R&D Co., Ltd.,

appointed in June 2001

 

Director of the Company,

appointed in June 2000

 

Executive Vice President of Honda R&D Americas, Inc.,

appointed in April 1998

 

Joined Honda in April 1978

   *3    12,900

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Koichi Kondo

(February 13, 1947)

  

Director of the Company from June 1997

 

Compliance Officer,

appointed in April 2010 (presently held)

 

Government & Industrial Affairs,

appointed in April 2010 (presently held)

 

Executive Vice President and Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Regional Sales Operations (Japan),

appointed in April 2007

 

Chairman and Director of American Honda Motor Co., Inc.,

appointed in April 2007

 

Senior Managing Director of the Company,

appointed in June 2005

 

President and Director of Honda North America, Inc.,

appointed in April 2005

 

Chief Operating Officer for Regional Operations

(North America),

appointed in April 2004

 

President and Director of American Honda Motor Co., Inc.,

appointed in June 2003

 

Executive Vice President and Director of

American Honda Motor Co., Inc.,

appointed in April 2003

 

Managing Director of the Company,

appointed in June 2002

 

Chief Operating Officer for Regional Operations

(Latin America),

appointed in April 2000

 

Director of the Company,

appointed in June 1997

 

President and Director of Honda Motor do Brasil Ltda.

(presently Honda South America Ltda.),

appointed in June 1996

 

President and Director of Moto Honda da Amazonia Ltda.,

appointed in June 1996

 

President and Director of Honda Automoveis do Brasil Ltda.,

appointed in June 1996

 

Joined Honda in April 1970

   *3    16,900

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Directors

        

Shigeru Takagi

(February 4, 1952)

  

Director of the Company from June 1998

 

Senior Managing Director of the Company,

appointed in June 2008

 

Managing Director of the Company,

appointed in June 2004

 

Chief Operating Officer for Regional Operations

(Europe, the Middle & Near East and Africa),

appointed in April 2004 (presently held)

 

President and Director of Honda Motor Europe Limited,

appointed in April 2004 (presently held)

 

President and Director of Honda Canada Inc.,

appointed in June 1998

 

Director of the Company,

appointed in June 1998

 

Joined Honda in April 1974

   *3    16,200

Akio Hamada

(December 2, 1948)

  

Director of the Company from June 1999

 

General Supervisor, Quality,

appointed in April 2009 (presently held)

 

Senior Managing Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Production Operations,

appointed in April 2008 (presently held)

 

Risk Management Officer,

appointed in April 2008 (presently held)

 

General Supervisor, Information Systems,

appointed in April 2008 (presently held)

 

Managing Officer of the Company,

appointed in June 2005

 

President and Director of Honda of America Mfg., Inc.,

appointed in April 2005

 

President and Director of Honda Engineering Co., Ltd.,

appointed in June 2001

 

Director of the Company,

appointed in June 1999

 

Stationed at Honda Canada Inc. in June 1998

 

Joined Honda in April 1971

   *3    12,600

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Tetsuo Iwamura

(May 30, 1951)

  

Director of the Company from June 2000

 

Senior Managing Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Regional Operations

(North America),

appointed in April 2007 (presently held)

 

President and Director of Honda North America, Inc.,

appointed in April 2007 (presently held)

 

President and Director of American Honda Motor Co., Inc.,

appointed in April 2007 (presently held)

 

Managing Director of the Company,

appointed in June 2006

 

Chief Operating Officer for Regional Operations

(Latin America),

appointed in April 2003

 

President and Director of Honda South America Ltda.,

appointed in April 2003

 

President and Director of Moto Honda da Amazonia Ltda.,

appointed in April 2003

 

President and Director of Honda Automoveis do Brasil Ltda.,

appointed in April 2003

 

Director of the Company,

appointed in June 2000

 

Chief Operating Officer for Parts Operations,

appointed in April 2000

 

Joined Honda in April 1978

   *3    13,800

Tatsuhiro Oyama

(July 9, 1950)

  

Director of the Company from June 2001

 

Senior Managing Director of the Company,

appointed in June 2010

 

Chief Officer of Driving Safety Promotion Center,

appointed in April 2010 (presently held)

 

Chief Operating Officer for Motorcycle Operations,

appointed in April 2008 (presently held)

 

Managing Director of the Company,

appointed in June 2006

 

Chief Operating Officer for Regional Operations

(Asia & Oceania),

appointed in April 2006

 

President and Director of Asian Honda Motor Co., Ltd.,

appointed in April 2006

   *3    16,300

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Chief Operating Officer for Parts Operations,

appointed in April 2003

 

President and Director of Honda Motorcycle Japan Co., Ltd.,

appointed in August 2001

 

Director of the Company,

appointed in June 2001

 

General Manager of Motorcycle Sales Division for Regional Sales Operations (Japan),

appointed in April 2001

 

Joined Honda in April 1969

     

Fumihiko Ike

(May 26, 1952)

  

Director of the Company from June 2003

 

Chief Operating Officer for Regional Operations

(Asia & Oceania),

appointed in April 2008 (presently held)

 

President and Director of Asian Honda Motor Co., Ltd.,

appointed in April 2008 (presently held)

 

Managing Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Business Management Operations,

appointed in April 2006

 

Director of the Company,

appointed in June 2003

 

Chief Operating Officer for Power Product Operations,

appointed in April 2003

 

Joined Honda in February 1982

   *3    15,100

Masaya Yamashita

(April 5, 1953)

  

Director of the Company from June 2003

 

Managing Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Purchasing Operations,

appointed in April 2008 (presently held)

 

General Manager of Kumamoto Factory of Production Operations,

appointed in April 2006

 

Operating Officer of the Company,

appointed in June 2005

 

Director of the Company,

appointed in June 2003

 

General Manager of Automobile Purchasing Division 1 in Purchasing Operations,

appointed in April 2002

 

Joined Honda in April 1977

   *3    12,600

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned

Tomohiko Kawanabe

(May 17, 1952)

  

Director of the Company from June 2010

 

Managing Director of the Company,

appointed in June 2010

 

President and Director of Honda R&D Co., Ltd.,

appointed in April 2010 (presently held)

 

Senior Managing Director of Honda R&D Co., Ltd.,

appointed in June 2005

 

Managing Director of Honda R&D Co., Ltd.,

appointed in June 2002

 

Joined Honda in April 1977

   *3    7,400

Kensaku Hogen

(August 2, 1941)

  

Director of the Company from June 2005

 

Director of the Company,

appointed in June 2005

 

Ambassador to Canada,

appointed in April 2001

   *3    800

Nobuo Kuroyanagi

(December 18, 1941)

  

Director of the Company from June 2009

 

Director of Mitsubishi UFJ Financial Group, Inc. (MUFG),

appointed in April 2010 (presently held)

 

Director of the Company,

appointed in June 2009

 

Chairman of The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU),

appointed in April 2008 (presently held)

 

President and CEO of MUFG,

appointed in October 2005

   *3    300

Takeo Fukui

(November 28, 1944)

  

Director of the Company from June 1988

 

Director and Advisor of the Company,

appointed in June 2009

 

President and Director of the Company,

appointed in June 2003

 

Motor Sports,

appointed in June 1999

 

Senior Managing Director of the Company,

appointed in June 1999

 

President and Director of Honda R&D Co., Ltd.,

appointed in June 1998

 

Managing Director of the Company,

appointed in June 1996

 

President and Director of Honda of America Mfg., Inc.,

appointed in June 1996

 

Executive Vice President and Director of Honda of America Mfg., Inc.,

appointed in June 1994

   *3    31,900

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Senior Managing Director of Honda R&D Co., Ltd.,

appointed in June 1990

 

Director of the Company,

appointed in June 1988

 

President and Director of Honda Racing Corporation,

appointed in May 1987

 

Managing Director of Honda R&D Co., Ltd.,

appointed in May 1987

 

Joined Honda in April 1969

     

Hiroshi Kobayashi

(November 12, 1954)

  

Director of the Company from June 2009

 

Director of the Company,

appointed in June 2009

 

Chief Operating Officer for Regional Sales Operations (Japan),

appointed in April 2009 (presently held)

 

Deputy Chief Operating officer for Regional Sales Operations (Japan); General Manager of Automobile Sales Operations for Regional Sales Operations (Japan); General Manager of Aftermarket Operations in Regional Sales Operations (Japan); General Manager of ASIMO Business Office in Regional Sales Operations (Japan),

appointed in April 2008

 

Operating Officer of the Company,

appointed in June 2005

 

President and Director of Honda Canada Inc.,

appointed in April 2004

 

Director of the Company,

appointed in June 2003

 

Executive Vice President and Director of Honda Motor Europe Limited,

appointed in April 2003

 

Joined Honda in April 1978

   *3    16,100

Sho Minekawa

(October 27, 1954)

  

Director of the Company from June 2007

 

Director of the Company,

appointed in June 2007

 

Chief Operating Officer for Regional Operations

(Latin America),

appointed in April 2007 (presently held)

 

President and Director of Honda South America Ltda.,

appointed in April 2007 (presently held)

 

President and Director of Moto Honda da Amazonia Ltda.,

appointed in April 2007 (presently held)

   *3    14,400

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

President and Director of Honda Automoveis do Brasil Ltda.,

appointed in April 2007 (presently held)

 

Operating Officer of the Company,

appointed in June 2005

 

Director of the Company,

appointed in June 2004

 

President of Guangzhou Honda Automobile Co., Ltd.

(presently, Guangqi Honda Automobile Co., Ltd.),

appointed in April 2004

 

Joined Honda in April 1978

     

Takuji Yamada

(September 28, 1956)

  

Director of the Company from June 2008

 

Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Power Product Operations,

appointed in April 2008 (presently held)

 

President and Director of Honda Motor Europe (North) GmbH,

appointed in April 2006

 

Operating Officer of the Company,

appointed in June 2005

 

Executive Vice President of American Honda Motor Co., Inc.,

appointed in December 2004

 

Joined Honda in April 1980

   *3    12,600

Yoichi Hojo

(February 17, 1956)

  

Director of the Company from June 2008

 

Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Business Management Operations,

appointed in April 2008 (presently held)

 

Operating Officer of the Company,

appointed in June 2006

 

General Manager of Automobile Purchasing Division 2 in Purchasing Operations,

appointed in April 2006

 

Joined Honda in April 1978

   *3    13,200

Tsuneo Tanai

(January 24, 1957)

  

Director of the Company from June 2009

 

Director of the Company,

appointed in June 2009

 

Chief Operating Officer for Automobile Operations,

appointed in April 2009 (presently held)

   *3    13,100

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

President and Director of Honda of America Mfg, Inc.,

appointed in April 2008

 

Operating Officer of the Company,

appointed in June 2006

 

Executive Vice President and Director of Honda of America Mfg., inc.,

appointed in April 2006

 

Joined Honda in April 1981

     

Masahiro Yoshida

(March 5, 1957)

  

Director of the Company from June 2010

 

Director of the Company,

appointed in June 2010

 

Chief Operating Officer for Business Support Operations,

appointed in April 2010 (presently held)

 

General Manager of Hamamatsu Factory of Production Operations,

appointed in April 2008

 

Operating Officer of the Company,

appointed in June 2007

 

Human Resources and Associate Relations for Business Support Operations,

appointed in April 2007

 

General Manager of Human Resources Division for Business Support Operations,

appointed in April 2006

 

Executive Vice President of Honda of America Mfg., inc.,

appointed in June 2004

 

Joined Honda in April 1979

   *3    10,000

Seiji Kuraishi

(July 10, 1958)

  

Director of the Company from June 2010

 

Director of the Company,

appointed in June 2010

 

Chief Operating Officer for Regional Operations (China),

appointed in April 2010 (presently held)

 

President of Honda Motor (China) Investment Corporation Limited,

appointed in April 2010 (presently held)

 

President of Dongfeng Honda Automobile Co., Ltd.

appointed in January 2008

 

Operating Officer of the Company

appointed in June 2007

 

Executive Vice President of Honda Motor (China) Investment Corporation, Limited,

appointed in April 2007

   *3    9,100

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

General Manager of Product Planning and Marketing Office for Automobile Operations,

appointed in April 2005

 

Joined Honda in April 1982

     

Hiroyuki Yamada

(December 14, 1956)

  

Director of the Company from June 2009

 

Director of the Company,

appointed in June 2009

 

Chief Operating Officer for Customer Service Operations,

appointed in April 2009 (presently held)

 

Joined Honda in April 1982

   *3    5,400

Corporate Auditors

        

Toru Onda

(March 18, 1949)

  

Corporate Auditor of the Company (full-time),

appointed in June 2008

 

Managing Director of the Company,

appointed in June 2002

 

Chief Operating Officer for Purchasing Operations,

appointed in April 2000

 

Director of the Company,

appointed in June 1999

 

General Manager of Automobile Purchasing Division 1 in Purchasing Operations,

appointed in June 1998

 

Joined Honda in January 1977

   *5    14,600

Hideki Okada

(June 1, 1953)

  

Corporate Auditor of the Company (full-time),

appointed in June 2009

 

General Manager of Regional Operation Planning Office

(North America),

appointed in April 2007

 

Executive Vice President and Director of American Honda Motor Co., Inc.,

appointed in April 2007

 

Operating Officer of the Company,

appointed in June 2006

 

General Manager of Accounting Division for Business Management Operation,

appointed in June 2004

 

Joined Honda in April 1977

   *6    12,500

Koukei Higuchi

(March 14, 1936)

  

Corporate Auditor of the Company,

appointed in June 2003

 

Advisor of the Board of The Tokio Marine & Fire Insurance Co., Ltd.

(presently Tokio Marine & Nichido Fire Insurance Co., Ltd.),

appointed in June 2003 (presently held)

   *4    800

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term    Number of
Shares Owned
  

Chairman of The Tokio Marine & Fire Insurance Co., Ltd.

(presently Tokio Marine & Nichido Fire Insurance Co., Ltd.),

appointed in June 2001

 

Joined The Tokio Marine and Fire Insurance Co., Ltd.

(presently Tokio Marine & Nichido Fire Insurance Co., Ltd.)

in April 1960

     

Fumihiko Saito

(June 9, 1945)

  

Corporate Auditor of the Company,

appointed in June 2004

 

Representative of the Saito Law Office in February 2006 (presently held)

 

Partner of Haarmann Hemmelrath Saito Law Office

in June 2003

 

Registered as a lawyer in April 1973

   *5    800

Yuji Matsuda

(August 27, 1951)

  

Corporate Auditor of the Company,

appointed in June 2007

 

President and Director of Mitsubishi UFJ Trust

 

Investment Technology Institute Co., Ltd.,

appointed in June 2006 (presently held)

 

Joined The Mitsubishi Trust and Banking Corporation

(presently The Mitsubishi UFJ Trust and Banking Corp.)

in April 1975

   *4    1,800

 

*1. Mr. Kensaku Hogen and Mr. Nobuo Kuroyanagi satisfy the required conditions for the outside director provided for in Article 2, Paragraph 1, Item 15 of the Company Law.
*2. Corporate Auditors Mr. Koukei Higuchi, Mr. Fumihiko Saito and Mr. Yuji Matsuda are outside corporate auditors as provided for in Article 2, Paragraph 1, Item 16 of the Company Law.
*3. The term of office of a Director is one year after his/her election to office at the close of the ordinary general meeting of shareholders on June 24, 2010.
*4. The term of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 22, 2007.
*5. The term of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 24, 2008.
*6. The term of a Corporate Auditor is four years after his/her election to office at the close of the ordinary general meeting of shareholders on June 23, 2009.
*7. The Company has introduced an operating officer system to strengthen operations in regions and local workplaces, and implement quick and appropriate decisions. Managing Officers and Operating Officers under the operating officer system are not statutory positions under the Japanese Company Law and do not conform to the definition of “Directors and Senior Management” as defined in Form 20-F. The Company’s Managing Officers and Operating Officers, as voluntarily disclosed in Japan, are listed below.

 

Managing Officers

  

Suguru Kanazawa

  

Executive Vice President and Director of Honda Motor Europe Limited

  

President and Director of Honda of the U.K. Manufacturing Ltd.

Hidenobu Iwata

  

President and Director of Honda of America Mfg., Inc.

Manabu Nishimae

  

CIS countries, the Middle & Near East and Africa for Regional Operations (Europe,

the Middle & Near East and Africa)

 

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Koichi Fukuo

  

Quality, Certification & Regulation Compliance

Operating Officers

  

Masahiro Takedagawa

  

President and Director of Honda Canada Inc.

Yoshiyuki Matsumoto

  

General Manager of Suzuka Factory of Production Operations

Eiji Okawara

  

President and Director of Honda Engineering Co., Ltd.

Ko Katayama

  

General Manager of Saitama Factory of Production Operations

Takashi Nagai

  

President and Director of Honda Siel Cars India Limited

 

President and Director of Honda Motor India Private Ltd.

Katsushi Watanabe

  

General Manager of Kumamoto Factory of Production Operations

Toshiaki Mikoshiba

  

President and Director of Honda Motor RUS LLC

Yoshi Yamane

  

Production Operations

 

Production for Regional Operations (China)

Takashi Sekiguchi

  

Executive Vice President and Director of American Honda Motor Co., Inc.

Takahiro Hachigo

  

General Manager of Automobile Purchasing Division 2 in Purchasing Operations

Hiroshi Sasamoto

  

Manufacturing of Honda Canada Inc.

Chitoshi Yokota

  

Automobile Products for Automobile Operations

Michimasa Fujino

  

President and Director of Honda Aircraft Company, Inc.

 

There is no family relationship between any director or executive officer and any other director or executive officer.

 

B. Compensation

 

Directors and Corporate Auditors receive monthly remuneration, the aggregate maximum monthly amount of which is approved at the annual general meeting of shareholders. Also, Directors and Corporate Auditors receive bonuses, the aggregate amount of which is approved at the annual general meeting of shareholders and is based on the Company’s performance for prior fiscal year. The amounts of the remuneration and bonuses approved to pay to Directors and Corporate Auditors are allocated among them at meetings of the Board of Directors and Corporate Auditors. All the directors and corporate auditors contribute a portion of their remuneration to the officer shareholders’ association, purchase shares of the Company’s Common Stock and keep holding those shares during their services.

 

The total amount of remuneration paid to the Company’s directors and corporate auditors during the fiscal year ended March 31, 2010 was ¥1,177 million. This amount includes remuneration paid to four directors and one corporate auditor, who retired during the fiscal year. The amount of remuneration paid to the directors includes amount of wages paid to those directors who were also directors of subsidiaries of the Company.

 

The total amount of bonuses paid to the Company’s directors and corporate auditors during the fiscal year ended March 31, 2010 was ¥293 million.

 

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The amounts of remuneration and bonuses that were paid during the year ended March 31, 2010 are as follows:

 

     Yen (millions)
     Directors excluding
outside directors
   Corporate auditors
excluding outside
corporate auditors
   Outside Officers    Total
     number    amount    number    amount    number    amount    number    amount

Remuneration

   22    1,036    3    88    6    53    31    1,177

Bonuses

   19    261    2    21    5    11    26    293
                               

Total

      1,297       109       64       1,471
                               

 

The amount of remuneration paid to Takanobu Ito during the fiscal year ended March 31, 2010 was ¥82 million. The amount of bonuses for Takanobu Ito accrued for the fiscal year ended March 31, 2010 was ¥33 million.

 

C. Board Practices

 

See Item 6.A “Directors and Senior Management” for information concerning the Company’s Directors and Corporate Auditors required by this item.

 

D. Employees

 

The following tables list the number of Honda full-time employees as of March 31, 2010, 2009 and 2008.

 

As of March 31, 2010

 

Total

   Motorcycle
Business
   Automobile
Business
   Financial Services
Business
   Power Product and
Other Businesses

176,815

   34,808    129,663    2,145    10,199
                     

 

At March 31, 2010, Honda had 176,815 full-time employees, including 106,230 local nationals employed in its overseas operations.

 

As of March 31, 2009

 

Total

   Motorcycle
Business
   Automobile
Business
   Financial Services
Business
   Power Product and
Other Businesses

181,876

   35,908    133,114    2,071    10,783
                     

 

At March 31, 2009, Honda had 181,876 full-time employees, including 111,581 local nationals employed in its overseas operations.

 

As of March 31, 2008

 

Total

   Motorcycle
Business
   Automobile
Business
   Financial Services
Business
   Power Product and
Other Businesses

178,960

   36,059    130,457    2,014    10,430
                     

 

At March 31, 2008, Honda had 178,960 full-time employees, including 109,213 local nationals employed in its overseas operations.

 

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Most of the Company’s regular employees in Japan, except management personnel, are required by the terms of the Company’s collective bargaining agreement with its labor union to become members of the Federation of All Honda Workers’ Union (AHWU), which is affiliated with the Japan Council of the International Metalworkers’ Federation. Approximately 85% of the employees of the Company and its Japanese subsidiaries were members of AHWU at March 31, 2010.

 

In Japan, basic wages are negotiated annually and the average increases in wages of the Company’s employees in fiscal 2008, 2009 and 2010 were 2.0%, 1.9% and 1.9%, respectively. In addition, in accordance with Japanese custom, each employee is paid a semi-annual bonus. Bonuses are negotiated during wage negotiations and are based on the overall performance of the Company or the applicable subsidiary in the previous year, the outlook for the current year and other factors.

 

The Company has had labor contracts with its labor union in Japan since 1970. These contracts are renegotiated with respect to basic wages and other working conditions. The regular employees of the Company’s domestic subsidiaries are covered by similar contracts. Since 1957, neither the Company nor any of its subsidiaries has experienced any strikes or other labor disputes that materially affected its business activities. The Company considers labor relations with its employees to be very good.

 

E. Share Ownership

 

The total amount of the Company’s voting securities owned by its officers, directors and corporate auditors as a group as of June 24, 2010 is as follows.

 

Title of Class   Amount Owned   % of Class  
Common Stock   281,200 shares   0.015

 

The Company’s full-time employees are eligible to participate in the Honda Employee Shareholders’ Association, whereby participating employees contribute a portion of their salaries to the Association and the Association purchases shares of the Company’s Common Stock on their behalf. As of March 31, 2010, the Association owned 5,057,252 shares of the Company’s common stock.

 

Item 7. Major Shareholders and Related Party Transactions

 

A. Major Shareholders

 

As of March 31, 2010, 1,834,828,430 shares of Honda’s Common Stock were issued and 1,814,602,736 shares were outstanding.

 

The following table shows the shareholders that owned of record 5% or more of the issued shares of Honda’s Common Stock as of March 31, 2010:

 

Name

   Shares owned
(thousands)
   Ownership
(%)
 

Japan Trustee Services Bank, Ltd. (trust account)

   133,296    7.26

 

According to a statement on Schedule 13G (Amendment No. 6) filed by Mitsubishi UFJ Financial Group, Inc. with the Securities and Exchange Commission on February 10, 2010, Mitsubishi UFJ Financial Group, Inc. directly and indirectly held, as of December 31, 2009, 117,071,145 shares, or 6.4% of the then issued shares, of Honda’s Common Stock.

 

None of the above shareholders has voting rights that are different from those of our other shareholders.

 

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ADSs representing American Depositary Shares are issued by JPMorgan Chase Bank, N.A., as Depositary. The normal trading unit is 100 American Depositary Shares. Total issued shares of Honda as of the close of business on March 31, 2010 were 1,834,828,430 shares of Common Stock, of which 71,107,703 shares represented by ADSs and 291,253,341 shares not represented by ADSs were owned by residents of the United States. The number of holders of record of the Company’s shares of Common Stock in the United States was 279 at March 31, 2010.

 

To the knowledge of Honda, it is not directly or indirectly owned or controlled by any other corporation, by any government, or by any other natural or legal person or persons severally or jointly. As far as is known to the Company, there are no arrangements, the operation of which may at a subsequent date, result in a change in control of the Company.

 

B. Related Party Transactions

 

Honda purchases materials, supplies and services from numerous suppliers throughout the world in the ordinary course of business, including firms with which Honda is affiliated.

 

During the fiscal year ended March 31, 2010, Honda had sales of ¥510.6 billion and purchases of ¥771.3 billion with equity affiliates accounted under the equity method. As of March 31, 2010, Honda had receivables of ¥152.2 billion from affiliated companies, and had payables of ¥133.2 billion to affiliated companies. In addition, the amounts of Honda’s sales to affiliates during the fiscal years ended March 31, 2008 and 2009 have been corrected in Note (5) to the accompanying consolidated financial statements from the amounts previously disclosed. Honda’s sales to affiliates during the fiscal year ended March 31, 2008 and 2009 were ¥500.7 billion and ¥ 515.5 billion, respectively.

 

Honda does not consider the amounts involved in such transactions to be material to its business.

 

C. Interests of Experts and Counsel

 

Not applicable.

 

Item 8. Financial Information

 

A. Consolidated Statements and Other Financial Information

 

1 – 3. Consolidated Financial Statements

 

Honda’s audited consolidated financial statements are included under “Item 18—Financial Statements”.

 

4. Not applicable.

 

5. Not applicable.

 

6. Export Sales.

 

See “Information on the Company—Marketing and Distribution—Overseas Sales”.

 

7. Legal Proceedings.

 

Various legal proceedings are pending against us. We believe that such proceedings constitute ordinary routine litigation incidental to our business. With respect to product liability, personal injury claims or lawsuits, we believe that any judgment that may be recovered by any plaintiff for general and special damages and court

 

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costs will be adequately covered by our insurance and accrued liabilities. Punitive damages are claimed in certain of these lawsuits. We are also subject to potential liability under other various lawsuits and claims including 44 purported class actions in the United States.

 

Honda recognizes an accrued liability for loss contingencies when it is probable that an obligation has been incurred and the amount of loss can be reasonably estimated. Honda reviews these pending lawsuits and claims periodically and adjusts the amounts recorded for these contingent liabilities, if necessary, by considering the nature of lawsuits and claims, the progress of the case and the opinions of legal counsel. After consultation with legal counsel, and taking into account all known factors pertaining to existing lawsuits and claims, Honda believes that the ultimate outcome of such lawsuits and pending claims including 44 purported class actions in the United States should not result in liability to Honda that would be likely to have an adverse material effect on its consolidated financial position, results of operations or cash flows.

 

8. Profit Redistribution Policy

 

The Company strives to carry out its operations from a global perspective and to increase its corporate value. With respect to the redistribution of profits to its shareholders, which it considers to be one of the most important management issues, its basic policy for dividends is to make distributions after taking into account its long-term consolidated earnings performance.

 

In addition, the Company’s basic policy for dividends is to make quarterly distributions. The Company may determine dividends from surplus by a resolution of the Board of Directors. Annual dividends for the fiscal year ended March 31 of each year require a resolution at the general meeting of shareholders.

 

The Company may also acquire its own shares at a timing that it deems optimal, with the goal of improving efficiency of the Company’s capital structure. The present goal is to maintain a shareholders’ return ratio (i.e. the ratio of the total of the dividend payment and the repurchase of the Company’s own shares to consolidated net income attributable to Honda Motor Co., Ltd.) of approximately 30%. Retained earnings will be allocated toward financing R&D activities that are essential for the future growth of the Company and capital expenditures and investment programs that will expand its operations for the purpose of improving business results and strengthening the Company’s financial condition.

 

The Company determined year-end dividends of ¥12 per share for the year ended March 31, 2010. As a result, total dividends for the year ended March 31, 2010, together with the first quarter dividends of ¥8, the second quarter dividends of ¥8 and the third quarter dividends of ¥10, were ¥38 per share, a decrease of ¥25 from the annual dividends paid for the year ended March 31, 2009.

 

Details of Distribution of Surplus (Record dates of the fiscal year ended March 31, 2010)

 

    Resolution of
the Board of
Directors
  Resolution of
the Board of
Directors
  Resolution of
the Board of
Directors
  Resolution at
General Meeting of
Shareholders
    July 29, 2009   October 27, 2009   February 3, 2010   June 24, 2010

Dividend per Share of Common Stock (yen)

  8.00   8.00   10.00   12.00

Total Amount of Dividends Yen (millions)

  14,516   14,516   18,146   21,775

 

B. Significant Changes

 

Except otherwise disclosed in this Annual Report on Form 20-F, no significant change has occurred since the date of the annual financial statements.

 

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Item 9. The Offer and Listing

 

A. Offer and Listing Details

 

Honda’s shares have been listed on the Tokyo Stock Exchange (TSE) since 1957 and as of March 31, 2010, Honda’s shares were traded on two stock exchanges in Japan.

 

Since February 11, 1977, American Depositary Shares (each representing one share of Common Stock and evidenced by American Depositary Receipts (ADRs)) have been listed and traded on the New York Stock Exchange (the NYSE), having been traded on the over-the-counter markets in the United States since 1962. In addition, European Shares (each representing ten shares of Common Stock and evidenced by European Depositary Receipts (EDRs)) have been traded in bearer form on the over-the-counter markets in several European countries since 1963. In June 1981, the shares of Common Stock were admitted to the official list of The Stock Exchange of London. In May 1983, the Company listed its shares on the stock exchanges in Zurich, Geneva and Basel in the form of Swiss Bearer Depositary Receipts. In June 1985, the shares of Common Stock were admitted to trading on the Paris Stock Exchange. As for the stock exchanges in Switzerland, the floor exchanges in Zurich, Basel and Geneva were consolidated to form a single national bourse – the Swiss Exchange, in 1995. The Paris Stock Exchange was merged with the exchanges in Amsterdam and Brussels and created Euronext in September 2000. The Company delisted itself from Euronext Paris and SWX Swiss Exchange and terminated European Depositary Receipts during fiscal year 2008.

 

The monthly average turnover of Honda’s shares of Common Stock and American Depositary Shares for the fiscal year ended March 31, 2010 was approximately 151,972,000 shares of Common Stock on the TSE and approximately 14,450,400 American Depositary Shares on the NYSE.

 

The following table sets out, for the periods indicated, the reported high and low sales prices of Honda’s shares on the TSE in yen and its American Depositary Shares on the NYSE in the U.S. dollars.

 

     Yen per share of
Common Stock on
the TSE*
   U.S. dollars per
American
Depositary Share on
the NYSE

Fiscal year

       High            Low            High            Low    

2006

   ¥ 3,750    ¥ 2,510    $ 31.74    $ 23.75

2007

     4,940      3,270      40.82      29.13

2008

     4,600      2,610      37.80      27.01

2009

           

1st quarter

   ¥ 3,910    ¥ 2,765    $ 36.40    $ 27.69

2nd quarter

     3,850      3,000      35.67      28.20

3rd quarter

     3,190      1,643      30.08      17.35

4th quarter

     2,515      1,860      25.58      20.28

2010

           

1st quarter

   ¥ 3,070    ¥ 2,390    $ 31.00    $ 24.83

2nd quarter

     3,230      2,300      32.99      25.00

3rd quarter

     3,170      2,590      34.52      28.82

4th quarter

     3,410      2,951      37.23      33.27

CY 2010

           

Jan

   ¥ 3,410    ¥ 3,035    $ 37.23    $ 33.29

Feb

     3,320      2,951      36.64      33.27

Mar

     3,355      3,055      36.70      34.51

Apr

     3,405      3,160      36.16      33.73

May

     3,120      2,700      34.00      30.16

 

* The Company executed a two-for-one stock split for the Company’s common stock effective July 1, 2006. The reported high and low sales prices of Honda’s shares on the TSE in yen have been adjusted based on the shares after stock split.

 

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B. Plan of Distribution

 

Not applicable.

 

C. Markets

 

See Item 9.A, “Offer and Listing Details”

 

D. Selling Shareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses of the Issue

 

Not applicable.

 

Item 10. Additional Information

 

A. Share Capital

 

Not applicable.

 

B. Memorandum and Articles of Association

 

Set forth below is information relating to Honda’s common stock, including brief summaries of the relevant provisions of Honda’s articles of incorporation and share handling regulations as currently in effect, and of the Company Law of Japan and related legislation.

 

General

 

Honda’s authorized share capital as of the date of the filing of this Form 20-F is 7,086,000,000 shares of common stock, of which 1,834,828,430 shares were issued. Effective as of July 1, 2006, Honda implemented a two for one stock split. The registered beneficial holder of shares underlying the ADSs is the depositary for the ADSs. Accordingly, holders of ADSs will not be able directly to assert shareholders’ rights.

 

On January 5, 2009, a new central clearing system for shares of Japanese listed companies was established pursuant to the Law Concerning Book-Entry Transfer of Corporate Bonds, Shares, Etc. of Japan (including the cabinet order and ministerial ordinances promulgated thereunder; the “Book-Entry Law”), and since then the shares of all Japanese companies listed on any Japanese financial instruments exchange, including Honda’s shares, have become subject to this new system. On the same day, all existing shares were dematerialized and all existing share certificates for such shares became null and void. At present, the Japan Securities Depository Center, Inc. (“JASDEC”) is the sole institution that is designated by the relevant authorities as a book-entry transfer institution which is permitted to engage in the clearing operations of shares of Japanese listed companies under the Book-Entry Law. Under the new clearing system, in order for any person to hold, sell or otherwise dispose of shares of Japanese listed companies, such person must have an account at an account management institution unless such person has an account directly at JASDEC. “Account management institutions” are, in general, financial instruments firms engaged in type 1 financial instruments business (i.e., securities brokers/dealers), banks, trust companies and certain other financial institutions which meet the requirements prescribed by the Book-Entry Law.

 

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Under the Book-Entry Law, any transfer of shares of Japanese listed companies is effected through book entry, and title to the shares passes to the transferee at the time when the transferred number of the shares is by an application for book entry recorded in the transferee’s account at an account management institution. The holder of an account at an account management institution is presumed to be the legal owner of the shares recorded in such account.

 

Under the Company Law and the Book-Entry Law, in order to assert shareholders’ rights against Honda, a shareholder must have its name and address registered in the register of shareholders, except in limited circumstances. Although, in general, holders of an account with shares recorded are to be registered in the register of shareholders on the basis of an all shareholders notice from JASDEC to Honda at certain prescribed times, in order to exercise minority shareholders’ rights (other than those the record dates for which are fixed) against Honda, a holder of an account with shares needs to make an application through an account management institution to JASDEC, which will then give a notice of the name and address of such holder, the number of shares held by such holder and other requisite information to Honda, and to exercise rights within four weeks from such notice.

 

Non-resident shareholders are required to appoint a standing proxy in Japan or provide a mailing address in Japan. Each such shareholder must give notice of such standing proxy or mailing address to the relevant account management institution. Such notice will be forwarded to Honda through JASDEC. Japanese financial instruments firms and commercial banks customarily act as standing proxies and provide related services for standard fees. Notices from Honda to non-resident shareholders are delivered to such standing proxies or mailing addresses.

 

Objects and Purposes

 

Article 2 of the articles of incorporation of Honda states that its purpose is to engage in the following businesses:

 

   

Manufacture, sale, lease and repair of motor vehicles, ships and vessels, aircrafts and other transportation machinery and equipment.

 

   

Manufacture, sale, lease and repair of prime movers, agricultural machinery and appliances, generators, processing machinery and other general machinery and apparatus, electric machinery and apparatus and precision machinery and apparatus.

 

   

Manufacture and sale of fiber products, paper products, leather products, lumber products, rubber products, chemical industry products, ceramic products, metal products and other products.

 

   

Overland transportation business, marine transportation business, air transportation business, warehousing business, travel business and other transport business and communication business.

 

   

Sale of sporting goods, articles of clothing, stationary, daily sundries, pharmaceuticals, drink and foodstuffs and other goods.

 

   

Financial business, nonlife insurance agency business, life insurance agency business, construction business including building construction work and real estate business including real estate brokerage.

 

   

Publishing business, advertising business, translation business, interpretation business, management consultancy business, information services including information processing, information and communication and information provision, industrial planning and design, comprehensive security business and labor dispatch services.

 

   

Management of parking garages, driving schools, training and education facilities, racecourses, recreation grounds, sporting facilities, marina facilities, hotels, restaurants and other facilities.

 

   

Manufacture, sale and licensing of equipment, parts and supplies and all other relevant business activities and investments relating to each of the foregoing items.

 

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Dividends

 

Under its articles of incorporation, Honda’s financial accounts will be closed on March 31 of each year. The record date for dividends is June 30, September 30, December 31 and March 31 of each year. In addition, Honda may distribute dividends from surplus by determining any record date.

 

Under the Company Law, a company is permitted to make distributions of surplus to the shareholders any number of times per fiscal year pursuant to resolutions of a general meeting of shareholders, subject to certain limitations provided by the Company Law and the Ordinances of the Ministry of Justice thereunder. Distributions of surplus are required, in principle, to be authorized by a resolution of a general meeting of shareholders. However, if the articles of incorporation so provide and certain other requirements under the Company Law are met, distributions of surplus may be made pursuant to a board resolution. Pursuant to the provisions of the Company Law and its articles of incorporation, the board of directors of Honda may determine distributions of its surplus.

 

Distributions of surplus may be made in cash or in-kind in proportion to the number of shares held by each shareholder. If a distribution of surplus is to be made in-kind, a special resolution of a general meeting of shareholders is required, except in the case that a right to receive cash distribution instead of distribution in-kind is granted to shareholders. If such right is granted, distributions in-kind may be made pursuant to an ordinary resolution of a general meeting of shareholders or, as the case may be, a board resolution.

 

Under the Company Law, Honda is permitted to prepare non-consolidated extraordinary financial statements consisting of a balance sheet as of any date subsequent to the end of the previous fiscal year and an income statement for the period from the first day of the current fiscal year to the date of such balance sheet. If such extraordinary financial statements are prepared and approved in accordance with the provisions of the Company Law and the Ordinances of the Ministry of Justice thereunder, the results of such extraordinary financial statements may be considered in the calculation of distributable amount.

 

Under its articles of incorporation, Honda is not obligated to pay any dividends which are left unclaimed for a period of three full years after the date on which they first became payable.

 

Capital and Reserves

 

The entire amount of the issue price of the shares to be issued in the future will generally be required to be accounted for as stated capital. However, Honda may account for an amount not exceeding one-half of such issue price as additional paid-in capital by resolution of the board of directors in accordance with the Company Law. Honda may at any time reduce the whole or any part of its additional paid-in capital or transfer them to stated capital by resolution of a general meeting of shareholders. The whole or any part of surplus may also be transferred to stated capital, additional paid-in capital or legal reserve by resolution of a general meeting of shareholders.

 

Stock Splits

 

Honda may at any time split its shares into greater number of shares by resolution of the board of directors. When the board of directors approves a stock split, it may also amend the articles of incorporation of Honda without approval of shareholders to increase the number of its authorized shares in proportion to the stock split, so long as Honda does not issue more than one class of shares.

 

Under the Book-Entry Law, Honda must give notice to JASDEC regarding a stock split at least two weeks prior to the relevant record date. On the effective date of the stock split, the numbers of shares recorded in all accounts held by its shareholders at account management institutions or at JASDEC will be increased in accordance with the applicable ratio.

 

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Consolidation of Shares

 

Honda may at any time consolidate the shares into a smaller number of shares by a special resolution of the general meeting of shareholders. A representative director of Honda must disclose the reason for the consolidation of the shares at the general meeting of shareholders.

 

Under the Book-Entry Law, Honda must give notice to JASDEC regarding a consolidation of shares at least two weeks prior to the relevant record date. On the effective date of the consolidation of shares, the number of shares recorded in all accounts held by its shareholders at account management institutions or at JASDEC will be decreased in accordance with the applicable ratio.

 

Japanese Unit Share System

 

Consistent with the requirements of the Company Law, the articles of incorporation of Honda adopts unit share system called as “tan-gen-kabu”, under which 100 shares constitute one voting unit of shares. The board of directors of Honda by itself may reduce, but not to increase, the number of shares that constitute one voting unit or abolish the unit share system entirely by amendments to the articles of incorporation by a board resolution without approval of shareholders. An increase in the number of shares that constitute one voting unit requires an amendment to the articles of incorporation by a special resolution of a general shareholders’ meeting. In any case, the number of shares constituting one voting unit may not exceed 1,000 shares or 0.5% of the total issued shares.

 

Under the Book-Entry Law, shares constituting less than one unit are transferable. Under the rules of the Japanese financial instruments exchanges, however, shares constituting less than one unit do not comprise a trading unit, except in limited circumstances, and accordingly may not be sold on the Japanese financial instruments exchanges.

 

The holder of shares constituting less than one voting unit may at any time require Honda to purchase or sell such shares to constitute one voting unit at the market price in accordance with Honda’s share handling regulations (see below). Because the transfer of ADRs does not require changes in the ownership of the underlying shares, holders of ADRs evidencing ADSs that constitute less than one voting unit of shares are not affected by these restrictions in their ability to transfer the ADRs. However, because transfers of less than one voting unit of the underlying shares are normally prohibited under the unit share system, under the deposit agreement, the right of ADR holders to surrender their ADRs and withdraw the underlying shares for sale in Japan may only be exercised as to whole voting units.

 

Right of a Holder of Shares Representing Less Than One Voting Unit to Require Honda to Purchase or Sell Its Shares

 

A holder of Honda’s shares representing less than one voting unit may at any time require Honda to purchase its shares. These shares will be purchased at (a) the closing price of the shares reported by the Tokyo Stock Exchange on the day when the request for purchase reaches the share handling agent, or (b) if no sale takes place on the Tokyo Stock Exchange on that day, then the price at which the first sale of shares is effected on the Tokyo Stock Exchange thereafter. In each case, Honda will request the payment of an amount determined by Honda as an amount equal to the brokerage commission required for the sale and purchase of the shares. A holder of shares representing less than one voting unit may, in accordance with the provisions of Honda’s share handling regulations, also make a request to the effect that such number of shares should be sold to it that will, when added to the shares less than one voting unit already held by that shareholder, constitute one voting unit. However, because holders of ADSs representing less than one unit are not able to withdraw the underlying shares from deposit, these holders will not be able to exercise many shareholder rights as a practical matter.

 

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Other Rights of a Holder of Shares Representing Less Than One Voting Unit

 

In addition to the right described in the preceding paragraph, a holder of shares representing less than one voting unit also has the rights including the followings and these rights may not be restricted by the articles of incorporation:

 

   

rights to receive any consideration for acquisition by a corporation of special shares all of which may be acquired by such corporation (zembu shutoku joukou tsuki shurui kabushiki) as provided by Article 171, paragraph 1, item 1 of the Company Law,

 

   

rights to receive any cash or other consideration for acquisition by a corporation of shares which may be acquired by such corporation on occurrence of certain event (shutoku joukou tsuki shurui kabushiki) as provided by Article 107, paragraph 1, item 3 of the Company Law,

 

   

rights to be allocated any shares without consideration as provided by Article 185 of the Company Law,

 

   

rights to receive distribution of any residual assets of a corporation, and

 

   

any other rights provided in the relevant Ordinance of the Ministry of Justice, including rights to receive cash or other distribution derived from consolidation of shares, stock split, allocation of stock acquisition rights without consideration, distribution of surplus or reorganization of a corporation.

 

Other rights of a holder of shares constituting less than one voting unit may be restricted if the articles of incorporation so provide.

 

Voting rights under the unit share system

 

Under the unit share system, the shareholders shall have one voting right for each voting unit of shares that they hold. A shareholder who owns shares representing less than one voting unit will not be able to exercise voting rights and any other rights relating thereto.

 

Voting Rights

 

Honda holds its ordinary general meeting of shareholders in June of each year. In addition, Honda may hold an extraordinary general meeting of shareholders whenever necessary by giving at least two weeks’ advance notice. Under the Company Law, notice of any shareholders’ meeting must be given to each shareholder having voting rights or, in the case of a non-resident shareholder, to his resident proxy or mailing address in Japan in accordance with Honda’s share handling regulations, at least two weeks prior to the date of the meeting.

 

A shareholder of Honda is generally entitled to one vote per voting unit of shares as described in this paragraph and under “Japanese Unit Share System” above. In general, under the Company Law and the articles of incorporation of Honda, a resolution may be adopted at a meeting of shareholders by a majority of the shares having voting rights represented at the meeting. The Company Law and Honda’s articles of incorporation require a quorum for the election of directors and corporate auditors of not less than one-third of the total number of voting rights of all shareholders and the resolution shall be adopted by majority voting. Honda’s shareholders are not entitled to cumulative voting in the election of directors. A corporate shareholder whose voting rights are in turn more than one-quarter directly or indirectly owned by Honda does not have voting rights. Also, Honda does not have voting rights with respect to its own shares.

 

Shareholders may exercise their voting rights through proxies, provided that those proxies are also shareholders who have voting rights. Shareholders who intend to be absent from a general meeting of shareholders may exercise their voting rights in writing. In addition, they may exercise their voting rights by electronic means if the board of directors decides to accept such means.

 

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Under the Company Law, in order to approve certain significant matters of a corporation, more strict requirement for the quorum or the number of voting rights to approve is provided. The articles of incorporation of Honda provide that such resolution may be adopted at a meeting of shareholders by two thirds of the voting rights of the shareholders present at the meeting representing at least one third of all the shareholders having voting rights. Such significant matters include, but not limited to:

 

   

acquisition of its own shares by Honda from a specific shareholder other than its subsidiary,

 

   

acquisition of special shares all of which may be acquired by Honda (zembu shutoku joukou tsuki shurui kabushiki),

 

   

consolidation of the shares,

 

   

reduction of stated capital (with certain exceptions),

 

   

issuance or transfer of new shares or existing shares held by Honda as treasury stock to persons other than the shareholders at a “specially favorable” price,

 

   

issuance of stock acquisition rights (including those incorporated in bonds with stock acquisition rights) to persons other than the shareholders under “specially favorable” conditions,

 

   

discharge of a part of responsibilities of directors, corporate auditors or accounting auditors,

 

   

distribution of surplus by property other than cash (only in the case that no cash distribution is allowed to shareholders),

 

   

amendments to the articles of incorporation,

 

   

transfer of whole or important part of business,

 

   

dissolution of a corporation,

 

   

reorganization of a corporation.

 

Pursuant to the terms of the Deposit Agreement, upon receipt of notice of any meeting of holders of Common Stock of the Registrant, the Depositary will mail to the record holders of ADRs and publish a notice which will contain the information in the notice of the meeting. The record holders of ADRs at the close of business on a date specified by the Depositary will be entitled to instruct the Depositary as to the exercise of the voting rights pertaining to the amount of Common Stock of the Registrant represented by their respective Depositary Receipts. The Depositary will endeavor, in so far as practicable, to vote the amount of Common Stock of the Registrant represented by such Depositary Receipts in accordance with such instructions, and the Registrant has agreed to take all action which may at any time be deemed necessary by the Depositary in order to enable the Depositary to so vote such Common Stock. In the absence of such instructions, the Depositary has agreed to use its best efforts to give a discretionary proxy to a person designated by the Registrant. However, such proxy may not be given with respect to any proposition of which the Depositary has knowledge regarding any contest related to the action to be taken at the meeting, or the purpose of which is to authorize a merger, consolidation or any other matter which may substantially affect the rights or privileges of the Common Stock of the Registrant or other securities, property or cash received by the Depositary or the Custodian in respect thereof.

 

Subscription Rights and Stock Acquisition Rights

 

Holders of Honda’s shares have no preemptive rights under Honda’s articles of incorporation. Under the Company Law, the board of directors may, however, determine that shareholders be given subscription rights in connection with a particular issue of new shares. In this case, such rights must be given to all shareholders as of a specified record date by at least two weeks’ prior public notice to shareholders of the record date. In addition, individual notice must be given to each of these shareholders at least two weeks prior to the date of expiration of the subscription rights.

 

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Honda also may decide to grant the stock acquisition rights (shinkabu-yoyakuken), with or without bonds, to any person including its shareholders, by resolution of its board of directors unless issued under specially favorable conditions. The holder of such rights may exercise its rights within the exercise period by paying subscription moneys all as prescribed in the terms of such rights.

 

Liquidation Rights

 

In the event of a liquidation of Honda, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed among the shareholders in proportion to the number of shares they own.

 

Liability to Further Calls or Assessments

 

All of Honda’s currently issued shares, including shares represented by the ADSs, are fully paid and nonassessable.

 

Shareholders’ Register Manager

 

The Chuo Mitsui Trust and Banking Company, Limited is the Shareholders’ Register Manager for the shares. Chuo Mitsui’s office is located at 33-1, Shiba 3-chome, Minato-ku, Tokyo, 105-8574, Japan. Chuo Mitsui maintains Honda’s register of shareholders and records the names and addresses of its shareholders and other relevant information in its register of shareholders upon notice thereof from JASDEC, as described in “–Record Date” below.

 

Record Date

 

As mentioned above, the record date for Honda’s dividends is June 30, September 30, December 31 and March 31, if paid. A holder of shares constituting one or more whole voting units who is registered as a holder on Honda’s register of shareholders at the close of business as of March 31 is entitled to exercise its voting rights at the ordinary general meeting of shareholders with respect to the fiscal year ended on March 31. In addition, Honda may set a record date for determining the shareholders entitled to other rights and for other purposes by giving at least two weeks’ prior public notice.

 

Under the Book-Entry Law, Honda is required to give notice of each record date to JASDEC at least two weeks prior to such record date. JASDEC is required to promptly give notice to Honda of the names and addresses of all of its shareholders of record, the numbers of shares held by them and other relevant information as of such record date.

 

The shares generally trade ex-dividend or ex-rights on the Japanese financial instruments exchanges on the third business day prior to a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings. On April 1, 2009, the Tokyo Stock Exchange announced that, with respect to record dates on or after November 19, 2009, shares will trade ex-dividend or ex-rights on the Tokyo Stock Exchange on the second business day prior to such record date.

 

Acquisition by Honda of Shares

 

Under the Company Law, Honda is generally required to obtain authorization for any acquisition of its own shares by means of:

 

(i) a resolution at a general meeting of shareholders, which may be effective for one year at the most from the date thereof;

 

(ii) a resolution of the board of directors if the acquisition is in accordance with its articles of incorporation; or

 

(iii) a resolution of the board of directors if the acquisition is to purchase its shares from a subsidiary.

 

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Honda may only dispose of shares so acquired in accordance with the procedures applicable to a new share issuance under the Company Law.

 

Upon due authorization, Honda may acquire its own shares:

 

   

in the case of (i) and (ii) above, from stock markets or by way of tender offer;

 

   

in the case of (i) above, from a specific person, but only if its shareholders approve such acquisition by special resolution; and

 

   

in the case of (iii) above, from such subsidiary.

 

In the event Honda is to acquire its own shares from a specific person other than its subsidiary at a price which is higher than the higher of (i) the final market price on the market trading such shares as of the date of such request or (ii) in the event that such shares are subject to a tender offer, etc., the price set in the contract regarding such tender offer, any shareholder may request that Honda includes such shareholder’s shares in the proposed purchase.

 

Acquisitions described in (i) through (iii) above must satisfy certain other requirements, including the restriction of the source of consideration in which the total amount of the purchase price of such own shares may not exceed the distributable amount of the corporation.

 

Reports to Shareholders

 

Honda currently furnishes shareholders with notices of shareholders’ meetings, business reports, including financial statements, and notices of resolutions adopted at the shareholders’ meetings, all of which are in Japanese. Such notices as described above may be furnished by electronic means to those shareholders who have approved such way of furnishing notices. Pursuant to its articles of incorporation, Honda must publish notices to shareholders in Japanese in the Nihon Keizai Shimbun, a Japanese newspaper of general circulation.

 

Report of Substantial Shareholdings

 

The Financial Instruments and Exchange Law of Japan and regulations under such law require any person who has become a holder (together with its related persons) of more than 5% of the total issued shares of a corporation listed on any Japanese financial instruments exchange or whose shares are traded on the over-the-counter market (including ADSs representing such shares) to file with the Director of a competent Local Finance Bureau, within five business days, in general, a report concerning those shareholdings. A similar report must also be filed to reflect any change of 1% or more in any shareholding or any change in material matters set out in reports previously filed. Copies of any report must also be furnished to the corporation and to all Japanese financial instruments exchanges on which the corporation’s shares are listed or in the case of shares traded on the over-the-counter market, the Japan Securities Dealers Association. For this purpose, shares issuable or transferable to such person upon exercise of exchangeable securities, conversion of convertible securities or exercise of warrants or stock acquisition rights are taken into account in determining both the number of shares held by that holder and the corporation’s total issued share capital.

 

Daily Price Limits under Japanese Financial Instruments Exchange Rules

 

Share prices on Japanese financial instruments exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges set daily price limits, which limit the maximum range of fluctuation within a single trading day. Daily price limits are set in absolute yen according to the previous day’s closing price or special quote. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell its shares at such price on a particular trading day, or at all.

 

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C. Material Contracts

 

All contracts concluded by Honda during the two years preceding this filing were entered into in the ordinary course of business.

 

D. Exchange Controls

 

There are no laws, decrees, regulations or other legislation which materially affect our ability to import or export capital for our use or our ability to pay dividends to nonresident holders of our shares.

 

E. Taxation

 

Japanese Taxes

 

The following is a summary of the principal Japanese tax consequences as of the date of filing of this Form 20-F to owners of Honda’s shares or ADSs who are non-resident individuals or non-Japanese corporations without a permanent establishment in Japan to which income from Honda’s shares is attributable. The tax treatment is subject to possible changes in the applicable Japanese laws or double taxation conventions occurring after that date. This summary is not exhaustive of all possible tax considerations that may apply to a particular investor. Potential investors should consult their own tax advisers as to:

 

   

the overall tax consequences of the acquisition, ownership and disposition of shares or ADSs, including specifically the tax consequences under Japanese law;

 

   

the laws of the jurisdiction of which they are resident; and

 

   

any tax treaty between Japan and their country of residence.

 

Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations.

 

In the absence of any applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to a non-resident of Japan or a non-Japanese corporation is 20%. With respect to dividends paid on listed shares issued by Japanese corporations (such as Honda’s shares) to a non-resident of Japan or a non-Japanese corporation, the aforementioned 20% withholding tax rate is reduced to (i) 7% for dividends to be paid until December 31, 2011, and (ii) 15% for dividends to be paid thereafter, except for dividends paid to any individual shareholder who holds 5% or more of the issued shares of that corporation. Japan has entered into income tax treaties, conventions or agreements, whereby the maximum withholding tax rate is generally set at 15% for portfolio investors with, among others, Belgium, Canada, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, and Switzerland.

 

Pursuant to the Convention Between the United States of America and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “U.S.-Japan Tax Treaty”), a portfolio investor that is a U.S. holder is generally subject to Japanese withholding tax on dividends on shares at a rate of 10%. A similar withholding tax treatment applies under the renewed tax treaties between the United Kingdom and Japan and between France and Japan. In addition, the tax treaty between Australia and Japan has also been renewed, effective from December 3, 2008, under which the standard treaty withholding rate on dividends taxed on or after January 1, 2009 will be reduced in general from 15% to 10%. Under Japanese tax law, the maximum rate applicable under the tax treaties, conventions or agreements shall be applicable except when such maximum rate is more than the Japanese statutory rate.

 

Gains derived from the sale outside Japan of common stock or Depositary Receipts by a non-resident of Japan or a non-Japanese corporation, or from the sale of common stock within Japan by a non-resident of Japan

 

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or by a non-Japanese corporation not having a permanent establishment in Japan, are in general not subject to Japanese income or corporation taxes. Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired common stock or Depositary Receipt as a legatee, heir or donee, even if the individual is not a Japanese resident.

 

United States Taxes

 

This section describes the material U.S. federal income tax consequences of the ownership of shares or ADSs by U.S. holders, as defined below. It applies only to persons who hold shares or ADSs as capital assets for tax purposes.

 

This section is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect, as well as on the U.S.-Japan Tax Treaty. These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.

 

For purposes of the U.S.-Japan Tax Treaty and the Code, U.S. holders of ADRs evidencing ADSs will be treated as the owners of the Shares represented by those ADRs. Exchanges of shares for ADRs and ADRs for shares generally will not be subject to U.S. federal income tax. For purposes of this discussion, a “U.S. holder” is a beneficial owner of shares or ADSs that is for U.S. federal income tax purposes, (i) a citizen or resident individual of the United States, (ii) a domestic corporation, (iii) an estate whose income is subject to United States federal income tax regardless of its source, or (iv) a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust; and that, for purposes of the U.S.-Japan Tax Treaty, (i) holds the shares and ADSs that do not form part of the business property of a permanent establishment through which the beneficial owner carries on or has carried on business and (ii) is not otherwise ineligible for benefits under the U.S.-Japan Tax Treaty, as the case may be, with respect to income and gain from the shares or ADSs.

 

This section does not apply to a person who is a member of a special class of holders subject to special rules, including a dealer in securities, a trader in securities that elects to use a mark-to-market method of accounting for its securities holdings, a tax-exempt organization, a life insurance company, a person liable for alternative minimum tax, a person that actually or constructively owns 10% or more of the voting stock of Honda, a person that holds shares or ADSs as part of a straddle or a hedging or conversion transaction, or a person whose functional currency is not the U.S. dollar.

 

This summary is not a comprehensive description of all the tax considerations that may be relevant with respect to a U.S. holder’s shares or ADSs. Each beneficial owner of shares or ADSs should consult its own tax advisor regarding the U.S. federal, state and local and other tax consequences of owning and disposing of shares and ADSs in its particular circumstances.

 

Taxation of Dividends

 

Under the U.S. federal income tax laws and subject to the passive foreign investment company, or PFIC, rules discussed below, the gross amount of any dividend paid by Honda out of its current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) is subject to U.S. federal income taxation. A U.S. holder must include any Japanese tax withheld from the dividend payment in this gross amount even though it does not in fact receive it.

 

Dividends paid to a noncorporate U.S. holder in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to such holder at a maximum tax rate of 15% provided that the noncorporate U.S. holder holds the shares or ADSs with respect to which the dividends are paid for more than 60 days during the 121 day period beginning 60 days before the ex-dividend date and meets other holding period

 

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requirements. Dividends that Honda pays with respect to the shares or ADSs generally will be qualified dividend income. A U.S. holder must include the dividend in its taxable income when the holder, in the case of shares, or the Depositary, in the case of ADSs, receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. The amount of the dividend distribution that a U.S. holder must include in its income will be the U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S. dollar rate on the date of the dividend distribution, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the U.S. holder includes the dividend payment in income to the date it converts the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the U.S. for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of U.S. holder’s basis in the shares or ADSs and thereafter as capital gain.

 

Subject to certain limitations, the Japanese tax withheld in accordance with the U.S.-Japan Tax Treaty and paid over to Japan will be creditable against a U.S. holder’s United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to a U.S. holder under Japanese law or under the U.S.-Japan Tax Treaty, the amount of tax withheld that is refundable will not be eligible for credit against the U.S. holder’s United States federal income tax liability.

 

Dividends will be income from sources outside the United States. Dividends will, depending on your circumstances, be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to a U.S. holder.

 

Taxation of Capital Gains

 

Subject to the PFIC rules discussed below, if a U.S. holder sells or otherwise disposes of its shares or ADSs, it will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount that it realizes and its tax basis, determined in U.S. dollars, in its shares or ADSs. Capital gain of a noncorporate U.S. holder is generally taxed at preferential rates where the property is held for more than one year. The gain or loss will generally be income or loss from sources within the U.S. for foreign tax credit limitation purposes.

 

Passive Foreign Investment Company (PFIC) Rules

 

Honda believes its shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes. This conclusion is a factual determination that is made annually and thus may be subject to change.

 

In general, Honda will be a PFIC with respect to a U.S. holder if for any taxable year in which such holder held shares or ADSs of Honda:

 

   

at least 75% of Honda’s gross income for the taxable year is passive income; or

 

   

at least 50% of the value, determined on the basis of a quarterly average, of Honda’s assets is attributable to assets that produce or are held for the production of passive income.

 

Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.

 

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If Honda is treated as a PFIC, and a U.S. holder does not make a mark-to-market election, as described below, that U.S. holder will be subject to special rules with respect to:

 

   

any gain it realizes on the sale or other disposition of its shares or ADSs; and

 

   

any excess distribution that Honda makes to the U.S holder (generally, any distributions to it during a single taxable year that are greater than 125% of the average annual distributions received by it in respect of the shares or ADSs during the three preceding taxable years or, if shorter, its holding period for the shares or ADSs).

 

Under these rules:

 

   

the gain or excess distribution will be allocated ratably over the U.S. holder’s holding period for the shares or ADSs,

 

   

the amount allocated to the taxable year in which it realized the gain or excess distribution will be taxed as ordinary income,

 

   

the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year, and

 

   

the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.

 

Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.

 

If a U.S. holder owns shares or ADSs in a PFIC that are treated as marketable stock, such holder may make a mark-to-market election. If a U.S. holder makes this election, it will not be subject to the PFIC rules described above. Instead, in general, a U.S. holder will include as ordinary income each year the excess, if any, of the fair market value of its shares or ADSs at the end of the taxable year over its adjusted basis in its shares or ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. A U.S. holder will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. holder’s basis in the shares or ADSs will be adjusted to reflect any such income or loss amount.

 

In addition, notwithstanding any election that a U.S. holder makes with regard to the shares or ADSs, dividends that a U.S. holder receives from Honda will not constitute qualified dividend income to such holder if Honda is a PFIC either in the taxable year of the distribution or the preceding taxable year. Moreover, shares or ADSs held by a U.S. holder will be treated as stock in a PFIC if Honda was a PFIC at any time during the U.S. holder’s holding period in its shares or ADSs, even if Honda is not currently a PFIC. For purposes of this rule, if a U.S. holder makes a mark-to-market election with respect to its shares or ADSs, the U.S. holder will be treated as having a new holding period in its shares or ADSs beginning on the first day of the first taxable year beginning after the last taxable year for which the mark-to-market election applies. Dividends that a U.S. holder receives that do not constitute qualified dividend income are not eligible for taxation at the 15% maximum rate applicable to qualified dividend income. Instead, the U.S. holder must include the gross amount of any such dividend paid by Honda out of Honda’s accumulated earnings and profits (as determined for United States federal income tax purposes) in the U.S. holder’s gross income, and it will be subject to tax at rates applicable to ordinary income.

 

If a U.S. holder owns shares or ADSs during any year that Honda is a PFIC with respect to such U.S. holder, it must file Internal Revenue Service Form 8621. U.S. holders should consult their own tax advisors regarding the PFIC rules and potential filing and other requirements.

 

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F. Dividends and Paying Agents

 

Not applicable.

 

G. Statement by Experts

 

Not applicable.

 

H. Documents on Display

 

Honda is subject to the information requirements of the Securities Exchange Act of 1934 and, in accordance therewith, it will file annual reports on Form 20-F within six months of its fiscal year-end and furnish other reports and information on Form 6-K with the Securities and Exchange Commission. These reports and other information can be inspected without charge at the public reference room at the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. You can also obtain copies of such material by mail from the public reference room of the Securities and Exchange Commission at prescribed fees. You may obtain information on the operation of the Securities and Exchange public reference room by calling the Securities and Exchange Commission in the United States at 1-800-SEC-0330. The Securities and Exchange Commission also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. Also, as a foreign private issuer, Honda is exempt from the rules under the Securities Exchange Act of 1934 prescribing the furnishing and content of proxy statements to shareholders.

 

I. Subsidiary Information

 

Not applicable.

 

Item 11. Quantitative and Qualitative Disclosure about Market Risk

 

Honda is exposed to market risks, which are changes in foreign currency exchanges rates, in interest rates and in prices of marketable equity securities. Honda is a party to derivative financial instruments in the normal course of business in order to manage risks associated with changes in foreign currency exchange rates and in interest rates. Honda does not hold any derivative financial instruments for trading purposes.

 

Foreign Currency Exchange Rate Risk

 

Foreign currency forward exchange contracts and purchased option contracts are used to hedge currency risk of sale commitments denominated in foreign currencies (principally U.S. dollars).

 

Foreign currency written option contracts are entered into in combination with purchased option contracts to offset premium amounts to be paid for purchased option contracts.

 

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The tables below provide information about our derivatives related to foreign currency exchange rate risk as of March 31, 2009 and 2010. For forward exchange contracts and currency options, the table presents the contract amounts and fair value. All forward exchange contracts and currency contracts to which we are a party have original maturities of less than one year.

 

Foreign Exchange Risk

 

     2009    2010
     Yen (millions)     Average
contractual
rate
   Yen (millions)     Average
contractual
rate

Forward Exchange Contracts

   Contract
amount
   Fair value        Contract
amount
   Fair value    

To sell US$

   ¥ 182,941    (8,966   93.33    ¥ 257,822    (6,076   90.80

To sell EUR

     42,324    (2,086   123.40      32,188    456      126.70

To sell CA$

     379    (5   76.99      24    57      88.58

To sell GBP