20-F 1 d363503d20f.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

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

For the fiscal year ended March 31, 2017

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)

Akihisa Ito, 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, 2017

Common Stock   1,802,280,395**

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act,    Yes  ☒    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  ☒

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  ☒    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  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer    ☒   Accelerated filer    ☐    Non-accelerated filer    ☐   Emerging growth company    ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

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

U.S.GAAP  ☐    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  ☒

* 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 66,809,460 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

     2  

C. Reason for the Offer and Use of Proceeds

     2  

D. Risk Factors

     2  

Item 4. Information on the Company

     7  

A. History and Development of the Company

     7  

B. Business Overview

     8  

C. Organizational Structure

     28  

D. Property, Plants and Equipment

     29  

Item 4A. Unresolved Staff Comments

     31  

Item 5. Operating and Financial Review and Prospects

     32  

A. Operating Results

     32  

B. Liquidity and Capital Resources

     57  

C. Research and Development

     59  

D. Trend Information

     62  

E. Off-Balance Sheet Arrangements

     62  

F. Tabular Disclosure of Contractual Obligations

     62  

G. Safe Harbor

     62  

Item 6. Directors, Senior Management and Employees

     63  

A. Directors and Senior Management

     63  

B. Compensation

     77  

C. Board Practices

     78  

D. Employees

     78  

E. Share Ownership

     79  

Item 7. Major Shareholders and Related Party Transactions

     79  

A. Major Shareholders

     79  

B. Related Party Transactions

     80  

C. Interests of Experts and Counsel

     80  

Item 8. Financial Information

     80  

A. Consolidated Statements and Other Financial Information

     80  

B. Significant Changes

     82  

Item 9. The Offer and Listing

     82  

A. Offer and Listing Details

     82  

B. Plan of Distribution

     83  

C. Markets

     83  

D. Selling Shareholders

     83  

E. Dilution

     83  

F. Expenses of the Issue

     83  

Item 10. Additional Information

     83  

A. Share Capital

     83  

B. Memorandum and Articles of Association

     83  

C. Material Contracts

     91  

D. Exchange Controls

     92  

E. Taxation

     92  


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F. Dividends and Paying Agents

     96  

G. Statement by Experts

     96  

H. Documents on Display

     96  

I. Subsidiary Information

     96  

Item 11. Quantitative and Qualitative Disclosure about Market Risk

     96  

Item 12. Description of Securities Other than Equity Securities

     97  

A. Debt Securities

     97  

B. Warrants and Rights

     97  

C. Other Securities

     97  

D. American Depositary Shares

     97  

PART II

  

Item 13. Defaults, Dividend Arrearages and Delinquencies

     98  

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

     98  

Item 15. Controls and Procedures

     98  

Item 16A. Audit Committee Financial Expert

     99  

Item 16B. Code of Ethics

     99  

Item 16C. Principal Accountant Fees and Services

     99  

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

     100  

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

     101  

Item 16F. Change in Registrant’s Certifying Accountant

     101  

Item 16G. Corporate Governance

     102  

Item 16H. Mine Safety Disclosure

     106  

PART III

  

Item 17. Financial Statements

     106  

Item 18. Financial Statements

     106  

Item 19. Exhibits

     107  


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 four fiscal years ended March 31, 2017 have been derived from our consolidated financial statements that were prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

 

You should read the IFRS 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, except Per Share Data)  
     2014     2015     2016     2017  

Consolidated Statement of Income Data:

        

Sales revenue

   ¥ 12,506,091     ¥ 13,328,099     ¥ 14,601,151     ¥ 13,999,200  

Operating profit

     823,864       670,603       503,376       840,711  

Share of profit of investments accounted for using the equity method

     130,916       96,097       126,001       164,793  

Profit before income taxes

     933,903       806,237       635,450       1,006,986  

Profit for the year

     665,911       561,098       406,358       679,394  

Profit for the year attributable to owners of the parent

     624,703       509,435       344,531       616,569  

Consolidated Statement of Financial Position Data:

        

Total assets

     16,048,438       18,425,837       18,229,294       18,958,123  

Financing liabilities, including current and non-current

     5,846,948       6,759,839       6,526,248       6,809,118  

Equity attributable to owners of the parent

     6,335,534       7,108,627       6,761,433       7,295,296  

Total equity

     6,558,928       7,382,821       7,031,788       7,569,626  

Common stock

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

Per Share Data:

        

Weighted average number of common shares outstanding

        

Basic and diluted (thousands of shares)

     1,802,294       1,802,289       1,802,285       1,802,282  

Earnings per share attributable to owners of the parent*1

        

Basic and diluted

   ¥ 346.62     ¥ 282.66     ¥ 191.16     ¥ 342.10  

Dividends declared during the period per common share*2

     79.00       88.00       88.00       90.00  
     (US$ 0.77     (US$ 0.73     (US$ 0.78     (US$ 0.80

 

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*1 

Earnings per share has been calculated by dividing profit for the year attributable to owners of the parent available to common shareholders by the weighted average number of common shares outstanding during the period.

*2 

A year-end dividend of ¥24 ($0.21) per common share aggregating ¥43.2 billion ($386 million) relating to fiscal 2017 was determined by our Board of Directors in May 2017 and approved by our shareholders in June 2017. This dividend will be paid in June 2017. U.S. dollar amounts for dividends per share are translated from yen at the year-end exchange rate of each period.

 

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 31, 2017, the noon buying rate was ¥110.71=$1.00. The average exchange rate for the period shown is the average of the month-end rates during the period.

 

     Noon Buying Rate  

Years ended or ending March 31,

   Average      Period end      High      Low  
     (Yen per $1.00)  

2013

     83.26        94.16        96.16        77.41  

2014

     100.46        102.98        105.25        92.96  

2015

     110.78        119.96        121.50        101.26  

2016

     120.13        112.42        125.58        111.30  

2017

     108.31        111.41        118.32        100.07  

2018 (through May 31, 2017)

     111.08        110.71        114.19        108.40  

Month,

                 High      Low  
                   (Yen per $1.00)  

December 2016

           118.32        113.50  

January 2017

           117.68        112.72  

February 2017

           114.34        111.74  

March 2017

           115.02        110.48  

April 2017

           111.52        108.40  

May 2017

           114.19        110.68  

 

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 shares 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.

 

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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 an extended economic slowdown, recession, changes in consumer preferences, rising fuel prices, financial crisis or other factors could trigger a decline in demand for motorcycles, automobiles and power products that may adversely affect Honda’s results.

 

Prices for products may fluctuate

 

Prices for motorcycles, automobiles and power products in certain markets may experience sharp changes over short periods of time. This volatility may be caused by various factors, including fierce competition, 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, a steep rise in material prices and sales incentives. There is no guarantee 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.

 

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.

 

Risks Relating to Honda’s Business in General

 

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 could affect Honda’s pricing of materials purchased and products sold. Accordingly, currency fluctuations have an effect on Honda’s results and financial condition, as well as Honda’s competitiveness, which will over time affect its results.

 

Legal and Regulatory Risks

 

Honda is subject to various governmental regulations

 

Honda conducts business operations in countries worldwide. As such, changes in regulations in these countries related to emissions, fuel economy, noise, vehicle safety, factory pollution levels, climate change or other factors could adversely affect Honda’s business, financial condition, or results.

 

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 will continue to be of value in the future. Honda does not regard any of its business operations 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, could have an adverse effect on Honda’s operations.

 

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Honda may be subject to legal proceedings

 

Honda could be subject to suits, various investigations and legal proceedings under relevant laws and regulations of various jurisdictions. A negative outcome in any such current or future legal proceedings brought against Honda could adversely affect Honda’s business, financial condition or results.

 

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. 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 Honda 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.

 

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 outside of 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. In particular, the loss of a key supplier could affect our production and increase our costs.

 

Honda relies on business alliances and joint ventures with other companies

 

Honda engages in business operations through alliances and joint ventures with other companies in expectation of synergy effects and increased efficiency, or in accordance with requirements from the countries in which Honda conducts its businesses. However, if disagreements occur between the parties to an alliance or joint venture, or if an alliance or joint venture is changed or cancelled, it may have an adverse effect on Honda’s business, financial condition, or results.

 

Honda may be adversely affected by wars, terrorism, political uncertainty and labor strikes

 

Honda conducts business operations in countries worldwide and is exposed to risks including wars, terrorism, political uncertainty and labor strikes in those countries or neighboring regions. If such unforeseeable events occur, and operations are delayed or suspended, Honda’s business, financial condition, or results could be adversely affected.

 

Honda may be adversely affected by natural disasters

 

In order to minimize the impact on its business operations when events such as large-scale natural disasters, accidents, or the outbreak of infectious diseases occur, Honda conducts a risk evaluation of these events and constructs business continuity plans (BCPs). However, if operations are delayed or suspended due to the occurrence of disasters, accidents, or the outbreak of infectious diseases that exceed assumptions, Honda’s business, financial condition or results could be adversely affected.

 

Honda’s operations rely on information systems and networks

 

Honda uses a range of information systems and networks relating to information services and operational support in its business activities and its products, including in areas managed by subcontractors. To protect the

 

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confidentiality of information handled by these systems and networks, Honda implements a range of security measures both in hardware and software, such as building management systems including those of subcontractors, information-handling procedures and training of staff. However, there is a risk of leakage of confidential information, suspension of important operations and services, improper administrative processing, destruction or alteration of important data or other adverse developments. These may be the result of external cyber-attacks, equipment malfunction, or management deficiencies and human error, as well as natural disasters, infrastructure failures, or other unforeseen events within Honda or at its subcontractors. In such cases, Honda’s business activities and performance could be adversely affected in terms of damage to its brand image or social reputation, liability to customers or parties affected, and a loss of Honda’s competitiveness.

 

Honda is subject to risks relating to its obligations to provide post-employment benefits

 

Honda has various pension plans and provides other post-employment benefits, in which the amount of benefits is basically determined based on the level of salary, service years, and other factors. Contributions are also regularly reviewed and adjusted as necessary to the extent permitted by laws and regulations. Defined benefit obligations and defined benefit costs are based on assumptions of many factors, including the discount rate and the rate of salary increase. Changes in assumptions could affect Honda’s defined benefit costs and obligations, including Honda’s cash requirements to fund such obligations in the future, which could materially affect Honda’s financial condition and results.

 

Honda’s success depends in part on the value of its brand image, which could be diminished by product defects

 

One of the important factors behind corporate sustainability is trust and support for the Honda brand from our customers, society and the communities in which Honda conducts business operations. With respect to the quality of our products, which serves as the pillar of our brand image, we recognize that our mainstay products provide personal mobility and touch human lives, so we place top priority on the safety and security of our customers and constantly strive to further enhance the quality of our development, production and service-related activities. However, if for some unforeseeable reason a product defect does occur, from the standpoint of assuring the safety and security of our customers, it is possible that Honda will issue a recall or take some other action considered to be appropriate. In such an event, the Honda brand image could be damaged and this could adversely impact Honda’s business operations as well as our results.

 

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 Audit and Supervisory Committee 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

 

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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 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, its directors or executive officers

 

The Company is a limited liability, joint stock corporation incorporated under the laws of Japan. Most of its directors and executive officers 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.

 

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

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

Since its establishment, Honda has remained on the leading edge by creating new value and providing products of the highest quality at a reasonable price for worldwide customer satisfaction. Honda develops, manufactures and markets motorcycles, automobiles and power products globally.

 

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, 2015, 2016 and 2017, Honda’s capital expenditures were ¥2,579.2 billion, ¥2,860.6 billion and ¥2,572.7 billion, respectively, on an accrual basis. Also, capital

 

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expenditures excluding those with respect to equipment on operating leases were ¥898.0 billion, ¥893.1 billion and ¥690.0 billion, respectively, on an accrual basis. For further details of Honda’s capital expenditures during fiscal 2017, see Item 4.D “Property, Plants and Equipment” of this Annual Report.

 

B. Business Overview

 

General

 

Honda’s business segments are the Motorcycle business operations, Automobile business operations, Financial services business operations, and Power product and other businesses operations.

 

The following tables show the breakdown of Honda’s revenue from external customers by category of business and by geographical markets based on the location of the customer for the fiscal years ended March 31, 2015, 2016 and 2017:

 

    Fiscal years ended March 31,  
        2015             2016             2017      
    Yen (billions)  

Motorcycle Business

  ¥ 1,846.6     ¥ 1,805.4     ¥ 1,716.1  

Automobile Business

    9,603.3       10,625.4       10,086.8  

Financial Services Business

    1,555.5       1,835.6       1,878.0  

Power Product and Other Businesses

    322.5       334.7       318.1  
 

 

 

   

 

 

   

 

 

 

Total

  ¥ 13,328.0     ¥ 14,601.1     ¥ 13,999.2  
 

 

 

   

 

 

   

 

 

 
    Fiscal years ended March 31,  
        2015             2016             2017      
    Yen (billions)  

Japan

  ¥ 1,800.4     ¥ 1,754.1     ¥ 1,799.7  

North America

    6,837.6       8,114.1       7,618.0  

Europe

    655.3       693.5       639.2  

Asia

    2,899.0       3,124.0       3,085.6  

Other Regions

    1,135.6       915.2       856.4  
 

 

 

   

 

 

   

 

 

 

Total

  ¥ 13,328.0     ¥ 14,601.1     ¥ 13,999.2  
 

 

 

   

 

 

   

 

 

 

 

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 also produces a range of off-road vehicles, including all-terrain vehicles (ATVs) and side-by-side (SxS).

 

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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 for the fiscal years ended March 31, 2015, 2016 and 2017:

 

    Fiscal years ended March 31,  
    2015     2016     2017  
    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

    199       199     ¥ 72.4       180       180     ¥ 66.8       156       156     ¥ 62.7  

North America

    286       286       154.7       308       308       186.0       294       294       168.0  

Europe

    191       191       116.9       204       204       125.0       217       217       118.2  

Asia

    15,345       8,478       1,050.4       15,133       8,650       1,107.6       15,937       9,513       1,088.1  

Other Regions

    1,571       1,571       451.9       1,230       1,230       319.7       1,057       1,057       278.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    17,592       10,725     ¥ 1,846.6       17,055       10,572     ¥ 1,805.4       17,661       11,237     ¥ 1,716.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Motorcycle revenue as a percentage of total sales revenue

        14         12         12

 

* 

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

 

See Item 4. D. “Property, Plants and Equipment” for information regarding principal manufacturing facilities.

 

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) and later conducted local development and expanded production activities to include light truck models. In 1986, the Acura Brand was established and an exclusive sales network was launched in the United States.

 

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

 

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Honda’s principal automobile products include the following vehicle models: (in alphabetical order)

 

Passenger cars:

 

Accord, Brio, City, Civic, Fit/Jazz

 

Light trucks:

 

CR-V, Odyssey, Pilot, Vezel/HR-V, XR-V

 

Mini vehicles:

 

N-BOX

 

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 for the fiscal years ended March 31, 2015, 2016 and 2017:

 

    Fiscal years ended March 31,  
    2015     2016     2017  
    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

    761       696     ¥ 1,526.0       668       614     ¥ 1,439.9       668       603     ¥ 1,453.4  

North America

    1,750       1,750       5,199.0       1,929       1,929       6,186.7       1,970       1,970       5,704.2  

Europe

    161       161       456.5       172       172       491.2       184       184       450.7  

Asia

    1,426       637       1,795.7       1,723       670       1,962.5       1,964       684       1,948.1  

Other Regions

    269       269       625.9       251       251       544.9       242       242       530.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    4,367       3,513     ¥ 9,603.3       4,743       3,636     ¥ 10,625.4       5,028       3,683     ¥ 10,086.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Automobile revenue as a percentage of total sales revenue

        72         73         73

 

* 

Honda Group Unit Sales is the total unit sales of completed products of Honda, its consolidated subsidiaries and its affiliates and joint ventures accounted for using the equity method. Consolidated Unit Sales is the total unit sales of completed products corresponding to consolidated sales revenue 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 and sold through our consolidated subsidiaries are accounted for as operating leases in conformity with IFRS and are not included in consolidated sales revenue to the external customers in our Automobile business. Accordingly, they are not included in Consolidated Unit Sales, but are included in Honda Group Unit Sales of our Automobile business.

 

See Item 4. D. “Property, Plants and Equipment” for information regarding principal manufacturing facilities.

 

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 for the fiscal years ended March 31, 2015, 2016 and 2017:

 

     Fiscal years ended March 31,  
     2015     2016     2017  
     Yen (billions)  

Japan

   ¥ 119.7     ¥ 162.0     ¥ 210.9  

North America

     1,376.2       1,619.2       1,616.2  

Europe

     14.2       14.4       12.1  

Asia

     12.1       12.6       10.5  

Other Regions

     33.1       27.2       28.2  
  

 

 

   

 

 

   

 

 

 

Total

   ¥ 1,555.5     ¥ 1,835.6     ¥ 1,878.0  
  

 

 

   

 

 

   

 

 

 

Financial Services revenue as a percentage of total sales revenue

     12     13     13

 

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 H, its first general purpose engine. Since then, Honda has manufactured a variety of power products including general-purpose engines, generators, water pumps, lawn mowers, riding mowers, robotic mowers, brush cutters, tillers, snow blowers, outboard marine engines, and walking assist devices.

 

In Other Businesses, Honda began deliveries of the HondaJet aircraft in December 2015.

 

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 for the fiscal years ended March 31, 2015, 2016 and 2017:

 

     Fiscal years ended March 31,  
     2015     2016     2017  
     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

     338      ¥ 82.1       363      ¥ 85.2       301      ¥ 72.6  

North America

     2,705        107.6       2,811        122.0       2,977        129.5  

Europe

     1,091        67.5       1,008        62.8       1,035        58.0  

Asia

     1,382        40.6       1,349        41.2       1,430        38.9  

Other Regions

     467        24.5       434        23.1       378        18.9  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     5,983      ¥ 322.5       5,965      ¥ 334.7       6,121      ¥ 318.1  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

        2        2        2

 

* 

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

 

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subsidiaries. In Power product business, there is no discrepancy between Honda Group Unit Sales and Consolidated Unit Sales since no affiliate and joint venture accounted for using 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.

 

In fiscal 2017, approximately 90% of Honda’s motorcycle units on a group basis were sold in Asia. Approximately 39% of Honda’s automobile units (including sales under the Acura Brand) on a group basis were sold in North America followed by 39% in Asia and 13% in Japan. Approximately 49% of Honda’s power products units on a group basis were sold in North America followed by 23% in Asia and 17% in Europe.

 

Sales and Service

 

In Japan, Honda produces and sells motorcycles, automobiles, and power products through its domestic sales subsidiaries and independent retail dealers. In overseas markets, Honda also provides motorcycles, automobiles, and power products through its principal foreign sales subsidiaries, which distribute Honda’s products to local wholesalers and retail dealers.

 

In fiscal 2017, approximately 98% of Honda’s overseas sales were made through its principal foreign sales subsidiaries, which distribute Honda’s products to local wholesalers and retail dealers.

 

Honda sells spare parts and provides after-sales services through retail dealers directly or via its overseas operations, independent distributors and licensees.

 

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 44% 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, 2017.

 

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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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). In 2015, the Central Environmental Council of Ministry of Environment decided to introduce 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 regulations in the world.

 

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 a 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.

 

In October 2015, the CARB issued the Final Statement Of Reasons for rulemaking (FSOR), to amend the current LEV III regulation in order to align its standards further with the finalized federal Tier 3 regulation.

 

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Europe

 

In 2005, the European Union created new emission standards (the Euro 5 and Euro 6 regulations) 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 hydrocarbons, NOx and PM. PM mass emission standards apply only to vehicles with direct injection engines.

 

Additionally, the Euro 5 regulation 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 in and after September 2011.

 

The Euro 6 regulation was implemented in September 2014. Emission limits for diesel vehicles will be lowered even more than the Euro 5 levels for NOx and THC plus NOx. Additionally, Euro 6 required limits on particle numbers from gasoline vehicles with direct injection engines. The required ethanol density of test fuel will also be increased, starting from September 2016.

 

The European Commission proposed the transition from New European Driving Cycle (NEDC) to World Light duty Test Cycle (WLTC) beginning from September 2017.

 

The European Commission implemented regulations regarding the Real Driving Emissions (RDE) using Portable Emissions Measurement System (PEMS). The monitoring phase started from April 2016 and RDE testing with emission limits starts from September 2017.

 

Russia

 

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

 

Russia, together with Kazakhstan and Belarus, formed a Customs Union. The Euro 5 regulation was introduced from January 2015 to the Customs Union. Implementation for the Kyrgyz Republic started from February 2016 and for Armenia will start from January 2020.

 

China

 

China adopted Step 5 emission regulation for light-duty vehicles in 2017. This regulation is similar to European regulations (such as Euro 5 regulation). In addition, China has promulgated rules to implement Step 6 emission regulations in July 2020, based on Euro 6 regulation. Step 6a regulations will be implemented in July 2020 and Step 6b regulations will be implemented in July 2023.

 

In order to reduce dependence on foreign sources of crude oil and reduce air pollution, which are viewed as serious problems, the Chinese government has implemented various infrastructure projects and subsidy policies and has been preparing the relevant national standards and a certification system in order to encourage broad use of new energy vehicles such as electric vehicles, plug-in hybrid electric vehicles, and fuel-cell electric vehicles.

 

Other Regions

 

India implements BS IV (Bharat Stage IV) regulations from April 2017 and is expected to implement BS VI regulation from April 2020, skipping the implementation of BS V regulations. The BS VI regulations feature two phases. The second phase is expected to apply from April 2023 with more stringent particle number and on-board diagnostic requirements and compliance for RDE.

 

Malaysia is scheduled to implement Euro 4 regulation from April 2020 for new vehicle and October 2021 for all gasoline vehicles.

 

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Thailand is scheduled to implement Euro 6b regulation from 2023 and Euro 6c regulation from 2028.

 

Several other Asian countries have adopted regulations which are similar to the European regulations (such as Euro 2 regulation and Euro 3 regulation). Some of these governments are considering the introduction of Euro 4 regulation, Euro 5 regulation and Euro 6 regulation.

 

Australia implemented Euro 5-equivalent regulations in November 2013. In addition, Australia plans to introduce Euro 6-equivalent regulations from June 2019.

 

Ukraine is scheduled to implement Euro 6 regulation from January 2018.

 

Turkey implemented Euro 6 regulation from January 2016.

 

Brazilian authorities are currently proposing a new emission regulation known as PROCONVE L7. This regulation is a unique Brazilian regulation based on U.S. regulations. This regulation is expected to be much stricter than current regulation, but it is still under consideration by the Brazilian authorities and the implementation date is not fixed yet.

 

Bolivia was previously scheduled to implement Euro 4 regulation in August 2016, but this implementation has been postponed.

 

Peru is scheduled to implement Tier 2 regulations and Euro 4 regulation in December 2017.

 

Uruguay is considering the introduction of Euro 4 regulation and Tier 2 regulations in January 2018.

 

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, Trade and Industry (METI) jointly established a committee and 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.

 

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.

 

In 2015, MLIT and METI examined the new fuel economy standards for small commercial vehicles.

 

In autumn 2016, WLTC mode was introduced into fuel economy standards, in addition to JC08 mode.

 

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.

 

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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 greenhouse gas regulation from the 2012 model year in accordance with President Obama’s announcement. The standard for the 2016 model year was 250 g-CO2/mile, or a 35.5 mpg 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 greenhouse gas regulation if the manufacturer complied with EPA-GHG from the 2012 through 2016 model years.

 

On May 21, 2010, then-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 in August 2012 regarding greenhouse gas/CAFE regulations from the 2017 through 2025 model years. The standard for the 2025 model year is 163 g-CO2/mile or a 54.5 mpg industry average. The CARB also issued a regulation that is nearly equivalent to the EPA’s greenhouse gas regulations in August 2012. In December 2012, the CARB amended its greenhouse gas regulation so that a manufacturer is also deemed to comply with the CARB greenhouse gas regulations if it complies with EPA-GHG from the 2017 through 2025 model years.

 

When greenhouse gas/CAFE regulation was legislated in 2012, the EPA the NHTSA announced that they, in coordination with the CARB, would perform a mid-term evaluation re-examining the appropriateness of limit values for 2022-2025 model years by April 2018. Accordingly, the EPA, NHTSA and CARB jointly issued a joint technical assessment report in July 2016 (although such report is a technical report, and not a decision document). Although the EPA independently issued a final determination not to alter the greenhouse gas regulation one year ahead of initial schedule in January 2017, after the political transition to the Trump administration, the EPA announced an intention to reconsider its final determination in concert with the NHTSA. The EPA has announced its intention to make a new final determination regarding the appropriateness of the standards no later than April 2018. On the other hand, CARB decided in March 2017 not to change the greenhouse gas regulations applicable for the 2022-2025 model years on March 2017.

 

On March 2017, President Trump issued executive order “Promoting Energy Independence and Economic Growth” which includes rescinding the “Climate Action Plan” announced by former president Obama. Therefore, U.S. environmental regulation may be drastically reconsidered in the future.

 

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.

 

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

 

The European Commission is planning to replace the current European type-approval procedure for fuel consumption and CO2 emissions of cars based on NEDC with new WLTC and WLTP in 2017. During the transitional years, WLTP-measured CO2 values would be calculated to NEDC CO2 values to check compliance to NEDC based CO2 target. A new WLTP based target for each manufacturer will be set from 2021.

 

The European Commission has announced its intention to amend CO2 regulation beyond 2025. The introduction of the proposed regulations is planned to be announced by end of 2017.

 

China

 

China adopted a fuel consumption regulation for passenger vehicles in 2004. Step 1 of this regulation was implemented in 2005, Step 2 of this regulation was implemented in 2008 and Step 3 of this regulation was implemented in 2012. In addition, China implemented Step 4 of this regulation in 2016.

 

Other Regions

 

India has promulgated rules to introduce fuel economy / CO2 regulations in 2017 and 2022 in a phased manner.

 

Australia is considering introducing fuel economy / CO2 regulations.

 

Taiwan introduced corporate average fuel consumption regulations.

 

Mexico carried over the regulation value of fuel economy / CO2 regulations for 2016 model years to 2017 model years.

 

The Province of Quebec in Canada proposed to introduce a mandate for each maker to sell a certain percentage of zero emission vehicles starting from the 2018 model year.

 

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. 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.

 

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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.

 

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.

 

4. Safety

 

United Nations

 

From 2014, under WP29 (World Forum for Harmonization of Vehicle Regulations), the ITS / AD Informal Working Group has been discussing the issue of Intelligent Transport System and Automated Driving. Current main discussion issues are “definition of each technical level (partially—fully automated driving) of automated driving”, “cyber security”, “privacy protection principles” and “amendment of current road traffic law”.

 

Japan

 

In November 2007, the MLIT issued safety standards, which have been 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 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 2017.

 

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 designed to better match with the human body structure and its characteristics.

 

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

 

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

 

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In January 2015, the MLIT adopted UN R21, which regulates interior fittings.

 

In January 2015, the MLIT adopted UN R127, which regulates pedestrian safety performance.

 

In June 2015, the MLIT adopted UN R135, which regulates protection of passengers from a lateral pole crash.

 

In June 2015, the MLIT adopted UN R34, which regulates vehicle fire prevention.

 

In October 2015, the MLIT adopted UN R117, which regulates exterior noise of tires, the frictional force on wet road surfaces and rolling resistance.

 

In October 2016, the MLIT adopted UN R138, which regulates the reduced audibility of “quiet road transport vehicles”, including electric vehicles.

 

To achieve the highest level of traffic safety in Japan, MLIT developed a strategy to introduce fully automated driving in the latter half of the 2020’s. To develop harmonized regulations for automated driving, MLIT is joining ITS / AD Informal Working Group under WP29 of the United Nations. MLIT is co-chairman of Informal Working Group together with the United Kingdom.

 

The United States

 

In June 2008, the NHTSA issued a final rule to revise some performance requirements and phase-in compliance schedules for upgraded side impact occupant protection standards. For both the moving deformable barrier test and the oblique side pole impact test, manufacturers have had to 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 have had to 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 in or 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 have had to comply with the new requirements for 25% of all vehicles produced by 2013, 50% by 2014 and 75% by 2015. Further, 100% had to comply (with carryover credit) by 2016, and all vehicles by 2017.

 

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, which is still under consideration.

 

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. After September 2014, the NHTSA had planned to require manufacturers to install EDRs which comply with specified performance requirements, but the issue is still under discussion.

 

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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 enabling pedestrians and bicycle riders be aware of approaching hybrid vehicles on electric drive or electric vehicles by sound. Manufacturers were encouraged to comply with the new requirements for 30% of all vehicles produced by 2015 and 60% by 2016. Further, the target is 90% by 2017, and all vehicles by 2018.

 

In April, 2013, the NHTSA issued the first phase of these guidelines. The Phase 1 Guidelines cover original equipment (OE) in-vehicle (i.e., integrated) electronic devices that are operated by the driver through visual-manual means (i.e., the driver looks at a device, manipulates a device-related control with his or her hand, and/or watches for visual feedback from the device). The Phase 2 Guidelines will apply to portable and aftermarket devices that are operated through visual-manual means and will be based on the same general principles as the Phase 1 Guidelines.

 

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 had to comply with the new requirements for 10% of all vehicles produced from May 2016 to April 2017. From May 2017 to April 2018, 40% must comply and all vehicles in or after May 2018.

 

In September 2016, the NHTSA issued the Federal Automated Vehicles Policy for safety testing and deployment of automated vehicles. This policy comprises four sections: vehicle performance guidance for automated vehicles, model state policy, current regulatory tools, and modern regulatory tools. The vehicle performance guidance section outlines a 15 point “safety assessment” for the safe design, development, testing and deployment of automated vehicles.

 

In December, 2016, the NHTSA issued a proposal titled Driver Distraction Guidelines Phase 2 to reduce accidents due to driver distraction. This guideline addresses vehicle safety problems posed by driver distraction due to aftermarket and portable device usage.

 

In December, 2016, the NHTSA issued a final rule to newly establish FMVSS141, a standard for minimum sound requirements for hybrid and electric vehicles. The purpose of FMVSS141 is to reduce the number of injuries that result from electric and hybrid vehicle crashes with pedestrians by providing a sound level and sound characteristics necessary for these vehicles to be detected and recognized by pedestrians. Manufacturers must comply with the new requirements for 50% of all hybrid and electric vehicles produced from September 2018, and all hybrid and electric vehicles on or after September 2019.

 

In January 2017, the NHTSA issued a proposed regulation to establish a new FMVSS150 (vehicle-to-vehicle (V2V) communications) standard. FMVSS150 specifies performance requirements for V2V communications capability and the mandatory equipment requirements of V2V function. FMVSS150 applies to new passenger cars, multi-purpose vehicles, truck, and buses with a gross vehicle weight rating of 10,000 pounds (4,536 kg) or less. FMVSS150 has a provision for a scheduled phase-in.

 

Europe

 

Legislation regarding a new system called “eCall” is under consideration in the EU and is already implemented in 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 vehicle types is scheduled for March 31, 2018. Final standards have already been published in the Customs Union. The effective date of eCall for the Customs Union (ERA-GLONASS) was on or after January 1, 2015 for new vehicle types and on or after January 1, 2017 for all vehicles.

 

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In January 2016, the EU commission issued the draft regulation to significantly revise the legal framework for the EU type-approval. This draft regulation introduces a market surveillance system effective for managing the conformity of motor vehicles available on the market and adds a requirement of an expiration date for vehicle type approval. This draft is scheduled to be adopted at the end of 2017.

 

China

 

Vehicle safety regulations in China were drafted with reference to the UNECE standards and cover almost the same matters as the UNECE standards. However, these regulations also include unique provisions which take into account the distinctive characteristics of the Chinese market environment and the rules differ from the latest UNECE standards. Future safety regulations are described as follows:

 

Newly published GB standards (Chinese national standards issued by the Standardization Administration of China) in 2016 include:

 

+ Limits of dimensions, axle load and masses for motor vehicles, trailers and combination vehicles;

 

+ Photometric characteristics of power-driven vehicle front fog lamps;

 

+ Symbols for controls, indicators and tell-tales of motor vehicles;

 

+ Electric vehicle charging systems;

 

+ Electric Vehicle Power Batteries Recycling Technology Policy (2015); and

 

+ Cybersecurity Law.

 

Newly established GB standards (not yet published) include:

 

+ Amendment to prescription for installation of the external lighting and light-signaling devices for motor vehicles and their trailers;

 

+ Amendment to Safety specifications for power-driven vehicles operating on roads;

 

+ Amendment to Road Vehicle-Vehicle Identification Number;

 

+ Amendment to Test methods and requirements for the misuse of automotive airbag systems;

 

+ Amendment to Performance requirements and test methods of tire pressure monitoring systems for passenger cars;

 

+ Amendment to Safety property requirements and test methods for automobile fuel tank;

 

+ Amendment to Road vehicle plate and label;

 

+ Amendment to Photometric characteristics of daytime running lamps for motor vehicles;

 

+ Amendment to Safety performance requirements and test methods of automobile wheels;

 

+ Amendment to Requirement of speed limitation system for motor vehicles;

 

+ Establishment of Requirement of Fuel Cell Stacks for Fuel Cell Electric Vehicles;

 

+ Establishment of Requirement of battery management system for Electric Vehicles;

 

+ Establishment of Requirement of Terminology of Electric Vehicles; and

 

+ Establishment of Requirement of EMC Standard for electric vehicle charging.

 

GB standards under development include:

 

+ Requirement of Event data recorder.

 

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Other Regions

 

In the Middle East, the Gulf Cooperation Council (GCC) aims to adopt electrical safety standards for electric vehicles and their infrastructure through the Emirates Authority for Standardization and Metrology (ESMA). These standards are still under review. Also, the Saudi Standards, Metrology and Quality Org. (SASO) is continually working with GCC standardization Organization (GSO) and prepared a draft standard on technical regulations regarding electric vehicles. This standard is expected to be completed before the end of this year with the participation of the relevant six major international vehicle manufacturers. SASO’s participation in these efforts is consistent with the ambitious “Vision of the Kingdom in 2030” and “National Transformation Program (NTP) 2020” initiatives announced by the Saudi government.

 

In India, the government has proposed AIS-145, a new standard for additional safety features, although the official gazette which would mandate this standard has not been issued yet. Specific safety features pursuant to this standard include a speed alert system, driver seat belt reminder, manual override for the central locking system, driver air bags and vehicle reverse parking alerts.

 

In Pakistan, the Ministry of Industries and Production and the Ministry of Finance have issued a notification regarding the revision of the Customs Act relating to the compulsory installation of immobilizers.

 

In Malaysia, the Road Transport Department (JPJ) issued a notification which makes installation of electronic stability control systems mandatory. This will be effective from June 2018.

 

In Cambodia, the Ministry of Industry & Handicraft (MIH) has issued a public notice to mandate 19 specific United Nations Regulations for vehicles, including, among others, environmental and safety requirements for emissions, brakes, tires and steering systems. This will be implemented from June 2019.

 

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 and regions 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 hydrocarbon levels and durability testing, are stricter than the current European regulations, namely the Euro 4 regulation.

 

Japan has implemented Phase 3 emission requirements, which are similar to Euro 4 regulation. The Phase 3 emission requirements, which introduces more stringent emission limits, simultaneous application of fuel evaporative gas regulation as well as mandatory installation of the On-Board Diagnostics (OBD) systems, became effective as of October 2016.

 

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

 

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years behind the schedule of California. The EPA regulations include fuel permeation requirements rather than traditional evaporative emission standards. California issued new evaporative emission standards for off-road highway vehicle (ORHV) involving diurnal test and tip test. It will apply from the 2018 model year.

 

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 has been 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 apply to new type approved vehicles from January 2016 and 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 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 emissions regulations based on European regulations.

 

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 introduced stricter emission limit and evaporative gas restrictions as of January 2016.

 

India has implemented a new emission regulation called Bharat Stage IV (BS IV). It applied to new motorcycles from April 2016, and applies to all motorcycles registered from April 2017. India has published a BS VI regulation, which will apply from 2020. In doing so, they will skip the introduction of a BS V regulation.

 

2. Recycling / REACH

 

Europe

 

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

 

Other Regions

 

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

 

3. Safety

 

Japan

 

Japan has introduced safety regulations based on UNECE regulations as described below.

 

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

 

Japan adopted the requirements for lighting devices (UNECE R50) and symmetry front beams (UNECE R113) in 2015 and issued new standards for control/tell-tales (UNECE R60) which will apply to all motorcycles from July 2017. They also issued new standards for advanced brake system (ABS: Anti-lock Brake System/ CBS: Combined Brake System) which will apply to new type motorcycles from October 2018, and to all motorcycles from October 2021.

 

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Japan adopted electric safety requirements for battery motorcycles (UNECE R136), and the requirements will apply to new type motorcycles from January 2018, and to all motorcycles from January 2020.

 

The United States

 

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

 

The NHTSA issued an amendment regulation to FMVSS108 “Lamps, reflective devices and associated equipment” to harmonize the license plate holder angle requirement (this allows license plates to be mounted on a plane up to 30 degrees upward; previously, the maximum allowable upward mounting angle was 15 degrees) with the European Regulation on December 17, 2015.

 

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 became applicable to new type motorcycles from January 2016 and will apply to new type mopeds from January 2017.

 

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 (EU Regulation No. 901/2014) was published on July 18, 2014 and the regulations established the new EU WVTA system.

 

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

 

Other Regions

 

In India, the Auto Headlight On (AHO) function, which automatically turns on the head lamps when the engine is running, shall be installed on all two-wheelers manufactured on and after April 1, 2017 and also for new vehicle models manufactured on and after April 1, 2018. All vehicles manufactured on and after April 1, 2019 shall be fitted with an advanced brake system. Two-wheeled vehicles with engine capacity not more than 125cc; continuous rated or net power not more than 11kw; and power/weight ratio not more than 0.1 kw/kg shall be fitted with ABS or CBS. All other categories of two-wheeled vehicles shall be fitted with ABS in India.

 

The Brazil transport authority (CONTRAN) issued a standard concerning motorcycle braking based on the UNECE Brake regulation (R78.03) as well as a new regulation mandating ABS/CBS installation. The Brazilian standardization authority (INMETRO) currently mandates parts certification for tires and batteries, but they will add drive/driven sprocket, drive chain and muffler to the scope of application from September 24, 2017 at customs clearance. Brazilian government issued lighting regulation based on previous UNECE regulations; these regulations will be implemented from September 2018.

 

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

 

Outline of Environmental and Safety Regulation for Power Products

 

1. Emissions

 

The United States

 

In November 2015, CARB presented a policy to develop a regulation to replace 25% of spark-ignition engine products circulating in the market with zero-emission products by 2030.

 

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In April 2016, CARB has published an evaporative emission regulation applicable to outboard engines implementing from the 2018 model year and later.

 

In September 2016, CARB has published a proposed regulation to amend California’s evaporative emission regulation for small off-road spark ignition equipment.

 

Canada

 

In June 2016, the Department of Environment published a proposed regulation to align the stringency of exhaust emission regulation and evaporative emission regulation with the EPA Phase 3 regulations for non-road small spark ignition engines.

 

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 started from January 1, 2014. The phase 3 regulation is under discussion.

 

Europe

 

The European Committee has finalized strengthened exhaust emission regulation for non-road small spark ignition engines (commonly known as Stage 5 regulation). Its limit values of exhaust emission follow the U.S. EPA phase 3 and the effective date is January 2018 for new certification and January 1, 2019 for engines newly placed on the market.

 

Japan

 

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

 

India

 

The Ministry of Environment issued a revised regulation for emission/noise standards applicable to gasoline/kerosene/LPG/CNG engine generators. The exhaust emission limits are very stringent. In particular, the CO level limit is less than half the limit allowed by the U.S. EPA Phase 3. It became effective as of June 2014.

 

Australia

 

The Australian Federal Government announced that they will introduce exhaust emission/evaporative emission regulations based on the U.S. EPA standards for all power products including outboard engines. Exhaust emission regulations, which are aligned with EPA Phase 3 regulation, are scheduled to be implemented in July 2018.

 

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.

 

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Other Regions

 

Several Asian and Eastern Europe countries have adopted regulations which are similar to the European regulations (such as RoHS and WEEE).

 

3. Safety

 

Japan

 

The METI amended the technical requirements of the Electrical Appliances and Materials Safety Act and added requirements regarding the retention force of receptacle outlets and the flame resistance of circuit boards. These amended and additional requirements have been implemented from July 2016.

 

The voluntary safety scheme for snow blowers newly included a requirement on dozers, which was implemented in April 2015.

 

The United States

 

NFPA (National Fire Protection Association) 70 (NEC (National Electrical Code) 2014) has been amended and the installation of Ground Fault Circuit Interrupter (GFCI) has become mandatory for certain generators. In 2014, an American National Standard Institute (ANSI) Standard for Snow Blowers was amended. In 2015, a new ANSI Standard for Generators was published. In 2016, an ANSI Standard for Tillers was amended.

 

In November 2016, the U.S. Consumer Product Safety Commission promulgated a notice of proposed rule-making in the Federal Register, which proposes to restrict the carbon monoxide emission from portable generators rated 19kW and below. This regulation was proposed to address the carbon monoxide poisoning injuries occurring from portable generator.

 

Europe

 

The Low Voltage Directive (LVD) and the Electromagnetic Compatibility Directive (EMCD) have been amended and they became applicable from April 2016. Recreational Craft Directive (RCD) Stage 2 also became effective. The Gas Appliance Regulation has been published and accordingly, the Gas Appliance Directive will expire in April 2018.

 

The EU Commission plans to enhance existing noise regulation applicable to equipment intended to be used outdoors. This is a comprehensive rulemaking including expansion of the scope of regulation, enhanced noise limits, change to the conformity assessment system, among other things. The commission is expected to publish proposed regulation in 2018.

 

China

 

The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) has issued final regulations for spark-ignition engines which include a wide variety of requirements such as machinery safety, thermal protection, electrical safety, and others. It became effective in 2015.

 

Other Regions

 

In 2015, Argentina amended the certification system for generators. Also in 2015, Vietnam published a compulsory certification system for engine-driven sprayers. In Mexico, a compulsory certification system for brush cutters was proposed in 2015.

 

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Preparing for the Future

 

Management Challenges and Preparing for the Future

 

Honda will focus its energies on the tasks set out below in order to overcome the challenges described in “Operating Results” in “Item 5. Operating and Financial Review and Prospects.”

 

1. Product Quality

 

Honda will strive to improve its product quality by verification within each development, purchasing, production, sales, and service department, along with integrated verification through coordination among those departments.

 

2. Research and Development

 

Focusing on the fields of “mobility” and “people’s daily lives,” Honda is committed to creating new value to meet the increasingly diverse expectations of its customers by combining its forte of creative manufacturing with progress in digital technologies such as AI and big data. Honda will reinforce its product development structure so that it manifests Honda’s identity as well as adopt open innovation with other companies and research institutions, in an effort to materialize a research and development structure that creates both product and experience.

 

3. Production Efficiency

 

Honda will strengthen its production systems at its global production bases and supply high-quality products flexibly and efficiently, with the aim of meeting the needs of its customers in each region.

 

In addition, Honda will work to reduce the environmental burden of its production bases while establishing production technologies to promote the global spread of electric-powered motor technology. Honda will work at improving its global supply chain by devising more effective business continuity plans in order to respond to various risks including, but not limited to, natural disasters.

 

4. Sales Efficiency

 

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

 

5. Safety Technologies

 

Honda will develop technologies to lead the effort of reducing traffic accidents. 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 also improve safety by developing technologies to commercialize automated driving, and by using artificial intelligence and connectivity technologies. In addition, Honda will reinforce traffic safety programs in Japan and abroad, advance driving and motorcycling training programs provided by local dealerships, and work actively in partnership with communities to build and improve the traffic environment.

 

6. The Environment

 

Honda will step up its efforts to create better, cleaner, and more fuel-efficient engine technologies, further improve recyclables, and develop zero-emission technologies and electric-powered motors throughout its product lines, in order to lead the effort to create a carbon-free society. In addition, Honda has set a target to reduce total CO2 emissions by 50% compared to year 2000 levels by 2050. To achieve this target, it will strengthen its efforts to realize reductions in CO2 emissions through the entirety of its corporate activities including the supply chain, through means such as further advancing its energy-efficiency technologies and making effective use of

 

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renewable energy, as well as effectively utilizing resources and properly disposing of waste. Furthermore, Honda will strengthen its efforts in advancing technologies in the area of total energy management to reduce CO2 emissions related to mobility and people’s everyday lives.

 

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, 2017, the Company had 90 Japanese subsidiaries and 277 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  

Honda Finance Co., Ltd.

  Japan   Finance     100.0  

American Honda Motor Co., Inc.

  U.S.A.   Sales     100.0  

Honda Aero., Inc.

  U.S.A.   Manufacturing     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 Aircraft Company, LLC

  U.S.A.   Research & Development, Manufacturing and Sales     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 Turkiye A.S

  Turkey   Manufacturing and Sales     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  

 

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Company

  Country of
Incorporation
 

Function

  Percentage
Ownership
and
Voting Interest
 

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 Malaysia Sdn Bhd

  Malaysia   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  

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     83.0  

A.P. Honda Co., Ltd.

  Thailand   Sales     61.0  

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  

 

D. Property, Plants and Equipment

 

The following table sets out information, as of March 31, 2017, 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

     4,952      Automobiles

Naka-ku, Hamamatsu, Shizuoka, Japan

     2,058      Power products and transmissions

Suzuka, Mie, Japan

     5,901      Automobiles

Ozu-machi, Kikuchi-gun, Kumamoto, Japan

     2,198      Motorcycles, all-terrain vehicles, power products and engines

Greensboro, North Carolina, U.S.A

     1,060      Aircrafts

Burlington, North Carolina, U.S.A.

     89      Aircraft engines

Marysville, Ohio, U.S.A.

     4,883      Automobiles

Anna, Ohio, U.S.A.

     2,569      Engines

East Liberty, Ohio, U.S.A.

     1,913      Automobiles

Lincoln, Alabama, U.S.A.

     4,821      Automobiles and engines

Greensburg, Indiana, U.S.A.

     2,443      Automobiles

Alliston, Canada

     4,270      Automobiles and engines

El Salto, Mexico

     2,535      Motorcycles and automobiles

Celaya, Mexico

     5,076      Automobiles

Swindon, U.K.

     2,567      Automobiles and engines

Gebze, Turkey

     776      Motorcycles and automobiles

Guangzhou, China

     839      Automobiles

Gurugram, India

     3,170      Motorcycles

Greater Noida, India

     2,564      Automobiles

Alwar, India

     2,634      Motorcycles and automobiles

Narasapura, India

     1,829      Motorcycles

 

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Location

   Number of
Employees
    

Principal Products Manufactured

Ahemdabad, India

     791      Motorcycles

Karawang, Indonesia

     2,566      Automobiles and engines

Melaka, Malaysia

     2,662      Automobiles

Ayutthaya, Thailand

     2,610      Automobiles

Prachinburi, Thailand

     1,102      Automobiles

Bangkok, Thailand

     3,529      Motorcycles and power products

Phuc Yen, Vietnam

     4,382      Motorcycles and automobiles

Duy Tien, Vietnam

     304      Motorcycles

Buenos Aires, Argentina

     1,263      Motorcycles and automobiles

Sumare, Brazil

     3,132      Automobiles

Manaus, Brazil

     5,829      Motorcycles and power products

 

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, 2017, the Company’s property, with a net book value of approximately ¥61.6 billion, was subject to specific mortgages securing indebtedness.

 

Capital Expenditures

 

Capital expenditures in the fiscal year ended March 31, 2017 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 ¥2,423.7 billion, decreased by ¥191.2 billion from the previous year. Also, total capital expenditures, excluding equipment on operating leases, for the year amounted to ¥541.0 billion, decreased by ¥106.4 billion from the previous year. Spending by business segment is shown below.

 

     Fiscal years ended March 31,  
     2016      2017      Increase
(Decrease)
 
     Yen (millions)  

Motorcycle Business

   ¥ 59,229      ¥ 50,040      ¥ (9,189

Automobile Business

     571,796        480,471        (91,325

Financial Services Business

     1,968,257        1,883,220        (85,037

Financial Services Business (Excluding Equipment on Operating Leases)

     719        524        (195

Power Product and Other Businesses

     15,754        10,006        (5,748

Total

   ¥ 2,615,036      ¥ 2,423,737      ¥ (191,299

Total (Excluding Equipment on Operating Leases)

   ¥ 647,498      ¥ 541,041      ¥ (106,457

 

Intangible assets are not included in the table above.

 

In Motorcycle business, we made capital expenditures of ¥50,040 million in the fiscal year ended March 31, 2017. 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 ¥480,471 million in the fiscal year ended March 31, 2017. 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.

 

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In Financial services business, capital expenditures excluding equipment on operating leases amounted to ¥524 million in the fiscal year ended March 31, 2017, while capital expenditures for equipment on operating leases were ¥1,882,696 million.

 

In Power products and other businesses, capital expenditures of ¥10,006 million in the fiscal year ended March 31, 2017, were deployed to upgrade, streamline, and modernize manufacturing facilities, and to improve R&D facilities.

 

Plans after fiscal year 2017

 

Our management mainly considers 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.

 

The estimated amounts of capital expenditures for the fiscal year ending March 31, 2018 are shown below.

 

     Fiscal year ending
March 31, 2018
 
     Yen (millions)  

Motorcycle Business

   ¥ 59,600  

Automobile Business

     454,600  

Financial Services Business

     1,600  

Power Product and Other Businesses

     14,200  
  

 

 

 

Total

   ¥ 530,000  
  

 

 

 

 

The estimated amount of capital expenditures for Financial services business in the above table does not include equipment 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 SEC regarding our periodic reports under the Securities Exchange Act of 1934.

 

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Item 5. Operating and Financial Review and Prospects

 

You should read the following discussion of our critical accounting policies and our financial positions and operating results together with our consolidated financial statements included in this Annual Report.

 

A. Operating Results

 

Overview

 

Business Environment

 

Looking at the economic environment surrounding Honda, its consolidated subsidiaries and its affiliates accounted for under the equity method (hereinafter, the “Honda Group”) in the fiscal year ended March 31, 2017, the United States economy continued to recover, mainly due to improvement in employment conditions and growing personal consumption. Europe saw a gradual economic recovery, mainly due to improvement in employment conditions and personal consumption. In the Asian economies, India experienced a moderate recovery and there was an upward trend in the economies of Thailand and Indonesia, while China’s economy slowed gradually in the first half of the fiscal year and saw an upturn in the second half. The Japanese economy continued on a gradual recovery track, mainly due to improvement in employment conditions and steady personal consumption.

 

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

 

Overview of Fiscal Year 2017 Operating Performance

 

Honda’s consolidated sales revenue for the fiscal year ended March 31, 2017 decreased from the fiscal year ended March 31, 2016, due mainly to negative foreign currency translation effects, which was partially offset by increased consolidated unit sales in all business operations as well as an increase in sales revenue in the Financial services business. Operating profit increased from the previous fiscal year, due mainly to decreased selling, general and administrative expenses including product warranty expenses, continuing cost reduction, increase in profit attributable to increased sales revenue and model mix as well as the impact of pension plan amendments, which was partially offset by an increase in research and development expenses as well as negative foreign currency effects.

 

Motorcycle Business

 

Honda’s consolidated unit sales of motorcycles and all-terrain vehicles (ATVs) in fiscal year 2017 totaled 11,237 thousand units, an increase of 6.3% from the previous fiscal year, due mainly to increases primarily in India and Vietnam, which more than offset a decline in Brazil.

 

Automobile Business

 

Honda’s consolidated unit sales of automobiles totaled 3,683 thousand units in fiscal year 2017, an increase of 1.3% from the previous fiscal year, due mainly to increases in sales units in North America and Asia mainly due to the launch of new models.

 

Power Product and Other Businesses

 

Honda’s consolidated unit sales of power products in fiscal year 2017 totaled 6,121 thousand units, an increase of 2.6% from the previous fiscal year primarily due to an increase in sales units in North America and Asia, which more than offset a decline in Japan.

 

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Fiscal Year 2017 Compared with Fiscal Year 2016

 

Sales Revenue

 

Honda’s consolidated sales revenue for the fiscal year ended March 31, 2017, decreased by ¥601.9 billion, or 4.1%, to ¥13,999.2 billion from the fiscal year ended March 31, 2016, due mainly to negative foreign currency translation effects, which was partially offset by increased consolidated unit sales in all business operations as well as an increase in sales revenue in the Financial services business. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥722.6 billion, or 4.9%, compared to the decrease as reported of ¥601.9 billion, which includes negative foreign currency translation effects.

 

Operating Costs and Expenses

 

Operating costs and expenses decreased by ¥939.2 billion, or 6.7%, to ¥13,158.4 billion from the previous fiscal year. Cost of sales decreased by ¥466.5 billion, or 4.1%, to ¥10,865.8 billion from the previous fiscal year, due mainly to the impact of pension plan amendments as well as positive foreign currency effects, which was partially offset by an increase in costs attributable to increased consolidated unit sales in all business operations. Selling, general and administrative expenses decreased by ¥507.6 billion, or 24.1%, to ¥1,601.2 billion from the previous fiscal year, due mainly to decreased product warranty expenses as well as the impact of pension plan amendments. Research and development expenses increased by ¥34.9 billion, or 5.3%, to ¥691.4 billion from the previous fiscal year, which was partially offset by a decrease in costs attributable to the impact of pension plan amendments.

 

Operating Profit

 

Operating profit increased by ¥337.3 billion, or 67.0%, to ¥840.7 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses including product warranty expenses, continuing cost reduction, increase in profit attributable to increased sales revenue and model mix as well as the impact of pension plan amendments, which was partially offset by an increase in research and development expenses as well as negative foreign currency effects. Honda estimates that by excluding negative foreign currency effects of approximately ¥283.2 billion, operating profit would have increased by approximately ¥620.5 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 transaction. With respect to “foreign currency adjustments”, management analyzed foreign currency adjustments primarily related to the following currencies: U.S. dollar, Japanese yen and others at the level of the Company and its material consolidated subsidiaries. The estimates excluding the foreign currency effects are not on the same base as Honda’s consolidated financial statements, and do not conform to IFRS. Furthermore, Honda does not believe that these measures are substitute for the disclosure required by IFRS. However, Honda believes that such estimates excluding the foreign currency effects provide financial statements users with additional useful information for understanding Honda’s results.

 

Profit before Income Taxes

 

Profit before income taxes increased by ¥371.5 billion, or 58.5%, to ¥1,006.9 billion. The main factors behind this increase, except factors relating to operating profit, are as follows:

 

Share of profit of investments accounted for using the equity method had a positive impact of ¥38.7 billion, due mainly to an increase in profit attributable to increased sales revenue at affiliates and joint ventures in Asia.

 

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Finance income and finance costs had a negative impact of ¥4.5 billion, due mainly to effect from gains or losses on derivatives. For further details, see note “(22) Finance Income and Finance Costs” to the accompanying consolidated financial statements.

 

Income Tax Expense

 

Income tax expense increased by ¥98.5 billion, or 43.0%, to ¥327.5 billion from the previous fiscal year. The average effective tax rate decreased 3.6 percentage points to 32.5% from the previous fiscal year. For further details, see “(a) Income Tax Expense” of note “(23) Income Taxes” to the accompanying consolidated financial statements.

 

Profit for the Year

 

Profit for the year increased by ¥273.0 billion, or 67.2%, to ¥679.3 billion from the previous fiscal year.

 

Profit for the Year Attributable to Owners of the Parent

 

Profit for the year attributable to owners of the parent increased by ¥272.0 billion, or 79.0%, to ¥616.5 billion from the previous fiscal year.

 

Profit for the Year Attributable to Non-controlling Interests

 

Profit for the year attributable to non-controlling interests increased by ¥0.9 billion, or 1.6%, to ¥62.8 billion from the previous fiscal year.

 

Business Segments

 

Motorcycle Business

 

Honda’s consolidated unit sales of motorcycles and all-terrain vehicles (ATVs) totaled 11,237 thousand units, increased by 6.3% from the previous fiscal year, due mainly to an increase in consolidated unit sales in Asia, which was partially offset by a decrease in Other Regions.

 

Sales revenue from external customers decreased by ¥89.2 billion, or 4.9%, to ¥1,716.1 billion from the previous fiscal year, due mainly to negative foreign currency translation effects, which was partially offset by an increase in consolidated unit sales. The impact of price changes was immaterial on sales revenue. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥101.5 billion, or 5.6%, compared to the decrease as reported of ¥89.2 billion, which includes negative foreign currency translation effects.

 

Operating costs and expenses decreased by ¥78.2 billion, or 4.8%, to ¥1,545.4 billion from the previous fiscal year. Cost of sales decreased by ¥63.8 billion, or 4.9%, to ¥1,248.6 billion, due mainly to the impact of pension plan amendments as well as positive foreign currency effects, which was partially offset by an increase in costs attributable to increased consolidated unit sales. Selling, general and administrative expenses decreased by ¥8.4 billion, or 3.7%, to ¥216.0 billion, due mainly to a decrease in costs attributable to the impact of pension plan amendments as well as positive foreign currency effects. Research and development expenses decreased by ¥5.9 billion, or 6.9%, to ¥80.6 billion, due mainly to a decrease in costs attributable to the impact of pension plan amendments.

 

Operating profit decreased by ¥11.0 billion, or 6.1%, to ¥170.7 billion from the previous fiscal year, due mainly to negative foreign currency effects, which was partially offset by continuing cost reduction as well as the impact of pension plan amendments.

 

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Japan

 

Total industry demand for motorcycles in Japan* decreased by around 6% from the previous fiscal year to approximately 370 thousand units in fiscal year 2017.

 

Honda’s consolidated unit sales in Japan declined 13.3% from the previous fiscal year to 156 thousand units in fiscal year 2017, mainly reflecting an overall decline in unit sales of 50cc scooter models.

 

* 

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, decreased around 3% from the previous year to approximately 700 thousand units in calendar year 2016.

 

Honda’s consolidated unit sales in North America decreased 4.5% from the previous fiscal year to 294 thousand units in fiscal year 2017. This was mainly due to a decrease in sales of ATVs, which was partially offset by increased sales of side-by-side (S×S) models, centered on the Pioneer 1000, primarily in the United States.

 

* 

Source: MIC (Motorcycle Industry Council)

The total includes motorcycles and ATVs, but does not include side-by-side (SxS) models.

 

Europe

 

Total demand for motorcycles in Europe* increased around 12% from the previous year to approximately 910 thousand units in calendar year 2016.

 

Honda’s consolidated unit sales in Europe increased 6.4% from the previous fiscal year to 217 thousand units in fiscal year 2017, mostly as a result of robust sales of the CRF1000L Africa Twin model.

 

* 

Based on Honda research. 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* increased around 2% from the previous year to approximately 39,760 thousand units in calendar year 2016.

 

Looking at market conditions by country, in calendar year 2016, demand in India increased about 10% from the previous year to approximately 17,670 thousand units. Demand in China decreased around 13% from the previous year to approximately 8,040 thousand units. Demand in Indonesia decreased around 8% from the previous year to approximately 5,930 thousand units. Vietnam saw demand increase around 10% from the previous year to approximately 3,120 thousand units. Demand in Thailand increased around 4% from the previous year to approximately 1,740 thousand units. Demand in Pakistan increased around 9% from the previous year to approximately 1,660 thousand units.

 

Honda’s consolidated unit sales in Asia increased 10.0% from the previous fiscal year to 9,513 thousand units in fiscal year 2017. This was due to brisk sales of scooter models such as the Activa in India and the Vision in Vietnam, among other factors.

 

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Honda’s consolidated unit sales do not include sales by P.T. Astra Honda Motor in Indonesia, which is accounted for using the equity method. P.T. Astra Honda Motor’s unit sales for fiscal year 2017 decreased around 2% from the previous fiscal year to approximately 4,370 thousand units due mainly to lackluster overall market conditions, despite increases in motorcycle models such as the CBR150R and CB150R models, among others.

 

* 

Based on Honda research. 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 significantly by about 28% from the previous year to approximately 850 thousand units in calendar year 2016, mainly due to a continued slump in economic conditions.

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales decreased 14.1% from the previous fiscal year to 1,057 thousand units in fiscal year 2017, mainly reflecting the overall market slump in Brazil.

 

* 

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

 

Automobile Business

 

Honda’s consolidated unit sales of automobiles totaled 3,683 thousand units, increased by 1.3% from the previous fiscal year, due mainly to an increase in consolidated unit sales in North America and Asia.

 

Sales revenue from external customers decreased by ¥538.5 billion, or 5.1%, to ¥10,086.8 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 on sales revenue. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥400.7 billion, or 3.8%, compared to the decrease as reported of ¥538.5 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales decreased by ¥511.0 billion, or 4.7%, to ¥10,256.6 billion from the previous fiscal year.

 

Operating costs and expenses decreased by ¥858.8 billion, or 8.1%, to ¥9,755.4 billion from the previous fiscal year. Cost of sales decreased by ¥402.9 billion, or 4.8%, to ¥7,947.6 billion, due mainly to the impact of pension plan amendments as well as positive foreign currency effects, which was partially offset by an increase in costs attributable to increased consolidated unit sales. Selling, general and administrative expenses decreased by ¥500.1 billion, or 29.0%, to ¥1,223.5 billion, due mainly to decreased product warranty expenses as well as the impact of pension plan amendments. Research and development expenses increased by ¥44.3 billion, or 8.2%, to ¥584.3 billion, which was partially offset by the impact of pension plan amendments.

 

Operating profit increased by ¥347.8 billion, or 226.8%, to ¥501.1 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses including product warranty expenses, continuing cost reduction, an increase in profit attributable to increased sales volume and model mix as well as the impact of pension plan amendments, which was partially offset by an increase in research and development expenses as well as negative foreign currency effects.

 

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Proportion of retail unit sales by vehicle category and principal automobile products:

 

    Fiscal year ended
March 31,
 
    2016     2017  

Passenger cars:

    52     51
Accord, Brio, City, Civic, Fit/Jazz    

Light trucks:

    41     43
CR-V, Odyssey, Pilot, Vezel/HR-V, XR-V    

Mini vehicles:

    7     6

N-BOX

   

 

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 varies 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 15% lower and our mini vehicles category was approximately 50% lower than total weighted average contribution margin for the fiscal year ended March 31, 2017. 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 increased around 3% from the previous fiscal year to approximately 5,070 thousand units in fiscal year 2017.

 

Honda’s consolidated unit sales in Japan decreased 1.8% from the previous fiscal year to 603 thousand units*2 in fiscal year 2017. This was mainly due to a decline in sales of the Step WGN, which outweighed the effect of a full model change of the Freed model and other factors.

 

Honda’s unit production of automobiles in fiscal year 2017 increased 6.5% from the previous fiscal year to 810 thousand units. This was mainly due to an increase in export volume.

 

*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)

 

*2 

Certain sales of automobiles that are financed with residual value type auto loans by our Japanese finance subsidiaries and sold through our consolidated subsidiaries are accounted for as operating leases in conformity with IFRS and are not included in consolidated sales revenue to external customers in the Automobile business. Accordingly, 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, was around the same level as the previous year at approximately 17,550 thousand units in calendar year 2016. This result reflected continued strong demand for light trucks, which offset a decrease for passenger cars which were fiercely competitive.

 

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Under these conditions, Honda’s consolidated unit sales in North America increased 2.1% from the previous fiscal year to 1,970 thousand units in fiscal year 2017. This increase was mainly attributable to the effect of launching the new Civic Hatchback model, and a full model change of the Ridgeline model, which offset a decline in sales volume of the Accord model.

 

Honda manufactured 1,937 thousand units in fiscal year 2017, an increase of 0.9% from the previous fiscal year. This increase mainly reflected increased production of HR-V model at the plant in Mexico.

 

* 

Source: Autodata

 

Europe

 

Total demand for automobiles in Europe* increased about 7% from the previous year to approximately 15,130 thousand units in calendar year 2016, mainly driven by the gradual recovery in economic conditions.

 

Honda’s consolidated unit sales in Europe increased 7.0% from the previous fiscal year to 184 thousand units in fiscal year 2017. This was mainly due to brisk sales of the HR-V model.

 

Unit production at Honda’s U.K. plant in fiscal year 2017 increased dramatically by 30.1% from the previous fiscal year to 149 thousand units, mainly due to the start of exports of the Civic Hatchback model to North America.

 

* 

Source: ACEA (Association des Constructeurs Europeens d’Automobiles (the European Automobile Manufacturers’ Association)) New passenger car registrations cover 28 EU countries and three EFTA countries.

 

Asia

 

Total demand for automobiles in Asia increased around 4% from the previous year to approximately 7,390 thousand units*1 in calendar year 2016. This was mainly due to an increase in demand in India despite a decrease in Malaysia and other places. Total demand for automobiles in China increased about 14% from the previous calendar year to approximately 28,020 thousand units*2.

 

Honda’s consolidated unit sales in Asia outside Japan increased 2.1% from the previous fiscal year to 684 thousand units in fiscal year 2017. This increase was mainly attributable to brisk sales of the new BR-V model in Indonesia, and the effect of a full model change of the Civic model in Pakistan, despite a decline in sales in India.

 

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 joint ventures accounted for using the equity method in China. Unit sales in China increased 21.5% from the previous fiscal year to 1,280 thousand units in fiscal year 2017. The increase was mainly attributable to strong sales of the fully remodeled Civic, the effect of launching the new Avancier and Gienia models, and brisk sales of the XR-V and Vezel models.

 

Honda’s unit production by consolidated subsidiaries in Asia increased 4.7% from the previous fiscal year to 752 thousand units*3 in fiscal year 2017.

 

Meanwhile, unit production by Chinese joint ventures Dongfeng Honda Automobile Co., Ltd. and Guangqi Honda Automobile Co., Ltd. increased 20.0% from the previous fiscal year to 1,259 thousand units in fiscal year 2017.

 

*1 

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

*2 

Source: CAAM (China Association of Automobile Manufacturers)

*3 

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

 

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Other Regions

 

Total industry demand for automobiles in Brazil, the principal market within Other Regions, decreased around 20% from the previous year to approximately 1,980 thousand units* in calendar year 2016. The decrease was mainly due to continued instability in the economic environment.

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales decreased 3.6% from the previous fiscal year to 242 thousand units in fiscal year 2017. The decrease mainly reflected a decrease in unit sales in Brazil.

 

Unit production at Honda’s plant in Brazil decreased 16.5% from the previous fiscal year to 120 thousand units in fiscal year 2017.

 

* 

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

 

Financial Services Business

 

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

 

Total amount of receivables from financial services and equipment on operating leases of finance subsidiaries on March 31, 2017 increased by ¥368.0 billion, or 4.2%, to ¥9,054.2 billion from the March 31, 2016. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, total amount of receivables from financial services and equipment on operating leases of finance subsidiaries as of March 31, 2017 would have increased by approximately ¥434.8 billion, or 5.0%, compared to the increase as reported of ¥368.0 billion, which includes negative foreign currency translation effects.

 

Sales revenue from external customers increased by ¥42.4 billion, or 2.3%, to ¥1,878.0 billion from the previous fiscal year, due mainly to an increase in operating lease revenues and revenues on disposition of lease vehicles, which was partially offset by negative foreign currency translation effects. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥210.9 billion, or 11.5%, compared to the increase as reported of ¥42.4 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales increased by ¥41.5 billion, or 2.2%, to ¥1,891.2 billion from the previous fiscal year.

 

Operating costs and expenses increased by ¥62.4 billion, or 3.8%, to ¥1,712.8 billion from the previous fiscal year. Cost of sales increased by ¥61.5 billion, or 4.0%, to ¥1,608.7 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased operating lease revenues and revenues on disposition of lease vehicles. Selling, general and administrative expenses increased by ¥0.9 billion, or 0.9%, to ¥104.1 billion.

 

Operating profit decreased by ¥20.9 billion, or 10.5%, to ¥178.4 billion from the previous fiscal year, due mainly to increased selling, general and administrative expenses as well as negative foreign currency effects, which was partially offset by an increase in profit attributable to increased sales revenue.

 

Power Product and Other Businesses

 

Honda’s consolidated unit sales of power products totaled 6,121 thousand units, increased by 2.6% from the previous fiscal year, due mainly to an increase in consolidated unit sales in North America and Asia, which was partially offset by a decrease in Japan and Other Regions.

 

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Sales revenue from external customers decreased by ¥16.5 billion, or 5.0%, to ¥318.1 billion from the previous fiscal year, due mainly to negative foreign currency translation effects, which was partially offset by increased sales revenue in Other businesses. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥9.4 billion, or 2.8%, compared to the decrease as reported of ¥16.5 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales decreased by ¥2.5 billion, or 0.7%, to ¥349.6 billion from the previous fiscal year.

 

Operating costs and expenses decreased by ¥24.0 billion, or 6.3%, to ¥359.3 billion from the previous fiscal year. Cost of sales decreased by ¥20.5 billion, or 7.0%, to ¥275.4 billion, due mainly to a decrease in operating costs in Other businesses as well as the impact of pension plan amendments. Selling, general and administrative expenses totaled to ¥57.4 billion basically unchanged from the previous fiscal year. Research and development expenses decreased by ¥3.4 billion, or 11.4%, to ¥26.4 billion, due mainly to a decrease in costs attributable to the impact of pension plan amendments.

 

Operating loss was ¥9.6 billion, an improvement of ¥21.4 billion from the previous fiscal year, due mainly to a decrease in operating costs in Other businesses as well as the impact of pension plan amendments, which was partially offset by negative foreign currency effects. In addition, operating loss of aircraft and aircraft engines included in the Power product and other businesses segment was ¥43.8 billion, an improvement of ¥27.2 billion from the previous fiscal year.

 

Japan

 

Honda’s consolidated unit sales in power product business operations in Japan decreased 17.1% from the previous fiscal year to 301 thousand units in fiscal year 2017 mainly due to a decline in sales of OEM engines* and snow blowers, among other factors.

 

* 

OEM (Original Equipment Manufacturer) engines: refers to engines installed on products sold under a third-party brand.

 

North America

 

Honda’s consolidated unit sales in North America increased 5.9% from the previous fiscal year to 2,977 thousand units in fiscal year 2017. This was mainly attributable to an increase in sales of OEM engines and generators.

 

Europe

 

Honda’s consolidated unit sales in Europe increased 2.7% from the previous fiscal year to 1,035 thousand units in the fiscal year 2017. This was mostly due to increases in sales of OEM engines and cordless trimmers.

 

Asia

 

Honda’s consolidated unit sales in Asia increased 6.0% from the previous fiscal year to 1,430 thousand units in fiscal year 2017. This was mainly due to an increase in sales of OEM engines, despite a decrease in sales of water pumps and other factors.

 

Other Regions

 

Honda’s consolidated unit sales in Other Regions (including South America, the Middle East, Africa, Oceania and other areas) decreased 12.9% from the previous fiscal year to 378 thousand units in fiscal year 2017. This was mainly due to a decrease in sales of OEM engines.

 

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Geographical Information

 

Japan

 

In Japan, sales revenue from domestic and export sales increased by ¥184.8 billion, or 4.7%, to ¥4,113.4 billion from the previous fiscal year, due mainly to an increase in sales revenue in the Automobile business and Financial services business. Operating profit was ¥104.5 billion, an increase of ¥203.2 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses including product warranty expenses, an increase in profit attributable to increased sales revenue and model mix as well as the impact of pension plan amendments, which was partially offset by increased research and development expenses as well as negative foreign currency effects.

 

North America

 

In North America, where the United States is the principal market, sales revenue decreased by ¥439.0 billion, or 5.1%, to ¥8,098.0 billion from the previous fiscal year, due mainly to negative foreign currency translation effects, which was partially offset by an increase in sales revenue in the Automobile business and Financial services business. Operating profit increased by ¥187.8 billion, or 89.1%, to ¥398.7 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses including product warranty expenses, continuing cost reduction as well as an increase in profit attributable to increased sales revenue and model mix, which was partially offset by negative foreign currency effects.

 

Europe

 

In Europe, sales revenue increased by ¥13.3 billion, or 1.7%, to ¥789.3 billion from the previous fiscal year, due mainly to an increase in sales revenue in the Automobile business, which was partially offset by negative foreign currency translation effects. Operating profit decreased by ¥6.6 billion, or 35.4%, to ¥12.1 billion from the previous fiscal year, due mainly to increased expenses for incentives, which was partially offset by an increase in profit attributable to increased sales revenue.

 

Asia

 

In Asia, sales revenue decreased by ¥79.3 billion, or 2.2%, to ¥3,456.0 billion from the previous fiscal year, due mainly to negative foreign currency translation effects, which was partially offset by an increase in sales revenue in the Automobile business and Motorcycle business. Operating profit decreased by ¥4.0 billion, or 1.2%, to ¥331.4 billion from the previous fiscal year, due mainly to and negative foreign currency effects, which was partially offset by continuing cost reduction as well as decreased selling, general and administrative expenses including product warranty expenses.

 

Other Regions

 

In Other Regions, sales revenue decreased by ¥75.1 billion, or 9.3%, to ¥733.4 billion from the previous fiscal year, due mainly to a decrease in sales revenue in the Motorcycle business as well as negative foreign currency translation effects. Operating profit was ¥29.0 billion, an increase of ¥37.3 billion from the previous fiscal year, due mainly to continuing cost reduction as well as decreased selling, general and administrative expenses including product warranty expenses, which was partially offset by a decrease in profit attributable to decreased sales revenue and model mix as well as negative foreign currency effects.

 

Fiscal Year 2016 Compared with Fiscal Year 2015

 

Sales Revenue

 

Honda’s consolidated sales revenue for the fiscal year ended March 31, 2016, increased by ¥1,273.0 billion, or 9.6%, to ¥14,601.1 billion from the fiscal year ended March 31, 2015, due mainly to increased sales revenue in the Automobile business and Financial services business operations. Honda estimates that by applying Japanese

 

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yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥853.9 billion, or 6.4%, compared to the increase as reported of ¥1,273.0 billion, which includes positive foreign currency translation effects.

 

Operating Costs and Expenses

 

Operating costs and expenses increased by ¥1,440.2 billion, or 11.4%, to ¥14,097.7 billion from the previous fiscal year. Cost of sales increased by ¥1,001.6 billion, or 9.7%, to ¥11,332.3 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased consolidated unit sales in the Automobile business. Selling, general and administrative expenses increased by ¥388.3 billion, or 22.6%, to ¥2,108.8 billion from the previous fiscal year, due mainly to increased product warranty expenses. Product warranty expenses include expenses related to airbag inflators. Research and development expenses increased by ¥50.3 billion, or 8.3%, to ¥656.5 billion from the previous fiscal year.

 

Operating Profit

 

Operating profit decreased by ¥167.2 billion, or 24.9%, to ¥503.3 billion from the previous fiscal year, due mainly to an increase in selling, general and administrative expenses including product warranty expenses and negative foreign currency effects, which was partially offset by an increase in profit attributable to increased sales revenue and model mix as well as continuing cost reduction. Honda estimates that by excluding negative foreign currency effects of approximately ¥60.1 billion, operating profit would have decreased by approximately ¥107.0 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 transaction. With respect to “foreign currency adjustments”, management analyzed foreign currency adjustments primarily related to the following currencies: U.S. dollar, Japanese yen and others at the level of the Company and its material consolidated subsidiaries. The estimates excluding the foreign currency effects are not on the same base as Honda’s consolidated financial statements, and do not conform to IFRS. Furthermore, Honda does not believe that these measures are substitute for the disclosure required by IFRS. However, Honda believes that such estimates excluding the foreign currency effects provides financial statements users with additional useful information for understanding Honda’s results.

 

Profit before Income Taxes

 

Profit before income taxes decreased by ¥170.7 billion, or 21.2%, to ¥635.4 billion. The main factors behind this decrease, except factors relating to operating profit, are as follows:

 

Share of profit of investments accounted for using the equity method had a positive impact of ¥29.9 billion, due mainly to an increase in profit attributable to increased sales revenue at affiliates and joint ventures in Asia, which was partially offset by a recognition of impairment loss on certain investments accounted for using the equity method.

 

Finance income and finance costs had a negative impact of ¥33.4 billion, due mainly to a decrease in gains on foreign exchange. For further details, see note “(22) Finance Income and Finance Costs” to the accompanying consolidated financial statements.

 

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Income Tax Expense

 

Income tax expense decreased by ¥16.0 billion, or 6.5%, to ¥229.0 billion from the previous fiscal year. The average effective tax rate increased 5.7 percentage points to 36.1% from the previous fiscal year. For further details, see “(a) Income Tax Expense” of note “(23) Income Taxes” to the accompanying consolidated financial statements.

 

Profit for the Year

 

Profit for the year decreased by ¥154.7 billion, or 27.6%, to ¥406.3 billion from the previous fiscal year.

 

Profit for the Year Attributable to Owners of the Parent

 

Profit for the year attributable to owners of the parent decreased by ¥164.9 billion, or 32.4%, to ¥344.5 billion from the previous fiscal year.

 

Profit for the Year Attributable to Non-controlling Interests

 

Profit for the year attributable to non-controlling interests increased by ¥10.1 billion, or 19.7%, to ¥61.8 billion from the previous fiscal year, due mainly to an increase in profit for the year of the subsidiaries in Asia which have non-controlling interests.

 

Business Segments

 

Motorcycle Business

 

Honda’s consolidated unit sales of motorcycles and all-terrain vehicles (ATVs) totaled 10,572 thousand units, decreased by 1.4% from the previous fiscal year, due mainly to a decrease in consolidated unit sales in Other Regions, which was partially offset by increase in Asia.

 

Sales revenue from external customers decreased by ¥41.2 billion, or 2.2%, to ¥1,805.4 billion from the previous fiscal year, due mainly to negative foreign currency translation effects. The impact of price changes was immaterial on sales revenue. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥13.1 billion, or 0.7%, compared to the decrease as reported of ¥41.2 billion, which includes negative foreign currency translation effects.

 

Operating costs and expenses decreased by ¥30.8 billion, or 1.9%, to ¥1,623.6 billion from the previous fiscal year. Cost of sales decreased by ¥30.3 billion, or 2.3%, to ¥1,312.4 billion, due mainly to a decrease in costs attributable to decreased consolidated unit sales and positive foreign currency effects. Selling, general and administrative expenses decreased by ¥9.3 billion, or 4.0%, to ¥224.5 billion, due mainly to positive foreign currency effects. Research and development expenses increased by ¥8.8 billion, or 11.4%, to ¥86.6 billion.

 

Operating profit decreased by ¥10.3 billion, or 5.4%, to ¥181.7 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* decreased by around 6% from the previous fiscal year to approximately 390 thousand units in fiscal year 2016.

 

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Honda’s consolidated unit sales in Japan declined 9.5% from the previous fiscal year to 180 thousand units in fiscal year 2016, reflecting an overall decline in unit sales of scooter models, despite an increase in unit sales of the Tact 50cc scooter and certain other models.

 

* 

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 around 2% from the previous year to approximately 720 thousand units in calendar year 2015.

 

Honda’s consolidated unit sales in North America increased 7.7% from the previous fiscal year to 308 thousand units in fiscal year 2016. This was mainly due to a sales increase of side-by-side (SxS) models, centered on the new Pioneer 1000, and motorcycles, primarily in the United States.

 

* 

Source: MIC (Motorcycle Industry Council)

   The total includes motorcycles and ATVs, but does not include side-by-side (SxS) models.

 

Europe

 

Total demand for motorcycles in Europe* increased around 9% from the previous year to approximately 810 thousand units in calendar year 2015.

 

Honda’s consolidated unit sales in Europe increased 6.8% from the previous fiscal year to 204 thousand units in fiscal year 2016, mostly as a result of robust sales of commuter models and the launch of the new CRF1000L Africa Twin model.

 

* 

Based on Honda research. 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* decreased around 6% from the previous year to approximately 39,140 thousand units in calendar year 2015.

 

Looking at market conditions by country, in calendar year 2015, demand in India increased about 1% from the previous year to approximately 16,120 thousand units. Demand in China decreased around 14% from the previous year to approximately 9,200 thousand units. Demand in Indonesia decreased around 18% from the previous year to approximately 6,480 thousand units. Vietnam saw demand increase around 5% from the previous year to approximately 2,840 thousand units. Demand in Thailand declined around 1% from the previous year to approximately 1,670 thousand units. Demand in Pakistan increased around 16% from the previous year to approximately 1,520 thousand units.

 

Honda’s consolidated unit sales in Asia increased 2.0% from the previous fiscal year to 8,650 thousand units in fiscal year 2016. This was due in part to brisk sales of scooter models such as the Vision scooter in Vietnam, increased sales of the TMX125 Alpha model in the Philippines, as well as other factors.

 

Honda’s consolidated unit sales do not include sales by P.T. Astra Honda Motor in Indonesia, which is a joint venture accounted for using the equity method. P.T. Astra Honda Motor’s unit sales for fiscal year 2016 decreased around 9% from the previous fiscal year to approximately 4,450 thousand units due mainly to lackluster overall market conditions, despite steady sales of the Vario series and other models.

 

* 

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

 

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Other Regions

 

Total demand for motorcycles in Brazil*, the principal market within Other Regions, declined about 17% from the previous year to approximately 1,190 thousand units in calendar year 2015, mainly due to an increase in unemployment and stricter lending standards for retail loans amid a continued worsening of economic conditions.

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales decreased 21.7% from the previous fiscal year to 1,230 thousand units in fiscal year 2016, mainly reflecting an overall market slump in Brazil.

 

* 

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

 

Automobile Business

 

Honda’s consolidated unit sales of automobiles totaled 3,636 thousand units, increased by 3.5% from the previous fiscal year, due mainly to an increase in consolidated unit sales in North America and Asia, which was partially offset by a decrease in Japan.

 

Sales revenue from external customers increased by ¥1,022.0 billion, or 10.6%, to ¥10,625.4 billion from the previous fiscal year, due mainly to increased consolidated unit sales. The impact of price changes was immaterial on sales revenue. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥682.7 billion, or 7.1%, compared to the increase as reported of ¥1,022.0 billion, which includes positive foreign currency translation effects. Sales revenue including intersegment sales increased by ¥1,009.8 billion, or 10.3%, to ¥10,767.6 billion from the previous fiscal year.

 

Operating costs and expenses increased by ¥1,136.2 billion, or 12.0%, to ¥10,614.3 billion from the previous fiscal year. Cost of sales increased by ¥708.6 billion, or 9.3%, to ¥8,350.5 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 ¥385.9 billion, or 28.9%, to ¥1,723.7 billion, due mainly to increased product warranty expenses. Product warranty expenses include expenses related to airbag inflators. Research and development expenses increased by ¥41.5 billion, or 8.3%, to ¥539.9 billion.

 

Operating profit decreased by ¥126.3 billion, or 45.2%, to ¥153.3 billion from the previous fiscal year, due mainly to increased selling, general and administrative expenses including product warranty expenses and negative foreign currency effect, which was partially offset by an increase in profit attributable to increased sales revenue and model mix as well as continuing cost reduction.

 

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Proportion of retail unit sales by vehicle category:

 

    Fiscal year ended
March 31,
 
    2015     2016  

Passenger cars:

    58     52
Accord, Accord Hybrid, Amaze, Brio, Brio Amaze, Brio Satya, City, Civic, Civic Tourer, Civic Type R, Crider, CR-Z, Fit/Jazz, Fit/Jazz Hybrid, Freed, Freed Hybrid, Freed Spike, Freed Spike Hybrid, Grace, Grace Hybrid, Greiz, Honda Mobilio, Insight, Jade, Jade Hybrid, Legend Hybrid, Mobilio, Shuttle, Shuttle Hybrid, Spirior, Acura ILX, Acura RLX, Acura TLX    

Light trucks:

    33     41
BR-V, Crosstour, CR-V, Elysion, Odyssey, Odyssey Hybrid, Pilot, Step WGN, Vezel/HR-V, Vezel Hybrid, XR-V, Acura MDX, Acura RDX    

Mini vehicles:

    9     7

Acty, N-BOX, N-BOX +, N-BOX Slash, N-ONE, N-WGN, S660, 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 varies 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 35% higher, our passenger cars category was approximately 15% lower and our mini vehicles category was approximately 60% lower than total weighted average contribution margin for the fiscal year ended March 31, 2016. 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 decreased around 7% from the previous fiscal year to approximately 4,930 thousand units in fiscal year 2016. This was greatly influenced by the impact of a tax increase on mini vehicles.

 

Honda’s consolidated unit sales in Japan decreased 11.8% from the previous fiscal year to 614 thousand units*2 in fiscal year 2016. The main reason for the decline was a tax increase on mini vehicles. This was despite the positive effect from the introduction of new automobile models such as the Shuttle, and a full model change of the Step WGN, and other factors.

 

Honda’s unit production of automobiles in fiscal year 2016 decreased 12.3% from the previous fiscal year to 761 thousand units. This was mainly due to the negative effect of a decline in unit sales in Japan, which more than offset an increase in export volume.

 

*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)

 

*2 

Certain sales of automobiles that are financed with residual value type auto loans by our Japanese finance subsidiaries and sold through our consolidated subsidiaries are accounted for as operating leases in conformity with IFRS and are not included in consolidated sales revenue to external customers in the Automobile business. Accordingly, they are not included in consolidated unit sales.

 

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North America

 

Total industry demand for automobiles in the United States*, the principal market within North America, rose around 6% from the previous year to approximately 17,470 thousand units in calendar year 2015. This was mainly attributable to a continued recovery in economic conditions, including the positive effects of an improvement in employment conditions, a gradual rise in housing starts, and a continued increase in personal consumption, as well as a surge in light truck sales as a result of lower gasoline prices.

 

Under these conditions, Honda’s consolidated unit sales in North America increased 10.2% from the previous fiscal year to 1,929 thousand units in fiscal year 2016. This increase was mainly attributable to the effect of launching the new HR-V model, and brisk sales of the CR-V and Civic models.

 

Honda manufactured 1,919 thousand units in fiscal year 2016, an increase of 6.0% from the previous fiscal year. This increase mainly reflected an increase in unit production at Honda’s plants in the United States and Canada, primarily to cope with brisk sales of CR-V and Civic models, and increased production of HR-V model at the plant in Mexico.

 

* 

Source: Autodata

 

Europe

 

Total demand for automobiles in Europe* increased about 9% from the previous year to approximately 14,200 thousand units in calendar year 2015, mainly driven by the gradual recovery in economic conditions.

 

Honda’s consolidated unit sales in Europe increased 6.8% from the previous fiscal year to 172 thousand units in fiscal year 2016. This was mainly due to the positive effect of launching the new HR-V model.

 

Unit production at Honda’s U.K. plant in fiscal year 2016 was roughly level with the previous fiscal year at 115 thousand units.

 

* 

Source: ACEA (Association des Constructeurs Europeens d’Automobiles (the European Automobile Manufacturers’ Association)) New passenger car registrations cover 28 EU countries and three EFTA countries.

 

Asia

 

Total demand for automobiles in Asia increased around 3% from the previous year to approximately 7,090 thousand units*1 in calendar year 2015. This was mainly due to a recovery in demand in India despite a moderate slowdown in Indonesia. Total demand for automobiles in China increased about 5% from the previous calendar year to approximately 24,590 thousand units*2.

 

Honda’s consolidated unit sales in Asia outside Japan increased 5.2% from the previous fiscal year to 670 thousand units in fiscal year 2016. This increase was mainly attributable to brisk sales of the HR-V in Malaysia and Indonesia, the launch of the new Mobilio model in the Philippines, and the effect of launching the new BR-V model 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 joint ventures accounted for using the equity method in China. Unit sales in China increased 33.5% from the previous fiscal year to 1,053 thousand units in fiscal year 2016. The increase was mainly attributable to strong sales of the XR-V and Vezel models.

 

Honda’s unit production by consolidated subsidiaries in Asia increased 3.0% from the previous fiscal year to 718 thousand units*3 in fiscal year 2016.

 

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Meanwhile, unit production by Chinese joint ventures Dongfeng Honda Automobile Co., Ltd. and Guangqi Honda Automobile Co., Ltd. increased 29.5% from the previous fiscal year to 1,049 thousand units in fiscal year 2016.

 

*1 

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

*2 

Source: CAAM (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*, the principal market within Other Regions, decreased around 26% from the previous year to approximately 2,480 thousand units in calendar year 2015. The decrease resulted mainly from a deterioration in the unemployment rate and an increase in loan interest rates amid continued difficult economic conditions and a downturn due to the termination of the tax reduction program for manufactured products (IPI (Imposto Sobre Produtos Industrializados)).

 

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales decreased 6.7% from the previous fiscal year to 251 thousand units in fiscal year 2016. This result was due to a decrease in sales mainly in the Middle East, which was more than offset brisk sales of the HR-V model in Brazil and other factors.

 

Unit production at Honda’s plant in Brazil increased 7.5% from the previous fiscal year to 144 thousand units in fiscal year 2016.

 

* 

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

 

Financial Services Business

 

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

 

Total amount of receivables from financial services and equipment on operating leases of finance subsidiaries on March 31, 2016 decreased by ¥332.7 billion, or 3.7%, to ¥8,686.1 billion from the March 31, 2015. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, total amount of receivables from financial services and equipment on operating leases of finance subsidiaries as of March 31, 2016 would have increased by approximately ¥236.0 billion, or 2.6%, compared to the decrease as reported of ¥332.7 billion, which includes negative foreign currency translation effects.

 

Sales revenue from external customers increased by ¥280.0 billion, or 18.0%, to ¥1,835.6 billion from the previous fiscal year, due mainly to an increase in operating lease revenues and revenues on disposition of lease vehicles. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥151.1 billion, or 9.7%, compared to the increase as reported of ¥280.0 billion, which includes positive foreign currency translation effects. Sales revenue including intersegment sales increased by ¥281.7 billion, or 18.0%, to ¥1,849.7 billion from the previous fiscal year.

 

Operating costs and expenses increased by ¥285.0 billion, or 20.9%, to ¥1,650.3 billion from the previous fiscal year. Cost of sales increased by ¥275.2 billion, or 21.6%, to ¥1,547.1 billion from the previous fiscal year,

 

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due mainly to an increase in costs attributable to increased operating lease revenues and revenues on disposition of lease vehicles. Selling, general and administrative expenses increased by ¥9.7 billion, or 10.4%, to ¥103.1 billion.

 

Operating profit decreased by ¥3.2 billion, or 1.6%, to ¥199.3 billion from the previous fiscal year, due mainly to increased selling, general and administrative expenses.

 

Power Product and Other Businesses

 

Honda’s consolidated unit sales of power products totaled 5,965 thousand units, decreased by 0.3% from the previous fiscal year, due mainly to a decrease in consolidated unit sales in Europe, which was partially offset by an increase in North America.

 

Sales revenue from external customers increased by ¥12.1 billion, or 3.8%, to ¥334.7 billion from the previous fiscal year, due mainly to increased sales revenue in Other businesses. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥6.8 billion, or 2.1%, compared to the increase as reported of ¥12.1 billion, which includes positive foreign currency translation effects. Sales revenue including intersegment sales increased by ¥5.3 billion, or 1.5%, to ¥352.2 billion from the previous fiscal year.

 

Operating costs and expenses increased by ¥32.5 billion, or 9.3%, to ¥383.3 billion from the previous fiscal year. Cost of sales increased by ¥30.6 billion, or 11.5%, to ¥296.0 billion, due mainly to an increase in operating costs in Other businesses. Selling, general and administrative expenses increased by ¥1.9 billion, or 3.6%, to ¥57.4 billion. Research and development expenses totaled to ¥29.8 billion basically unchanged from the previous fiscal year.

 

Operating loss was ¥31.1 billion, an increase of ¥27.2 billion from the previous fiscal year, due mainly to an increase in operating costs in Other businesses.

 

* 

Aircraft and aircraft engines which began deliveries in December 2015 are included in the Power product and other businesses segment.

 

Japan

 

Honda’s consolidated unit sales in power product business operations in Japan increased 7.4% from the previous fiscal year to 363 thousand units in fiscal year 2016. This was mainly due to an increase in sales of OEM engines*, which more than offset a decline in sales of snow blowers and other models.

 

* 

OEM (Original Equipment Manufacturer) engines: refers to engines installed on products sold under a third-party brand.

 

North America

 

Honda’s consolidated unit sales in North America increased 3.9% from the previous fiscal year to 2,811 thousand units in fiscal year 2016. This was mainly attributable to an increase in sales of generators, lawn mowers, and OEM engines.

 

Europe

 

Honda’s consolidated unit sales in Europe decreased 7.6% from the previous fiscal year to 1,008 thousand units in fiscal year 2016. This was mostly due to a decline in sales of OEM engines.

 

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Asia

 

Honda’s consolidated unit sales in Asia decreased 2.4% from the previous fiscal year to 1,349 thousand units in fiscal year 2016. The main reason was a decrease in sales of OEM engines, despite an increase in sales of water pumps and other factors.

 

Other Regions

 

Honda’s consolidated unit sales in Other Regions (including South America, the Middle East, Africa, Oceania and other areas) decreased 7.1% from the previous fiscal year to 434 thousand units in fiscal year 2016. This was mainly due to a decrease in sales of OEM engines.

 

Geographical Information

 

Japan

 

In Japan, sales revenue from domestic and export sales was ¥3,928.5 billion basically unchanged from the previous fiscal year, due mainly to an increase in sales revenue in the Financial services business, which was partially offset by a decrease in sales revenue in the Automobile business. Operating loss was ¥98.7 billion, a decrease in operating profit of ¥308.8 billion from the previous fiscal year, due mainly to increased selling, general and administrative expenses including product warranty expenses and a decrease in profit attributable to decreased sales revenue and model mix, which was partially offset by positive foreign currency effects.

 

North America

 

In North America, where the United States is the principal market, sales revenue increased by ¥1,336.2 billion, or 18.6%, to ¥8,537.0 billion from the previous fiscal year, due mainly to an increase in sales revenue in the Automobile business and Financial services business. Operating profit increased by ¥29.3 billion, or 16.2%, to ¥210.8 billion from the previous fiscal year, due mainly to an increase in profit attributable to increased sales revenue and model mix, which was partially offset by increased selling, general and administrative expenses including product warranty expenses and negative foreign currency effects.

 

Europe

 

In Europe, sales revenue increased by ¥52.1 billion, or 7.2%, to ¥776.0 billion from the previous fiscal year, due mainly to an increase in sales revenue in the Automobile business. Operating profit was ¥18.7 billion, an increase of ¥41.3 billion from the previous fiscal year, due mainly to an increase in profit attributable to increased sales revenue and model mix, which was partially offset by increased selling, general and administrative expenses and negative foreign currency effects.

 

Asia

 

In Asia, sales revenue increased by ¥206.8 billion, or 6.2%, to ¥3,535.3 billion from the previous fiscal year, due mainly to an increase in sales revenue in the Automobile business and Motorcycle business. Operating profit increased by ¥56.6 billion, or 20.3%, to ¥335.5 billion from the previous fiscal year, due mainly to continuing cost reduction, increased profit attributable to increased sales revenue and model mix and positive foreign currency effects, which was partially offset by increased selling, general and administrative expenses.

 

Other Regions

 

In Other Regions, sales revenue decreased by ¥141.6 billion, or 14.9%, to ¥808.6 billion from the previous fiscal year, due mainly to a decrease in sales revenue in the Motorcycle business. Operating loss was ¥8.3 billion, a decrease of ¥48.4 billion from the previous fiscal year, due mainly to increased selling, general and administrative expenses and negative foreign currency effects, which was partially offset by continuing cost reduction.

 

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Significant Factors Affecting Our Results of Operations

 

Loss related to airbag inflators

 

Honda has been conducting market-based measures in relation to airbag inflators mainly in North America and Japan. This is related to the problem where the internal pressure of the inflators rise abnormally at the time of airbag deployment on the driver’s side and passenger’s side, causing damage to the container and spraying metal fragments within the cars. We are continuing to focus on the satisfaction and safety of our customers and making every effort through market-based measures to replace those airbag inflators as quickly as possible.

 

Provisions recorded for the above warranty programs accrued during the period for the years ended March 31, 2015 and 2016 are approximately ¥120.0 billion and approximately ¥436.0 billion, respectively.

 

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 position 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 described in note “(3) Significant Accounting Policies” 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 recognize general estimated warranty costs at the time products are sold to customers. We also recognize specific estimated warranty program costs when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. 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 that typically warrant these parts.

 

We believe our provision for product warranties is a “critical accounting estimate” because changes in the calculation can materially affect profit for the year attributable to owners of the parent, 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 provision for those product warranties and sales revenue for the years ended March 31, 2015, 2016 and 2017 are as follows:

 

    Yen (millions)  
    2015     2016     2017  

Provisions for product warranties

     

Balance at beginning of year

  ¥ 274,231     ¥ 421,523     ¥ 727,441  

Provision*

    295,035       607,646       198,016  

Charge-offs

    (156,787     (257,574     (341,416

Reversal

    (12,171     (12,907     (54,324

Exchange differences on translating foreign operations

    21,215       (31,247     (9,587
 

 

 

   

 

 

   

 

 

 

Balance at end of year

  ¥ 421,523     ¥ 727,441     ¥ 520,130  
 

 

 

   

 

 

   

 

 

 

Sales revenue

  ¥ 13,328,099     ¥ 14,601,151     ¥ 13,999,200  

 

* 

Provisions for product warranties accrued during the period for the years ended March 31, 2015, 2016 and 2017 are ¥295.0 billion, ¥607.6 billion and ¥198.0 billion, respectively, due mainly to the future warranty costs for product recalls in the Automobile business.

 

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 includes retail and finance lease receivables (“consumer finance receivables”) derived from those services in receivables from financial services, and operating leases are classified as equipment on operating leases. Honda also includes wholesale receivables in receivables from financial services.

 

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 equipment on operating leases. 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 finance receivables 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 monitoring the payment performance and creditworthiness of dealers with existing financing arrangements on an ongoing basis.

 

The allowance for credit losses is management’s estimate of probable losses incurred on receivables from financial services. 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.

 

Consumer finance receivables are collectively evaluated for impairment. Delinquencies and losses are monitored on an ongoing basis and this historical experience provides the primary basis for estimating the

 

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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, collateral types, and loan terms. Market and economic factors such as used vehicle prices, unemployment rates, and consumer debt service burdens are also incorporated into these models. 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.

 

Dealer finance receivables are individually evaluated for impairment when specifically identified as impaired. Dealer finance 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 finance receivables are impaired is based on evaluations of dealership payment history, financial condition and cash flows, and their ability to perform under the terms of the loans. Dealer finance receivables 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. Our finance subsidiaries regularly review the adequacy of the allowance for credit losses and impairment losses on operating leases. The estimates are based on information available at the end of each reporting period. 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 part of our allowance calculation would have on the provision and allowance for credit losses. If we had experienced a 10% increase in net charge-offs during fiscal year 2017, the provision for fiscal year 2017 and the allowance balance at the end of fiscal year 2017 would have increased by approximately ¥5.6 billion and ¥3.1 billion, respectively. Note that this sensitivity analysis may be asymmetric and is specific to the base conditions in fiscal year 2017.

 

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Additional Narrative of the Change in Credit Loss

 

The following tables summarize our allowance for credit losses on receivables from financial services:

 

     Yen (millions)  

For the year ended March 31, 2015

   Retail     Finance
lease
    Wholesale     Total  

Allowance for credit losses

        

Balance at beginning of year

   ¥ 21,970     ¥ 636     ¥ 2,594     ¥ 25,200  

Provision

     18,213       349       (202     18,360  

Charge-offs

     (26,673     (620     (385     (27,678

Recoveries

     9,101       131       27       9,259  

Exchange differences on translating foreign operations

     38       3       (144     (103
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 22,649     ¥ 499     ¥ 1,890     ¥ 25,038  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of receivables from financial services

   ¥ 4,901,918     ¥ 260,543     ¥ 556,735     ¥ 5,719,196  

Average balance of receivables from financial services

   ¥ 4,732,809     ¥ 295,315     ¥ 526,817     ¥ 5,554,941  

Net charge-offs as a % of average balance of receivables from financial services

     0.37     0.17     0.07     0.33

Allowance as a % of ending balance of receivables from financial services

     0.46     0.19     0.34     0.44
     Yen (millions)  

For the year ended March 31, 2016

   Retail     Finance
lease
    Wholesale     Total  

Allowance for credit losses

        

Balance at beginning of year

   ¥ 22,649     ¥ 499     ¥ 1,890     ¥ 25,038  

Provision

     24,148       457       769       25,374  

Charge-offs

     (31,258     (268     (64     (31,590

Recoveries

     8,839       107       98       9,044  

Exchange differences on translating foreign operations

     (2,078     (33     (190     (2,301
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 22,300     ¥ 762     ¥ 2,503     ¥ 25,565  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of receivables from financial services

   ¥ 4,227,816     ¥ 227,502     ¥ 589,889     ¥ 5,045,207  

Average balance of receivables from financial services

   ¥ 4,564,867     ¥ 244,023     ¥ 573,312     ¥ 5,382,202  

Net charge-offs as a % of average balance of receivables from financial services

     0.49     0.07     (0.01 )%      0.42

Allowance as a % of ending balance of receivables from financial services

     0.53     0.33     0.42     0.51

 

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     Yen (millions)  

For the year ended March 31, 2017

   Retail     Finance
lease
    Wholesale     Total  

Allowance for credit losses

        

Balance at beginning of year

   ¥ 22,300     ¥ 762     ¥ 2,503     ¥ 25,565  

Provision

     29,870       338       (278     29,930  

Charge-offs

     (33,045     (287     (382     (33,714

Recoveries

     8,487       69       3       8,559  

Exchange differences on translating foreign operations

     1,255       (73     (23     1,159  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 28,867     ¥ 809     ¥ 1,823     ¥ 31,499  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of receivables from financial services

   ¥ 4,199,715     ¥ 184,339     ¥ 608,549     ¥ 4,992,603  

Average balance of receivables from financial services

   ¥ 4,100,161     ¥ 195,750     ¥ 568,024     ¥ 4,863,935  

Net charge-offs as a % of average balance of receivables from financial services

     0.60     0.11     0.07     0.52

Allowance as a % of ending balance of receivables from financial services

     0.69     0.44     0.30     0.63

 

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

 

     Yen (millions)  
         2015              2016              2017      

Provision for credit losses on past due lease payments under operating leases

   ¥ 1,869      ¥ 2,141      ¥ 2,493  

Impairment losses on operating leases due to early termination

   ¥ 4,077      ¥ 5,486      ¥ 7,987  

 

Fiscal Year 2017 Compared with Fiscal Year 2016

 

The provision for credit losses on receivables from financial services for the fiscal year ended March 31, 2017 increased by ¥4.5 billion, or 18.0%, from the fiscal year ended March 31, 2016. Net charge-offs of receivables from financial services for the fiscal year ended March 31, 2017 increased by ¥2.6 billion, or 11.6%, from the fiscal year ended March 31, 2016. The increase in the provision for credit losses and net charge-offs was attributable to higher default frequencies and loss severities on receivables due in part to the increase in the volume of retail loans with longer terms in our North American finance subsidiaries. Impairment losses on operating leases due to early termination for the fiscal year ended March 31, 2017 increased by ¥2.5 billion, or 45.6%, from the fiscal year ended March 31, 2016 primarily due to the growth in equipment on operating leases in our North American finance subsidiaries.

 

Fiscal Year 2016 Compared with Fiscal Year 2015

 

The provision for credit losses on receivables from financial services for the fiscal year ended March 31, 2016 increased by ¥7.0 billion, or 38.2%, from the fiscal year ended March 31, 2015. Net charge-offs of receivables from financial services for the fiscal year ended March 31, 2016 increased by ¥4.1 billion, or 22.4%, from the fiscal year ended March 31, 2015. The increase in the provision for credit losses and net charge-offs was attributable to higher loss severities on receivables in our North American finance subsidiaries. Impairment losses on operating leases due to early termination for the fiscal year ended March 31, 2016 increased by ¥1.4 billion, or 34.6%, from the fiscal year ended March 31, 2015 due to the growth in equipment on operating leases in our North American finance subsidiaries.

 

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 end of term used vehicle values, taking into consideration external industry

 

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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, for 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, for the outstanding contractual balance) or a market based price. 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 are the percentage of leased vehicles that we expect to be returned by the lessee at the end of lease term and expected loss severities. 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 recognized as depreciation expense. For finance leases, if there is an objective evidence that recognition of losses on lease residual values is needed, downward adjustments for declines in estimated residual values are recognized as a loss on lease residual values in the period in which the estimate changed.

 

We also review our equipment on 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 recoverable amounts.

 

We believe that our estimated losses on lease residual values and impairment losses are 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, 2017 were to decrease by approximately ¥10,000 per unit from our present estimates, holding all other assumptions constant, the total impact would be an increase in depreciation expense by approximately ¥6.6 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 ¥1.2 billion, which would be recognized over the remaining lease terms. Note that this sensitivity analysis may be asymmetric and is specific to the base conditions in fiscal year 2017. Also, declines in auction values are likely to have a negative effect on return rates which could affect the sensitivities.

 

Post-employment Benefits

 

We have various pension plans covering substantially all of our employees in Japan and certain employees in foreign countries. Defined benefit obligations and defined benefit costs are based on assumptions of many factors, including the discount rate and the rate of salary increase. The discount rate is determined by reference to market yields at the end of the reporting period on high quality corporate bonds that is consistent with the currency and estimated term of the post-employment benefit obligations. The rate of salary increase reflects our actual experience as well as near-term outlook. Our assumed discount rate and rate of salary increase for Japanese plans as of March 31, 2017 were 0.8% and 1.7%, respectively. Our assumed discount rate and rate of salary increase for foreign plans as of March 31, 2017 were 2.8 - 4.4% and 2.5 - 3.0%, respectively.

 

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

 

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We believe that the assumptions currently used are appropriate. However, changes in assumptions could affect our defined benefit costs and obligations, including our cash requirements to fund such obligations in the future. Actual results may differ from our assumptions, and the difference is recognized in other comprehensive income when it is incurred and reclassified immediately to retained earnings.

 

For information on the effect of change in the assumed discount rate on our defined benefit obligations, see “4) Sensitivity analysis” of note “(18) Employee Benefits” to the accompanying consolidated financial statements.

 

Deferred Tax Assets

 

We consider the probability that a portion of or all of the deductible temporary differences, carryforward of unused tax losses and carryforward of unused tax credit can be utilized against future taxable profits in the recognition of deferred tax assets. In assessing recoverability of deferred tax assets, we consider the scheduled reversal of deferred tax liabilities, projected future taxable profit and tax planning strategies.

 

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

 

Based upon the level of historical taxable profit and projections for future taxable profit over the periods for which the deferred tax assets are deductible, we believe it is probable that we will utilize the benefits of these deferred tax assets as of March 31, 2016 and 2017. Uncertainty of estimates of future taxable profit could increase due to changes in the economic environment surrounding us, effects by market conditions, effects of currency fluctuations or other factors.

 

New Accounting Pronouncements Not Yet Adopted

 

For a description of new accounting pronouncements not yet adopted, see “(e) New Accounting Standards and Interpretations Not Yet Adopted” of note “(2) Basis of Preparation” to the accompanying consolidated financial statements.

 

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, Honda also funds financial programs for customers and 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 ¥477.6 billion as of March 31, 2017. 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 and corporate bonds. The year-end balance of liabilities associated with these finance subsidiaries’ funding for Financial services business was ¥6,484.5 billion as of March 31, 2017.

 

There are no material seasonal variations in Honda’s borrowing requirements.

 

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Cash Flows

 

Fiscal Year 2017 Compared with Fiscal Year 2016

 

Consolidated cash and cash equivalents on March 31, 2017 increased by ¥348.5 billion from March 31, 2016, to ¥2,105.9 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 ¥885.0 billion of cash inflows. Cash inflows from operating activities decreased by ¥505.9 billion compared with the previous fiscal year, due mainly to a decrease in cash received from customers, including negative foreign currency translation effects.

 

Net cash used in investing activities amounted to ¥650.6 billion of cash outflows. Cash outflows from investing activities decreased by ¥224.4 billion compared with the previous fiscal year, due mainly to a decrease in payments for additions to property, plant and equipment.

 

Net cash used in financing activities amounted to ¥115.4 billion of cash inflows. Cash inflows from financing activities increased by ¥210.7 billion compared with the previous fiscal year, due mainly to a decrease in repayments of financing liabilities.

 

Fiscal Year 2016 Compared with Fiscal Year 2015

 

Consolidated cash and cash equivalents on March 31, 2016 increased by ¥285.7 billion from March 31, 2015, to ¥1,757.4 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 ¥1,390.9 billion of cash inflows. Cash inflows from operating activities increased by ¥370.5 billion compared with the previous fiscal year, due mainly to an increase in cash received from customers, which was partially offset by increased payments for parts and raw materials.

 

Net cash used in investing activities amounted to ¥875.0 billion of cash outflows. Cash outflows from investing activities increased by ¥34.5 billion compared with the previous fiscal year, due mainly to an increase in payments for acquisitions of other financial assets.

 

Net cash used in financing activities amounted to ¥95.2 billion of cash outflows. Cash outflows from financing activities increased by ¥107.7 billion compared with the previous fiscal year, due mainly to a decrease in proceeds from financing liabilities.

 

Liquidity

 

The ¥2,105.9 billion in cash and cash equivalents as of March 31, 2017 is mainly denominated in U.S. dollars and in Japanese yen, with the remainder denominated in other currencies.

 

Honda’s cash and cash equivalents as of March 31, 2017 corresponds to approximately 1.8 months of sales revenue, 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 ¥1,046.9 billion have committed lines of credit equivalent to ¥1,090.4 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.

 

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Honda’s financing liabilities as of March 31, 2017 are mainly denominated in U.S. dollars, with the remainder denominated in Japanese yen and in other currencies. For further information regarding financing liabilities, see note “(15) Financing Liabilities” and “(25) Financial Risk Management” to the accompanying consolidated financial statements.

 

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, 2017.

 

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

Moody’s Investors Service

     P-1        A1  

Standard & Poor’s Rating Services

     A-1        A+  

Rating and Investment Information

     a-1+        AA  

 

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

 

C. Research and Development

 

The Company and its consolidated subsidiaries use the most-advanced technologies and conduct R&D activities with the goal of creating distinctive products that are internationally competitive. To attain this goal, Honda’s main R&D divisions operate independently as subsidiaries, allowing engineers to pursue their tasks with significant freedom. Product-related R&D is conducted mainly 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 expenditures incurred during the fiscal year 2015, 2016 and 2017 were ¥670.3 billion, ¥719.8 billion and ¥659.9 billion, respectively.

 

In addition, a portion of the R&D expenditures at the Company and its consolidated subsidiaries has been capitalized, and recorded as intangible assets. For details regarding R&D expenses recognized in the consolidated statements of income, see note “(21) Research and Development” to the accompanying consolidated financial statements.

 

R&D activities by segment are as follows.

 

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.

 

Among major technological achievements, in the medium motorcycle sector, Honda developed a four-stroke DOHC 4-valve in-line two-cylinder water-cooled engine, which is both very powerful at low-to-medium rotation and has the characteristic of accelerating sharply to high rotation. This newly developed engine was installed in CBR250RR, launched in Indonesia and Japan, which has a new frame design boasting both strength and flexibility, and adopting a newly developed suspension.

 

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In the large motorcycle sector, we launched the CBR1000RR in Europe, Japan, the United States and other countries, as a product of our thorough pursuit of reduction in weight and size. In addition to adopting the newly designed die-cast aluminum seat rail and the titanium muffler with a new structure and achieving the lightest frame in its class by reducing the weight of frame components, it also incorporates new electrical control technology that supports ‘joy of control’, with a power unit that seeks both improved output and controllability characteristics, the Honda Selectable Torque Control feature and a riding mode that can be adjusted according to preferences. We also launched the X-ADV in Europe and other countries, designed for comfort and convenience in urban riding, and featuring adventurous styling and equipment. On top of its four-stroke OHC 4-valve in-line two-cylinder 745cc water-cooled engine that is easy to handle from low rotation to high rotation, the dual clutch transmission (DCT) is also featured as standard equipment.

 

Furthermore, we have begun to consider a business alliance with Yamaha Motor Co., Ltd. regarding collaboration in the area of small-sized scooters. Going forward, we are aiming for OEM supply of 50cc scooter models for the Japanese market, the joint development and OEM supply of next-generation 50cc business scooter models, and collaborations regarding electric motorcycles in the Class-1 category* for further popularization.

 

R&D expenditures in this segment incurred during the fiscal year 2015, 2016 and 2017 were ¥73.7 billion, ¥76.7 billion and ¥74.3 billion, respectively.

 

*The Class-1 category: A category defined by the Road Vehicles Act of Japan as ‘vehicles equipped with two or more wheels and an engine with total displacement of 50 cc or less or an electric motor with rated output of 0.60 kW or less’.

 

Automobile Business

 

In the Automobile Business segment, Honda has been involved in R&D activities under the themes of ‘Creating New Values’ and ‘Advanced R&D Activities Worldwide’.

 

Among major technological achievements in the Automobile Business segment, Honda launched NSX supercar in the United States, Canada, Japan and other countries. The SPORT HYBRID SH-AWD incorporates a hybrid system, which controls the driving force of the automobile electrically, by combining the newly developed V-type six-cylinder twin turbo engine that adopts a mid-mounted layout, a high-efficiency motor, 9-speed DCT, a twin motor unit (TMU), and other features. The body is lightweight yet has high rigidity, realized by using a variety of materials centering around extruded aluminum, while the all-aluminum suspension allows both swift handling and stability at high speeds. Furthermore, the Integrated Dynamic System feature, which selects the optimal set of vehicle characteristics out of four driving modes depending on the driving environment, is also installed.

 

Also, by newly designing components such as motors and batteries, we reduced the size and weight of the hybrid system SPORT HYBRID i-MMD, and launched ACCORD with high output and high torque in the United States, China and other countries. In addition to renewing the interior and exterior designs, Honda SENSING, an advanced safety and driver-assistive system, is featured as standard equipment.

 

In the United States, after the 10th generation CIVIC Sedan and CIVIC Coupe were launched, we subsequently launched the five-door model CIVIC Hatchback. The CIVIC Hatchback uses the 1.5L direct injection VTEC Turbo engine for its powertrain, CVT and 6-speed manual transmission for transmission, and features Honda SENSING. In addition, in North America, we launched the CR-V which features the 1.5L direct injection turbo engine for the first time, on top of the existing 2.4L direct injection DOHC i-VTEC engine. Transmission for all grades are equipped with CVT, and Honda’s proprietary speed control system G-Design Shift has been used.

 

In Japan, we launched FREED, which offers a versatile seating arrangement and ensures ample cabin space, as well as FREED+, where the ultra-low floor for the cargo space further increased the cargo space usability, and

 

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a flat space that makes it possible to sleep in the vehicle along with underfloor storage were simultaneously achieved. In addition to adopting Honda SENSING, for the powertrain, gasoline-power vehicles feature the 1.5L direct injection DOHC i-VTEC engine and high-efficiency CVT, while hybrid vehicles feature the SPORT HYBRID i-DCD. Both vehicles provide a superior fuel economy and a powerful drive.

 

R&D expenditures in this segment incurred during the fiscal year 2015, 2016 and 2017 were ¥567.3 billion, ¥614.2 billion and ¥559.8 billion, respectively.

 

Power Product and Other Businesses

 

Honda has involved research and development in the Power Products Business, based on the principle of ‘Expand the usefulness and joy towards worldwide customers, by having a full understanding of the market, looking into the future and adapting business fundamentals’.

 

Among major technological achievements, Honda launched the BF5 and BF6 compact four-stroke outboard engines, featuring a large capacity internal fuel tank which enables a long running time, in Europe, the United States, Canada, Japan and other countries. Equipped with an oil alert function that warns the ship operator of an oil volume drop, improved convenience due to features such as the compact, easily-stored tiller handle, minimal recoil due to less pulling force required to start the engine and an easier start, and a one-push stop structure with an engine-stopping switch; Honda received the ‘2016 IBEX Innovation Award’ in the United States and the ‘Japan’s Boat of the Year Award 2016’ in Japan for the BF5 and BF6 compact four-stroke outboard engines.

 

Utilizing Honda’s proprietary sine wave inverter technologies, the EG25i, EB2800i, and EG2800i generators, which can stably deliver high-quality electrical output equivalent to power supplies for homes, were launched in the United States, Japan and Canada. By adopting a lightweight, compact and high-rigidity open frame, low costs are achieved, and the generator is protected from engine vibrations and external impact. Also, it features an eco-throttle function that automatically controls the number of engine oscillations according to the electrical consumption burden of the machine in use, thereby realizing superior fuel economy and noise reduction.

 

In Other Businesses such as aircraft engines, Honda seeks to establish a sustainable business structure and make a name for itself in the industry. Under this policy, Honda promoted the establishment of the production and services structures of the HF120 jet engine, as well as cost reductions. In 2016, we received a Type Certificate from the European Aviation Safety Agency (EASA), marking another step forward in our aircraft engines business in Europe.

 

In addition, through proprietary technologies such as Over-The-Wing Engine Mount, natural laminar flow wings, and an integrally molded carbon composite fuselage, the HondaJet achieves top speed, flight ceiling, climbing ability, fuel economy, and cabin size that are among the best* in its class. The HondaJet started to receive orders from Central and South America, and the actual machine was first showcased in a business aviation event held in Dubai.

 

*Based on the Company’s research as of March 30, 2017

 

R&D expenditures in this segment incurred during the fiscal year 2015, 2016 and 2017 were ¥29.2 billion, ¥28.8 billion and ¥25.6 billion, respectively.

 

Patents and Licenses

 

As of March 31, 2017, Honda owned more than 20,500 patents in Japan and more than 26,100 patents abroad. Honda also had applications pending for more than 6,700 patents in Japan and for more than 13,800 patents abroad. While Honda considers that, in the aggregate, Honda’s patents are important, it does not consider any one of such patents, or any related group of them, to be of such importance that the expiration or termination thereof would materially affect Honda’s business.

 

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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

 

Loan commitments

 

Honda maintains unused balances on committed lines to dealers based on loan commitment contracts. The undiscounted maximum amount of this obligation as of March 31, 2017 was ¥120.5 billion. Although committed lines have been extended, they will not necessarily be withdrawn, as certain contracts contain terms and conditions of withdrawal that require screening of the obligor’s credit standing.

 

Guarantee of employee loans

 

As of March 31, 2017, we guaranteed ¥16.1 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 ¥16.1 billion. As of March 31, 2017, 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, 2017:

 

Contractual Obligations

 

     Yen (millions)  
     Total      Payments due by period  
        Within
1 year
     1-3
years
     3-5
years
     Thereafter  

Financing liabilities

   ¥ 7,090,264      ¥ 2,883,047      ¥ 2,647,229      ¥ 1,116,212      ¥ 443,776  

Other financial liabilities

     202,861        78,905        71,144        21,862        30,950  

Future minimum lease payments under non-cancelable operating leases

     68,673        16,722        20,902        11,387        19,662  

Purchase and other commitments*1

     84,095        52,773        24,428        5,623        1,271  

Contributions to defined benefit pension plans*2

     46,213        46,213        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 7,492,106      ¥ 3,077,660      ¥ 2,763,703      ¥ 1,155,084      ¥ 495,659  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

*1 

Honda had commitments for purchases of property, plant and equipment as of March 31, 2017.

*2 

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.

 

G. Safe Harbor

 

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

 

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

 

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Item 6. Directors, Senior Management and Employees

 

A. Directors and Senior Management

 

Effective on June 15, 2017, Honda adopted a “company with an audit and supervisory committee” corporate governance system (the “Audit and Supervisory Committee system”) under Japan’s Company Law (in which this system was newly established by its amendments effected as of May 1, 2015) upon approval on the amendments to the Articles of Incorporation relating thereto at its Ordinary General Meeting of Shareholders held on June 15, 2017. As a result of adopting the Audit and Supervisory Committee system, Honda no longer has a Board of Corporate Auditors.

 

For Japanese companies which employ the Audit and Supervisory Committee system, including Honda, Japan’s Company Law requires that such company have a board of directors, which shall consist of directors who are audit and supervisory committee members and directors who are not such members, and, within the board of directors, an audit and supervisory committee, which shall consist of three or more directors. Honda’s Articles of Incorporation provide for the Board of Directors of not more than 20 Directors of whom no more than seven Directors shall be Audit and Supervisory Committee Members. Directors who are not audit and supervisory committee members and directors who are such members are separately elected by resolutions of the general meetings of shareholders. The normal term of office of a director who is an audit and supervisory committee member is two years and that of a director who is not such member is one year. Directors may serve any number of consecutive terms.

 

Honda’s 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 Directors who are not Audit and Supervisory Committee 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 audit and supervisory committee has the following responsibilities: (i) auditing the performance of duties by directors and preparing audit reports, (ii) determining proposals concerning the appointment and dismissal of the company’s accounting audit firm and the refusal of reappointment of the company’s accounting audit firm to be submitted to general meetings of shareholders, (iii) deciding opinions on election, dismissal or resignation of directors who are not audit and supervisory committee members, in which case the audit and supervisory committee may express its opinion at the general meeting of shareholders, and (iv) deciding opinions on compensation of directors who are not audit and supervisory committee members, in which case the audit and supervisory committee may express its opinion at the general meeting of shareholders. Not less than half of the members of the audit and supervisory committee must be outside directors. Each of the outside directors is required to meet all of the following independence requirements: the relevant person must be (1) a person who is not an executive director, executive officer, manager or any other employee of the company or any of its subsidiaries and has not been in such position for ten years prior to the assumption of office; (2) if the relevant person assumed an office of a non-executive director, accounting councilor or corporate auditor of the company or any of its subsidiaries during the ten years mentioned in (1) above, a person who had not been an executive director, executive officer, manager or any other employee of the company or any of its subsidiaries for further ten years prior to the assumption of such office; (3) a person who is not a director, corporate auditor, executive officer, manager or any other employee of the parent company or who is not a natural person controlling the company; (4) a person who is not an executive director, executive officer, manager or any other employee of a company which is controlled by the parent company or by the natural person controlling the company; and (5) a person who is not a spouse or one of a certain kinds of relatives of (a) a director, executive officer, manager or any other important employee of the company or (b) the natural person controlling the company. With respect to audit reports prepared by the audit and supervisory committee, each member of the committee may note his or her opinion in the audit report if his

 

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or her opinion is different from the opinion expressed in the audit report. In addition, the Company is required to appoint independent certified public accountants as accounting auditors. 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 member of the audit and supervisory committee (or, if such member is not specified, any member of the committee) and the specified director in charge.

 

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The following table provides the names of all the members of the Board of Directors (including the Audit and Supervisory Committee Members) and of the Executive Officers (who are not concurrently the members of the Board of Directors) 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

     

Takahiro Hachigo

(May 19, 1959)

  Joined Honda Motor Co., Ltd. in April 1982     *3       33,400  
 

 

General Manager of Automobile Purchasing Division II

for Purchasing Operations,

appointed in April 2008

   
 

Operating Officer of the Company,

appointed in June 2008

   
 

General Manager of Purchasing Division II

for Purchasing Operations,

appointed in April 2010

   
 

General Manager of Suzuka Factory for Production Operations,

appointed in April 2011

   
 

Vice President and Director of Honda Motor Europe, Ltd.,

appointed in April 2012

   
 

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

appointed in September 2012

   
 

President and Director of Honda R&D Europe (U.K.) Ltd.,

appointed in September 2012

   
 

Representative of Development, Purchasing and Production (China),

appointed in April 2013

   
 

Vice President of Honda Motor (China) Investment Co., Ltd.,

appointed in April 2013

   
 

Vice President of Honda Motor Technology (China) Co., Ltd.,

appointed in November 2013

   
 

Managing Officer of the Company,

appointed in April 2014

   
 

Senior Managing Officer of the Company,

appointed in April 2015

   
 

President, Chief Executive Officer and

Representative Director of the Company,

appointed in June 2015

   
 

Chief Executive Officer of the Company,

appointed in April 2017 (presently held)

   
 

President and Representative Director of the Company,

appointed in June 2017 (presently held)

   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Seiji Kuraishi

(July 10, 1958)

  Joined Honda Motor Co., Ltd. in April 1982     *3       33,400  
 

 

Vice President of Honda Motor (China) Investment Co., Ltd.,

appointed in April 2007

   
 

Operating Officer of the Company,

appointed in June 2007

   
 

President of Dongfeng Honda Automobile Co., Ltd.,

appointed in January 2008

   
 

Chief Officer for Regional Operations (China),

appointed in April 2010

   
 

President of Honda Motor (China) Investment Co., Ltd.,

appointed in April 2010

   
 

Director of the Company,

appointed in June 2010

   
 

Operating Officer and Director of the Company,

appointed in April 2011

   
 

Operating Officer of the Company

(retired from the position as Director),

appointed in June 2011

   
 

President of Honda Motor Technology (China) Co., Ltd.,

appointed in November 2013

   
 

Managing Officer of the Company,

appointed in April 2014

   
 

Senior Managing Officer of the Company,

appointed in April 2016

   
 

Executive Vice President, Executive Officer and

Representative Director of the Company,

appointed in June 2016

   
 

Risk Management Officer,

appointed in June 2016 (presently held)

   
 

Corporate Brand Officer,

appointed in June 2016 (presently held)

   
 

Chief Operating Officer of the Company,

appointed in April 2017 (presently held)

   
 

In Charge of Strategy, Business Operations and
Regional Operations,

appointed in April 2017 (presently held)

   
 

Executive Vice President and Representative Director
of the Company,

appointed in June 2017 (presently held)

   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Senior Managing Directors

     

Yoshiyuki Matsumoto

  Joined Honda Motor Co., Ltd. in April 1981     *3       36,800  

(January 14, 1958)

 

 

Responsible for Automobile Products for Automobile Operations,
appointed in April 2006

   
  Operating Officer of the Company,
appointed in June 2006
   
  General Manager of Suzuka Factory for Production Operations,
appointed in April 2009
   
  Executive in Charge of Business Unit No.3
for Automobile Operations,
appointed in April 2011
   
  Managing Officer of the Company,
appointed in April 2012
   
  Representative of Development, Purchasing and Production
(Asia & Oceania),
appointed in April 2013
   
  Executive Vice President of Asian Honda Motor Co., Ltd.,
appointed in April 2013
   
  President and Chief Executive Officer of
Honda Motor India Private Ltd.,
appointed in April 2013
   
  Senior Managing Officer of the Company,
appointed in April 2015
   
  Chief Officer for Automobile Operations,
appointed in April 2015
   
  Executive in Charge of Quality Innovation
for Automobile Operations,
appointed in April 2015
   
  Senior Managing Officer and Director of the Company,
appointed in June 2015
   
  President, Chief Executive Officer and Representative Director of Honda R&D Co., Ltd.,
appointed in April 2016 (presently held)
   
  Supervising Director of F1 Project,
appointed in April 2016
   
  In Charge of Research & Development
(Research & Development, Intellectual Property and Standardization),
appointed in April 2017 (presently held)
   
  Senior Managing Director of the Company,
appointed in June 2017 (presently held)
   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Toshiaki Mikoshiba

  Joined Honda Motor Co., Ltd. in April 1980     *3       32,600  

(November 15, 1957)

 

 

Responsible for East Europe, the Middle & Near East and Africa for

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

appointed in April 2008

   
  Executive Vice President and Director of Honda Motor Europe Ltd.,
appointed in April 2008
   
  Operating Officer of the Company,
appointed in June 2008
   
  Responsible for Russia and CIS for Regional Operations
(Europe, the Middle & Near East and Africa),
appointed in June 2009
   
  President and Director of Honda Motor RUS LLC,
appointed in August 2009
   
  President of Guangqi Honda Automobile Co., Ltd.,
appointed in April 2011
   
  Managing Officer of the Company,
appointed in April 2014
   
  Chief Officer for Regional Operations (Europe Region),
appointed in April 2014
   
  President and Director of Honda Motor Europe Ltd.,
appointed in April 2014
   
  Senior Managing Officer of the Company,
appointed in April 2015
   
  Chief Officer for Regional Operations (North America),
appointed in April 2016 (presently held)
   
  President and Director of Honda North America, Inc.,
appointed in April 2016 (presently held)
   
  President and Chief Executive Officer of
American Honda Motor Co., Inc.,
appointed in April 2016 (presently held)
   
  In Charge of Sales and Marketing,
appointed in April 2017 (presently held)
   
  Senior Managing Director of the Company,
appointed in June 2017 (presently held)
   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Yoshi Yamane

(September 28, 1958)

  Joined Honda Engineering Co., Ltd. in October 1985     *3       32,600  
 

 

Large Project Leader of Corporate Project,
Automobile Production Planning Office for Production Operations,

appointed in April 2008

   
  Operating Officer of the Company,
appointed in June 2008
   
  Responsible for Production for Production Operations,
appointed in June 2008
   
 

Responsible for Production for Regional Operations (China),

appointed in April 2009

   
 

Vice President of Honda Motor (China) Investment Co., Ltd.,

appointed in September 2010

   
 

General Manager of Suzuka Factory for Production Operations,

appointed in April 2012

   
 

Representative of Automobile Development,

Purchasing and Production (Japan),
appointed in April 2013

   
 

General Manager of Suzuka Factory of Automobile Production

for Automobile Operations,
appointed in April 2013

   
  Managing Officer of the Company,
appointed in April 2014
   
 

Head of Automobile Production for Regional Operations (Japan),

appointed in April 2014

   
  Head of Production Supervisory Unit of Automobile Production
for Regional Operations (Japan),
appointed in April 2014
   
  Senior Managing Officer of the Company,
appointed in April 2015
   
  Chief Production Officer,
appointed in April 2015
   
  Representative of Automobile Development,
Purchasing and Production for Automobile Operations,
appointed in April 2015
   
  Head of Production for Automobile Operations,
appointed in April 2015
   
  Representative of Automobile Development,
Purchasing and Production (Europe Region),
appointed in April 2015
   
  Senior Managing Officer and Director of the Company,
appointed in June 2015
   
  Chief Officer for Production Operations,
appointed in April 2016 (presently held)
   
  In Charge of Production
(Production, Purchasing, Quality, Parts and Service)
appointed in April 2017 (presently held)
   
  Senior Managing Director of the Company,
appointed in June 2017 (presently held)
   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Kohei Takeuchi

(February 10, 1960)

  Joined Honda Motor Co., Ltd. in April 1982     *3       23,200  
 

 

General Manager of Accounting Division
for Business Management Operations,
appointed in April 2010

   
  Operating Officer of the Company,
appointed in April 2011
   
  Chief Officer for Business Management Operations,
appointed in April 2013 (presently held)
   
  Operating Officer and Director of the Company,
appointed in June 2013
   
  Managing Officer and Director of the Company,
appointed in April 2015
   
  Senior Managing Officer and Director of the Company,
appointed in April 2016
   
  Chief Officer for Driving Safety Promotion Center,
appointed in April 2016 (presently held)
   
 

Chief Financial Officer of the Company
(Accounting, Finance, Human Resources, Corporate Governance and IT)

appointed in April 2017 (presently held)

   
  Senior Managing Director of the Company,
appointed in June 2017 (presently held)
   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Directors

     

Hideko Kunii

(December 13, 1947)

  Associate Director of Ricoh Co., Ltd.,
appointed in April 2009
    *3       1,100  
  Chairperson of Ricoh IT Solutions Co., Ltd.,
appointed in July 2009
   
  Outside Director of Innovation Network Corporation of Japan,
appointed in July 2009 (presently held)
   
  Member of Gender Equality Bureau Cabinet Office,
appointed in August 2009
   
  Professor, Graduate School of Engineering Management,
Shibaura Institute of Technology,
appointed in April 2012 (presently held)
   
  Retired from Chairperson of Ricoh IT Solutions Co., Ltd.
in March 2013
   
  Retired from Associate Director of Ricoh Co., Ltd.
in March 2013
   
  Deputy President, Shibaura Institute of Technology,
appointed in April 2013 (presently held)
   
  General Manager of Gender Equality Promotion Office,
Shibaura Institute of Technology,
appointed in October 2013 (presently held)
   
  Director of the Company,
appointed in June 2014 (presently held)
   
  Outside Director of Tokyo Electric Power Company, Incorporated
(currently, Tokyo Electric Power Company Holdings, Inc.),
appointed in June 2014 (presently held)
   
  Outside Director of Mitsubishi Chemical Holdings Corporation,
appointed in June 2015 (presently held)
   

Motoki Ozaki

(June 6, 1949)

  Chairman of the Board of Kao Corporation,
appointed in June 2012
    *3       200  
  President and Representative Director of The Kao Foundation
for Arts and Sciences,
appointed in June 2012 (presently held)
   
  President of Kigyo Mecenat Kyogikai,
Association for Corporate Support of the Arts,
appointed in March 2014 (presently held)
   
  End of tenure as Chairman of the Board of Kao Corporation
in March 2014
   
  President of New National Theatre Foundation,
appointed in June 2014 (presently held)
   
  Outside Director of Nomura Securities Co., Ltd.,
appointed in June 2015 (presently held)
   
  Director of the Company,
appointed in June 2016 (presently held)
   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Takanobu Ito

  Joined Honda Motor Co., Ltd. in April 1978     *3       40,300  

(August 29, 1953)

 

 

Executive Vice President of Honda R&D Americas, Inc.,
appointed in April 1998

   
  Director of the Company,
appointed in June 2000
   
  Senior Managing Director of Honda R&D Co., Ltd.,
appointed in June 2001
   
  Managing Director of the Company,
appointed in June 2003
   
  Responsible for Motor Sports,
appointed in June 2003
   
  President and Representative Director of Honda R&D Co., Ltd.,
appointed in June 2003
   
  General Supervisor, Motor Sports,
appointed in April 2004
   
  General Manager of Suzuka Factory for Production Operations,
appointed in April 2005
   
  Managing Officer of the Company,
appointed in June 2005
   
  Chief Officer for Automobile Operations,
appointed in April 2007
   
  Senior Managing Director of the Company,
appointed in June 2007
   
  President and Representative Director of Honda R&D Co., Ltd.,
appointed in April 2009
   
  President and Representative Director of the Company,
appointed in June 2009
   
  President, Chief Executive Officer and
Representative Director of the Company,
appointed in April 2011
   
  Chief Officer for Automobile Operations,
appointed in April 2011
   
  Director and Advisor of the Company,
appointed in June 2015 (presently held)
   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 
Directors
(Audit and Supervisory Committee Members)
     

Masahiro Yoshida

(March 5, 1957)

  Joined Honda Motor Co., Ltd. in April 1979     *4       35,300  
 

Responsible for Human Resources and Associate Relations

and General Manager of Human Resources Division

for Business Support Operations,
appointed in April 2007

   
  Operating Officer of the Company,
appointed in June 2007
   
 

General Manager of Hamamatsu Factory for Production Operations,

appointed in April 2008

   
  Chief Officer for Business Support Operations,
appointed in April 2010
   
  Director of the Company,
appointed in June 2010
   
  Operating Officer and Director of the Company,
appointed in April 2011
   
  Compliance Officer,
appointed in April 2012
   
  Managing Officer and Director of the Company,
appointed in April 2013
   
  Corporate Auditor of the Company (full-time),
appointed in June 2016
   
  Director (Audit and Supervisory Committee Member)
of the Company (full-time),
appointed in June 2017 (presently held)
   

Masafumi Suzuki

(April 23, 1964)

  Joined Honda Motor Co., Ltd. in April 1987     *4       42,420  
 

General Manager of Regional Operation Planning Office for

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

appointed in April 2010

   
 

General Manager of Regional Operation Planning Office

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

and Africa),
appointed in April 2012

   
 

General Manager of Accounting Division

for Business Management Operations,
appointed in April 2013

   
  Director (Audit and Supervisory Committee Member)
of the Company (full-time),
appointed in June 2017 (presently held)
   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Toshiaki Hiwatari

(August 4, 1945)

 

Prosecutor General, appointed in July 2008

 

    *4       1,900  
  Retired from office in June 2010    
  Registered with the Daiichi Tokyo Bar Association
in September 2010
   
  Advisor Attorney to TMI Associates,
appointed in September 2010 (presently held)
   
  Corporate Auditor of the Company,
appointed in June 2012
   
  Outside Auditor of TOYO KANETSU K.K.
appointed in June 2012
   
  Outside Director of Nomura Securities Co., Ltd.,
appointed in October 2012 (presently held)
   
  Outside Director (Audit & Supervisory Committee member)
of TOYO KANETSU K.K.,
appointed in June 2015 (presently held)
   
 

Company Auditor (Outside) of THE KAGOSHIMA BANK, LTD.

appointed in October 2016 (presently held)

   
  Director (Audit and Supervisory Committee Member) of the Company,
appointed in June 2017 (presently held)
   

Hideo Takaura

(June 19, 1949)

  Registered as Japanese CPA in May 1977     *4       700  
 

Chief Executive Officer of PricewaterhouseCoopers Aarata

(currently, PricewaterhouseCoopers Aarata LLC),
appointed in September 2006

   
  Representative Partner of PricewaterhouseCoopers Aarata,
appointed in May 2009
   
  Retired from PricewaterhouseCoopers Aarata in June 2009    
  Outside Auditor of Innovation Network Corporation of Japan,
appointed in July 2009 (presently held)
   
  Corporate Auditor of the Company,
appointed in June 2015
   
  Director (Audit and Supervisory Committee Member) of the Company,
appointed in June 2017 (presently held)
   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Mayumi Tamura

(May 22, 1960)

  Executive Officer, SVP and Chief Financial Officer
of The Seiyu, Ltd. (currently, Seiyu GK),
appointed in June 2007
    *4       700  
 

 

Executive Officer, SVP and Chief Financial Officer
of Wal-Mart Japan Holdings GK
(currently, Wal-Mart Japan Holdings KK),
appointed in May 2010

   
 

End of tenure as Executive Officer, SVP and Chief Financial Officer

of Seiyu GK in July 2013

   
 

End of tenure as Executive Officer, SVP and Chief Financial Officer

of Wal-Mart Japan Holdings GK in July 2013

   
  Retired from Seiyu GK in January 2014    
  Retired from Wal-Mart Japan Holdings GK in January 2014    
  Corporate Auditor of the Company,
appointed in June 2015
   
  Director (Audit and Supervisory Committee Member) of the Company,
appointed in June 2017 (presently held)
   

 

*1

The Company transitioned to being a company with an audit and supervisory committee after obtaining approval for requisite amendments to the Articles of Incorporation at its ordinary general meeting of shareholders held on June 15, 2017.

*2

Directors (including Audit and Supervisory Committee Members) Ms. Hideko Kunii, Mr. Motoki Ozaki, Mr. Toshiaki Hiwatari, Mr. Hideo Takaura and Ms. Mayumi Tamura are Outside Directors.

*3

The term of office of a Director who is not a member of the Audit and Supervisory Committee is until at the close of the ordinary general meeting of shareholders of the fiscal year ending March 31, 2018 after his/her election to office at the close of the ordinary general meeting of shareholders on June 15, 2017.

*4

The term of office of a Director who is a member of the Audit and Supervisory Committee is until at the close of the ordinary general meeting of shareholders of the fiscal year ending March 31, 2019 after his/her election to office at the close of the ordinary general meeting of shareholders on June 15, 2017.

*5

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 Managing Officers and Operating Officers under the operating officer system, as voluntarily disclosed in Japan, are as follows:

 

Managing Officers

Toshihiko Nonaka

  

President, Chief Executive Officer and Representative Director

of Honda Engineering Co., Ltd.

Takashi Sekiguchi

   Chief Officer for Automobile Operations
   Executive in Charge of Sales Strategy, Automobile Operations
   Executive in Charge of Corporate Project

Soichiro Takizawa

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

Michimasa Fujino

   President and Director of Honda Aircraft Company, LLC

 

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Table of Contents

Operating Officers

  

Naoto Matsui

   Chief Officer for Purchasing Operations

Mitsugu Matsukawa

  

Executive in charge of Strategy, New Model and Supply Chain Management for

Production Operations

Shinji Aoyama

   Chief Officer for Regional Operations (Asia & Oceania)
   President and Director of Asian Honda Motor Co., Ltd.

Noriya Kaihara

   Chief Officer for Customer First Operations
   Chief Quality Officer

Tetsuo Suzuki

   Representative of Motorcycle DEB for Motorcycle Operations

Issao Mizoguchi

   Chief 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

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

Yusuke Hori

   Head of Regional Unit (Africa & the Middle East)

Tomomi Kosaka

   Vice President of Fuel Cell System Manufacturing LLC

Noriaki Abe

   Chief Officer for Motorcycle Operations

Toshiyuki Shimabara

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

Yasuhide Mizuno

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

Kazuhiro Odaka

   Chief Officer for Human Resources and Corporate Governance Operations
   Compliance Officer

Masayuki Igarashi

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

Hiroyuki Kachi

   Chief Officer for IT Operations
   Executive in Charge of Corporate Project

Soichi Yamamoto

  

Executive Vice President and Director of Honda Motor Europe Ltd.

  

Managing Director of Honda of the U.K. Manufacturing Ltd.

Katsushi Inoue

  

Chief Officer for Regional Operations (Europe Region)

  

President and Director of Honda Motor Europe Ltd.

Kimiyoshi Teratani

  

Chief Officer for Regional Operations (Japan)

Asako Suzuki

  

General Manager of Marketing and Product Planning Division

for Regional Operations (Japan)

Katsuhisa Okuda

  

Chief Officer for Power Product Operations

Katsuhide Moriyama

  

Chief Officer for Brand and Communication Operations

 

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

 

None of Honda’s members of the board of directors is party to a service contract with Honda or any of its subsidiaries that provides for benefits upon termination of employment.

 

B. Compensation

 

On June 15, 2017, Honda established an Audit and Supervisory Committee, a body within its Board of Directors. Prior to this date, Honda had a Board of Corporate Auditors, a legally separate and independent body from the Board of Directors. See Item 16.G “Corporate Governance.”

 

The maximum total amount of compensation for Directors who are Audit and Supervisory Committee Members and that for Directors who are not such members shall be separately approved at the general meeting of shareholders.

 

Compensation of the Directors who are neither Outside Directors nor Audit and Supervisory Committee Members consists of a fixed monthly remuneration, which shall be paid as compensation for the performance of their duties, and an executive bonus, which is linked to the business results for the relevant fiscal year. Compensation of Outside Directors and Directors who are Audit and Supervisory Committee Members consists only of a fixed monthly remuneration, which shall be paid as compensation for the performance of their duties.

 

Compensation of the Directors who are not Audit and Supervisory Committee Members is paid based on the compensation standards approved by the Board of Directors. Bonuses of the Directors who are neither Outside Directors nor Audit and Supervisory Committee members shall be resolved by the Board of Directors by taking into consideration the business results of each fiscal year, dividends to shareholders, the standards of bonuses of employees and other relevant matters. Compensation of the Directors who are Audit and Supervisory Committee Members is determined and paid through discussion among such Directors.

 

All the Directors including Audit and Supervisory Committee Members shall acquire the Company’s Common Stock by contributing a certain portion of their fixed monthly remuneration to the Officer Shareholders’ Association, and such stock shall be held continuously throughout their term of office and for one year after their retirement.

 

The total amount of fixed monthly remuneration paid to the Company’s Directors and Corporate Auditors during the fiscal year ended March 31, 2017 was ¥860 million. This amount includes fixed monthly remuneration paid to five Directors and one Corporate Auditor who retired during the fiscal year. The amount of fixed monthly remuneration paid to the Directors and Corporate Auditors includes amount of fixed monthly remuneration paid to those Directors and Corporate Auditors who were also Directors or Corporate Auditors of subsidiaries of the Company.

 

The total amount of bonuses for the Company’s Directors accrued for the fiscal year ended March 31, 2017 was ¥275 million.

 

The amounts of fixed monthly remuneration paid and bonuses accrued during the year ended March 31, 2017 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

    15     ¥ 653       3     ¥ 23       3     ¥ 135       3     ¥ 47       24     ¥ 860  

Bonus

    11       267       2       8