20-F 1 d737005d20f.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, 2014

OR

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

For the transition period from              to             

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            

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)

Narushi Yazaki, Honda North America, Inc.,

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

(Name, E-mail and/or Facsimile number, Telephone 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, 2014

Common Stock   1,802,291,196**

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 55,964,204 shares represented by American Depositary Shares.

 

 


Table of Contents

PART I

  

Item 1. Identity of Directors, Senior Management and Advisers

     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

     8   

A. History and Development of the Company

     8   

B. Business Overview

     8   

C. Organizational Structure

     26   

D. Property, Plants and Equipment

     27   

Item 4A. Unresolved Staff Comments

     29   

Item 5. Operating and Financial Review and Prospects

     29   

A. Operating Results

     29   

B. Liquidity and Capital Resources

     55   

C. Research and Development

     57   

D. Trend Information

     59   

E. Off-Balance Sheet Arrangements

     59   

F. Tabular Disclosure of Contractual Obligations

     59   

G. Safe Harbor

     59   

Item 6. Directors, Senior Management and Employees

     60   

A. Directors and Senior Management

     60   

B. Compensation

     74   

C. Board Practices

     74   

D. Employees

     75   

E. Share Ownership

     76   

Item 7. Major Shareholders and Related Party Transactions

     76   

A. Major Shareholders

     76   

B. Related Party Transactions

     76   

C. Interests of Experts and Counsel

     77   

Item 8. Financial Information

     77   

A. Consolidated Statements and Other Financial Information

     77   

B. Significant Changes

     78   

Item 9. The Offer and Listing

     78   

A. Offer and Listing Details

     78   

B. Plan of Distribution

     79   

C. Markets

     79   

D. Selling Shareholders

     79   

E. Dilution

     79   

F. Expenses of the Issue

     79   

Item 10. Additional Information

     80   

A. Share Capital

     80   

B. Memorandum and Articles of Association

     80   

C. Material Contracts

     87   

D. Exchange Controls

     87   

E. Taxation

     87   


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F. Dividends and Paying Agents

     91   

G. Statement by Experts

     91   

H. Documents on Display

     91   

I. Subsidiary Information

     92   

Item 11. Quantitative and Qualitative Disclosure about Market Risk

     92   

Item 12. Description of Securities Other than Equity Securities

     94   

A. Debt Securities

     94   

B. Warrants and Rights

     95   

C. Other Securities

     95   

D. American Depositary Shares

     95   

PART II

  

Item 13. Defaults, Dividend Arrearages and Delinquencies

     96   

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

     96   

Item 15. Controls and Procedures

     96   

Item 16A. Audit Committee Financial Expert

     97   

Item 16B. Code of Ethics

     97   

Item 16C. Principal Accountant Fees and Services

     97   

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

     98   

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

     100   

Item 16F. Change in Registrant’s Certifying Accountant

     100   

Item 16G. Corporate Governance

     100   

Item 16H. Mine Safety Disclosure

     103   

PART III

  

Item 17. Financial Statements

     103   

Item 18. Financial Statements

     103   

Item 19. Exhibits

     104   


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 Advisers

 

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, 2014 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)  
    2010     2011     2012     2013     2014  

Income statement data:

         

Net sales and other operating revenue

  ¥ 8,579,174      ¥ 8,936,867      ¥ 7,948,095      ¥ 9,877,947      ¥ 11,842,451   

Research and development

    463,354        487,591        519,818        560,270        634,130   

Operating income

    363,775        569,775        231,364        544,810        750,281   

Income before income taxes and equity in income of affiliates

    336,198        630,548        257,403        488,891        728,940   

Equity in income of affiliates

    93,282        139,756        100,406        82,723        132,471   

Net income

    282,611        563,477        222,074        392,638        608,749   

Net income attributable to Honda Motor Co., Ltd.

    268,400        534,088        211,482        367,149        574,107   

Balance sheet data:

         

Total assets

  ¥ 11,629,115      ¥ 11,577,714      ¥ 11,787,599      ¥ 13,635,357      ¥ 15,622,031   

Long-term debt, excluding current portion

    2,313,035        2,043,240        2,235,001        2,710,845        3,234,066   

Honda Motor Co., Ltd. shareholders’ equity

    4,328,640        4,439,587        4,398,249        5,043,500        5,918,979   

Total equity

    4,456,430        4,572,524        4,525,583        5,205,423        6,113,398   

Common stock

    86,067        86,067        86,067        86,067        86,067   

Cash flow data:

         

Depreciation excluding property on operating leases

  ¥ 401,743      ¥ 377,272      ¥ 345,105      ¥ 335,536      ¥ 442,318   

Depreciation of property on operating leases

    227,931        212,143        209,762        254,933        352,402   

Total depreciation

    629,674        589,415        554,867        590,469        794,720   

Capital expenditures

    392,062        318,543        397,218        626,879        774,006   

Purchase of operating lease assets

    544,027        798,420        683,767        793,118        1,127,840   

Total capital expenditures

    936,089        1,116,963        1,080,985        1,419,997        1,901,846   

 

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Weighted average number of shares outstanding

 

     (Thousands of shares)  
     2010      2011      2012      2013      2014  

Weighted average number of common shares outstanding

     1,814,605         1,806,360         1,802,300         1,802,298         1,802,294   
Net income attributable to Honda Motor Co., Ltd. per common share   
     (Yen)  
     2010      2011      2012      2013      2014  

Basic

   ¥ 147.91       ¥ 295.67       ¥ 117.34       ¥ 203.71       ¥ 318.54   

Diluted

     147.91         295.67         117.34         203.71         318.54   

 

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)  
     2010     2011     2012     2013     2014  

Dividends declared during the period per common share

     ¥34.00        ¥51.00        ¥60.00        ¥72.00        ¥79.00   
     (US$  0.37     (US$  0.61     (US$  0.73     (US$  0.77     (US$  0.77

 

Additionally, a year-end dividend of ¥22 ($0.21) per common share aggregating ¥39.6 billion ($385 million) relating to fiscal 2014 was determined by our Board of Directors in April 2014 and approved by our shareholders in June 2014. This dividend will be paid in June 2014.

 

U.S. dollar amounts for dividends per share are translated from yen at the year-end exchange rate of each period.

 

Adjustments of prior years’ financial data

 

As described in note (1)(c) to the accompanying consolidated financial statements, certain adjustments have been made to the consolidated financial statement periods presented above.

 

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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 30, 2014, the noon buying rate was ¥101.77=$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  

2010

     92.49         93.40         100.71         86.12   

2011

     85.00         82.76         94.68         78.74   

2012

     78.86         82.41         85.26         75.72   

2013

     83.26         94.16         96.16         77.41   

2014

     100.46         102.98         105.25         92.96   

2015 (through May 30, 2014)

     101.96         101.77         103.94         101.26   

Dec-2013

           105.25         101.82   

Jan-2014

           104.87         102.20   

Feb-2014

           102.71         101.11   

Mar-2014

           103.38         101.36   

Apr-2014

           103.94         101.43   

May-2014

           102.34         101.26   

 

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 products can be volatile

 

Prices for automobiles, motorcycles and power products in certain markets may experience sharp changes over short periods of time. This volatility is caused by various factors, including fierce competition, which is increasing, short-term fluctuations in demand caused by instability in underlying economic conditions, changes in tariffs, import regulations and other taxes, shortages of certain materials and parts, steep rise in material prices and sales incentives. There can be no assurance that such price volatility will not continue for an extended period of time or that price volatility will not occur in markets that to date have not experienced such volatility.

 

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Overcapacity within the industry has increased and will likely continue to increase if the economic downturn continues in Honda’s major markets, leading, potentially, to further increased price volatility. Price volatility in any of Honda’s markets could adversely affect Honda’s results of operations.

 

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 components and sells its products and components 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, particularly 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 risks, Honda uses derivative financial instruments in order to reduce the substantial effects of currency fluctuations and interest rate exposure on our cash flows 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 and safety and noxious substances, as well as levels of pollutants from production plants, are extensive within the automobile, motorcycle and power 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

 

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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 infringement 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 and could be subject to suits, investigations and proceedings under relevant laws and regulations of various jurisdictions. A negative outcome in any of the legal proceedings pending against Honda 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 to its customers 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 external suppliers for the provision of certain raw materials and parts

 

Honda purchases raw materials and parts from numerous external suppliers, and relies on certain suppliers for some of the raw materials and parts which it uses in the manufacture 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 raw materials and parts 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 and frictions, political uncertainty, natural disasters, epidemics and labor strikes

 

Honda conducts its businesses worldwide and such businesses may be affected by events, such as wars, use of force by foreign countries, terrorism, multinational conflicts and frictions, political uncertainty, natural disasters such as earthquakes, tsunami and floods, epidemics and labor strikes, and other events beyond our control, which may delay, disrupt or suspend the purchase of raw materials and parts, the manufacture, sales and distribution of products, the provision of services, etc., in the region where such events occurred. Such events occurring in one region may in turn affect other regions. If such delay, disruption or suspension occurs and continues for a long period of time, Honda’s business, financial condition or results of operations may be adversely affected.

 

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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 also result in a loss of Honda’s competitiveness.

 

Risks Relating to Pension Costs 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.

 

A holder of ADSs will have fewer rights than a shareholder has and such holder 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 exercise votes regarding the Shares underlying the ADSs as instructed by the holders and will pay to the holders the dividends and distributions collected from the Company. However, in the capacity as an ADS holder, such holder will not be able to bring a derivative action, examine our accounting books or records or exercise appraisal rights through the depositary.

 

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

 

The Company’s Articles of Incorporation, Regulations of the Board of Directors, Regulations of the Board of Corporate Auditors and the Company Law of Japan (the “Company Law”) govern corporate affairs of the Company. 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 the Company 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. An ADS holder may have more difficulty in asserting his/her rights as a shareholder than such an ADS holder would as a shareholder of a U.S. corporation. In addition, Japanese courts may not be willing to enforce liabilities against the Company 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, a holder of ADSs may not be able to sell his/her shares of the Company’s 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 limits for each stock, based on the previous day’s closing price. Although transactions may continue at the

 

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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.

 

U.S. investors may have difficulty in serving process or enforcing a judgment against the Company or its directors, executive officers or corporate auditors

 

The Company is a limited liability, joint stock corporation incorporated under the laws of Japan. Most of its directors, executive officers and corporate auditors reside in Japan. All or substantially all of the Company’s assets and the assets of these persons are located in Japan and elsewhere outside the United States. It may not be possible, therefore, for U.S. investors to effect service of process within the United States upon the Company or these persons or to enforce against the Company or these persons judgments obtained in U.S. courts predicated upon the civil liability provisions of the Federal securities laws of the United States. There is doubt as to the enforceability in Japan, in original actions or in actions for enforcement of judgment of U.S. courts, of liabilities predicated solely upon the federal securities laws of the United States.

 

The Company’s shareholders of record on a record date may not receive the dividend they anticipate

 

The customary dividend payout practice and relevant regulatory regime of publicly listed companies in Japan may differ from that followed in foreign markets. The Company’s dividend payout practice is no exception. While the Company may announce forecasts of year-end and quarterly dividends prior to the record date, these forecasts are not legally binding. The actual payment of year-end dividends requires a resolution of the Company’s shareholders. If the shareholders adopt such a resolution, the year-end dividend payment is made to shareholders as of the applicable record date, which is currently specified as March 31 by the Company’s Articles of Incorporation. However, such a resolution of the shareholders is usually made at an ordinary general meeting of shareholders held in June. The payment of quarterly dividends requires a resolution of the Company’s Board of Directors. If the board adopts such a resolution, the dividend payment is made to shareholders as of the applicable record dates, which are currently specified as June 30, September 30 and December 31 by the Articles of Incorporation. However, the board usually does not adopt a resolution with respect to a quarterly dividend until after the respective record dates.

 

Shareholders of record as of an applicable record date may sell shares after the record date in anticipation of receiving a certain dividend payment based on the previously announced forecasts. However, since these forecasts are not legally binding and resolutions to pay dividends are usually not adopted until after the record date, our shareholders of record on record dates for year-end and quarterly dividends may not receive the dividend they anticipate.

 

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

 

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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 as a successor to the 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.

 

Principal Capital Investments

 

In the fiscal years ended March 31, 2012, 2013 and 2014, Honda’s capital expenditures were ¥1,108.1 billion, ¥1,423.5 billion and ¥1,909.8 billion, respectively, on an accrual basis. Also, capital expenditures excluding those with respect to property on operating leases were ¥424.4 billion, ¥630.4 billion and ¥782.0 billion, respectively, on an accrual basis. For further details of Honda’s capital expenditures during fiscal 2014, 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.

 

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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, 2012, 2013 and 2014:

 

     Fiscal years ended March 31,  
         2012              2013              2014      
     Yen (billions)  

Motorcycle Business

   ¥ 1,348.8       ¥ 1,339.5       ¥ 1,663.6   

Automobile Business

     5,805.9         7,709.2         9,176.3   

Financial Services Business

     516.1         548.5         698.1   

Power Product and Other Businesses

     277.1         280.6         304.2   
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 7,948.0       ¥ 9,877.9       ¥ 11,842.4   
  

 

 

    

 

 

    

 

 

 

 

     Fiscal years ended March 31,  
         2012              2013              2014      
     Yen (billions)  

Japan

   ¥ 1,517.9       ¥ 1,652.9       ¥ 1,912.5   

North America

     3,480.7         4,586.4         5,567.5   

Europe

     515.7         534.5         667.1   

Asia

     1,458.7         2,093.0         2,515.8   

Other Regions

     974.8         1,010.9         1,179.2   
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 7,948.0       ¥ 9,877.9       ¥ 11,842.4   
  

 

 

    

 

 

    

 

 

 

 

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 Japanese 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 first started overseas production in Belgium in 1963.

 

Honda produces a wide range of motorcycles, with engine displacement ranging from the 50cc class to the 1800cc class. Honda’s motorcycles use internal combustion engines developed by Honda that are air- or water-cooled, four-cycle, and are in single, two, four or six-cylinder configurations. 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 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, and all-terrain vehicles (ATVs) 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, 2012, 2013 and 2014:

 

    Fiscal years ended March 31,  
    2012     2013     2014  
    Honda Group
Unit Sales*
    Consolidated
Unit Sales*
    Revenue     Honda Group
Unit Sales*
    Consolidated
Unit Sales*
    Revenue     Honda Group
Unit Sales*
    Consolidated
Unit Sales*
    Revenue  
   

Units

(thousands)

   

Units

(thousands)

   

Yen

(billions)

   

Units

(thousands)

   

Units

(thousands)

   

Yen

(billions)

   

Units

(thousands)

   

Units

(thousands)

   

Yen

(billions)

 

Japan

    220        220      ¥ 72.9        217        217      ¥ 72.9        226        226      ¥ 79.4   

North America

    200        200        97.3        250        250        112.1        276        276        141.5   

Europe

    198        198        96.1        179        179        86.4        166        166        102.6   

Asia

    12,412        6,001        579.5        13,035        7,051        667.4        14,536        7,858        868.4   

Other Regions

    2,031        2,031        502.8        1,813        1,813        400.5        1,817        1,817        471.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    15,061        8,650      ¥ 1,348.8        15,494        9,510      ¥ 1,339.5        17,021        10,343      ¥ 1,663.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Motorcycle revenue as a percentage of total sales revenue

        17         14         14

 

* 

Honda Group Unit Sales is the total unit sales of completed products of Honda, its consolidated subsidiaries and its affiliates accounted for under the equity method. Consolidated Unit Sales is the total unit sales of completed products corresponding to consolidated net sales to external customers, which consists of unit sales of completed products of Honda and its consolidated subsidiaries.

 

Motorcycles are produced by Honda in Japan at its Kumamoto Factory. Honda’s motorcycles are also produced by subsidiaries in countries around the world including Thailand, Vietnam, 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 Automobile business operations in 1963 with the T360 mini truck and the S500 small sports car models. Honda subsequently launched a series of mass-production models including the Civic in 1972 and 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 model).

 

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

 

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

 

Passenger cars:

 

Accord, Accord Hybrid, Accord Plug-in Hybrid, Accord Tourer, Amaze, Brio, Brio Amaze, Brio Satya, City, Civic, Civic Tourer, CRIDER, CR-Z, Fit/Jazz, Fit/Jazz Hybrid, Fit Shuttle, Fit Shuttle Hybrid, FREED, FREED Hybrid, FREED SPIKE, FREED SPIKE Hybrid, Honda MOBILIO, Insight, JADE, Spirior, Stream, Acura ILX, Acura RLX, Acura TL, Acura TSX

 

Light trucks:

 

Crosstour, CR-V, Elysion, Odyssey, Pilot, Ridgeline, Step WGN, VEZEL, VEZEL Hybrid, Acura MDX, Acura RDX

 

Mini vehicles:

 

Acty, Life, N-Box, N-Box +, N-ONE, N-WGN, Vamos

 

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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, 2012, 2013 and 2014:

 

    Fiscal years ended March 31,  
    2012     2013     2014  
    Honda Group
Unit Sales*
    Consolidated
Unit Sales*
    Revenue     Honda Group
Unit Sales*
    Consolidated
Unit Sales*
    Revenue     Honda Group
Unit Sales*
    Consolidated
Unit Sales*
    Revenue  
   

Units

(thousands)

   

Units

(thousands)

   

Yen

(billions)

   

Units

(thousands)

   

Units

(thousands)

   

Yen

(billions)

   

Units

(thousands)

   

Units

(thousands)

   

Yen

(billions)

 

Japan

    588        580      ¥ 1,329.6        692        685      ¥ 1,462.6        818        812      ¥ 1,714.7   

North America

    1,323        1,323        2,855.6        1,731        1,731        3,905.2        1,757        1,757        4,717.7   

Europe

    158        158        355.9        171        171        388.4        169        169        487.6   

Asia

    837        219        836.3        1,122        523        1,385.4        1,286        529        1,599.0   

Other Regions

    202        202        428.3        298        298        567.3        293        293        657.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    3,108        2,482      ¥ 5,805.9        4,014        3,408      ¥ 7,709.2        4,323        3,560      ¥ 9,176.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Automobile revenue as a percentage of total sales revenue

        73         78         77

 

* 

Honda Group Unit Sales is the total unit sales of completed products of Honda, its consolidated subsidiaries and its affiliates accounted for under the equity method. Consolidated Unit Sales is the total unit sales of completed products corresponding to consolidated net sales to external customers, which consists of unit sales of completed products of Honda and its consolidated subsidiaries. Certain sales of automobiles that are financed with residual value type auto loans by our Japanese finance subsidiaries are accounted for as operating leases in conformity with U.S. generally accepted accounting principles and are not included in consolidated net sales to the external customers in our automobile business. As a result, they are not included in Consolidated Unit Sales, but are included in Honda Group Unit Sales of our automobile business.

 

Automobiles are produced by Honda at two factories located at three sites in Japan: the Saitama Factory (at the Sayama Plant and the Yorii Plant) 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), Greater Noida (India) and Sao Paulo (Brazil). Yachiyo Industry Co., Ltd., one of our consolidated subsidiaries, assembles mini vehicles for the Japanese 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.

 

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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, 2012, 2013 and 2014:

 

     Fiscal years ended March 31,  
         2012             2013             2014      
     Yen (billions)  

Japan

   ¥ 28.9      ¥ 34.2      ¥ 40.3   

North America

     455.5        484.2        610.8   

Europe

     8.1        7.2        12.6   

Asia

     2.8        3.1        8.0   

Other Regions

     20.6        19.5        26.3   
  

 

 

   

 

 

   

 

 

 

Total

   ¥ 516.1      ¥ 548.5      ¥ 698.1   
  

 

 

   

 

 

   

 

 

 

Financial Service revenue as a percentage of total sales revenue

     7     5     6

 

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”.

 

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.

 

* 

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, 2012, 2013 and 2014:

 

     Fiscal years ended March 31,  
     2012     2013     2014  
     Honda Group
Unit Sales /
Consolidated
Unit Sales*
     Revenue     Honda Group
Unit Sales /
Consolidated
Unit Sales*
     Revenue     Honda Group
Unit Sales /
Consolidated
Unit Sales*
     Revenue  
    

Units

(thousands)

    

Yen

(billions)

   

Units

(thousands)

    

Yen

(billions)

   

Units

(thousands)

    

Yen

(billions)

 

Japan

     392       ¥ 86.4        314       ¥ 83.1        314       ¥ 77.9   

North America

     2,314         72.1        2,604         84.6        2,718         97.4   

Europe

     1,121         55.4        1,004         52.3        1,032         64.2   

Asia

     1,472         40.0        1,572         36.9        1,500         40.2   

Other Regions

     520         23.0        577         23.5        472         24.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     5,819       ¥ 277.1        6,071       ¥ 280.6        6,036       ¥ 304.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

        3        3        3

 

* 

Honda Group Unit Sales is the total unit sales of completed products of Honda, its consolidated subsidiaries and its affiliates accounted for under the equity method. Consolidated Unit Sales is the total unit sales of

 

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completed products corresponding to consolidated net sales to external customers, which consists of unit sales of completed products of Honda and its consolidated subsidiaries. In power product business, there is no discrepancy between Honda Group Unit Sales and Consolidated Unit Sales since no affiliate accounted for under the equity method was involved in the sale of Honda power products.

 

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 6,900 outlets, including approximately 600 “PRO’S” shops and approximately 110 Honda Dream authorized dealerships.

 

As for the automobile distribution network, at present, approximately 740 retail dealers operate approximately 2,200 shops and sell models including the Accord, Accord Hybrid, Accord Plug-in Hybrid, Accord Tourer, CR-Z, Fit, Fit Hybrid, Fit Shuttle, Fit Shuttle Hybrid, FREED, FREED Hybrid, FREED SPIKE, FREED SPIKE Hybrid, Insight, Stream, CR-V, Elysion, Odyssey, Step WGN, VEZEL, VEZEL Hybrid, Acty, Life, N-Box, N-Box +, N-ONE, N-WGN, and Vamos.

 

Power products are distributed in Japan to approximately 1,110 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 2014, approximately 97% 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 1,040 independent local dealers for motorcycles, approximately 1,310 for automobiles and approximately 8,000 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 274 dealerships at the end of fiscal 2014. The Acura network offers ILX, MDX, RDX, RLX, TL and TSX models.

 

With regard to exports from North America, Honda is currently exporting such North American-built models as the Accord, Civic, CR-V, Crosstour, Odyssey, Pilot, Ridgeline, Acura ILX, Acura MDX, Acura RDX and Acura TL to other markets. In fiscal 2014, Honda exported approximately 94,600 units from North America to 54 countries throughout the world.

 

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In Europe, Honda’s products are distributed through approximately 1,400 independent local dealers for motorcycles, approximately 1,150 for automobiles and approximately 2,850* for power products.

 

* 

Total number represents dealers in 12 countries which fall under the management of Honda foreign sales subsidiaries in the region.

 

In Asia, Honda’s products are distributed through approximately 14,070 independent local dealers for motorcycles, approximately 1,580 for automobiles and approximately 3,500* for power products.

 

* 

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

 

The Company exports motorcycle components to 14 countries, including Indonesia, Thailand and Vietnam, 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 15 countries, including the United States, China and Canada, 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 six countries, including India, France 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.

 

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 42% 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, 2014.

 

Ordinarily, 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 Japanese domestic suppliers are substantially more dependent on foreign suppliers than 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.

 

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Table of Contents

Environmental and Safety Regulation

 

Honda is subject to various government regulations, including environmental and safety regulations for automobiles, motorcycles and power products. Such regulations relate to items such as emissions, fuel economy, recycling and safety and have had, and are expected to continue to have, material effects on Honda’s business. Honda has incurred significant compliance and other costs in connection with such regulations and will incur future compliance and other costs for new and upcoming regulations. Relevant environmental and safety regulations are described below.

 

Outline of Environmental and Safety Regulation for Automobiles

 

1. Emissions

 

Japan

 

In March 2008, to strengthen the enforcement of laws, the 2009 Exhaust Emission Standards were created after the passage of long-term regulation. Long-term targets for gasoline vehicles remained unchanged except those for direct injection gasoline vehicles, which were also required to meet the particulate matter (PM) standard. New long-term emissions targets for diesel vehicles were lowered by more than 60% from the 2005 level of nitrogen oxides (NOx) and PM standards.

 

In 2010, the Central Environmental Council in the Ministry of Environment reviewed the current JC08 mode for emission testing and began to consider the introduction of the Worldwide harmonized Light vehicle Test Procedure (WLTP).

 

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 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 March 2009, the CARB finalized the Zero Emission Vehicle (ZEV) regulation to require 7,500 Fuel Cell Vehicles (FCV) in the entire industry instead of the previous requirement of 2,500 FCV. In addition, manufacturers were required to sell a significant number of Enhanced Advanced Technology Partial Zero Emission Vehicles (Enhanced AT-PZEV) in the market after the 2012 model year.

 

In August 2012, the CARB issued the Advanced Clean Car package of regulations, which included amendments to the California Low Emission Vehicle Program III (LEV III) and ZEV regulations. The LEV III regulation, which applies to 2015 and subsequent model years, tightened limits on emissions and evaporative emissions. The ZEV regulation was revised so that requirements could be satisfied by TZEV (formerly, Enhanced AT-PZEV) and ZEV alone for 2018 and subsequent model years. Also, for 2018 and subsequent model years, the credit value eligible for each ZEV category was decreased drastically, which consequently increases the required sales volume dramatically. The BEVx category, which includes battery electric vehicles with auxiliary power units, was also added as a ZEV category. Currently, many states have adopted California LEV III and ZEV regulations.

 

In March 2014, the Environmental Protection Agency (EPA) finalized Tier 3 regulation, the federal emission and fuel standards. Tier 3 requires gasoline fuels at pump to have an average sulfur content of 10 parts-per-million, which is already implemented in Europe and Japan. It also sets exhaust and evaporative emission standards equivalent to California LEV III. In other words, it enables auto manufacturers to sell some of the same vehicles they sell in California in states that have not adopted LEV III.

 

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Table of Contents

Europe

 

In 2005, the European Union created new emission standards (Euro 5 and Euro 6) and comprehensive requirements for gasoline vehicles and diesel vehicles. Euro 5 was implemented in September 2009. Emission limits for gasoline vehicles and diesel vehicles were further lowered compared to the Euro 4 level for hydro-carbons (HC), NOx and PM. PM mass emission standards shall apply only to vehicles with direct injection engines.

 

Additionally, Euro 5 required limits on particle number emissions from diesel vehicles, and implemented new test measurements for PM mass emissions from gasoline vehicles with direct injection engines and diesel vehicles on and after September 2011.

 

Euro 6 will be implemented from September 2014. Emission limits for diesel vehicles will be lowered even more than the Euro 5 levels for HC and NOx. Additionally, Euro 6 will require limits on particle numbers from gasoline vehicles with direct injection engines.

 

Russia

 

The Euro 4 regulation has been in effect from January 2010. Additionally, the Euro 5 regulation was implemented in January 2014.

 

China

 

China adopted Step 3 and Step 4 emission regulations for light-duty vehicles in 2005. These regulations are similar to European regulations (such as Euro 3 and Euro 4). Step 3 was implemented in 2007 and Step 4 was implemented in July 2010. In addition, China has promulgated rules to implement Step 5 emission regulations in 2018, based on Euro 5.

 

In the city of Beijing, Step 4 was implemented in March 2008 and Step 5 was implemented in February 2013. In addition, the city of Beijing is considering the introduction of Step 6 emission regulations in 2016.

 

Other Regions

 

Several other Asian countries have adopted regulations which are similar to the European regulations (such as Euro 2 and Euro 3). Some of these countries are considering the introduction of Euro 4 and Euro 5.

 

Australia implemented Euro 4-equivalent regulations in July 2008. In addition, Australia introduced Euro 5-equivalent regulations from November 2013.

 

2. Fuel Economy / CO2

 

Japan

 

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.

 

In June 2010, the Ministry of Land, Infrastructure and Transport (MLIT) and the Ministry of Economy, Trend and Industry (METI) set out a committee, respectively, and jointly commenced a study to formulate new fuel economy standards for passenger motor vehicles for 2020. The new standards were announced in March 2013. The next term fuel economy standards improve the 2015 standards by 19.6% and adopt the Corporate Average Fuel Economy (CAFE) calculation method.

 

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Table of Contents

Fuel specifications for E10 fuel, which is gasoline blended with 10% ethanol, were revised and included in the April 2012 announcement setting forth the details of safety standards under the Road Transport Vehicle Law. Ethanol blended fuel is a “biomass fuel”. Biomass fuel is regarded as an effective countermeasure for CO2 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 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.

 

In March 2009, the National Highway Traffic Safety Administration (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. The industry-wide combined average for the 2011 model year was estimated to be 27.3 mpg.

 

The EPA and the NHTSA jointly finalized the U.S. federal Green House Gas (GHG) regulation from the 2012 model year in accordance with President Obama’s announcement. 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 March 2008, the EPA denied California’s GHG regulation waiver request. On January 26, 2009, President Obama announced that he had directed the EPA to review California’s waiver request. The EPA approved the waiver on July 8, 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.

 

On May 21, 2010, President Obama ordered the NHTSA and the EPA to extend the National Program for cars and light-duty trucks to the 2017 model year and beyond with the support of the CARB. On October 1, 2010, the NHTSA, the EPA, and the CARB gave the notice of their intent to conduct joint rulemaking to establish 2017 and later model year fuel economy and greenhouse gas standards. The NHTSA and EPA issued a regulation on August 2012 regarding GHG / CAFE regulations from the 2017 through 2025 model years. The standard for the 2025 model year is 163 g-CO2/mile or 54.4 mpg over the industry average. The CARB also issued a regulation that is almost equivalent to the EPA’s GHG regulations on August 2012. On December 2012, the CARB amended its GHG regulation so that a manufacturer is also deemed to comply with CARB GHG regulations if it complies with EPA-GHG from the 2017 through 2025 model years.

 

Europe

 

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

 

Pursuant to the 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 is based on the number of grams per kilometer (g/km) that an average vehicle sold by the manufacturer exceeding the limit imposed by the curve, multiplied by the number of vehicles sold by the manufacturer.

 

In 2014, a new regulation was issued, requiring more stringent regulation that targets 95 g/km of CO2 for 2020.

 

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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. Step 3 was implemented in 2012. It will be a Corporate Average Fuel Consumption regulation from Step 3. In addition, China is considering the introduction of Step 4 in 2016.

 

Other Regions

 

India has promulgated rules to introduce fuel economy / CO2 regulations in 2015 and 2020 in a phased manner.

 

Australia is considering introducing fuel economy / CO2 regulations.

 

Taiwan is considering introducing fuel economy / CO2 regulations.

 

Mexico finalized rules in June 2013 to introduce fuel economy / CO2 regulations for the 2014 through 2016 model years.

 

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

 

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 European Chemicals 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 registration for existing chemical substances. The list of Substances of Very High Concern (SVHC) is amended periodically to include new substances. Currently, 73 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, including at least the name of the substance, within 45 days.

 

On February 18, 2011, the first set of substances which require authorization for use after specified dates were announced. Manufacturers using these substances in Europe must either be authorized for use after submitting an application or use substitute substances. Substances which require authorization will be added periodically. Currently, 14 substances require authorization.

 

Other Regions

 

Taiwan and Korea implemented automobile recycling laws on January 1, 2008, following the regulations established by the European Union and Japan. Turkey also implemented automobile recycling laws on December 12, 2010, following the regulations established by the European Union. In addition, China, Vietnam, India and Russia each have a plan to implement automobile recycling laws in the near future.

 

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4. Safety

 

Japan

 

In November 2007, the 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 post-crash. Furthermore, in 2011, they have adopted Economic Commission for Europe (ECE) R100, which was amended to incorporate the Japanese electrical safety standard.

 

Japan Automobile Standards Internationalization Center (JASIC), which is organized by the MLIT and Japan Automobile Manufacturers Association (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 made the proposal to other contracting parties of the 58 / 98 Agreement in 2009 and aims at reaching an agreement among the contracting parties by 2015.

 

In January 2010, the MLIT started preparing a guideline for noise measurements regarding the danger of hybrid vehicles remaining silent and also started studying how to regulate this.

 

In March 2010, in a 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, an accident in the Unites States caused by sudden unintended acceleration prompted the MLIT to consider introducing a “brake-override system”.

 

In May 2011, the MLIT introduced a pedestrian leg protection standard, adopting, for the first time in the world, a flexible leg impactor that features an improved biomechanism. The impactor has been made to match more similarly to the human body structure and its characteristics.

 

In August 2013, the MLIT adopted UN ECE R121, which regulates the location and identification of controls, tell-tales and indicators.

 

In November 2013, the MLIT adopted UN ECE R125, which regulates the front visibility of the motor vehicle driver.

 

The United States

 

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 May 2009, the NHTSA issued a final rule to upgrade the vehicle roof crush standard. The rule newly introduces the “Two-sided Roof Test,” which imposes strength tests for both sides of the vehicle roof and increases the maximum applied load. For vehicles with a gross vehicle weight rating (GVWR) of 2,722 kg 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 January 2011, the NHTSA issued a final 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 meet with performance requirements. Manufacturers must comply with the new requirements for 25% of all vehicles produced by 2013, 50% by 2014, 75% by 2015, 100% (with carryover credit) by 2016, and all vehicles by 2017.

 

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In February 2012, the NHTSA issued a proposed Driver Distraction Guideline. The purpose of the guideline is to reduce the number of crashes and resulting deaths and injuries that occur due to distracted driving while performing non-driving activities with integrated in-vehicle electronic devices. Compliance with this guideline is voluntary, but the NHTSA believes that manufacturers will take the initiative to implement these guidelines in an effort to improve safety.

 

In April 2012, the NHTSA issued a proposed regulation that mandates installation of a brake-throttle override system. This rule was proposed to take proper measures against the following problem: a vehicle cannot be effectively decelerated/stopped in the event that the accelerator pedal cannot return to its stationary position even after the foot is taken off the accelerator pedal, because of the floor mat being caught in the accelerator pedal or any failure in the accelerator pedal. Manufacturers must comply with the new requirements within two years from September 1 of the date of publication of the final rule.

 

In December 2012, the NHTSA issued a proposed regulation that mandates installation of an event data recorder (EDR) in vehicles. The purpose of this regulation is to allow for effective collision research as well as to share important data for the performance analysis of safety devices (e.g. advanced restraint devices) through the mandatory installation of EDRs. On or after September 2014, the NHTSA plans to require manufacturers to install EDRs which comply with specified performance requirements.

 

In January 2013, the NHTSA issued a proposed regulation that mandates installation of an approaching vehicle audible system. This regulation was established to reduce the number of collision accidents by letting pedestrians and bicycle riders be aware of approaching hybrid vehicles on electric drive or electric vehicles by sound. Manufacturers must comply with the new requirements for 30% of all vehicles produced by 2015, 60% by 2016, 90% by 2017, and all vehicles by 2018.

 

In March 2014, the NHTSA issued a final rule for FMVSS No. 111, which requires that rear visibility technology be installed in all new vehicles weighing under 10,000 pounds. The purpose is to reduce death and injury resulting from incidents when the driver is backing up. Manufacturers must comply with the new requirements for 10% of all vehicles produced from May 2016 to April 2017, 40% from May 2017 to April 2018, and all vehicles on and after May 2018.

 

Europe

 

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

 

In February 2011, the United Nations issued a revised ECE regulation relating to the installation of lighting devices, requiring automatic switching of dipped-beam headlamps. For M1 and N1 vehicles, the dipped-beam headlamps shall be switched on and off automatically relative to the ambient light conditions, if a vehicle is equipped with daytime running lamps on and after January 30, 2015.

 

Legislation regarding a new system called “eCall” is under consideration in the EU and the Customs Union, which is organized by Russia, Kazakhstan and Belarus. eCall is a system that can automatically transmit vehicle status (e.g., Supplemental Restraint System (SRS) deployment, location, direction and other information) to conventional infrastructures simultaneously with voice messages when accidents occur. Some relevant draft standards have been published in the EU. The effective date of the EU eCall for new vehicles is scheduled for the end of the first quarter in 2015. On the other hand, final standards were published in the Customs Union. The effective date of eCall for the Customs Union (ERA-GLONASS) is on and after January 1, 2015 for new vehicle types.

 

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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, China and Malaysia. 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.

 

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 Euro 3 regulations.

 

Japan is planning to implement Phase 3 emission requirements by the end of 2016, which may involve consideration of simultaneous application of the fuel evaporative gas regulation as well as mandatory installation of the On-Board Diagnostics (OBD) system.

 

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 EPA regulations include fuel permeation requirements rather than traditional evaporative emission standards. California is considering new evaporative emission standards.

 

The EPA emission standard has strengthened the class III HC + NOx limit value to 0.8 g/km as of 2010 model year vehicles. As for greenhouse gases, reporting is mandated for each emission gas (CO2 from 2011 model year, CH4 from 2012 model year and N2O from 2013 model year, respectively.

 

Europe

 

The EU has issued regulations to reform the Whole Vehicle Type Approval (WVTA) scheme in order to further enforce exhaust emissions following the Euro 4 and Euro 5 steps. Euro 4 requirements will apply to new type approved vehicles from January 2016 and will apply to all vehicles registered from January 2017. Euro 5 requirements will apply to new type approved vehicles from January 2020 and will apply to all vehicles registered from January 2021. The new requirements introduce not only mode emission gas restrictions but also evaporative emission, durability and OBD requirements. As for L1e category vehicles (mopeds), the Euro 4 requirements will apply to new type approved vehicles from 2017 and will apply to all vehicles registered from 2018 based on the WVTA amendment.

 

Other Regions

 

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

 

Japan, China, Korea, and India are considering new exhaust emission standards based on the next European WVTA.

 

In Brazil, the Worldwide-harmonized Motorcycle Test Cycle (WMTC) was introduced. The WMTC became effective from the beginning of 2014. Brazil introduced the WMTC durability requirement as of January 2014 and will introduce stricter emission limit and evaporative gas restrictions as of January 2016.

 

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2. Recycling / REACH

 

Europe

 

The same REACH compliance required for motor vehicles is required for motorcycles.

 

Other Regions

 

Vietnam and India each have a plan to implement motorcycle recycling laws in the near future.

 

3. Safety

 

Japan

 

In November 2007, the 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 accidents. Further, in 2011, it adopted ECE R100, which was amended to incorporate the Japanese electrical safety standard.

 

The 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 made the proposal to other contracting parties of the 58 / 98 Agreement in 2009 and aims to reach an agreement among the contracting parties by 2015.

 

In February 2013, the MLIT established a homologation system for ultra-compact mobility vehicles. These are vehicles which are easy to maneuver in a small space compared to automobiles, have superior environmental performance and can be utilized as a means of simple mobility for 1 or 2 passengers in a regional area. The system permits ultra-compact mobility vehicles to be run on public roads by adding features pertaining to such vehicles and relaxing certain standards without degrading the safety or environmental performances of the vehicles.

 

Japan has implemented the EMC requirement (UNECE R10) as of August 1, 2011. The amended version (R10.04) will become applicable to new type vehicles from August 1, 2016 and to all vehicles from October 28, 2016.

 

Japan is also planning to adopt requirements for lighting devices (UN ECE R50) and symmetry front beams (UNECE R113) in 2014, and control/tell-tales (UNECE R60) in 2017.

 

The United States

 

The NHTSA adopted the global technical regulation for braking systems (GTR 3) into the federal standard (FMVSS 122) as part of standard harmonization activities. The new standard will be applicable to the vehicles produced on and after September 1, 2014.

 

The NHTSA amended the federal standard for lighting devices (FMVSS 108) to change visibility and other requirements, which became effective as of December 2012.

 

Europe

 

The EU has issued regulations to change the WVTA scheme in order to further enforce safety. The new safety regulations require advanced brake systems and functional safety and electrical safety requirements. The new EU WVTA (EU Regulation No. 168/2013) was published on March 2, 2013. This new system will become applicable to new type motorcycles from January 2016 and new type mopeds from January 2017.

 

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The EU Commission finalized Delegated Regulations concerning environmental and propulsion unit performance (EU Regulation No. 134/2014), vehicle functional safety (EU Regulation No. 3/2014), vehicle construction and general requirements (EU Regulation No. 44/2014). The Implementing Regulation is expected to be published by July 2014 and the new regulations establishing the new EU WVTA system will be completed afterwards.

 

The new WVTA system requires motorcycle manufacturers to make vehicle repair and maintenance information available through their websites.

 

Other regions

 

The Brazilian government issued a new regulation regarding anti-theft devices, which requires installations of an immobilizer and a vehicle tracking system on vehicles and motorcycles sold or registered from August 1, 2009. However, this regulation has not been implemented yet because the Prosecutors Office claimed it was unconstitutional and asked the courts to overturn it. Several amendments are scheduled to go into effect on the effective date (currently set for September 2014) in accordance with the phase-in application schedule, but the date of the actual implementation of this regulation is still unclear because of a court decision holding this regulation to be unconstitutional. Brazil is also considering issuing a new standard concerning motorcycle braking based on the UN ECE Brake regulation (R78.03) as well as a new regulation mandating ABS/CBS installation.

 

The Gulf Cooperation Council (GCC) is considering introducing a motorcycle certification system which is scheduled to become effective as of July 2014. The GCC Standardization Organization (GSO) is currently discussing the applicable requirements and test methods.

 

Many Asian countries, such as India, Thailand, Indonesia, Malaysia, Korea and Vietnam, are introducing various regulations, regarding lighting, braking, and anti-theft, based on UN R (ECE) regulations.

 

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 small non-road engines. The regulations applied starting in the 2011 model year for Class II engines (above 225 cc), in the 2012 model year for Class I engines (less than 225 cc and used in non-handheld applications) and generally in 2010 for handheld products. The 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 standards to control evaporative emissions for all vessels using marine spark-ignition engines.

 

Canada

 

The Canadian federal government has introduced emissions regulations generally equivalent to the U.S. EPA regulations for outboard and personal watercraft engines from the 2012 model year. These new regulations include controls for evaporative emissions from the 2015 model year.

 

China

 

An exhaust emission standard was introduced in China on March 1, 2011. Its requirements are based on the European exhaust emission regulations and are applicable to small spark-ignition engines for non-road mobile machinery with 19 kW or less. The phase 2 regulation with durability requirement has started from January 1, 2014.

 

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Europe

 

European Committee started to consider the stage 3 regulation. Its requirement will follow U.S. EPA phase 3 and the effective date will be 2019 or 2020.

 

Japan

 

The Japan Land Engine Manufacturers Association (LEMA) has implemented Phase 3 voluntary exhaust emission regulation from January 1, 2014. The requirements are consistent with U.S. EPA Phase 3 regulation.

 

India

 

The Ministry of Environment issued a revised regulation for emission/noise standards applicable to gasoline/kerosene engine generators. The exhaust emission limits are very stringent. In particular, the CO level limit is less than half the limit allowed by U.S. EPA Phase 3. The effective date is June 2015.

 

2. Recycling /RoHS / WEEE / REACH

 

Europe

 

The same REACH compliance required for motor vehicles is required for power products. In June 2011, the European Union Directive on the restriction of the use of certain hazardous substances in electrical and electronic equipment (RoHS) was wholly revised and most power products will be within its scope after 2019.

 

Other regions

 

Turkey and several Asian countries have adopted regulations which are similar to the European regulations (such as RoHS and WEEE).

 

3. Safety

 

Japan

 

The Institute of Agricultural Machinery amended the safety standard of backward speed requirements for walk-behind equipment from 3.6 km/h to 1.8 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 certificate requirements from November 11, 2008. The CPSC has enhanced the recall system by this Act.

 

Europe

 

The Machinery Directive was changed and a new directive has been effective from December 29, 2009. The main changes were to clarify the scope of the directive (for example, whether it covered partly completed machinery, such as engine units), add a concrete description of market surveys and create an obligation to establish a penalty description for member states.

 

China

 

The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) has issued a draft safety regulation for spark-ignition engines including a wide variety of requirements such as machinery safety, thermal protection, electrical safety, and others. It is expected to come into force in 2014.

 

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Preparing for the Future

 

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

 

Honda will focus all its energies on the tasks set out below as it pursues the vision toward 2020 of “providing good products to customers with speed, affordability, and low CO2 emissions.”

 

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. Learning from the experience of disasters such as the Great East Japan Earthquake and the Thai floods, Honda will work at improving its global supply chain, implementing disaster prevention measures at each place of business and devising more effective business continuity plans (BCPs).

 

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 has now set a target to reduce CO2 emissions from its global products by 30% by the end of 2020 compared to year 2000 levels. In addition to reducing CO2 emissions during production and supply chain, Honda will strengthen its efforts to realize reductions in CO2 emissions through its entire corporate activities. Furthermore, Honda will strengthen its efforts in advancing technologies in the area of total energy management, to reduce CO2 emissions through mobility and people’s everyday lives.

 

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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.

 

Through these company-wide activities, Honda will strive to be a company that its shareholders, investors, customers and society want to exist.

 

C. Organizational Structure

 

As of March 31, 2014, the Company had 92 Japanese subsidiaries and 273 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 Bank GmbH

  Germany   Finance     100.0   

Honda Motor (China) Investment Co., Ltd.

  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 Motorcycle & Scooter India (Private) Ltd.

  India   Manufacturing and Sales     100.0   

Honda Cars India Limited

  India   Manufacturing and Sales     100.0   

P.T. Honda Precision Parts Manufacturing

  Indonesia   Manufacturing     100.0   

P.T. Honda Prospect Motor

  Indonesia   Manufacturing and Sales     51.0   

Honda Taiwan Co., Ltd.

  Taiwan   Sales     100.0   

Asian Honda Motor Co., Ltd.

  Thailand   Coordination of Subsidiaries Operation and Sales     100.0   

 

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Company

  Country of
Incorporation
 

Function

  Percentage
Ownership
and
Voting Interest
 

Honda Leasing (Thailand) Co., Ltd.

  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   

Banco Honda S.A.

  Brazil   Finance     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   

 

D. Property, Plants and Equipment

 

The following table sets out information, as of March 31, 2014, 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

     5,049       Automobiles

Hamamatsu, Shizuoka, Japan

     2,298       Power products and transmissions

Suzuka, Mie, Japan

     6,492       Automobiles

Ohzu-machi, Kikuchi-gun, Kumamoto, Japan

     2,600       Motorcycles, all-terrain vehicles, power products and engines

Marysville, Ohio, U.S.A.

     5,660       Automobiles

Anna, Ohio, U.S.A.

     2,544       Engines

East Liberty, Ohio, U.S.A.

     2,201       Automobiles

Lincoln, Alabama, U.S.A.

     4,614       Automobiles and engines

Greensburg, Indiana, U.S.A.

     2,289       Automobiles

Alliston, Ontario, Canada

     4,009       Automobiles and engines

El Salto, Mexico

     3,756       Motorcycles and automobiles

Swindon, Wiltshire, U.K.

     3,155       Automobiles and engines

Guangzhou, China

     845       Automobiles

Gurgaon, India

     5,929       Motorcycles

Greater Noida, India

     3,200       Automobiles

Karawang, Indonesia

     2,048       Automobiles and engines

Ayutthaya, Thailand

     3,975       Automobiles

Bangkok, Thailand

     3,524       Motorcycles and power products

Phuc Yen, Vietnam

     4,127       Motorcycles and automobiles

Buenos Aires, Argentina

     1,350       Motorcycles and automobiles

Sumare, Brazil

     3,454       Automobiles

Manaus, Brazil

     7,957       Motorcycles and power products

Gebze, Turkey

     747       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 R&D facilities.

 

As of March 31, 2014, the Company’s property, with a net book value of approximately ¥58.5 billion, was subject to specific mortgages securing indebtedness.

 

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Capital Expenditures

 

Capital expenditures in fiscal 2014 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 ¥1,854.0 billion, increased by ¥467.2 billion from the previous year. Also, total capital expenditures, excluding property on operating leases, for the year amounted to ¥726.1 billion, increased by ¥132.5 billion from the previous year. Spending by business segment is shown below.

     Fiscal years ended March 31,  
     2013      2014      Increase
(Decrease)
 
     Yen (millions)  

Motorcycle Business

   ¥ 73,513       ¥ 55,575       ¥ (17,938

Automobile Business

     505,045         656,412         151,367   

Financial Services Business

     793,669         1,128,460         334,791   

Financial Services Business (Excluding Property on Operating Leases)

     551         620         69   

Power Product and Other Businesses

     14,519         13,580         (939

Total

   ¥ 1,386,746       ¥ 1,854,027       ¥ 467,281   

Total (Excluding Property on Operating Leases)

   ¥ 593,628       ¥ 726,187       ¥ 132,559   

 

Intangible assets are not included in the table above.

 

In Motorcycle business, we made capital expenditures of ¥55,575 million in the fiscal year ended March 31, 2014. 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 Automobile business, we made capital expenditures of ¥656,412 million in the fiscal year ended March 31, 2014. 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 auto plant in Yorii-machi, Osato-gun, Saitama, Japan completed construction of its facilities for production in July 2013. A second auto plant of Honda De Mexico, S.A. de C.V., which is one of the Company’s consolidated subsidiaries, completed construction of facilities for production in February 2014. A second auto plant of Honda Cars India Limited, which is one of the Company’s consolidated subsidiaries, completed construction of facilities for production in February 2014.

 

In Financial services business, capital expenditures excluding property on operating leases amounted to ¥620 million in the fiscal year ended March 31, 2014, while capital expenditures for property on operating leases were ¥1,127,840 million. Capital expenditures in Power products and other businesses in the fiscal year ended March 31, 2014, totaling ¥13,580 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 2014

 

During the fiscal year ended March 31, 2014, we modified our capital expenditure plans which were originally set out in the prior fiscal year. The modified plans are as follows:

 

The scale of a test course in a new R&D facility, which is under construction in Sakura-shi, Tochigi, Japan, has been changed. Also, a mega-solar power plant will be built on its property.

 

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, 2015 are shown below.

 

     Fiscal year ending
March 31, 2015
 
     Yen (millions)  

Motorcycle Business

   ¥ 77,400   

Automobile Business

     559,900   

Financial Services Business

     900   

Power Product and Other Businesses

     11,800   
  

 

 

 

Total

   ¥ 650,000   
  

 

 

 

 

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 Results

 

Overview

 

Business Environment

 

Economic conditions in the U.S. continued to improve during the fiscal year ended March 31, 2014. This recovery in the U.S. was underscored by the job market improving, personal consumption increasing gradually, and strong housing investment. Economic conditions in Europe began showing signs of a recovery, despite negative GDP growth, high unemployment rates and other lingering weaknesses in the economy. As for conditions in Asia, the economy continued to expand in China, while the pace of economic expansion slowed in Thailand and became more gradual in India and Indonesia. Meanwhile, the Japanese economy recovered gradually owing, among other positive developments, to the employment situation improving and personal consumption expanding.

 

The trends, uncertainties, demands, commitments and events identified below may continue or recur, impacting the company’s future financial results.

 

Overview of Fiscal Year 2014 Operating Performance

 

Honda’s consolidated net sales and operating revenues for the fiscal year ended March 31, 2014, increased from the fiscal year ended March 31, 2013, due mainly to increased net sales in Automobile business and Motorcycle business operations as well as favorable foreign currency translation effects. Operating income increased from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and model mix as well as favorable foreign currency translation effects, which was partially offset by increased selling, general and administrative expenses, in addition to increased research and development expenses.

 

Motorcycle Business

 

Honda’s consolidated unit sales of motorcycles totaled 10,343 thousand units in fiscal year 2014, an increase of 8.8% from the previous fiscal year, mainly due to the introduction of new models in India, among other countries.

 

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Automobile Business

 

Honda’s consolidated unit sales of automobiles totaled 3,560 thousand units in fiscal year 2014, an increase of 4.5% from the previous fiscal year. This growth was supported mainly by an increase in sales in Japan and North America as a result of new model introductions and full model changes.

 

Power Product and Other Businesses

 

Honda’s consolidated unit sales of power products totaled 6,036 thousand units in fiscal year 2014, a decrease of 0.6% from the previous fiscal year. This minor setback was the result of diminishing sales in Asia and Other Regions which offset an increase in sales - mainly in North America.

 

Fiscal Year 2014 Compared with Fiscal Year 2013

 

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, 2014, increased by ¥1,964.5 billion, or 19.9%, to ¥11,842.4 billion from the fiscal year ended March 31, 2013, due mainly to increased net sales in Automobile business and Motorcycle business operations as well as positive 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 increased by approximately ¥458.4 billion, or 4.6%, compared to the increase as reported of ¥1,964.5 billion, which includes positive foreign currency translation effects.

 

Operating Costs and Expenses

 

Operating costs and expenses increased by ¥1,759.0 billion, or 18.8%, to ¥11,092.1 billion from the previous fiscal year. Cost of sales increased by ¥1,415.9 billion, or 19.3%, to ¥8,761.0 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased consolidated unit sales in Automobile business and Motorcycle business, and negative foreign currency effects. Selling, general and administrative expenses increased by ¥269.2 billion, or 18.9%, to ¥1,696.9 billion from the previous fiscal year, due mainly to increased product warranty expenses and increase in selling expenses attributable to increased consolidated unit sales in Automobile business and Motorcycle business. R&D expenses increased by ¥73.8 billion, or 13.2%, to ¥634.1 billion from the previous fiscal year, due mainly to improving safety and environmental technologies and enhancing of the attractiveness of the products.

 

Operating Income

 

Operating income increased by ¥205.4 billion, or 37.7%, to ¥750.2 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and positive foreign currency effects, which was partially offset by increased selling, general and administrative expenses and increased R&D expenses. Excluding positive foreign currency effects of ¥288.7 billion, Honda estimates operating income decreased by ¥83.2 billion.

 

With respect to the discussion above of the changes, management identified 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, Euro, Japanese yen and others at the level of the Company and its material consolidated subsidiaries.

 

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Income before Income Taxes and Equity in Income of Affiliates

 

Income before income taxes and equity in income of affiliates increased by ¥240.0 billion, or 49.1%, to ¥728.9 billion. The main factors behind this increase, except factors relating operating income, are as follows:

 

Unrealized gains and losses related to derivative instruments had a positive impact of ¥74.4 billion. Other income (expenses) excluding unrealized gains and losses related to derivative instruments had a negative impact of ¥39.8 billion, due mainly to an increase in foreign currency transaction losses.

 

Income Tax Expense

 

Income tax expense increased by ¥73.6 billion, or 41.2%, to ¥252.6 billion from the previous fiscal year. The effective tax rate decreased 1.9 percentage points to 34.7% from the previous fiscal year. The decrease in the effective tax rate was due mainly to a decrease in a portion of unrecognized tax benefits related to transfer pricing matters of overseas transactions between the Company and foreign affiliates.

 

Equity in Income of Affiliates

 

Equity in income of affiliates increased by ¥49.7 billion, or 60.1%, to ¥132.4 billion, due mainly to an increase in income attributable to increased net sales at affiliates in Asia and a recognition of impairment loss on certain investments in affiliates, which was included in the previous fiscal year.

 

Net Income

 

Net income increased by ¥216.1 billion, or 55.0%, to ¥608.7 billion from the previous fiscal year.

 

Net Income attributable to Noncontrolling Interests

 

Net income attributable to noncontrolling interests increased by ¥9.1 billion, or 35.9%, to ¥34.6 billion from the previous fiscal year.

 

Net Income attributable to Honda Motor Co., Ltd.

 

Net income attributable to Honda Motor Co., Ltd. increased by ¥206.9 billion, or 56.4%, to ¥574.1 billion from the previous fiscal year.

 

Business Segments

 

Motorcycle Business

 

Honda’s consolidated unit sales of motorcycles and all-terrain vehicles (ATVs) totaled 10,343 thousand units, increased by 8.8% from the previous fiscal year, due mainly to an increase in consolidated unit sales in Asia.

 

Revenue from external customers increased by ¥324.0 billion, or 24.2%, to ¥1,663.6 billion from the previous fiscal year, due mainly to increased consolidated unit sales and positive foreign currency translation effects. The impact of price changes was immaterial. 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 ¥124.9 billion, or 9.3%, compared to the increase as reported of ¥324.0 billion, which includes positive foreign currency translation effects.

 

Operating costs and expenses increased by ¥268.7 billion, or 21.9%, to ¥1,498.0 billion from the previous fiscal year. Cost of sales increased by ¥218.5 billion, or 22.7%, to ¥1,181.5 billion, due mainly to an increase in costs attributable to increased consolidated unit sales and negative foreign currency effects. Selling, general and administrative expenses increased by ¥43.5 billion, or 21.8%, to ¥243.3 billion, due mainly to an increase in selling expenses attributable to increased consolidated unit sales and negative foreign currency effects. R&D expenses increased by ¥6.6 billion, or 10.0%, to ¥73.0 billion.

 

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Operating income increased by ¥55.3 billion, or 50.2%, to ¥165.6 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and positive foreign currency effects, which was partially offset by increased selling, general and administrative expenses and increased R&D expenses.

 

Japan

 

Total industry demand for motorcycles in Japan* was approximately 470 thousand units in fiscal year 2014, an increase of roughly 7% from the previous fiscal year. This was attributable to an increase in sales of scooters and small to lightweight motorcycles, with engines ranging from 50cc to 250cc, due mainly to a spike in demand ahead of an increase in Japan’s consumption tax rate.

 

Honda’s consolidated unit sales in Japan were 226 thousand units in fiscal year 2014, up 4.1% from the previous fiscal year, owing to the launch of models such as the DUNK 50cc scooter and the GROM sporty motorcycle.

 

* 

Source: JAMA (Japan Automobile Manufacturers Association)

 

North America

 

Total demand for motorcycles and all-terrain vehicles (ATVs) in the United States*, the principal market within North America, increased approximately 1% from the previous year to approximately 690 thousand units in calendar year 2013. Unit sales growth reflected an improvement in consumer sentiment in line with falling unemployment rates.

 

Under these circumstances, Honda’s consolidated unit sales in North America increased 10.4% from the previous fiscal year to 276 thousand units in fiscal year 2014, mainly due to steady sales of models such as the CB500 series of middleweight road machines and the CRF250L on/off-road model, as well as favorable effects from the introductions of the all new sporty model, GROM and full model changes of utility ATVs such as TRX420 and TRX500 in the United States.

 

* 

Source: MIC (Motorcycle Industry Council)

 

Europe

 

Total demand for motorcycles in Europe* declined around 11% from the previous fiscal year, to approximately 690 thousand units in calendar year 2013. Weak consumer sentiment due to continually high unemployment rates adversely affected demand.

 

Under these circumstances, Honda’s consolidated unit sales in Europe decreased 7.3% from the previous fiscal year to 166 thousand units in fiscal year 2014, mainly reflecting the lackluster market as a whole. This was despite brisk sales of the CB500 series of middleweight road machines, and a positive impact from the introduction of the sporty MSX125 model.

 

* 

Based on Honda research: this only includes the following 10 countries – the United Kingdom, Germany, France, Italy, Spain, Switzerland, Portugal, the Netherlands, Belgium and Austria.

 

Asia

 

Total demand for motorcycles in Asia* declined around 1% from the previous year to approximately 40,980 thousand units in calendar year 2013.

 

Looking at market conditions by country, demand in India increased roughly 3% from the previous fiscal year to approximately 14,300 thousand units, while demand in China decreased around 9% from the previous year to approximately 11,510 thousand units. Indonesia saw demand increase around 8% from the previous year to approximately 7,740 thousand units, and Vietnam saw demand decline roughly 13% to approximately 2,700 thousand units. Demand in Thailand declined around 9% to approximately 1,930 thousand units.

 

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Despite these circumstances, Honda’s consolidated unit sales in Asia increased 11.4% from the previous fiscal year to 7,858 thousand units in fiscal year 2014. This was due mainly to brisk sales of the ACTIVA scooter and DREAM Yuga small motorcycle, as well as the introduction of the DREAM Neo small motorcycle, in India.

 

Honda’s consolidated unit sales do not include sales by P.T. Astra Honda Motor in Indonesia, which is an affiliate accounted for under the equity method. P.T. Astra Honda Motor’s unit sales for fiscal year 2014 increased around 15% from the previous fiscal year to approximately 4,700 thousand units. This was due mainly to consumer sentiment improving in line with incomes rising in Indonesia.

 

* 

Based on Honda research: this only includes the following eight countries – Thailand, Indonesia, Malaysia, the Philippines, Vietnam, India, Pakistan and China.

 

Other Regions

 

Total demand for motorcycles in Brazil*, the principal market within Other Regions, declined roughly 7% from the previous year to approximately 1,510 thousand units in calendar year 2013, mainly due to stricter lending standards for retail loans.

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales increased 0.2% from the previous fiscal year to 1,817 thousand units in fiscal year 2014, mainly due to increased sales in South American countries other than Brazil. This, however, was partly offset by a decline in sales of small motorcycles such as the CG125 Fan and CG150 Fan, due mainly to the negative effects from stricter lending standards for retail loans in Brazil.

 

* 

Source: ABRACICLO (the Brazilian Association of Motorcycle, Moped, and Bicycle Manufacturers)

 

Automobile Business

 

Honda’s consolidated unit sales of automobiles totaled 3,560 thousand units, increased by 4.5% from the previous fiscal year, due mainly to an increase in consolidated unit sales in Japan and North America.

 

Revenue from external customers increased by ¥1,467.1 billion, or 19.0%, to ¥9,176.3 billion from the previous fiscal year, due mainly to increased consolidated unit sales and positive foreign currency translation effects. The impact of price changes was immaterial. 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 ¥304.4 billion, or 3.9%, compared to the increase as reported of ¥1,467.1 billion, which includes positive foreign currency translation effects. Revenue including intersegment sales increased by ¥1,471.3 billion, or 19.0%, to ¥9,194.9 billion from the previous fiscal year.

 

Operating costs and expenses increased by ¥1,353.6 billion, or 18.2%, to ¥8,791.2 billion from the previous fiscal year. Cost of sales increased by ¥1,086.8 billion, or 18.5%, to ¥6,955.1 billion, due mainly to an increase in costs attributable to increased consolidated unit sales and negative foreign currency effects. Selling, general and administrative expenses increased by ¥199.3 billion, or 18.0%, to ¥1,304.6 billion, due mainly to increased product warranty expenses, an increase in selling expenses attributable to increased consolidated unit sales and negative foreign currency effects. R&D expenses increased by ¥67.3 billion, or 14.5%, to ¥531.4 billion, due mainly to improving safety and environmental technologies and enhancing of the attractiveness of the products.

 

Operating income increased by ¥117.7 billion, or 41.2%, to ¥403.7 billion from the previous fiscal year, due mainly to continuing cost reduction and positive foreign currency effects, which was partially offset by increased selling, general and administrative expenses and increased R&D expenses.

 

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Proportion of retail unit sales by vehicle category:

 

    Fiscal year ended
March  31,
 
    2013     2014  

Passenger cars:

    60     58

Accord, Accord Hybrid, Accord Plug-in Hybrid, Accord Tourer, Amaze, Brio, Brio Amaze, Brio Satya, City, Civic, Civic Tourer, CRIDER, CR-Z, Fit/Jazz, Fit/Jazz Hybrid, Fit Shuttle, Fit Shuttle Hybrid, FREED, FREED Hybrid, FREED SPIKE, FREED SPIKE Hybrid,

Honda MOBILIO, Insight, JADE, Spirior, Stream,

Acura ILX, Acura RLX, Acura TL, Acura TSX

   

Light trucks:

    31     32
Crosstour, CR-V, Elysion, Odyssey, Pilot, Ridgeline, Step WGN, VEZEL, VEZEL Hybrid, Acura MDX, Acura RDX    

Mini vehicles:

    9     10

Acty, Life, N-Box, N-Box +, N-ONE, N-WGN, Vamos

   

 

Although there are various factors that affect the profitability of each vehicle category, sales price is an important factor in determining profitability. In general, the weighted average sales price in the light trucks category is higher relative to the total average sales price, while the weighted average sales price in the mini vehicles category, which is unique to the Japanese market, is relatively lower, although sales price vary from model to model.

 

In general, the contribution margin of the light trucks category tends to be higher relative to the total weighted average contribution margin because the sales price is higher, while the contribution margin of the mini vehicles category tends to be relatively lower because the sales price is lower, although the level of contribution margin varies from model to model. For example, in Japan and the United States, which are the main sales markets for our automobiles, the contribution margin of our light trucks category was approximately 40% higher, our passenger cars category was approximately 10% lower and our mini vehicles category was approximately 40% lower than total weighted average contribution margin for the fiscal year ended March 31, 2014. It should be noted that we define contribution margin as an amount per unit of net sales minus material cost, which is thought to increase in almost direct proportion to net sales volume.

 

Japan

 

Total demand for automobiles in Japan*1 rose around 9% from the previous fiscal year to approximately 5,690 thousand units in fiscal year 2014. This was mainly due to sales receiving a boost in the second half of the fiscal year from a last-minute rise in demand before an increase in Japan’s consumption tax rate. Gains were offset in part by a backlash from the termination of eco-car subsidies.

 

Honda’s consolidated unit sales in Japan rose 18.5% from the previous fiscal year to 812 thousand units*2. This result was attributable to the introduction of the N-WGN and VEZEL and full model changes of the Fit and Odyssey.

 

In production activities, Honda’s unit production of automobiles increased 6.9% from the previous fiscal year to 936 thousand units in fiscal year 2014, mainly due to higher sales in Japan, despite the shift of some production overseas.

 

The Saitama Factory’s Yorii automobile plant, which had been under construction in Yorii-machi, Osato-gun, Saitama, began operation in July 2013. The manufacturing capacity of the Yorii Plant, which mainly produces the Fit and VEZEL, is 250 thousand units per year.

 

*1:

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

 

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*2:

Certain sales of automobiles that are financed with residual value-type auto loans by our Japanese finance subsidiaries are accounted for as operating leases in conformity with U.S. generally accepted accounting principles and are not included in consolidated net sales to the external customers in our automobile business. As a result, they are not included in consolidated unit sales.

 

North America

 

Total industry demand for automobiles in the United States*, the principal market within North America, rose around 8% from the previous year to approximately 15,600 thousand units in calendar year 2013. This was mainly attributable to improvements in employment conditions and upswings in consumer sentiment that led to a substantial increase in light truck sales and also a rise in small passenger car sales.

 

Under these circumstances, Honda’s consolidated unit sales in North America increased 1.5% from the previous fiscal year to 1,757 thousand units in fiscal year 2014. This was mainly due to strong sales of the Accord, Civic, CR-V and other models, as well as a full model change of the ACURA MDX.

 

In production activities, Honda manufactured 1,777 thousand units, up 5.3% from the previous fiscal year.

 

Honda de Mexico, S.A. de C.V., a consolidated subsidiary in Mexico, built a new plant with an annual production capacity of 200 thousand units in order to meet expected market expansion for small cars in North America. This new plant went into operation in February 2014.

 

* 

Source: WardsAuto

 

Europe

 

Total demand for automobiles in Europe*1 decreased roughly 2% from the previous year to approximately 12,300 thousand units in calendar year 2013. The market diminished as a whole due mainly to unemployment rates remaining high and the weakness of the real economy in the eurozone, excluding the U.K. The market’s decline was offset in part by an economic recovery in the U.K., resulting in a pocket of growth in demand for automobiles. On the other hand, total demand for automobiles in Russia*2 decreased around 5% from the previous year to approximately 2,770 thousand units.

 

Honda’s consolidated unit sales in Europe decreased 1.2% from the previous year to 169 thousand units in fiscal year 2014. This was mainly due to a decline in unit sales of the Civic which offset sales generated by the launch of a new diesel engine equipped CR-V.

 

On the production front, unit output at Honda’s U.K. plant declined 21.6% from the previous fiscal year to 133 thousand units in fiscal year 2014.

 

*1:

Source: ACEA (Association des Constructeurs Europeens d’Automobiles (the European Automobile Manufacturers’ Association)) New passenger car registrations cover 27 EU countries and three EFTA countries, excluding Russia.

 

*2:

Source: AEB (The Association of European Businesses)

 

Asia

 

Total demand for automobiles in Asia decreased around 2% from the previous year to approximately 8,730 thousand units*1 in the 2013 calendar year. This was mainly due to the market shrinking as a consequence of a slowdown in the economy in India and the backlash from a termination of government subsidies in Thailand. Total demand for automobiles in China increased roughly 14% from the previous year to approximately 21,980 thousand units*2.

 

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Honda’s consolidated unit sales in Asia outside Japan increased 1.1% from the previous fiscal year to 529 thousand units in fiscal year 2014. This increase was mainly attributable to strong sales of the Amaze and introduction of the City in India, and a boost from the introduction of the Honda MOBILIO in Indonesia.

 

Honda’s consolidated unit sales do not include unit sales of Dongfeng Honda Automobile Co., Ltd. and Guangqi Honda Automobile Co., Ltd., both of which are affiliates accounted for under the equity method in China. That said, unit sales in China increased 26.3% from the previous fiscal year to 757 thousand units in fiscal year 2014. The increase was mainly attributable to a full model change of the Accord and introduction of the Crider and Jade models.

 

Honda’s unit production by consolidated subsidiaries in Asia increased 2.0% from the previous fiscal year to 591 thousand units*3 in fiscal year 2014.

 

Meanwhile, unit production by Chinese equity-method affiliates Dongfeng Honda Automobile Co., Ltd. and Guangqi Honda Automobile Co., Ltd. increased 29.8% from the previous fiscal year to 764 thousand units in fiscal year 2014.

 

Honda Malaysia SDN BHD, a consolidated subsidiary in Malaysia, built a second production line with an annual capacity of 50 thousand units. This line went in to operation in October 2013.

 

In addition, P.T. Honda Prospect Motor, a consolidated subsidiary in Indonesia, constructed a new automobile plant with an annual production capacity of 120 thousand units that went into operation in January 2014.

 

Moreover, Honda Cars India Ltd., a consolidated subsidiary in India, constructed a new automobile plant with an annual production capacity of 120 thousand units that went into operation in February 2014.

 

*1:

The total is based on Honda research and includes the following 10 countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Singapore, Taiwan, South Korea, India and Pakistan.

 

*2:

Source: China Association of Automobile Manufacturers

 

*3:

The total includes the following nine countries: China, Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Taiwan, India and Pakistan.

 

Other Regions

 

Total industry demand for automobiles in Brazil*, one of the principal markets among the Other Regions, decreased around 1% to approximately 3,570 thousand units in calendar year 2013.

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales decreased 1.7% from the previous fiscal year to 293 thousand units in fiscal year 2014. This result was due to a decrease in sales mainly in Australia, which were partly offset by increased sales of the Civic and other models mainly in Brazil.

 

On the production front, Honda’s unit production in Brazil increased 0.3% from the previous fiscal year to 136 thousand units in fiscal year 2014.

 

* 

Source: ANFAVEA (Associação Nacional dos Fabricantes de Veiculos Automotores (the Brazilian Automobile Association)) Includes passenger cars and light commercial vehicles.

 

Power Product and Other Businesses

 

Honda’s consolidated unit sales of power products totaled 6,036 thousand units, decreased by 0.6% from the previous fiscal year, due mainly to a decrease in consolidated unit sales in Asia and Other Regions, which was partially offset by an increase in unit sales in North America.

 

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Revenue from external customers increased by ¥23.5 billion, or 8.4%, to ¥304.2 billion from the previous fiscal year, due mainly to positive 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 ¥10.4 billion, or 3.7%, compared to the increase as reported of ¥23.5 billion, which includes positive foreign currency translation effects. Revenue including intersegment sales increased by ¥26.5 billion, or 9.1%, to ¥318.1 billion from the previous fiscal year.

 

Operating costs and expenses increased by ¥18.7 billion, or 6.2%, to ¥319.9 billion from the previous fiscal year. Cost of sales increased by ¥12.2 billion, or 5.7%, to ¥227.1 billion, due mainly to negative foreign currency effects. Selling, general and administrative expenses increased by ¥6.5 billion, or 11.6%, to ¥63.1 billion. R&D expenses decreased by ¥0.1 billion, or 0.4%, to ¥29.6 billion.

 

Operating loss was ¥1.7 billion, an improvement of ¥7.7 billion from the previous fiscal year, due mainly to positive foreign currency effects.

 

Japan

 

Honda’s consolidated unit sales of power product and other businesses in Japan remained about the same as the previous fiscal year at 314 thousand units in fiscal year 2014. This was mainly due to a decline in sales of portable power generators which offset an increase in sales of OEM* general-purpose engines and snow throwers.

 

* 

OEM (Original Equipment Manufacturer): refers to the manufacturers of products and components sold under a third-party brand.

 

North America

 

Honda’s consolidated unit sales in North America increased 4.4% from the previous fiscal year to 2,718 thousand units in fiscal year 2014. This was mainly attributable to an increase in sales of OEM engines which offset a decline in sales of portable power generators.

 

Europe

 

Honda’s consolidated unit sales in Europe increased 2.8% from the previous fiscal year to 1,032 thousand units in fiscal year 2014. This was mainly due to an increase in sales of OEM engines which offset a decline in sales of lawn mowers and snow throwers.

 

Asia

 

Honda’s consolidated unit sales in Asia decreased 4.6% from the previous fiscal year to 1,500 thousand units in fiscal year 2014. This was mainly attributable to a decline in sales of OEM engines in Thailand and portable power generators in India which offset an increase in sales of OEM engines and pumps in China.

 

Other Regions

 

Honda’s consolidated unit sales in Other Regions (including South America, the Middle East, Africa, Oceania and other areas) decreased 18.2% from the previous fiscal year to 472 thousand units in fiscal year 2014. This was mainly due to a decrease in sales of pumps and OEM engines in 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.

 

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Total amount of finance subsidiaries-receivables and property on operating leases of finance subsidiaries increased by ¥1,144.2 billion, or 19.5%, to ¥7,018.4 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 ¥641.4 billion, or 10.9%, compared to the increase as reported of ¥1,144.2 billion, which includes positive foreign currency translation effects.

 

Revenue from external customers in Financial services business increased by ¥149.6 billion, or 27.3%, to ¥698.1 billion from the previous fiscal year, due mainly to an increase in operating lease revenues and positive 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 ¥39.4 billion, or 7.2%, compared to the increase as reported of ¥149.6 billion, which includes positive foreign currency translation effects. Revenue including intersegment sales increased by ¥148.3 billion, or 26.5%, to ¥708.5 billion from the previous fiscal year.

 

Operating costs and expenses increased by ¥123.7 billion, or 30.8%, to ¥525.8 billion from the previous fiscal year. Cost of sales increased by ¥103.9 billion, or 30.9%, to ¥440.1 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased operating lease revenues and negative foreign currency effects. Selling, general and administrative expenses increased by ¥19.7 billion, or 30.0%, to ¥85.6 billion from the previous fiscal year.

 

Operating income increased by ¥24.5 billion, or 15.6%, to ¥182.7 billion from the previous fiscal year, due mainly to positive foreign currency effects, which was partially offset by increased selling, general and administrative expenses.

 

Geographical Information

 

Japan

 

In Japan, revenue from domestic and export sales increased by ¥298.7 billion, or 7.7%, to ¥4,192.2 billion from the previous fiscal year, due mainly to an increase in revenue in Automobile business and Motorcycle business. Operating income increased by ¥35.6 billion, or 20.0%, to ¥214.0 billion from the previous fiscal year, due mainly to positive foreign currency effects, which was partially offset by increased R&D expenses and increased selling, general and administrative expenses.

 

North America

 

In North America, which mainly consists of the United States, revenue increased by ¥1,112.8 billion, or 22.9%, to ¥5,969.9 billion from the previous fiscal year, due mainly to an increase in revenue in Automobile business and positive foreign currency translation effects. Operating income increased by ¥81.9 billion, or 39.2%, to ¥290.9 billion from the previous fiscal year, due mainly to continuing cost reduction and positive foreign currency effects, which was partially offset by increased selling, general and administrative expenses.

 

Europe

 

In Europe, revenue increased by ¥133.1 billion, or 20.7%, to ¥775.2 billion from the previous fiscal year, due mainly to positive foreign currency translation effects, which was partially offset by a decrease in revenue in Motorcycle business and Automobile business. Operating loss was ¥17.1 billion, a decrease of ¥17.5 billion of operating income from the previous fiscal year, due mainly to a decrease in income attributable to decreased net sales and model mix, which was partially offset by decreased selling, general and administrative expenses and positive foreign currency effects.

 

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Asia

 

In Asia, revenue increased by ¥521.2 billion, or 22.6%, to ¥2,826.9 billion from the previous fiscal year, due mainly to an increase in revenue in Motorcycle business and positive foreign currency translation effects. Operating income increased by ¥71.1 billion, or 48.5%, to ¥217.9 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and model mix and positive foreign currency effects, which was partially offset by increased selling, general and administrative expenses.

 

Other Regions

 

In Other Regions, revenue increased by ¥129.0 billion, or 14.4%, to ¥1,025.5 billion from the previous fiscal year, due mainly to an increase in revenue in Motorcycle business and positive foreign currency translation effects. Operating income increased by ¥9.2 billion, or 25.8%, to ¥44.9 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and model mix, which was partially offset by increased selling, general and administrative expenses.

 

Fiscal Year 2013 Compared with Fiscal Year 2012

 

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, 2013, increased by ¥1,929.8 billion, or 24.3%, to ¥9,877.9 billion from the fiscal year ended March 31, 2012, due mainly to increased net sales in Automobile business by recovery from the impact of the Great East Japan Earthquake and the floods in Thailand and positive 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 increased by approximately ¥1,773.9 billion, or 22.3%, compared to the increase as reported of ¥1,929.8 billion, which includes positive foreign currency translation effects.

 

Operating Costs and Expenses

 

Operating costs and expenses increased by ¥1,616.4 billion, or 20.9%, to ¥9,333.1 billion from the previous fiscal year. Cost of sales increased by ¥1,425.5 billion, or 24.1%, to ¥7,345.1 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased consolidated unit sales in Automobile business and negative foreign currency effects. Selling, general and administrative expenses increased by ¥150.4 billion, or 11.8%, to ¥1,427.7 billion from the previous fiscal year, due mainly to an increase in selling expenses attributable to increased consolidated unit sales in Automobile business and increased product warranty expenses. R&D expenses increased by ¥40.4 billion, or 7.8%, to ¥560.2 billion from the previous fiscal year, due mainly to improving safety and environmental technologies and enhancing of the attractiveness of the products.

 

Operating Income

 

Operating income increased by ¥313.4 billion, or 135.5%, to ¥544.8 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and continuing cost reduction, which was partially offset by increased selling, general and administrative expenses and increased R&D expenses. Excluding positive foreign currency effects of ¥35.8 billion, Honda estimates operating income increased by ¥277.6 billion.

 

With respect to the discussion above of the changes, management identified 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, Euro, Japanese yen and others at the level of the Company and its material consolidated subsidiaries.

 

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Income before Income Taxes and Equity in Income of Affiliates

 

Income before income taxes and equity in income of affiliates increased by ¥231.4 billion, or 89.9%, to ¥488.8 billion. The main factors behind this increase, except factors relating operating income, are as follows:

 

Unrealized gains and losses related to derivative instruments had a negative impact of ¥36.8 billion. Other income (expenses) excluding unrealized gains and losses related to derivative instruments had a negative impact of ¥45.0 billion, due mainly to an increase in foreign currency transaction losses.

 

Income Tax Expense

 

Income tax expense increased by ¥43.2 billion, or 31.9%, to ¥178.9 billion from the previous fiscal year. The effective tax rate decreased 16.1 percentage points to 36.6% from the previous fiscal year. The decrease in the effective tax rate was due mainly to a decrease in adjustments for the change in income tax laws in Japan and a decrease in impact on recognition of valuation allowance.

 

Equity in Income of Affiliates

 

Equity in income of affiliates decreased by ¥17.6 billion, or 17.6%, to ¥82.7 billion, due mainly to a recognition of impairment loss on certain investments in affiliates and a decrease in income attributable to decreased net sales at affiliates in Asia.

 

Net Income

 

Net income increased by ¥170.5 billion, or 76.8%, to ¥392.6 billion from the previous fiscal year.

 

Net Income attributable to Noncontrolling Interests

 

Net income attributable to noncontrolling interests increased by ¥14.8 billion, or 140.6%, to ¥25.4 billion from the previous fiscal year.

 

Net Income attributable to Honda Motor Co., Ltd.

 

Net income attributable to Honda Motor Co., Ltd. increased by ¥155.6 billion, or 73.6%, to ¥367.1 billion from the previous fiscal year.

 

Business Segments

 

Motorcycle Business

 

Honda’s consolidated unit sales of motorcycles and all-terrain vehicles (ATVs) totaled 9,510 thousand units, increased by 9.9% from the previous fiscal year, due mainly to an increase in consolidated unit sales in Asia.

 

Revenue from external customers decreased by ¥9.2 billion, or 0.7%, to ¥1,339.5 billion from the previous fiscal year, due mainly to negative foreign currency translation effects, which was partially offset by increased consolidated unit sales. The impact of price changes was immaterial. 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 ¥45.2 billion, or 3.4%, compared to the decrease as reported of ¥9.2 billion, which includes negative foreign currency translation effects.

 

Operating costs and expenses increased by ¥23.0 billion, or 1.9%, to ¥1,229.3 billion from the previous fiscal year. Cost of sales increased by ¥24.0 billion, or 2.6%, to ¥963.0 billion, due mainly to an increase in costs attributable to increased consolidated unit sales, which was partially offset by positive foreign currency effects. Selling, general and administrative expenses decreased by ¥4.0 billion, or 2.0%, to ¥199.8 billion, due mainly to decreased product warranty expenses and positive foreign currency effects, which was partially offset by an increase in selling expenses attributable to increased consolidated unit sales. R&D expenses increased by ¥3.1 billion, or 4.9%, to ¥66.4 billion.

 

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Operating income decreased by ¥32.3 billion, or 22.7%, to ¥110.2 billion from the previous fiscal year, due mainly to negative foreign currency effects, which was partially offset by continuing cost reduction.

 

Japan

 

Total industry demand for motorcycles in Japan* in fiscal year 2013 was approximately 440 thousand units, mostly unchanged from the previous fiscal year. Although the number of licensed riders declined in line with the continued decline in the population of young people in Japan, unit sales growth was driven by higher demand for scooters and small motorcycles.

 

Honda’s consolidated unit sales in Japan in fiscal year 2013 were 217 thousand units, down 1.4% from the previous fiscal year. This result reflects lower unit sales of the TODAY model scooter and other models. The lower unit sales were partly offset by the positive impact of the launch of the large NC700S and Integra models, as well as the new PCX150 model scooter featuring enhanced fuel economy. Another positive factor was increased unit sales of the SUPER CUB series.

 

* 

Source: JAMA (Japan Automobile Manufacturers Association)

 

North America

 

Total demand for motorcycles and all-terrain vehicles (ATVs) in the United States*, the principal market within North America, during calendar year 2012 increased approximately 2% from the previous year to approximately 680 thousand units, although demand has yet to fully recover. Unit sales growth reflected stronger consumer sentiment in line with improvement in the unemployment rate and income levels.

 

Under these circumstances, Honda’s consolidated unit sales in North America for fiscal year 2013 increased 25.0% from the previous fiscal year to 250 thousand units. Of this, consolidated unit sales of motorcycles increased 43.0% from the previous fiscal year to 153 thousand units, mainly due to steady sales of models such as the newly introduced large NC700X model featuring outstanding fuel economy and the PCX model scooter. Consolidated unit sales of ATVs rose 4.3% to 97 thousand units, mainly due to brisk sales of utility ATVs such as the TRX420 in the United States.

 

* 

Source: MIC (Motorcycle Industry Council)

 

Europe

 

Total demand for motorcycles in Europe* during calendar year 2012 declined approximately 10% from the previous year to approximately 770 thousand units. Weak consumer sentiment due to growing economic instability adversely affected demand.

 

Under these circumstances, Honda’s consolidated unit sales in Europe for fiscal year 2013 decreased 9.6% from the previous fiscal year to 179 thousand units, mainly reflecting the lackluster market as a whole. This was despite increased sales of newly introduced large models NC700X, NC700S and Integra featuring outstanding fuel economy.

 

* 

Based on Honda research: this only includes the following 10 countries – the United Kingdom, Germany, France, Italy, Spain, Switzerland, Portugal, the Netherlands, Belgium and Austria.

 

Asia

 

Total demand for motorcycles in Asia* during calendar year 2012 declined approximately 3% from the previous year to approximately 41,490 thousand units.

 

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Looking at market conditions by country, demand in India increased approximately 5% from the previous year, to approximately 13,840 thousand units while demand in China decreased approximately 10% from the previous year, to approximately 12,630 thousand units. Indonesia saw demand decline approximately 12% from the previous year, to approximately 7,140 thousand units and Vietnam saw demand decline approximately 7% from the previous year, to approximately 3,100 thousand units. Demand in Thailand rose approximately 8% from the previous year, to approximately 2,130 thousand units.

 

Under these circumstances, Honda’s consolidated unit sales in Asia for fiscal year 2013 increased 17.5% from the previous fiscal year to 7,051 thousand units. Sales rose on growth in sales of the Activa scooter and the small Dream Yuga motorcycle in India. In Thailand, which was impacted by floods in the previous year, sales growth was supported by brisk sales of the Wave Cub-type motorcycle, the Click 125i scooter and certain other models.

 

Honda’s consolidated unit sales do not include unit sales of P.T. Astra Honda Motor in Indonesia, which is an affiliate accounted for under the equity method. P.T. Astra Honda Motor’s unit sales for fiscal year 2013 decreased 4.3% from the previous fiscal year to 4,091 thousand units mainly due to the impact of Indonesian government’s regulations concerning down payments on two-wheeled vehicles.

 

* 

Based on Honda research: this only included the following eight countries – Thailand, Indonesia, Malaysia, the Philippines, Vietnam, India, Pakistan and China.

 

Other Regions

 

Total demand for motorcycles in Brazil*, the principal market within Other Regions, declined roughly 15% from the previous year to approximately 1,630 thousand units, mainly due to stricter lending standards for retail loans.

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales in fiscal year 2013 decreased 10.7% from the previous fiscal year to 1,813 thousand units, mainly due to lower sales of the small motorcycle CG125 Fan, CG150 Fan and other models. These sales declines primarily reflected stricter lending standards for retail loans in Brazil.

 

* 

Source: ABRACICLO (the Brazilian Association of Motorcycle, Moped, and Bicycle Manufacturers)

 

Automobile Business

 

Honda’s consolidated unit sales of automobiles totaled 3,408 thousand units, increased by 37.3% from the previous fiscal year, due mainly to an increase in consolidated unit sales in all regions by recovery from the impact of the Great East Japan Earthquake and the floods in Thailand.

 

Revenue from external customers increased by ¥1,903.2 billion, or 32.8%, to ¥7,709.2 billion from the previous fiscal year, due mainly to increased consolidated unit sales and positive foreign currency translation effects. The impact of price changes was immaterial. 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 ¥1,721.4 billion, or 29.6%, compared to the increase as reported of ¥1,903.2 billion, which includes positive foreign currency translation effects. Revenue including intersegment sales increased by ¥1,900.8 billion, or 32.6%, to ¥7,723.5 billion from the previous fiscal year.

 

Operating costs and expenses increased by ¥1,537.6 billion, or 26.1%, to ¥7,437.5 billion from the previous fiscal year. Cost of sales increased by ¥1,349.6 billion, or 29.9%, to ¥5,868.2 billion, due mainly to an increase in costs attributable to increased consolidated unit sales and negative foreign currency effects. Selling, general and administrative expenses increased by ¥151.8 billion, or 15.9%, to ¥1,105.3 billion, due mainly to an increase in selling expenses attributable to increased consolidated unit sales and increased product warranty expenses. R&D expenses increased by ¥36.1 billion, or 8.5%, to ¥464.0 billion, due mainly to improving safety and environmental technologies and enhancing of the attractiveness of the products.

 

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Operating income was ¥285.9 billion, an increase of ¥363.1 billion of operating income from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and continuing cost reduction, which was partially offset by increased selling, general and administrative expenses and increased R&D expenses.

 

Proportion of retail unit sales by vehicle category:

 

     Fiscal year ended March 31,  
     2012     2013  

Passenger cars:

     62     60

Accord, Accord Plug-in Hybrid, Accord Tourer, Brio, Brio Amaze, City, Civic, CR-Z,

Fit/Jazz, Fit/Jazz Hybrid, Fit Shuttle, Fit Shuttle Hybrid, FREED, FREED Hybrid,

FREED SPIKE, FREED SPIKE Hybrid, Insight, Inspire, Legend, Stream,

Acura ILX, Acura RLX, Acura TL, Acura TSX

    

Light trucks:

     33     31

Crosstour, CR-V, Elysion, Odyssey, Pilot, Ridgeline, Step WGN,

Acura MDX, Acura RDX, Acura ZDX

    

Mini vehicles:

     5     9

Acty, Life, N Box, N Box +, N-ONE, Vamos, Zest

    

 

Although there are various factors that affect the profitability of each vehicle category, sales price is an important factor in determining profitability. In general, the weighted average sales price in the light trucks category is higher relative to the total average sales price, while the weighted average sales price in the mini vehicles category, which is unique to the Japanese market, is relatively lower, although sales price vary from model to model.

 

In general, the contribution margin of the light trucks category tends to be higher relative to the total weighted average contribution margin because the sales price is higher, while the contribution margin of the mini vehicles category tends to be relatively lower because the sales price is lower, although the level of contribution margin varies from model to model. For example, in Japan and the United States, which are the main sales markets for our automobiles, the contribution margin of our light trucks category was approximately 30% higher, our passenger cars category was approximately 10% lower and our mini vehicles category was approximately 30% lower than total weighted average contribution margin for the fiscal year ended March 31, 2013. It should be noted that we define contribution margin as an amount per unit of net sales minus material cost, which is thought to increase in almost direct proportion to net sales volume.

 

Japan

 

Total demand for automobiles in Japan*1 rose approximately 10% from the previous fiscal year, to approximately 5,210 thousand units in fiscal year 2013. Automobile sales held firm thanks to the pump-priming effect of government stimulus policies that provided tax breaks and subsidies for purchasing eco-cars in the first half of the fiscal year. Another contributing factor was the recovery from the Great East Japan Earthquake.

 

Honda’s consolidated unit sales in Japan rose 18.1% from the previous fiscal year to 685 thousand units*2. This result was mainly due to strong sales of the N Box mini vehicle and Step WGN, along with the positive impact of the launch of the new mini vehicle N Box + and N-ONE.

 

In production activities, Honda’s unit production of automobiles in Japan for fiscal year 2013 increased 0.6% from the previous fiscal year to 876 thousand units, mainly due to higher sales in Japan, despite the shift of some production overseas.

 

*1:

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

 

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*2:

Certain sales of automobiles that are financed with residual value-type auto loans by our Japanese finance subsidiaries are accounted for as operating leases in conformity with U.S. generally accepted accounting principles and are not included in consolidated net sales to the external customers in our automobile business. As a result, they are not included in consolidated unit sales.

 

North America

 

In calendar year 2012, total industry sales of automobiles in the United States*, the principal market within North America, rose approximately 13% from the previous year to approximately 14,490 thousand units. The main contributing factors were an upswing in consumer sentiment, an improvement in the unemployment rate, and firm sales of passenger cars, in particular.

 

Under these circumstances, Honda’s consolidated unit sales in North America increased 30.8% from the previous fiscal year to 1,731 thousand units. This was mainly due to the positive impact of the launch of the all-new Accord, as well as strong sales of the Civic, CR-V and other models.

 

In production activities, Honda manufactured 1,687 thousand units, up 37.3% from the previous fiscal year.

 

Honda Manufacturing of Alabama, LLC, a consolidated subsidiary, ramped up its production capacity by 40 thousand units in fiscal year 2013, bringing its annual production capacity to 340 thousand units.

 

Honda Manufacturing of Indiana, LLC, a consolidated subsidiary, ramped up its production capacity by 50 thousand units in fiscal year 2013, bringing its annual production capacity to 250 thousand units.

 

* 

Source: WardsAuto

 

Europe

 

Total demand for automobile in Europe*1 decreased roughly 8% from the previous year, to approximately 12,520 thousand units in calendar year 2012. The market contracted as a whole, mainly due to weak consumer sentiment accompanying growing concerns about the economy, despite signs of a market recovery in the U.K. On the other hand, in Russia, total demand*2 increased approximately 11% from the previous year to approximately 2,930 thousand units.

 

Honda’s consolidated unit sales in Europe increased 8.2% from the previous fiscal year to 171 thousand units. The main contributing factors were the launch of the all-new CR-V model, and the rollout of a Civic model fitted with a new diesel engine.

 

On the production front, unit output at Honda’s U.K. plant in fiscal year 2013 increased 62.8% from the previous fiscal year to 170 thousand units.

 

*1:

Source: ACEA (Association des Constructeurs Europeens d’Automobiles (the European Automobile Manufacturers’ Association)) New passenger car registrations cover 27 EU countries and three EFTA countries., excluding Russia

 

*2:

Source: AEB (The Association of European Businesses)

 

Asia

 

In Asia, in calendar year 2012, total demand increased approximately 13% from the previous year to approximately 8,920 thousand units*1, mainly due to market expansion in Indonesia and India. Another factor was growth in Thailand’s sub-compact segment of the market, which is eligible for government subsidies. Total demand in China rose around 4% from the previous year to approximately 19,300 thousand units*2.

 

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Honda’s consolidated unit sales in Asia outside Japan increased 138.8% from the previous fiscal year to 523 thousand units. Sales grew atop a recovery from the damage caused by the floods in Thailand, as well as the positive impact of the launch of Brio Amaze and higher sales of City and other models.

 

Honda’s consolidated unit sales do not include unit sales of Dongfeng Honda Automobile Co., Ltd. and Guangqi Honda Automobile Co., Ltd., both of which are affiliates accounted for under the equity method in China. However, unit sales for fiscal year 2013 decreased 3.0% from the previous fiscal year to 599 thousand units, reflecting the challenging sales conditions faced by Japanese automakers in the country during the fiscal year.

 

On the production front, Honda’s unit production increased 40.0% to 1,167 thousand units*3. In Asia, excluding China, production was 550 thousand units, while output in China was 617 thousand units.

 

*1:

The total is based on Honda research and includes the following 10 countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Singapore, Taiwan, South Korea, India and Pakistan.

 

*2:

Source: China Association of Automobile Manufacturers

 

*3:

The total includes the following nine countries: China, Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Taiwan, India and Pakistan.

 

Other Regions

 

Total industry demand for automobiles in Brazil*, one of the principal markets among the Other Regions, increased approximately 6% from the previous year to approximately 3,630 thousand units in calendar year 2012. This growth mainly reflected government policies such as tax breaks for automobile purchases.

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), consolidated unit sales in fiscal year 2013 increased 47.5% from the previous fiscal year to 298 thousand units. This result was mainly due to the positive impact of the launch of the all-new Civic in Brazil.

 

On the production front, Honda’s unit production in Brazil increased 67.8% from the previous fiscal year to 135 thousand units in fiscal year 2013.

 

* 

Source: ANFAVEA (Associação Nacional dos Fabricantes de Veiculos Automotores (the Brazilian Automobile Association)) Includes passenger cars and light commercial vehicles

 

Power Product and Other Businesses

 

Honda’s consolidated unit sales of power products totaled 6,071 thousand units, increased by 4.3% from the previous fiscal year, due mainly to an increase in consolidated unit sales in North America and Asia.

 

Revenue from external customers increased by ¥3.5 billion, or 1.3%, to ¥280.6 billion from the previous fiscal year, due mainly to increased consolidated unit sales of power products and positive foreign currency translation effects, which was partially offset by decreased sales of Other 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 ¥1.2 billion, or 0.4%, compared to the increase as reported of ¥3.5 billion, which includes positive foreign currency translation effects. Revenue including intersegment sales increased by ¥1.9 billion, or 0.7%, to ¥291.6 billion from the previous fiscal year.

 

Operating costs and expenses increased by ¥7.4 billion, or 2.5%, to ¥301.2 billion from the previous fiscal year. Cost of sales increased by ¥6.2 billion, or 3.0%, to ¥214.8 billion, due mainly to an increase in costs attributable to increased net sales of Power products business and negative foreign currency effects. Selling, general and administrative expenses increased by ¥0.08 billion, or 0.1%, to ¥56.6 billion. R&D expenses increased by ¥1.1 billion, or 4.1%, to ¥29.7 billion.

 

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Operating loss was ¥9.5 billion, an increase of ¥5.5 billion from the previous fiscal year, due mainly to increased costs including R&D expenses.

 

Japan

 

Honda’s consolidated unit sales in fiscal year 2013 decreased 19.9% from the previous fiscal year to 314 thousand units, mainly due to lower exports of general-purpose engines for OEM* use and decreased sales of generators and certain other products. These declines were partly offset by higher sales of lawn mowers, snow blowers and certain other products.

 

* 

OEM (Original Equipment Manufacturer): refers to the manufacturers of products and components sold under a third-party brand.

 

North America

 

Honda’s consolidated unit sales in fiscal year 2013 increased 12.5% from the previous fiscal year to 2,604 thousand units. Although sales of snow blowers and certain other products declined, increased sales of general-purpose engines for OEM use in lawn mowers, construction machinery and other products contributed to the increase.

 

Europe

 

Honda’s consolidated unit sales in fiscal year 2013 decreased 10.4% from the previous fiscal year to 1,004 thousand units, despite strong sales of brush cutters and certain other products. The main reason for the decrease was lower sales of general-purpose engines for OEM use in construction machinery and agricultural equipment, as well as decreased sales of small tillers.

 

Asia

 

Honda’s consolidated unit sales in fiscal year 2013 increased 6.8% from the previous fiscal year to 1,572 thousand units, mainly due to higher sales of pumps and certain other products in Thailand, despite lower sales of general-purpose engines for OEM use in India.

 

Other Regions

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas) Honda’s consolidated unit sales in fiscal year 2013 rose 11.0% from the previous fiscal year to 577 thousand units. Sales growth was fueled by higher sales of general-purpose engines for OEM use, pumps and certain other products in the Middle East and Africa. This growth was tempered by lower sales of lawn mowers and certain other products in Australia.

 

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 increased by ¥955.3 billion, or 19.4%, to ¥5,874.2 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 ¥281.0 billion, or 5.7%, compared to the increase as reported of ¥955.3 billion, which includes positive foreign currency translation effects.

 

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Revenue from external customers in Financial services business increased by ¥32.3 billion, or 6.3%, to ¥548.5 billion from the previous fiscal year, due mainly to an increase in operating lease revenues and positive 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 ¥8.4 billion, or 1.6%, compared to the increase as reported of ¥32.3 billion, which includes positive foreign currency translation effects. Revenue including intersegment sales increased by ¥33.6 billion, or 6.4%, to ¥560.2 billion from the previous fiscal year.

 

Operating costs and expenses increased by ¥45.5 billion, or 12.8%, to ¥402.0 billion from the previous fiscal year. Cost of sales increased by ¥42.9 billion, or 14.7%, to ¥336.2 billion from the previous fiscal year, due mainly to an increase in costs related to lease residual values and negative foreign currency effects. Selling, general and administrative expenses increased by ¥2.5 billion, or 4.0%, to ¥65.8 billion from the previous fiscal year.

 

Operating income decreased by ¥11.8 billion, or 7.0%, to ¥158.1 billion from the previous fiscal year, due mainly to an increase in costs related to lease residual values.

 

Geographical Information

 

Japan

 

In Japan, revenue from domestic and export sales increased by ¥530.5 billion, or 15.8%, to ¥3,893.5 billion from the previous fiscal year, due mainly to an increase in revenue in Automobile business. Operating income was ¥178.4 billion, an increase of ¥288.2 billion of operating income from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and model mix and positive foreign currency effects, which was partially offset by increased R&D expenses and increased selling, general and administrative expenses.

 

North America

 

In North America, which mainly consists of the United States, revenue increased by ¥1,142.3 billion, or 30.8%, to ¥4,857.1 billion from the previous fiscal year, due mainly to an increase in revenue in Automobile business and positive foreign currency translation effects. Operating income decreased by ¥14.3 billion, or 6.4%, to ¥208.9 billion from the previous fiscal year, due mainly to increased selling, general and administrative expenses, which was partially offset by an increase in income attributable to increased net sales, model mix and continuing cost reduction.

 

Europe

 

In Europe, revenue increased by ¥61.3 billion, or 10.6%, to ¥642.1 billion from the previous fiscal year, due mainly to an increase in revenue in the Automobile business. Operating income was ¥0.4 billion, an increase of ¥12.5 billion of operating income from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and model mix, which was partially offset by increased selling, general and administrative expenses.

 

Asia

 

In Asia, revenue increased by ¥815.1 billion, or 54.7%, to ¥2,305.6 billion from the previous fiscal year, due mainly to an increase in revenue in Automobile business and Motorcycle business. Operating income increased by ¥69.8 billion, or 90.9%, to ¥146.7 billion from the previous fiscal year, due mainly to an increase in income attributable to increased net sales and model mix and continuing cost reduction, which was partially offset by increased selling, general and administrative expenses.

 

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Other Regions

 

In Other Regions, revenue increased by ¥3.3 billion, or 0.4%, to ¥896.4 billion from the previous fiscal year, due mainly to an increase in revenue in Automobile business, which was partially offset by a decrease in revenue in Motorcycle business and negative foreign currency translation effects. Operating income decreased by ¥21.2 billion, or 37.3%, to ¥35.6 billion from the previous fiscal year, due mainly to increased selling, general and administrative expenses and negative foreign currency effects.

 

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. Further changes in the economic environment surrounding us, effects by market conditions, effects of currency fluctuations 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.

 

Product Warranty

 

We warrant our products for specific periods of time. We also provide specific warranty programs, including product recalls, as needed.

 

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 for specific warranty programs, including product recalls. We provide for general estimated warranty costs at the time products are sold to customers. We also provide for specific estimated warranty program costs at the time those costs for new warranty programs are deemed to be probable and can be reasonably estimated. 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.

 

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The changes in the accrued liabilities for those product warranties and net sales and other operating revenue for each of the years in the three-year period ended March 31, 2014 are as follows:

 

    Yen (millions)  
    2012     2013     2014  

Accrued Liabilities for product warranties

     

Balance at beginning of year

  ¥ 213,943      ¥ 170,562      ¥ 208,033   

Warranty claims paid during the period

    (82,547     (64,942     (104,090

Liabilities accrued for warranties issued during the period*1

    60,004        97,108        153,898   

Changes in liabilities for pre-existing warranties during the period*2

    (17,697     (8,583     397   

Foreign currency translation

    (3,141     13,888        11,382   
 

 

 

   

 

 

   

 

 

 

Balance at end of year

  ¥ 170,562      ¥ 208,033      ¥ 269,620   
 

 

 

   

 

 

   

 

 

 

Net sales and other operating revenue

  ¥ 7,948,095      ¥ 9,877,947      ¥ 11,842,451   

 

*1 

Liabilities accrued for warranties issued during the period for the fiscal year ended March 31, 2014, was ¥153.8 billion, due mainly to the future warranty costs for product recalls in Automobile business.

 

*2 

Changes in liabilities for pre-existing warranties during the period for the fiscal year ended March 31, 2012, was ¥17.6 billion, due mainly to the change of the expected level of future warranty costs, including the expected number of units to be affected and estimated average repair cost per unit for product recalls.

 

Credit Losses

 

Our finance subsidiaries provide retail lending and leasing to customers and wholesale financing to dealers primarily to support sales of our products. Honda classifies retail and direct financing lease receivables (consumer finance 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 accounts and notes receivable and other assets in the consolidated balance sheets.

 

Credit losses are an expected cost of extending credit. The majority of the credit risk is with consumer financing and to a lesser extent with dealer financing. Credit risk on consumer finance receivables can be affected by general economic conditions. Adverse changes such as a rise in unemployment rates can increase the likelihood of defaults. Declines in used vehicle prices can reduce the amount of recoveries on repossessed collateral. Exposure to credit risk on consumer finance receivables is managed by monitoring and adjusting underwriting standards, which affect the level of credit risk that is assumed, pricing contracts for expected losses, and focusing collection efforts to minimize losses.

 

Our finance subsidiaries are also exposed to credit risk on operating lease assets. A portion of our finance subsidiaries’ operating leases are expected to terminate prior to their scheduled maturities when lessees default on their contractual obligations. Losses are generally realized upon the disposition of the repossessed operating lease vehicles. The factors affecting credit risk on operating leases and management of the risk are similar to that of consumer finance receivables.

 

Credit risk on dealer loans is affected primarily by the financial strength of the dealers within the portfolio, the value of collateral securing the financings, and economic factors that could affect the creditworthiness of dealers. Exposure to credit risk in dealer financing is managed by performing comprehensive reviews of dealers prior to establishing financing arrangements and continuously monitoring the payment performance and creditworthiness of dealers with existing financing arrangements.

 

The allowance for credit losses is management’s estimate of probable losses incurred on finance receivables. Estimated losses on past due operating lease rental payments are also recognized with an allowance for credit losses. Our finance subsidiaries evaluate these estimates, at minimum, on a quarterly basis.

 

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Consumer finance receivables are collectively evaluated for impairment. Delinquencies and losses are continuously monitored and this historical experience provides the primary basis for estimating the allowance. Various methodologies are utilized when estimating the allowance for credit losses including models that incorporate vintage loss and delinquency migration analysis. The models take into consideration attributes of the portfolio including loan-to-value ratios, internal and external credit scores, and collateral types. Economic factors such as used vehicle prices, unemployment rates, and consumer debt service burdens are also incorporated when estimating losses. Estimated losses on operating leases expected to terminate early due to lessee defaults are also determined collectively, consistent with the methodologies used for consumer finance receivables.

 

Wholesales receivables are individually evaluated for impairment when specifically identified as impaired. Wholesales receivables are considered to be impaired when it is probable that our finance subsidiaries will be unable to collect all amounts due according to the original terms of the loan. The determination of whether dealer loans are impaired is based on evaluations of dealerships’ payment history, financial condition and cash flows, and their ability to perform under the terms of the loans. Dealer loans that have not been specifically identified as impaired are collectively evaluated for impairment.

 

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 2014, the provision for fiscal 2014 and the allowance balance at the end of fiscal 2014 would have increased by approximately ¥4.1 billion and ¥2.4 billion, respectively. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2014.

 

Additional Narrative of the Change in Credit Loss

 

The following tables summarize our allowance for credit losses on finance receivables:

 

     Yen (billions)  

For the year ended March 31, 2012

   Retail     Direct
financing
lease
    Wholesale     Total  

Allowance for credit losses

        

Balance at beginning of year

   ¥ 25.5      ¥ 1.4      ¥ 1.4      ¥ 28.4   

Provision

     10.3        0.3        0.0        10.8   

Charge-offs

     (21.1     (0.7     (0.0     (21.9

Recoveries

     6.6        0.1        0.0        6.8   

Adjustments from foreign currency translation

     (0.9     (0.0     (0.0     (1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 20.4      ¥ 1.1      ¥ 1.4      ¥ 23.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending receivable balance

   ¥ 3,328.1      ¥ 380.3      ¥ 301.3      ¥ 4,009.8   

Average receivable balance, net

   ¥ 3,233.1      ¥ 366.1      ¥ 243.7      ¥ 3,843.0   

Net Charge-offs as a % of average receivable balance

     0.45     0.16     0.03     0.39

Allowance as a % of ending receivable balance

     0.62     0.30     0.46     0.57

 

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     Yen (billions)  

For the year ended March 31, 2013

   Retail     Direct
financing
lease
    Wholesale     Total  

Allowance for credit losses

        

Balance at beginning of year

   ¥ 20.4      ¥ 1.1      ¥ 1.4      ¥ 23.0   

Provision

     8.7        0.3        0.0        9.1   

Charge-offs

     (20.8     (0.9     (0.2     (22.0

Recoveries

     8.1        0.1        0.0        8.2   

Adjustments from foreign currency translation

     1.1        0.0        0.0        1.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 17.6      ¥ 0.7      ¥ 1.2      ¥ 19.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending receivable balance

   ¥ 3,865.4      ¥ 448.6      ¥ 431.9      ¥ 4,746.0   

Average receivable balance, net

   ¥ 3,429.8      ¥ 394.5      ¥ 334.1      ¥ 4,158.4   

Net Charge-offs as a % of average receivable balance

     0.37     0.21     0.08     0.33

Allowance as a % of ending receivable balance

     0.46     0.18     0.30     0.42

 

     Yen (billions)  

For the year ended March 31, 2014

   Retail     Direct
financing
lease
    Wholesale     Total  

Allowance for credit losses

        

Balance at beginning of year

   ¥ 17.6      ¥ 0.7      ¥ 1.2      ¥ 19.7   

Provision

     18.6        0.3        1.4        20.4   

Charge-offs

     (27.5     (0.5     (0.4     (28.5

Recoveries

     11.6        0.0        0.0        11.7   

Adjustments from foreign currency translation

     1.2        0.0        0.2        1.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 21.6      ¥ 0.6      ¥ 2.5      ¥ 24.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending receivable balance

   ¥ 4,678.7      ¥ 422.9      ¥ 497.3      ¥ 5,599.0   

Average receivable balance, net

   ¥ 4,358.0      ¥ 457.1      ¥ 446.6      ¥ 5,261.8   

Net Charge-offs as a % of average receivable balance

     0.36     0.10     0.09     0.32

Allowance as a % of ending receivable balance

     0.46     0.15     0.52     0.44

 

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

 

     Yen (billions)  
         2012              2013              2014      

Provision for credit losses on past due rental payments

   ¥ 1.1       ¥ 1.1       ¥ 1.7   

Impairment losses on operating leases due to early termination

   ¥ 1.5       ¥ 4.7       ¥ 3.3   

 

Fiscal Year 2014 Compared with Fiscal Year 2013

 

The provision for credit losses on finance receivables increased by ¥11.2 billion, or 122.9%, and net charge-offs increased by ¥2.9 billion, or 21.6%. The increase in net charge-offs was primarily due to the increase in finance receivables and declines in used vehicle prices which reduced recoveries on repossessed collateral in North America. Impairment losses on operating leases due to early termination decreased by ¥1.4 billion, or 29.8%.

 

Fiscal Year 2013 Compared with Fiscal Year 2012

 

The provision for credit losses on finance receivables decreased by ¥1.6 billion, or 15.3%, and net charge-offs decreased by ¥1.3 billion, or 9.0%. The decline in net charge-offs is due mainly to the improved credit

 

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quality of our North American portfolio. Impairment losses on operating leases due to early termination increased by ¥3.2 billion, or 213.3%. The increase was primarily attributable to the increase in the volume of operating lease assets in North America.

 

Losses on Lease Residual Values

 

Our finance subsidiaries in North America determine contractual residual values of lease vehicles at lease inception based on expectations of future used vehicle values, taking into consideration external industry data and our own historical experience. Lease customers have the option at the end of the lease term to return the vehicle to the dealer or to buy the vehicle for the contractual residual value (or if purchased prior to lease maturity, at the outstanding contractual balance). Returned lease vehicles can be purchased by the grounding dealer for the contractual residual value (or if purchased prior to lease maturity, at the outstanding contractual balance) or through market based pricing programs. Returned lease vehicles that are not purchased by the grounding dealers are sold through online and physical auctions. 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.

 

We assess our estimates for end of term market values of lease vehicles, at minimum, on a quarterly basis. The primary factors affecting the estimates the percentage of leased vehicles that we expect to be returned by the lessee at the end of lease term and the expected loss severity. Factors considered in this evaluation include, among other factors, economic conditions, historical trends, and market information on new and used vehicles. For operating leases, adjustments to estimated residual values are made on a straight-line basis over the remaining term of the lease and are included as depreciation expense. For direct financing leases, downward adjustments for declines in estimated residual values deemed to be other-than-temporary are recognized as a loss on lease residual values in the period in which the estimate changed.

 

We also review our investment in operating leases for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. If impairment conditions are met, impairment losses are measured by the amount carrying values exceed their fair values. There were no events or circumstances that indicated that the carrying values of our operating leases would not be recoverable during the fiscal years ended March 31, 2012, 2013, and 2014.

 

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.

 

If future auction values for all Honda and Acura vehicles in our North American operating lease portfolio as of March 31, 2014, 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 ¥4.6 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 ¥0.6 billion, which would be recognized over the remaining lease terms. With the same prerequisites shown above, if future auction values in our North American direct financing lease portfolio were to decrease by approximately ¥10,000 per unit from our present estimates, the total impact would be an increase in losses on lease residual values by approximately ¥0.1 billion. And if future return rates were to increase by one percentage point from our present estimates, the total impact would be slight. Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions in fiscal 2014. Also, declines in auction values are likely to have a negative effect on return rates which could affect the sensitivities.

 

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Fiscal Year 2014 Compared with Fiscal Year 2013

 

Losses on lease residual values on direct financing leases declined by ¥0.4 billion, or 51.4%. The decrease in losses on lease residual values was due to an improvement in used vehicle prices in North America compared with fiscal year 2013.

 

Fiscal Year 2013 Compared with Fiscal Year 2012

 

Losses on lease residual values on direct financing leases declined by ¥0.6 billion, or 47.4%. Incremental depreciation on operating leases increased by ¥6.7 billion, due mainly to declines in used vehicle prices in North America compared with fiscal year 2012 which showed near historical high.

 

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, 2014 were 1.5% and 2.2%, respectively, and our assumed expected long-term rate of return for the year ended March 31, 2014 was 3.0% for Japanese plans. Our assumed discount rate and rate of salary increase as of March 31, 2014 were 4.6~4.8% and 2.5~3.9%, respectively, and our assumed expected long-term rate of return for fiscal 2014 was 6.0~7.4% for foreign plans.

 

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

 

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         -89.7/+100.8         +59.5/-66.9         -1.8/+2.3   

Expected long-term rate of return

     +0.5/-0.5         —          —          -4.2/+4.2   

 

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Foreign Plans

 

      Yen (billions)  

Assumptions

   Percentage
point
change (%)
     Funded
status
     Equity      Pension
expense
 

Discount rate

     +0.5/-0.5         -61.0/+71.0         +44.2/-52.0         -4.4/+4.9   

Expected long-term rate of return

     +0.5/-0.5         —          —          -2.8/+2.8   

 

*1 

Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions at March 31, 2014.

 

*2 

Funded status for fiscal 2014 is affected by March 31, 2014 assumptions.

     Pension expense for fiscal 2014 is affected by March 31, 2013 assumptions.

 

Income Taxes

 

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.

 

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.

 

Due to the Company’s remeasurement based on technical merits regarding transfer pricing matters of overseas transactions between the Company and foreign affiliates, the Company has decreased a portion of unrecognized tax benefits during the year ended March 31, 2014.

 

Valuation of Deferred Tax Assets

 

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income over the periods in which those temporary differences become deductible and operating loss carryforwards utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

 

We believe that our accounting for the valuation of deferred tax assets is a “critical accounting estimate” because it required us to evaluate and assess the probability of future taxable income and our business plan, which are inherently uncertain.

 

Based upon the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences and operating loss carryforwards, net of the existing valuation allowances at March 31, 2013 and 2014. The amount of the deferred tax assets considered realizable, however, could be significantly reduced in the near term if estimates of future taxable income during the carryforward period are

 

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reduced due to further changes in the economic environment surrounding us, effects by market conditions, effects of currency fluctuations or other factors and our consolidated results of operation could be adversely affected.

 

New Accounting Pronouncements Not Yet Adopted

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 “Revenue from Contracts with Customers”, which amends the revenue recognition requirements in the FASB Accounting Standards Codification (ASC). This statement requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The statement shall be applied using one of two methods: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying this statement recognized at the date of initial application. The Company has not yet determined which method it will apply. This statement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. Honda is currently evaluating the impact of this statement 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 working 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 working capital requirements primarily through cash generated by operations and bank loans. Honda believes that its working capital is sufficient for the Company’s present requirements. The year-end balance of liabilities associated with the Company and its subsidiaries’ funding for non-Financial services businesses was ¥565.3 billion as of March 31, 2014. In addition, the Company’s finance subsidiaries fund financial programs for customers and dealers primarily from medium-term notes, bank loans, securitization of finance receivables, commercial paper, corporate bonds, and intercompany loans. The year-end balance of liabilities associated with these finance subsidiaries’ funding for Financial services business was ¥5,838.2 billion as of March 31, 2014.

 

Cash Flows

 

Fiscal Year 2014 Compared with Fiscal Year 2013

 

Consolidated cash and cash equivalents on March 31, 2014 decreased by ¥37.2 billion from March 31, 2013, to ¥1,168.9 billion. The reasons for the increases or decreases for each cash flow activity, when compared with the previous fiscal year, are as follows:

 

Net cash provided by operating activities amounted to ¥1,229.1 billion of cash inflows. Cash inflows from operating activities increased by ¥428.4 billion compared with the previous fiscal year, due mainly to an increase in cash received due to increased unit sales in Automobile business, which was partially offset by increased payments for parts and raw materials.

 

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Net cash used in investing activities amounted to ¥1,708.7 billion of cash outflows. Cash outflows from investing activities increased by ¥638.9 billion compared with the previous fiscal year, due mainly to an increase in acquisitions of finance subsidiaries-receivables and purchases of operating lease assets, which was partially offset by an increase in collections of finance subsidiaries-receivables.

 

Net cash provided by financing activities amounted to ¥370.5 billion of cash inflows. Cash inflows from financing activities increased by ¥250.9 billion compared with the previous fiscal year, due mainly to an increase in proceeds from debt, which was partially offset by an increase in dividends paid.

 

Fiscal Year 2013 Compared with Fiscal Year 2012

 

Consolidated cash and cash equivalents on March 31, 2013 decreased by ¥40.9 billion from March 31, 2012, to ¥1,206.1 billion. The reasons for the increases or decreases for each cash flow activity, when compared with the previous fiscal year, are as follows:

 

Net cash provided by operating activities amounted to ¥800.7 billion of cash inflows. Cash inflows from operating activities increased by ¥39.2 billion compared with the previous fiscal year, due mainly to an increase in cash received due to increased unit sales in Automobile business, which was partially offset by increased payments for parts and raw materials primarily caused by an increase in automobile production.

 

Net cash used in investing activities amounted to ¥1,069.7 billion of cash outflows. Cash outflows from investing activities increased by ¥396.6 billion compared with the previous fiscal year, due mainly to an increase in capital expenditure, acquisitions of finance subsidiaries-receivables and purchase of operating lease assets.

 

Net cash provided by financing activities amounted to ¥119.5 billion of cash inflows. Cash inflows from financing activities increased by ¥187.7 billion compared with the previous fiscal year, due mainly to an increase in proceeds from debt, which was partially offset by an increase in dividends paid.

 

Liquidity

 

The ¥1,168.9 billion in cash and cash equivalents at the end of the fiscal year 2014 corresponds to approximately 1.2 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 ¥1,566.8 billion have committed lines of credit equivalent to ¥965.0 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, 2014.

 

     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

 

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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

 

Honda and its consolidated subsidiaries use the most-advanced technologies and conduct R&D activities with the goal of creating distinctive products that are internationally competitive. To attain this goal, the Honda’s main R&D divisions operate independently as subsidiaries, allowing engineers to pursue their tasks with significant freedom. Product-related R&D is spearheaded by Honda R&D Co., Ltd. in Japan; Honda R&D Americas, Inc. in the United States; and Honda R&D Asia Pacific Co., Ltd. in Thailand. R&D on production technologies centers around Honda Engineering Co., Ltd. in Japan and Honda Engineering North America, Inc. in the United States. All of these entities work in close association with our other entities and businesses in their respective regions.

 

Total consolidated R&D expenses amounted to ¥634.1 billion in the fiscal year ended March 31, 2014.

 

Motorcycle Business

 

In the motorcycle business segment, Honda is aiming to deliver appealing products in a timely manner that offer outstanding environmental performance and that will enable customers to experience the joy of ownership. To this end, we prioritized initiatives designed to bolster product appeal, strengthen cost competitiveness, quicken the pace of product and technology development, and respond to the demands of a low-carbon society.

 

Among major technological achievements, the CTX1300, CBR650F and CB650F models were launched globally. The CTX1300 is the new flagship model of the CTX series with “Comfort Technology Experience” as its development concept. The CBR and CB models were equipped with a newly developed DOHC parallel four-cylinder 650cc water-cooled four-stroke engine.

 

In Japan, the CBR400R, CB400F and 400X sports models equipped with a newly developed DOHC parallel twin-cylinder 400cc water-cooled four-stroke engine were launched. In addition, a new-model DUNK scooter equipped with a newly developed OHC single-cylinder 50cc water-cooled four-stroke “eSP” engine was also introduced.

 

R&D expenses in this segment amounted to ¥73.0 billion in the year ended March 31, 2014.

 

In terms of major race results, Honda won the rider, constructor and team divisions to become a triple-crown champion in MotoGP-class motorcycle racing.

 

Automobile Business

 

In the automobile business segment, Honda’s aim is to become the premier manufacturer of interesting, cleverly designed cars that enable customers to experience the joy of driving. The overall strategic direction is to develop “great products speedily, at affordable prices and with low CO2 emissions.”

 

Among major technological achievements in the automobile business segment, Honda developed and launched the all new N-WGN and N-WGN Custom models equipped with safety enhancements, including six airbags and a system that prevents the car from drifting sideways in reaction to abrupt turns of the steering wheel. In addition, Honda enhanced fuel economy by developing a new lightweight and compact hybrid system that can operate on one motor in electric vehicle (EV) mode. It was initially installed in the Fit Hybrid and the new VEZEL Hybrid models.

 

Moreover, a hybrid system combining a two-motor electric mode CVT powertrain with lithium ion batteries was developed for installation in the Accord Hybrid and Accord Plug-in Hybrid models. The capacity of the

 

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lithium ion battery was enlarged for the plug-in hybrid model to enable it to operate entirely in EV mode in most daily driving situations. As a result, a balance between nimble acceleration and fuel economy, which is characteristic of EVs, was realized in these two models.

 

Furthermore, a new hybrid system combining a three-motor electric mode and V6 engine with direct fuel injection to realize both superb acceleration performance and fuel economy was developed. This proprietary system with two motors mounted in the back is capable of independently controlling the torque to the left and right rear wheels, and will be installed in models to be launched in the near future.

 

As for other technological achievements, an omnidirectional safety system to assist drivers in avoiding accidents was developed. This system utilizes a microwave radar and a set of cameras to monitor the surroundings of a vehicle, and automatically provides braking and steering assistance to help the driver take evasive action.

 

R&D expenses in this segment amounted to ¥531.4 billion in the year ended March 31, 2014.

 

Power Product and Other Businesses

 

The power product business’ overall strategic direction is to proactively propose new and useful ideas that will bring joy to customers worldwide. The segment’s core technological initiatives focus primarily on (1) creating new products and technologies for developed countries, and (2) developing products for expanding markets in the emerging countries.

 

Among key technological achievements, Honda launched the HSS760n compact rotary snowblower equipped with an auger (snow-throwing unit) with a concentric, simultaneous forward, reverse mechanism that prevents the machine from riding up on top of hardened snow. Also launched was the HSL2511 large-sized snowblower equipped with a function for adjusting the angling of the auger, among other features. In the general-purpose engine category, the GP160H and GP200H engines were developed for sale in emerging markets. These engines were designed to share as many water pump and generator components produced in China as possible in order to lower their price and make them affordable to many more customers.

 

R&D expenses in this segment amounted to ¥29.6 billion in the year ended March 31, 2014.

 

Fundamental Research

 

Major initiatives in the fundamental research area included a joint trial research project for Honda’s walking assist device in collaboration with a leading U.S. rehabilitation institute in Chicago. Honda’s walking assist devices are being developed to help people who have walking impairments due to illness, injuries or weakened leg muscles due to old age, to regain biopedal mobility.

 

Honda also unveiled a UNI-CUB ß model of its UNI-CUB Personal Mobility Device, which enables riders to move at walking speed simply by shifting their weight and leaning in the direction they would like to go. This beta model was developed based on data and user feedback collected from trial demonstrations that began in June 2012.

 

Please note that expenses incurred in fundamental research are allocated among each business segment.

 

Patents and Licenses

 

As of March 31, 2014, Honda owned more than 20,800 patents in Japan and more than 25,900 patents abroad. Honda also had applications pending for more than 8,800 patents in Japan and for more than 15,700 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.

 

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D. Trend Information

 

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

 

E. Off-Balance Sheet Arrangements

 

(Guarantee)

 

As of March 31, 2014, we guaranteed ¥25.3 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 ¥25.3 billion. As of March 31, 2014, no amount has been 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 as of March 31, 2014:

 

Contractual Obligations

 

     As of March 31, 2014  
     Yen (millions)  
     Payments due by period  
     Total      Within
1 year
     1-3
years
     3-5
years
     Thereafter  

Long-term debt

   ¥ 4,537,530         1,303,464         2,088,658         851,734         293,674   

Operating leases

     102,180         18,862         27,567         16,027         39,724   

Purchase and other commitments*1

     131,238         93,448         16,452         16,452         4,886   

Interest payments*2

     181,449         79,061         73,865         25,802         2,721   

Contributions to defined benefit pension plans*3

     79,240         79,240         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 5,031,637         1,574,075         2,206,542         910,015         341,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

*1 

Honda had commitments for purchases of property, plant and equipment as of March 31, 2014.

 

*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, 2014.

 

*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.

 

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 ¥6,983 million is not represented in the table above.

 

As of March 31, 2014, 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.

 

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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 15 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, 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 certified public accountants, and may not at the same time be Directors or employees of the Company or any of its subsidiaries. They are required to attend at 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 Full-time 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 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.

 

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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

        

Fumihiko Ike

(May 26, 1952)

  

Chairman and Director of the Company,

appointed in April 2013 (presently held)

     *3         30,700   
  

Chief Operating Officer for IT Operations,

appointed in April 2012

     
  

Responsible for Government & Industrial Affairs,

appointed in April 2012

     
  

Senior Managing Officer and Director of the Company,

appointed in April 2011

     
  

Chief Operating Officer for Business Management Operations,

appointed in April 2011

     
  

Risk Management Officer,

appointed in April 2011

     
  

General Supervisor, Information Systems,

appointed in April 2011

     
  

Chief Operating Officer for Regional Operations

(Asia & Oceania),

appointed in April 2008

     
  

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

appointed in April 2008

     
  

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      

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Takanobu Ito

(August 29, 1953)

  

President, Chief Executive Officer and

Director of the Company,

appointed in April 2011 (presently held)

     *3         29,700   
  

Chief Operating Officer for Automobile Operations,

appointed in April 2011

 

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

     
  

Responsible for 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      

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Tetsuo Iwamura

(May 30, 1951)

  

Corporate Brand Officer,

appointed in April 2014 (presently held)

 

Chairman of American Honda Motor Co., Inc.,

appointed in April 2014 (presently held)

 

Chief Operating Officer for Automobile Operations,

appointed in April 2013

 

Risk Management Officer,

appointed in April 2013 (presently held)

 

Director of the Company,

appointed in June 2012 (presently held)

 

Executive Vice President and Executive Officer,

appointed in April 2012 (presently held)

 

Senior Managing Officer of the Company,

appointed in June 2011

 

Senior Managing Officer and Director of the Company,

appointed in April 2011

 

Senior Managing Director of the Company,

appointed in June 2008

 

Chief Operating Officer for Regional Operations (North America),

appointed in April 2007

 

President and Director of Honda North America, Inc.,

appointed in April 2007

 

President and Chief Executive Officer of American Honda Motor Co., Inc.,

appointed in April 2007

 

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         29,800   

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Directors

        

Takashi Yamamoto

(January 12, 1953)

  

Representative of Automobile Development, Purchasing and Production for Automobile Operations,

appointed in April 2014 (presently held)

 

Head of Automobile Production for Automobile Operations,

appointed in April 2014 (presently held)

 

President, Chief Executive Officer and Representative Director of Honda Engineering Co., Ltd.,

appointed in April 2014 (presently held)

 

Chief Production Officer,

appointed in April 2013 (presently held)

 

General Manager of Automobile Production Oversight Unit for Automobile Operations,

appointed in April 2013

 

Director of the Company,

appointed in June 2012 (presently held)

 

Senior Managing Officer of the Company,

appointed in April 2012 (presently held)

 

Chief Operating Officer for Production Operations,

appointed in April 2012

 

Managing Officer of the Company,

appointed in April 2011

 

General Manager of Automobile Production Planning Office, Production Operations,

appointed in April 2011

 

President and Director of Yutaka Giken Co., Ltd.,

appointed in June 2009

 

Managing Officer of the Company,

appointed in June 2007

 

General Manager of Saitama Factory of Production Operations,

appointed in April 2007

 

Operating Officer of the Company,

appointed in June 2005

 

President and Director, Honda Manufacturing of Alabama, LLC,

appointed in April 2005

 

Responsible for Quality, Certification and Regulation Compliance,

appointed in April 2004

 

Responsible for Quality, Certification and Regulation Compliance and Service Technology,

appointed in April 2002

 

Director of the Company,

appointed in June 2000

 

General Manager of Automobile Purchasing Division 1 for Purchasing Operations,

appointed in April 2000

 

Joined Honda in April 1977

     *3         21,400   

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Yoshiharu Yamamoto

(March 19, 1953)

  

Chief Operating Officer for IT Operations,

appointed in April 2013 (presently held)

 

Senior Managing Officer and Director of the Company,

appointed in April 2012 (presently held)

 

Director of the Company,

appointed in June 2011

 

Managing Officer of the Company,

appointed in April 2011

 

President, Chief Executive Officer and Representative Director of Honda R&D Co., Ltd.,

appointed in April 2011 (presently held)

 

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

appointed in June 2010

 

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

appointed in June 2007

 

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

appointed in June 2005

 

Joined Honda in April 1973

     *3         21,400   

Toshihiko Nonaka

(September 15, 1957)

  

Director of the Company,

appointed in June 2014 (presently held)

 

Chief Operating Officer for Automobile Operations,

appointed in April 2014 (presently held)

 

Executive in Charge of Product and Brand Strategy for Automobile Operations,

appointed in April 2013

 

Executive Vice President, Executive Officer and Director of

Honda R&D Co., Ltd.,

appointed in April 2012

 

Managing Officer of the Company,

appointed in April 2011 (presently held)

 

Executive in Charge of Production for Automobile Operations,

appointed in April 2011

 

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

appointed in April 2011

 

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

appointed in June 2010

 

Joined Honda in April 1978

     *3         21,400   

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Masahiro Yoshida

(March 5, 1957)

  

Managing Officer and Director of the Company,

appointed in April 2013 (presently held)

 

Compliance Officer,

appointed in April 2012 (presently held)

 

Operating Officer and Director of the Company,

appointed in April 2011

 

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

 

Responsible for Human Resources and Associate Relations,

appointed in April 2007

(also General Manager of Human Resources Division for Business Support Operations as of April 2006)

 

Joined Honda in April 1979

     *3         25,200   

Nobuo Kuroyanagi

(December 18, 1941)

  

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

appointed in April 2012 (presently held)

 

End of tenure as Director of BTMU in March 2012

 

End of tenure as Director of Mitsubishi UFJ Financial Group, Inc. (MUFG) in June 2010

 

Director of MUFG,

appointed in April 2010

 

Director of the Company,

appointed in June 2009 (presently held)

 

Chairman of BTMU,

appointed in April 2008

 

President and CEO of MUFG,

appointed in October 2005

     *3         2,300   

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Hideko Kunii

(December 13, 1947)

  

Director of the Company,

appointed in June 2014 (presently held)

 

General Manager of Gender Equality Promotion Office, Shibaura Institute of Technology,

appointed in October 2013 (presently held)

 

Deputy President, Professor, Shibaura Institute of Technology Graduate School of Engineering Management,

appointed in April 2013 (presently held)

 

End of tenure as Chairperson of Ricoh IT Solutions Co., Ltd. in March 2013

 

End of tenure as Associate Director of Ricoh Co., Ltd. in March 2013

 

Professor, Graduate School of Engineering Management, Shibaura Institute of Technology,

appointed in April 2012 (presently held)

 

Vice Chairperson of Japan Information Technology Service Industry Association,

appointed in June 2011 (presently held)

 

Cabinet Member of Gender Equality Bureau Cabinet Office,

appointed in August 2009 (presently held)

 

Member of Committee of Innovation Network Corporation of Japan,

appointed in July 2009 (presently held)

 

Chairperson of Ricoh IT Solutions Co., Ltd.,

appointed in July 2009

 

Associate Director of Ricoh Co., Ltd.,

appointed in April 2009

 

Chairperson of Ricoh Software Co., Ltd. (Current Ricoh IT Solutions Co., Ltd.),

appointed in April 2008

 

Corporate Senior Vice President of Ricoh Co., Ltd.,

appointed in June 2005

 

General Manager of Software Research & Development of Ricoh Co., Ltd.,

appointed in October 2002

 

Corporate Vice President of Ricoh Co., Ltd.,

appointed in June 2000

 

The University of Texas at Austin, Doctor of Philosophy, May 1983

 

Joined Ricoh Co., Ltd. in May 1982

 

San Jose State University, Master of Science—Computer and Information Sciences, January 1976

 

Ochanomizu University, Master of Science—Physics, March 1973

     *3         0   

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Yuji Shiga

(October 7, 1958)

  

Director of the Company,

appointed in June 2012 (presently held)

 

Chief Operating Officer for Power Product Operations,

appointed in April 2012 (presently held)

 

Operating Officer of the Company,

appointed in April 2011 (presently held)

 

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

appointed in April 2011

 

General Manager of Operation Office No. 2 in Regional Operations (Asia & Oceania),

appointed in April 2010

 

General Manager of Operation Office No. 1 in Regional Operations (North America),

appointed in April 2009

 

Joined Honda in April 1982

     *3         13,500   

Kohei Takeuchi

(February 10, 1960)

  

Director of the Company,

appointed in June 2013 (presently held)

 

Chief Operating Officer for Business Management Operations, appointed in April 2013 (presently held)

 

Operating Officer of the Company,

appointed in April 2011 (presently held)

 

General Manager of Accounting Division for Business Management Operations,

appointed in April 2010

 

Joined Honda in April 1982

     *3         13,100   

Shinji Aoyama

(December 25, 1963)

  

Director of the Company,

appointed in June 2013 (presently held)

 

Chief Operating Officer for Motorcycle Operations,

appointed in April 2013 (presently held)

 

Operating Officer of the Company,

appointed in April 2012 (presently held)

 

General Manager of Motorcycle Business Planning Office for Motorcycle Operations,

appointed in April 2011

 

Joined Honda in April 1986

     *3         9,300   

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Noriya Kaihara

(August 4, 1961)

  

Chief Operating Officer for Customer Service Operations,

appointed in April 2014 (presently held)

 

Head of Service Supervisory Unit for Automobile Operations,

appointed in April 2014 (presently held)

 

Director of the Company,

appointed in June 2013 (presently held)

 

Operating Officer of the Company,

appointed in April 2013 (presently held)

 

Chief Quality Officer,

appointed in April 2013 (presently held)

 

General Manager of Automobile Quality Assurance Division,

appointed in April 2012

 

General Manager of Parts Sales and Service Division

for Customer Service Operations,

appointed in April 2010

 

Joined Honda in April 1984

     *3         5,600   

Corporate Auditors

        

Masaya Yamashita

(April 5, 1953)

  

Corporate Auditor of the Company (full-time),

appointed in June 2012 (presently held)

     *5         27,700   
  

Managing Officer of the Company,

appointed in June 2011

     
  

Managing Officer and Director of the Company,

appointed in April 2011

     
  

Managing Director of the Company,

appointed in June 2008

     
  

Chief Operating Officer for Purchasing Operations,

appointed in April 2008

     
  

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 for Purchasing Operations,

appointed in April 2002

 

Joined Honda in April 1977

     

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Kunio Endo

(August 23, 1957)

  

Corporate Auditor of the Company (full-time),

appointed in June 2013 (presently held)

     *6         8,800   
  

President and Director of American Honda Finance Corporation,

appointed in November 2010

     
  

President and Director of Honda Canada Finance Inc.,

appointed in November 2010

     
   Joined Honda in April 1981      

Hirotake Abe

(November 13, 1944)

  

Corporate Auditor of the Company,

appointed in June 2011 (presently held)

     *4         1,200   
  

Established the Certified Public Accountant

Hirotake Abe Office in January 2010 (presently held)

     
   Retired from Deloitte Touche Tohmatsu LLC in December 2009      
  

Senior Adviser of Deloitte Touche Tohmatsu (presently, Deloitte Touche Tohmatsu LLC),

appointed in June 2007

     
   End of tenure as Executive Member of Deloitte Touche Tohmatsu Limited in May 2007      
   End of tenure as CEO of Tomatsu & Co. (presently, Deloitte Touche Tohmatsu LLC) in May 2007      
  

Executive Member of Deloitte Touche Tohmatsu Limited,

in June 2004

     
   CEO of Tomatsu & Co. (presently, Deloitte Touche Tohmatsu LLC), appointed in June 2001      
   Registered as certified public accountant in March 1974      

 

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Name

(Date of birth)

  

Current Positions and Biographies with Registrant

   Term      Number of
Shares Owned
 

Tomochika Iwashita

(November 14, 1946)

  

Corporate Auditor of the Company,

appointed in June 2011 (presently held)

     *4         1,200   
  

End of tenure as Director of Tokio Marine Holdings, Inc.

in June 2010

     
  

End of tenure as President and Director of Tokio Marine & Nichido Life Insurance Co., Ltd.,

in June 2010

     
  

President and Director of Tokio Marine & Nichido Life Insurance Co., Ltd.,

appointed in June 2006

     
  

End of tenure as Vice President and Director of Tokio Marine & Nichido Fire Insurance Co., Ltd.,

in June 2006

     
  

Vice President and Director of Tokio Marine & Nichido Fire Insurance Co., Ltd.,

appointed in June 2005

     
  

Director of Millea Holdings, Inc. (presently, Tokio Marine Holdings, Inc.),

appointed in June 2005

     
  

Senior Managing Director of Tokio Marine & Nichido Fire Insurance Co., Ltd.,

appointed in October 2004

     
  

Senior Managing Director of Tokio Marine and Fire Insurance Co., Ltd.

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

appointed in June 2003

     
  

Managing Director of Tokio Marine and Fire Insurance Co., Ltd.

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

appointed in June 2002

     

Toshiaki Hiwatari

(August 4, 1945)

  

Corporate Auditor of the Company,

appointed in June 2012 (presently held)

 

Registered with the Daiichi Tokyo Bar Association

in September 2010

 

Advisor Attorney to TMI Associates,

appointed in September 2010 (presently held)

 

Retired from office in June 2010

 

Prosecutor General appointed in July 2008

     *5         700   

 

*1. Directors Mr. Nobuo Kuroyanagi and Ms. Hideko Kunii are outside directors.

 

*2. Corporate Auditors Mr. Hirotake Abe, Mr. Tomochika Iwashita and Mr. Toshiaki Hiwatari are outside corporate auditors.

 

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*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 13, 2014.

 

*4. The term of office 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, 2011.

 

*5. The term of office 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 21, 2012.

 

*6. The term of office 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 19, 2013.

 

*7. The Company has introduced an operating officer system to strengthen operations in regions and local workplaces, and implement quick and appropriate decisions. Executive Officers, Senior Managing Officers, Managing Officers and Operating Officers under the operating officer system are not statutory positions under the Company Law and do not conform to the definition of “Directors and Senior Management” as defined in Form 20-F. The Company’s Senior Managing Officers, Managing Officers and Operating Officers (excluding officers who also hold the position of Director) under the operating officer system, as voluntarily disclosed in Japan, are as follows:

 

Senior Managing Officers

Sho Minekawa

   Chief Operating Officer for Regional Operations (Japan)
  

Chief Officer of Honda Driving Safety Promotion Center

Koichi Fukuo

  

Executive in Charge of Business Unit No. 1 for Automobile Operations

Managing Officers

  

Takuji Yamada

   Chief Operating Officer for Regional Operations (North America)
   President and Director of Honda North America, Inc.
   President and Chief Executive Officer of American Honda Motor Co., Inc.

Yoshiyuki Matsumoto

   Representative of Development, Purchasing and Production (Asia and Oceania)
   Executive Vice President of Asian Honda Motor Co., Ltd.
   President and CEO of Honda Motor India Private Ltd.

Ko Katayama

   Executive in Charge of Production Strategy for Automobile Operations
   Head of Supply Chain Management Supervisory Unit in Automobile Production for Automobile Operations

Chitoshi Yokota

   Representative of Automobile Development, Purchasing and Production (North America)
   Executive Vice President and Director of Honda North America, Inc.

Seiji Kuraishi

   Chief Operating Officer for Regional Operations (China)
   President of Honda Motor (China) Investment Co., Ltd.
   President of Honda Motor Technology (China) Co., Ltd.

Toshiaki Mikoshiba

   Chief Operating Officer for Regional Operations (Europe Region)
   President and Director of Honda Motor Europe Ltd.

 

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Yoshi Yamane

   Representative of Automobile Development, Purchasing and Production (Japan)
   Head of Automobile Production, Regional Operations (Japan)
   Head of Production Supervisory Unit, Automobile Production, Regional Operations (Japan)

Takahiro Hachigo

   Representative of Development, Purchasing and Production (China)
   Vice President of Honda Motor (China) Investment Co., Ltd.
   Vice President of Honda Motor Technology (China) Co., Ltd.

Operating Officers

  

Takashi Sekiguchi

   Executive in Charge of Business Unit No.2, Automobile Operations

Michimasa Fujino

   President and Director of Honda Aircraft Company, LLC

Soichiro Takizawa

   Representative of Development, Purchasing and Production (Europe Region)
   Executive Vice President and Director of Honda Motor Europe Ltd.
   Managing Director of Honda of the U.K. Manufacturing Ltd.

Naoto Matsui

   Chief Operating Officer for Purchasing Operations
   Head of Purchasing Supervisory Unit, Automobile Production, Automobile Operations

Mitsugu Matsukawa

   Head of Drivetrain Business Unit, Automobile Production, Automobile Operations

Tetsuo Suzuki

   Representative of Motorcycle Development, Purchasing and Production, Motorcycle Operations

Issao Mizoguchi

   Chief Operating Officer for Regional Operations (Latin America)
   President and Director of Honda South America Ltda.
   President and Director of Honda Automoveis do Brazil Ltda.
   President and Director of Moto Honda da Amazonia Ltda.

Toshihiro Mibe

  

Executive in Charge of Powertrain Business, Automobile Operations

   Head of Powertrain Production Supervisory Unit, Automobile Production, Automobile Operations

Yusuke Hori

  

Head of Regional Unit (Africa and the Middle East)

Tomomi Kosaka

  

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

  

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

Noriaki Abe

  

Chief Operating Officer for Regional Operations (Asia & Oceania)

  

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

  

President and Director of Honda Automobile (Thailand) Co., Ltd.

Toshiyuki Shimabara

  

Executive in Charge of Motorcycle Production for Motorcycle Operations

  

General Manager of Kumamoto Factory for Motorcycle Operations

  

Executive in Charge of Power Product Production for Power Product Operations

Yasuhide Mizuno

  

President of Guangqi Honda Automobile Co., Ltd.

 

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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 remuneration, the aggregate maximum amount of which is approved at the annual general meeting of shareholders. The amounts of the remuneration approved to pay to Directors and Corporate Auditors are allocated among them at meeting of the Board of Directors and Corporate Auditors. Also, Directors receive bonuses, the aggregate amount of which is approved at the annual general meeting of shareholders. The amounts of the bonuses approved to pay to Directors are allocated among them at meeting of the Board of Directors. It is based on the Company’s performance for each fiscal year, Director’s bonuses in the past and other factors. 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, 2014 was ¥895 million. This amount includes remuneration paid to two 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 during the fiscal year ended March 31, 2014 was ¥248 million.

 

The amounts of remuneration and bonuses that were paid during the year ended March 31, 2014 are as follows:

 

    Yen (millions)  
    Directors excluding
outside Directors
    Outside
Directors
    Corporate Auditors
excluding outside
Corporate Auditors
    Outside
Corporate Auditors
    Total  
    number     amount     number     amount     number     amount     number     amount     number     amount  

Remuneration

    13      ¥ 688        2      ¥ 23        3      ¥ 135        3      ¥ 47        21      ¥ 895   

Bonus

    10        241       2        7        —          —         —         —         12        248   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    ¥ 929        ¥ 30        ¥ 135        ¥ 47        ¥ 1,143   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

The amount of remuneration paid to Fumihiko Ike during the fiscal year ended March 31, 2014 was ¥74 million. The amount of bonus for Fumihiko Ike accrued for the fiscal year ended March 31, 2014 was ¥33 million.

 

The amount of remuneration paid to Takanobu Ito during the fiscal year ended March 31, 2014 was ¥102 million. The amount of bonus for Takanobu Ito accrued for the fiscal year ended March 31, 2014 was ¥48 million.

 

The amount of remuneration paid to Tetsuo Iwamura during the fiscal year ended March 31, 2014 was ¥112 million. The amount of bonus for Tetsuo Iwamura accrued for the fiscal year ended March 31, 2014 was ¥29 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.

 

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D. Employees

 

The following tables list the number of Honda full-time employees as of March 31, 2014, 2013 and 2012.

 

As of March 31, 2014

 

Total

  

Motorcycle
Business

  

Automobile
Business

  

Financial Services
Business

  

Power Product and
Other Businesses

198,561

   42,276    145,585    2,160    8,540

 

  

 

  

 

  

 

  

 

 

At March 31, 2014, Honda had 198,561 full-time employees, including 132,206 local nationals employed in its overseas operations.

 

As of March 31, 2013

 

Total

  

Motorcycle
Business

  

Automobile
Business

  

Financial Services
Business

  

Power Product and
Other Businesses

190,338

   40,430    138,443    2,157    9,308

 

  

 

  

 

  

 

  

 

 

At March 31, 2013, Honda had 190,338 full-time employees, including 123,726 local nationals employed in its overseas operations.

 

As of March 31, 2012

 

Total

  

Motorcycle
Business

  

Automobile
Business

  

Financial Services
Business

  

Power Product and
Other Businesses

187,094

   39,954    134,357    2,145    10,638

 

  

 

  

 

  

 

  

 

 

At March 31, 2012, Honda had 187,094 full-time employees, including 118,923 local nationals employed in its overseas operations.

 

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 as of March 31, 2014.

 

In Japan, basic wages are negotiated annually and the average increases in wages of the Company’s employees in fiscal 2012, 2013 and 2014 were 1.8%, 1.7% and 2.6%, 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 Japanese 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.

 

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E. Share Ownership

 

The total amount of the Company’s voting securities owned by its Directors and Corporate Auditors as a group as of June 13, 2014 is as follows.

 

Title of Class

  Amount Owned   % of Class
Common Stock   263,000 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, 2014, the Association owned 5,409,170 shares of the Company’s common stock.

 

Item 7. Major Shareholders and Related Party Transactions

 

A. Major Shareholders

 

As of March 31, 2014, 1,811,428,430 shares of Honda’s Common Stock were issued and 1,802,291,196 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, 2014:

 

Name

   Shares owned
(thousands)
   Ownership
(%)

Japan Trustee Services Bank, Ltd. (trust account)

   117,059    6.46

 

According to a statement on Schedule 13G (Amendment No. 10) filed by Mitsubishi UFJ Financial Group, Inc. with the Securities and Exchange Commission on February 12, 2014, Mitsubishi UFJ Financial Group, Inc. directly and indirectly held, as of December 31, 2013, 109,893,670 shares, or 6.1% of the then issued shares, of Honda’s Common Stock. In addition, according to a statement on the Report of Possession of Large Volume filed by Sumitomo Mitsui Trust Bank, Limited with the Director of the Kanto Local Finance Bureau on January 9, 2014, Sumitomo Mitsui Trust Bank, Limited directly and indirectly held, as of December 31, 2013, 91,179,756 shares, or 5.03% 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.

 

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, 2014 were 1,811,428,430 shares of Common Stock, of which 55,964,204 shares represented by ADSs and 268,802,061 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 256 at March 31, 2014.

 

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.

 

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During the fiscal year ended March 31, 2014, Honda had sales of ¥786.8 billion and purchases of ¥1,028.5 billion with equity affiliates accounted under the equity method. As of March 31, 2014, Honda had receivables of ¥225.3 billion from affiliated companies, and had payables of ¥138.1 billion to affiliated companies.

 

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 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.

 

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 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