20-F 1 d824108d20f.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, 2020

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)

Rikako Suzuki

prj_h_ir2@hm.honda.co.jp, +81-3-5412-1134, No. 1-1, Minami-Aoyama 2-chome, Minato-ku, Tokyo 107-8556, Japan

(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

 

Trading Symbol(s)

 

Name of each exchange on which  registered

Common Stock*   HMC   New York Stock Exchange
American Depositary Shares**

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, 2020***

Common Stock   1,726,609,786****

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 transition 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 every Interactive Data File required to be submitted 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 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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

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.

**

American Depositary Receipts evidence American Depositary Shares, each American Depositary Share representing one share of Common Stock.

 

***

Unless otherwise indicated in this Form 20-F, “outstanding shares” excludes the number of shares held by the BIP Trust (as defined under Item 6.B. “Compensation-The Board Incentive Plan”).

 

****

Shares of Common Stock include 53,915,262 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

     8  

A. History and Development of the Company

     8  

B. Business Overview

     9  

C. Organizational Structure

     29  

D. Property, Plants and Equipment

     30  

Item 4A. Unresolved Staff Comments

     31  

Item 5. Operating and Financial Review and Prospects

     31  

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

     63  

Item 6. Directors, Senior Management and Employees

     64  

A. Directors and Senior Management

     64  

B. Compensation

     78  

C. Board Practices

     81  

D. Employees

     81  

E. Share Ownership

     82  

Item 7. Major Shareholders and Related Party Transactions

     82  

A. Major Shareholders

     82  

B. Related Party Transactions

     83  

C. Interests of Experts and Counsel

     83  

Item 8. Financial Information

     83  

A. Consolidated Statements and Other Financial Information

     83  

B. Significant Changes

     85  

Item 9. The Offer and Listing

     85  

A. Offer and Listing Details

     85  

B. Plan of Distribution

     85  

C. Markets

     85  

D. Selling Shareholders

     86  

E. Dilution

     86  

F. Expenses of the Issue

     86  

Item 10. Additional Information

     86  

A. Share Capital

     86  

B. Memorandum and Articles of Association

     86  

C. Material Contracts

     87  

D. Exchange Controls

     87  

E. Taxation

     88  


Table of Contents

F. Dividends and Paying Agents

     92  

G. Statement by Experts

     92  

H. Documents on Display

     92  

I. Subsidiary Information

     92  

Item 11. Quantitative and Qualitative Disclosure about Market Risk

     92  

Item 12. Description of Securities Other than Equity Securities

     92  

A. Debt Securities

     92  

B. Warrants and Rights

     92  

C. Other Securities

     92  

D. American Depositary Shares

     92  

PART II

  

Item 13. Defaults, Dividend Arrearages and Delinquencies

     94  

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

     94  

Item 15. Controls and Procedures

     94  

Item 16A. Audit Committee Financial Expert

     95  

Item 16B. Code of Ethics

     95  

Item 16C. Principal Accountant Fees and Services

     95  

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

     96  

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

     96  

Item 16F. Change in Registrant’s Certifying Accountant

     97  

Item 16G. Corporate Governance

     97  

Item 16H. Mine Safety Disclosure

     102  

PART III

  

Item 17. Financial Statements

     102  

Item 18. Financial Statements

     102  

Item 19. Exhibits

     103  

 


Table of Contents

PART I

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

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected Financial Data

The selected consolidated financial data set out below for each of the five fiscal years ended March 31, 2020 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)  
    2016     2017     2018     2019     2020  

Consolidated Statement of Income Data:

         

Sales revenue

  ¥ 14,601,151     ¥ 13,999,200     ¥ 15,361,146     ¥ 15,888,617     ¥ 14,931,009  

Operating profit

    503,376       840,711       833,558       726,370       633,637  

Share of profit of investments accounted for using the equity method

    126,001       164,793       247,643       228,827       164,203  

Profit before income taxes

    635,450       1,006,986       1,114,973       979,375       789,918  

Profit for the year

    406,358       679,394       1,128,639       676,286       509,932  

Profit for the year attributable to owners of the parent

    344,531       616,569       1,059,337       610,316       455,746  

Consolidated Statement of Financial Position Data:

         

Total assets

    18,229,294       18,958,123       19,349,164       20,419,122       20,461,465  

Financing liabilities, including current and non-current

    6,526,248       6,809,118       6,799,010       7,331,120       7,469,686  

Equity attributable to owners of the parent

    6,761,433       7,295,296       7,933,538       8,267,720       8,012,259  

Total equity

    7,031,788       7,569,626       8,234,095       8,565,790       8,286,023  

Common stock

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

Per Share Data:

         

Weighted average number of common shares outstanding

         

Basic and diluted (thousands of shares)

    1,802,285       1,802,282       1,793,088       1,763,983       1,752,006  

Earnings per share attributable to owners of the parent*1

         

Basic and diluted

  ¥ 191.16     ¥ 342.10     ¥ 590.79     ¥ 345.99     ¥ 260.13  

Dividends declared during the period per common share*2

    88.00       90.00       97.00       110.00       112.00  
    (US$ 0.78     (US$ 0.80     (US$ 0.91     (US$ 0.99     (US$ 1.03

 

*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.

 

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*2 

A year-end dividend of ¥28 ($0.26) per common share aggregating ¥48.3 billion ($444 million) relating to fiscal 2020 was resolved by the Company’s Board of Directors in May 2020. This dividend was paid in June 2020. U.S. dollar amounts for dividends per share are translated from yen at the year-end exchange rate of each period.

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 operating results 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.

Risks relating to the spread of coronavirus disease 2019 (COVID-19)

The World Health Organization (WHO) declared COVID-19 a Public Health Emergency of International Concern in January 2020 and, subsequently, a pandemic in March 2020. Thereafter, COVID-19 continued to spread worldwide, due to various responses resulted from the spread of COVID-19 including outing and travel restrictions in various countries, there has been stagnation of consumers’ consumptions and corporate economic activities, and resulted in decreased sales units of automobiles and other products.

The spread of COVID-19 has adversely affected Honda’s business and operating results in its Motorcycle business, Automobile business, Financial services business, and Life creation and other businesses. Resulting from travel restriction measures by government, Honda’s production bases in Japan and overseas are also affected by suspended or reduced production mainly due to restrictions on employees’ commute to the workplaces and delays in the supply of parts within the supply chain. Dongfeng Honda Automobile Co., Ltd. located in Wuhan City, China, stopped production at February 3, 2020, and subsequently, resumed production sequentially after March 11, 2020. Automobile factories located in the United States, stopped production at March 23, 2020, and subsequently, resumed production sequentially after May 11, 2020. Some dealers in Japan and overseas were obliged to suspend business, shorten business hours, or reduce services such as inspections and repairs. Customer credit risk and other factors are affected by changes in forecast, including an increase in unemployment rate and decline in used vehicle prices due to the downturn of economy. Furthermore, financing costs in the Financial services business are affected by the volatility in the financial market resulted from the spread of COVID-19. Honda’s cash and cash equivalents as of March 31, 2020 corresponds to approximately 2.1 months of sales revenue, and Honda believes it has sufficient liquidity for its business operations.

In January 2020, Honda established the Global Emergency Headquarters. Honda’s first priority is the safety of our stakeholders, including customers, suppliers and employees, Honda has taken countermeasures to minimize the adverse impacts on Honda’s business and operating results, from the perspective of business continuity. Beginning with thorough infection prevention countermeasures based on guidelines from the WHO and governments worldwide, Honda is taking various measures, such as disallowing travel to countries with a high risk of infection in line with travel restrictions in each country, expanding remote work by introducing restrictions on physical commuting, and canceling or scaling down events in which Honda’s stakeholders gather

 

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in large numbers. Honda has been gradually resuming its business activities in some countries based on developments on local regulations and the supply of parts, upon taking measures such as checking employees’ temperatures, maintaining hygiene in work areas, and ensuring social distancing.

As mentioned above, some business activities are resuming. However, the duration of the spread of COVID-19, market trends, and economic trends remain uncertain. Unpredictable future trends may adversely affect Honda’s business and operating results, such as through factory downtime and business suspensions or shortening of business hours at dealers and decrease in sales units, in addition to increased costs to maintain prolonged infection prevention countermeasures. Increase of customer credit risk and other factors, which are affected by changes in forecast including an increase in unemployment rate and decline in used vehicle prices, may adversely affect Honda’s operating results including increase of credit losses and losses on lease residual values. Prolonged spread of COVID-19 may affect Honda’s liquidity and financing activities.

The spread of COVID-19 may have an impact on the following risks.

Regional Risk

Honda conducts business operations in countries worldwide and is exposed to risks including changes in local laws and regulations, agreements, institutions and business practices, such as tariffs, import and export regulations, and taxes, wars, terrorism, political uncertainty, worsening security situation, change in political regime and labor strikes in those countries or neighboring regions. If such unforeseeable events occur, and operations are delayed or suspended, Honda’s business and operating results could be adversely affected.

Particularly among them, Honda recognizes the following as the main risks, which could significantly affect the mid- and long-term initiatives of the Honda regarding further electrification of the products and provision of mobility services, so countermeasures are gaining importance.

For the scale of business in each region that may be affected by such changes in local laws and regulations and systems in the future, see “(d) Supplemental Geographical Information” of note “(4) Segment Information” to the accompanying consolidated financial statements.

1. Status of Trade Agreements

Going forward, trends in the negotiations regarding trade agreements, particularly those related to the United States, could have adverse effects on Honda’s business and operating results. Honda will continue to monitor the status of negotiations and take action in consideration of the impact on Honda.

Especially noteworthy is the fact that the United States-Mexico-Canada Agreement (USMCA) is expected to enter into force in July 2020. The revision of various rules such as the rules of country of origin for automobiles sold within the regions covered in USMCA may adversely affect Honda’s business in North America.

2. Status of Environmental Regulations

Fuel efficiency and emissions regulations are being revised or are scheduled to be revised in countries around the world. Depending on the trend of revisions of the regulations, countermeasure expenses of regulations may be incurred regarding development and the procurement of parts, thereby potentially adversely affecting Honda’s businesses in North America, Europe, Asia, and other regions.

3. Status of Personal Information Protection Rules

In recent years, personal information protection rules have been rapidly developed in countries around the world, as exemplified by the California Consumer Privacy Act that took effect in January 2020. As such, fines

 

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may be imposed if violations of rules occur, including the leakage of personal information, in accordance with the rules of each country, and this could have an adverse effect on Honda’s business and operating results. In initiatives for other next-generation technologies such as provision of mobility services, measures to protect personal information are also gaining importance.

Information Security Risk

Honda uses a wide range of information systems and networks relating to information services and driving support in its business activities and its products, including in areas managed by subcontractors. Especially, in recent years, IoT and other information technologies, which have evolved rapidly, have become indispensable for control of vehicles. Amid this situation, cyber-attacks could substantially impact Honda’s mid- and long-term initiatives toward more widespread use and evolution of driver-assistive technologies and further provision of mobility services, so countermeasures are gaining importance, and this trend is expected to continue to accelerate in the future.

These may be the result of external cyber-attacks, in addition to 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. When such event occurs, Honda’s business and operating results could be adversely affected in terms of damage to its brand image or social reputation, liability to customers or parties affected, payment of financial penalties, delays to or suspension of manufacturing operations, and a loss of Honda’s competitiveness.

Recent Incident

On June 8, Honda experienced a cyber-attack, which widely affected personal computers when they accessed Honda’s internal system. As a result, Honda’s business operation suspended temporarily at several locations including Honda’s production bases.

In addition to restoring affected personal computers, Honda is continuing to investigate, including the identity of the attackers and the method by which they accessed Honda’s internal system. As of the date of this report, no damages to customers or other third parties, such as leaks of information, have been confirmed. While Honda has taken countermeasures to minimize the impacts of the attack and prevent similar or additional attacks, because the investigation has not been completed yet, there may be undetected impacts of the attack, and Honda’s countermeasures may not be sufficient to prevent similar or additional attacks.

If any such undetected impact of this attack is revealed or there is a similar or additional attack, Honda’s business and operating results could be adversely affected in terms of damage to its brand image or social reputation, liability to customers or parties affected, payment of financial penalties, delays to or suspension of manufacturing operations, and a loss of Honda’s competitiveness.

Business Alliances and Joint Ventures Risk

Honda engages in business operations through alliances and joint ventures with other companies in expectation of synergy effects and increased efficiency, or to meet the requirements of the countries in which business development is being undertaken.

As Honda advances its mid- and long-term initiatives toward further electrification, more widespread use and evolution of driver-assistive technologies, and further provision of mobility services, the utilization of alliances and other forms of partnership are gaining importance.

If disagreements in business, profit or technology leakage, delays in decision-making or poor operating results at business partners occur among the parties to an alliance or joint venture, or if conditions to an alliance or joint venture is changed or cancelled, it may have an adverse effect on Honda’s business and operating results.

 

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Intellectual Property Risk

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 include those that could significantly affect Honda’s mid- and long-term initiatives toward more widespread use and evolution of driver-assistive technologies and further provision of mobility services, among other areas, so countermeasures are gaining importance.

The inability to protect this intellectual property generally, the illegal infringement of some or a large group of Honda’s intellectual property rights, or the suspension of manufacturing and/or sales activities and the payment of large amounts of damages as a result of lawsuits on infringement of patent rights and license fees, could have an adverse effect on Honda’s business and operating results.

Natural Disasters Risk

The suspension and delay in business activities such as production, development, purchasing and sales as a result of damage caused to Honda’s operational sites and employees by earthquakes, floods, windstorms, infections and other natural disasters may adversely affect Honda’s business and operating results.

Financial & Economic Risk

1. Economic Trends and Economic Fluctuations Risks

Honda conducts business operations in the countries throughout the world. Honda has manufacturing operations and sells products in various regions and countries. These business activities may be affected by economic slowdown, currency fluctuation or other factors, which could result in decreased sales due to market contraction, increases in component procurement prices and product sales prices, higher credit risk for Honda’s business, and higher financing interest rates, among others. Accordingly, these changes may have an adverse effect on Honda’s business and operating results.

2. Currency Fluctuations Risk

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 may have an adverse effect on Honda’s business and operating results.

Relating to Industry Market Risk

Honda conducts its operations in Japan and countries 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 and needs, rising fuel prices, financial crisis, increases in product prices due to increases in material costs or decreases in supply volume, intensifying competition with other companies or other factors could trigger a decline in demand for Honda’s products that may adversely affect Honda’s business and operating results.

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

 

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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 adversely affect Honda’s business and operating results.

Purchasing and Procurement Risk

Honda aims to sustain the procurement of good products at reasonable prices in a timely manner, 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 to manufacture 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 adversely affect Honda’s business and operating results, including affecting its production.

Legal Risk

Honda could be subject to lawsuits, 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 and operating results.

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 a variety of 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 adversely affect Honda’s operating results.

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

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. In order to support this brand image, Honda endeavors to gain the trust of society in all types of corporate activities, including ensuring product quality and compliance with laws and regulations, conducting risk management, and enhancing internal controls related to corporate governance. However, if for some unforeseeable reason the Honda brand image is damaged or Honda is unable to communicate information in a timely manner and deal with such information appropriately, this could adversely affect Honda’s business and operating results.

Risks Relating to Honda’s ADSs

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.

 

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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 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 Board of Directors. If the Board of Directors 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 Board of Directors is usually made at a meeting of the Board of Directors held in April. The payment of quarterly dividends also 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

 

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date, our shareholders of record on record dates for year-end and quarterly dividends may not receive the dividend they anticipate.

Cautionary Statement with Respect to Forward-Looking Statements in This Annual Report

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

 

   

the political, economic and social conditions in Japan and throughout the world including North America, Europe and Asia, including economic slowdowns, recessions, changes in consumer preferences, rising fuel prices, financial crises and other factors, as well as the relevant governments’ specific policies with respect to economic growth, inflation, taxation, currency conversion, imports and sources of supplies and the availability of credit, particularly to the extent such current or future 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. We maintain a website at https://global.honda/investors/ that contains information about our Company.

 

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The United States Securities and Exchange Commission (the “SEC”) maintains a website at https://www.sec.gov/ which contains in electronic form each of the reports and other information that we have filed electronically with the SEC.

Principal Capital Investments

In the fiscal years ended March 31, 2018, 2019 and 2020, Honda’s capital expenditures were ¥2,394.6 billion, ¥2,657.2 billion and ¥2,858.3 billion, respectively, on an accrual basis. Also, capital expenditures excluding those with respect to equipment on operating leases were ¥595.4 billion, ¥618.5 billion and ¥613.4 billion, respectively, on an accrual basis. For further details of Honda’s capital expenditures during fiscal 2020, 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 Life creation 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, 2018, 2019 and 2020:

 

    Fiscal years ended March 31,  
    2018     2019     2020  
    Yen (billions)  

Motorcycle Business

  ¥ 2,038.7     ¥ 2,100.1     ¥ 2,059.3  

Automobile Business

    10,852.1       11,072.1       9,959.0  

Financial Services Business

    2,123.1       2,365.3       2,586.9  

Life Creation and Other Businesses

    347.0       350.9       325.6  
 

 

 

   

 

 

   

 

 

 

Total

  ¥ 15,361.1     ¥ 15,888.6     ¥ 14,931.0  
 

 

 

   

 

 

   

 

 

 

 

    Fiscal years ended March 31,  
    2018     2019     2020  
    Yen (billions)  

Japan

  ¥ 1,919.1     ¥ 2,042.8     ¥ 1,985.9  

North America

    8,062.2       8,519.0       8,164.3  

Europe

    690.8       660.9       568.7  

Asia

    3,771.6       3,793.7       3,449.8  

Other Regions

    917.2       872.0       762.0  
 

 

 

   

 

 

   

 

 

 

Total

  ¥ 15,361.1     ¥ 15,888.6     ¥ 14,931.0  
 

 

 

   

 

 

   

 

 

 

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 motorcycle lineup uses internal combustion engine of air- or water-cooled, and in single, two, four or six-cylinder configurations. Honda also has electric vehicles in its lineup. Honda’s motorcycle lineup consists of sports, business and commuter models. Honda also produces a range of off-road vehicles, including all-terrain vehicles (ATVs) and side-by-sides (SxS).

 

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The following table sets out unit sales for Honda’s Motorcycle business, including motorcycles, all-terrain vehicles (ATVs) and side-by-sides (SxS) 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, 2018, 2019 and 2020:

 

    Fiscal years ended March 31,  
    2018     2019     2020  
    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

    167       167     ¥ 70.9       207       207     ¥ 79.2       205       205     ¥ 77.2  

North America

    313       313       190.6       301       301       188.2       330       330       203.8  

Europe

    234       234       141.4       249       249       159.6       239       239       144.3  

Asia

    17,720       11,120       1,327.7       18,224       11,201       1,375.2       17,262       10,348       1,338.7  

Other Regions

    1,120       1,120       307.8       1,257       1,257       297.7       1,304       1,304       295.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    19,554       12,954     ¥ 2,038.7       20,238       13,215     ¥ 2,100.1       19,340       12,426     ¥ 2,059.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Motorcycle revenue as a percentage of total sales revenue

        13         13         14

 

* 

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 battery electric vehicles, fuel cell vehicles, and flexible fuel vehicles.

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

Passenger cars:

Accord, Brio, City, Civic, Crider, Fit/Jazz

Light trucks:

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

Mini vehicles:

N-BOX

 

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The following table sets out Honda’s unit sales of automobiles and revenue from Automobile business and the breakdown by geographical markets based on the location of the customer for the fiscal years ended March 31, 2018, 2019 and 2020:

 

    Fiscal years ended March 31,  
    2018     2019     2020  
    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

    696       627     ¥ 1,521.8       719       643     ¥ 1,590.2       672       589     ¥ 1,473.7  

North America

    1,902       1,902       5,910.0       1,954       1,954       6,165.5       1,825       1,825       5,650.6  

Europe

    183       183       473.4       169       169       427.3       133       133       359.2  

Asia

    2,166       725       2,389.0       2,233       734       2,360.6       1,952       563       2,049.4  

Other Regions

    252       252       557.7       248       248       528.3       208       208       425.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    5,199       3,689     ¥ 10,852.1       5,323       3,748     ¥ 11,072.1       4,790       3,318     ¥ 9,959.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Automobile revenue as a percentage of total sales revenue

        71         70         67

 

* 

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, 2018, 2019 and 2020:

 

     Fiscal years ended March 31,  
         2018             2019             2020      
     Yen (billions)  

Japan

   ¥ 248.5     ¥ 285.8     ¥ 358.8  

North America

     1,822.8       2,029.9       2,176.6  

Europe

     12.5       12.9       11.8  

Asia

     10.4       11.4       14.7  

Other Regions

     28.8       25.2       24.8  
  

 

 

   

 

 

   

 

 

 

Total

   ¥ 2,123.1     ¥ 2,365.3     ¥ 2,586.9  
  

 

 

   

 

 

   

 

 

 

Financial Services revenue as a percentage of total sales revenue

     14     15     17

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”.

Life Creation 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, walking assist devices and portable battery inverter power sources. In 2019, Honda had renamed Power product business to Life creation business. This renaming represents Honda’s intention to evolve Power product business as a function to create new value for “mobility” and “daily lives”, which includes existing power products business as well as new businesses for the future, including energy business. Energy business consists of portable and swappable battery rechargeable with renewable energy and energy management service for EV owners to charge their car with the renewables.

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

The following table sets out Honda’s revenue from Life creation and other businesses and the breakdown by geographical markets based on the location of the customer for the fiscal years ended March 31, 2018, 2019 and 2020:

 

     Fiscal years ended March 31,  
     2018     2019     2020  
     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

     300      ¥ 77.7       336      ¥ 87.5       312      ¥ 76.1  

North America

     3,012        138.7       3,049        135.3       2,848        133.1  

Europe

     1,022        63.4       984        60.9       845        53.2  

Asia

     1,512        44.3       1,559        46.4       1,375        46.8  

Other Regions

     416        22.7       373        20.7       321        16.2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     6,262      ¥ 347.0       6,301      ¥ 350.9       5,701      ¥ 325.6  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Life Creation and Other businesses revenue as a percentage of total sales revenue

        2        2        2

 

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* 

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 subsidiaries. In Life creation 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 Life creation 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 2020, approximately 89% of Honda’s motorcycle units on a group basis were sold in Asia. Approximately 41% of Honda’s automobile units (including sales under the Acura Brand) on a group basis were sold in Asia followed by 38% in North America and 14% in Japan. Approximately 50% of Honda’s power products units on a group basis were sold in North America followed by 24% in Asia and 15% 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 2020, approximately 97% of Honda’s overseas sales were made through its principal foreign sales subsidiaries, which distribute Honda’s products to local wholesalers and retail dealers.

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 38% 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, 2020.

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.

 

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Seasonality

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

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 2010, the Central Environmental Council in the Ministry of Environment reviewed the 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 in the Ministry of Environment decided to introduce WLTP. From October 2018, emission test based on WLTP has been obligatory instead of JC08 mode.

In December 2017, the Central Environmental Council in the Ministry of Environment started to consider introduction of regulations of particle number (PN) from diesel/gasoline direct injection engine vehicles.

In March 2018, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) introduced the Real Driving Emissions (RDE) examination for diesel vehicles. It will be applicable to new models of vehicles beginning in October 2022 and to existing models of vehicles beginning in October 2024.

In February 2019, the MLIT adopted the Global Technical Regulation No.19 (Evaporative emission test procedure for WLTP) for domestic regulation.

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 Zero Emission Vehicle (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 (Transitional ZEV) 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.

 

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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.

Canada

On July 16, 2015, the Environment Canada (current Environment and Climate Change Canada) issued the final regulation of amendment to emission regulation whose requirements refer to Tier 3 regulations in the United States.

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.

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 were lowered even more than the Euro 5 levels for NOx and THC plus NOx. Additionally, Euro 6 requires limits on particle numbers from gasoline vehicles with direct injection engines.

The required ethanol density of test fuel was also increased, starting from September 2016.

The testing cycle to measure emissions has gradually been transitioning from New European Driving Cycle (NEDC) to Worldwide harmonized Light duty driving 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 started from September 2017 for NOX and PN (particulate number).

The new Evaporative Emissions Test started from September 2019. The testing cycle was updated from NEDC to WLTP in conformity with the United Nations Economic Commission for Europe (UNECE) GTR No. 19.

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. From July 2019, some regional environmental protection departments have already introduced Step 6 regulations in advance of national schedule.

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

 

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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.

India

India implemented Bharat Stage VI (BS VI) regulations 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.

Thailand

Thailand is scheduled to implement Euro 5 regulation by 2022 and Euro 6 regulation by 2023.

Malaysia

Malaysia is scheduled to implement Euro 4 regulation from July 2020 for new vehicles and January 2022 for all gasoline vehicles.

Indonesia

Indonesia introduced Euro 4 regulation from April 2017 for new models of vehicles and October 2018 for existing models of vehicles.

Other Regions

Brazil is scheduled to implement PROCONVE L7 from 2022 and L8 from 2025. This regulation is a unique Brazilian regulation based on U.S. regulations, which is much stricter than current regulations. Brazilian authorities and manufacturers are currently discussing the test methods and the OBD requirements.

2. Fuel Economy / CO2

Japan

In June 2010, 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.

In March 2018, MLIT and METI jointly established a committee and commenced a study to formulate new fuel economy standards for passenger motor vehicles for 2030. The new standards, announced in January 2020, require an improvement in fuel efficiency of 32.4% over the 2016 standards and adopted the Corporate Average Fuel Economy (CAFE) calculation method.

 

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The United States

On May 21, 2010, then-President Obama ordered the National Highway Traffic Safety Administration (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 was 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 and 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, the NHTSA and the CARB jointly issued a joint technical assessment report in July 2016 (a technical report, and not a decision document). The CARB decided in March 2017, before the new EPA decision planned for April 2018 was announced, not to change the greenhouse gas regulations applicable for the 2022-2025 model years.

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.

On April 2, 2018, the EPA announced that the GHG requirement for 2022-2025 model years needs reconsideration.

On September 27, 2019, the EPA and the NHTSA jointly issued Part 1 of the “Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule Part 1: One National Program” replacing the current GHG / CAFE regulations.

The SAFE Vehicles Rule Part 1 clarified that federal law supersedes state law and withdrew a preemption waiver (Federal Priority) previously granted to allow the state of California to set its own GHG emission standards different from the federal standards set by EPA.

In March 2020, the EPA and the NHTSA jointly published the SAFE Vehicles Rule Part 2. Under the new SAFE rule, both GHG and CAFE requirements will increase in stringency by 1.5% per year during 2021-2026 model years. The CO2 standard for the 2026 model year is industry average of 199 g-CO2/mile.

Canada

The government of Quebec in Canada finalized the standard to mandate each automaker to sell a certain minimum number of ZEVs starting from the 2018 model year.

In May 2019, the government of British Columbia also adopted a bill to mandate ZEV sales from 2025.

In June 2019, the Environment and Climate Change Canada signed an agreement with the California Air Resources Board in the United States to promote cooperation in reducing GHG emissions.

Europe

In 2014, a new regulation was issued, requiring EU fleet-wide target of 95 g CO2/km for 2020 based on NEDC testing procedure.

 

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The current European type-approval procedure for fuel consumption and CO2 emissions of cars based on NEDC has been gradually replaced with WLTP beginning from September 2017. During the transitional years, WLTP-measured CO2 values are calculated to NEDC CO2 values to check compliance to the NEDC based CO2 target. A new WLTP based target for each manufacturer will be set from 2021.

On November 8, 2017, the European Commission proposed a new CO2 standard beyond 2025. The European Parliament and Council reached a provisional inter institutional agreement on the European Commission proposal during the fifth trilogue meeting on December 17, 2018.

The agreed target beyond 2025 is negative 15%. The agreed target beyond 2030 is negative 37.5% for new passenger cars and negative 31% for light commercial vehicles, respectively, compared to the 2021 average of all manufacturers’ EU fleet-wide target.

The agreement also provide that, for zero- and low-emission vehicles, a benchmark equal to 15% share of the respective fleets of newly registered passenger cars and light commercial vehicles shall apply from January 1, 2025, and a benchmark equal to 35% share of the fleet of newly registered passenger cars and a benchmark equal to 30% share of the fleet of newly registered light commercial vehicles shall apply from January 1, 2030.

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. Based on the latest draft of the regulation, Step 5 will be implemented in 2021.

India

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

Other Regions

Brazil is scheduled to implement new fuel economy / CO2 regulations from 2022.

3. Recycling / End-of-Life Vehicles (ELV) / Chemicals and hazardous substances

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.

China

On June 23, 2017, China implemented automobile recycling laws partially following the regulations established by the European Union.

India

India has a plan to implement automobile recycling laws in the near future.

4. Safety

Japan

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 reached an agreement among the contracting parties by 2017.

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

In February 2017, the MLIT adopted UN R139, which regulates Brake Assist Systems.

In February 2017, the MLIT adopted UN R140, which regulates Electronic Stability Control (ESC) Systems.

In February 2017, the MLIT adopted UN R141, which regulates Tyre Pressure Monitoring Systems (TPMS).

In February 2017, the MLIT adopted UN R142, which regulates Tyres installation.

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 2020s. 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.

In 2019, the Cabinet decided on a bill to develop a system to secure the safety of automated driving.

MLIT is considering introducing a regulation regarding “Accident Emergency Call Systems (AECS)”.

In 2019, the MLIT adopted UN R152, which regulates “Advanced Emergency Braking System (AEBS)”.

The United States

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 meets with performance requirements. Manufacturers have had to comply with the new

 

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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 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 by 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 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 in 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, trucks, 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.

In September 2017, the NHTSA issued a voluntary guidance “A Vision for Safety” to update the Federal Automated Vehicle Policy issued in 2016. Manufacturers may demonstrate how they address the safety elements contained in this guidance by publishing a Voluntary Safety Assessment for automated driving system (SAE Level 3 through 5).

In September 2017, the NHTSA issued a final rule for FMVSS No. 305, electrolyte spillage and electrical shock protection. This update adopts various electrical safety requirements found in Global Technical Regulation (GTR) No.13, “Hydrogen and fuel cell vehicles” and other sources.

In February 2018, the NHTSA issued a final rule for FMVSS141, a standard for minimum sound requirement for hybrid and electric vehicle. The purpose of this amendment is to clarify the details of technical requirement and reschedule phase-in schedule (1 year delay).

In February 2020, the NHTSA issued a proposed rule for FMVSS 200 series to establish a new “Occupant Protection for Automated Driving Systems”. This proposed rule seeks to adopt safety requirements for vehicles with Automated Driving Systems (ADS) that lack traditional manual controls by revising the requirements and test procedures to account for the removal of manually operated driving controls.

Europe

Legislation regarding a new system called “eCall” was finalized in 2017. The EU eCall for new vehicle types became effective on March 31, 2018.

In August 2018, the EU commission issued a regulation to significantly revise the legal framework for the EU type-approval. This regulation introduces a market surveillance system for managing the conformity of motor

 

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vehicles available on the market and adds a requirement of an expiration date for vehicle type approval. This EU type-approval will be entered into force on September 1, 2020.

In March 2019, the Committee of the Permanent Representatives of the Governments of the Member States to the European Union approved amendments to the “General safety regulation”. Road traffic safety in the EU has improved during the last decade, but recently the decrease in the number of road fatalities has stagnated.

To address this issue, the revised General Safety Regulations came into force in January 2020 and will be applied to vehicles from July 2022, which is 30 months after the enforcement. The revised General Safety Regulations include mandatory equipment such as driver assistance systems like ADAS.

In January 10, 2019, the EU Commission issued a regulation complementing Union type-approval legislation with regard to the withdrawal of the United Kingdom from the EU (i.e. Brexit).

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 2019 include:

 

  +

Electromagnetic compatibility requirements and test methods of drive motor system for electric vehicles;

 

  +

Acoustic vehicle alerting system of electric vehicles running at low speed; and

 

  +

Technical Specifications of High Duty Cables and Connectors for Electric Vehicles.

 

  +

Amendment to Photometric characteristics of daytime running lamps for power driven vehicles.

Newly established GB standards (not yet published) include:

 

  +

Amendment to DC/DC Converter for Electric Vehicles;

 

  +

Amendment to Fuel cell electric vehicles – Safety requirements;

 

  +

Establishment of Electric vehicles safety requirements;

 

  +

Establishment of Requirement of Event Data Recorder (EDR);

 

  +

Establishment of Technical requirements and testing methods for lane keeping assistance system (LKA);

 

  +

Establishment of Performance requirements and test method of intelligent assisted parking system;

 

  +

Establishment of Technical requirements and testing methods for blind spot detection system (BSD);

 

  +

Establishment of Electric vehicles traction battery safety requirements;

 

  +

Establishment of Technical requirements and testing methods for Automatic Emergency Call Systems (AECS); and

 

  +

Establishment of Technical requirements for cyber security.

India

In India, the government had amended AIS-145, a new standard for additional safety features, which became mandatory from July 2019. 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.

 

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United Nations

Following a long discussion, Revision 3 of the 1958 Agreement was adopted at the 169th WP29 and the official document (UN Agreement) was published in October 2017. This Revision 3 was entered into force on September 14, 2017. The 1958 Agreement, an intergovernmental agreement of United Nations Economic Commission for Europe (UN/ECE) signed in 1958, aims at establishing a unified standard for the structure, safety and environment performance of wheeled vehicles, equipment and parts and promoting reciprocal recognition of approvals for such wheeled vehicles, equipment and parts. The major changes of Revision 3 are:

 

  +

Introduction of the International Whole Vehicle Type Approval (IWVTA) (The current agreement covers only components and systems),

 

  +

Issuance of UN Regulation (UN R)’s certificate of former series (Acceptance is optional in each country),

 

  +

Review of the majoritarian provisions (Ratio of the adoption is changed from two-thirds and more to four-fifths and more).

IWVTA is a system that develops mutual recognition of automobile certification from “unit of equipment” to “vehicle unit”. This system was introduced via Japan’s proposal, and Japan has served as the chairman and led the discussion since then. This system was adopted at the 173rd WP29, as UN R No.0 and entered into force on July 19, 2018.

Outline of Environmental and Safety Regulation for Motorcycles

1. Emissions

Japan

Japan published the next phase (Euro 5) level emission regulation to be implemented from December 2020.

The United States

The state of California started to consider introducing the Euro 5 level emission regulation.

Europe

Euro 5 requirements other than catalyst monitoring of OBD (Onboard Diagnostics Regulation) started to apply to new vehicle models from January 2020 and will apply to all vehicles registered from January 2021. Catalyst monitoring will apply to new vehicle models from January 2024 and will apply to all vehicles registered from January 2025.

India

Ministry of Road Transport & Highways, the Government of India implemented an emission regulation called BS IV, which applied to new motorcycles from April 2016 and to all motorcycles registered from April 2017. India also published a BS VI regulation (Euro 5 level exhaust emission regulation), which started to apply from April 2020, except OBD stage 2, which will apply from 2023.

China

China started to consider introducing the Euro 5 level emission regulation.

Other Asian Countries

Indonesia, Vietnam and Thailand have implemented emissions regulations based on European regulations.

 

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Other Regions

Brazil published a new emission regulation called PROMOT 5 (Euro 5 level exhaust emission regulation), which will apply to new motorcycles from January 2023 and to all motorcycles registered from January 2025. The OBD stage 2 requirement will apply to new models of motorcycles from January 2025 and will apply to all motorcycles registered from January 2027.

2. Recycling / Chemicals and hazardous substances

Europe

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

India

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

Vietnam

Vietnam implemented motorcycle recycling laws on January 1, 2018.

3. Safety

Japan

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

Japan issued new standards for advanced brake system (ABS: Anti-lock Brake System/ CBS: Combined Brake System) which applied to new type motorcycles from October 2018, and will apply to all motorcycles from October 2021.

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

Japan newly adopted “Hydrogen and Fuel Cell Vehicles of category L” (UN R146), which became applicable to all motorcycles from January 2, 2019.

Japan plans to adopt the Installation of lighting and light-signaling devices (UN R53), which will be applied to new motorcycle models from 2023.

The United States

There is no new regulation information for motorcycle safety.

Europe

On January 10, 2019, the EU Commission issued a regulation complementing Union type-approval legislation with regard to Brexit.

India

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 on new

 

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vehicle models manufactured on and after April 1, 2018. All vehicles manufactured on and after April 1, 2019 shall be equipped with an advanced brake system. Two-wheeled vehicles with engine capacity of 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 equipped with ABS or CBS. All other categories of two-wheeled vehicles shall be equipped with ABS. Furthermore, the Automotive Industry Standard Committee (AISC) published AIS 146, 147 and 148. These are the standards for stand, external projection and footrest strength. These standards became closer to those required by the European regulations.

In addition, AIS-156 for electric safety requirements for electric motorcycles are currently being prepared based on UNR136.

China

China introduced a requirement for an advanced braking system, which shall be installed on new vehicle models manufactured on and after July 1, 2019, and also on all motorcycles manufactured on and after July 1, 2020. Motorcycles with engine capacity of more than 150cc and not exceeding 250cc shall be equipped with ABS or CBS. Motorcycles with engine capacity of more than 250cc shall be equipped with ABS.

The noise regulations will be revised in 2020.

Other Asian Countries

Indonesia, Vietnam and Thailand have been introducing various regulations regarding lighting and braking based on UN Regulations.

Other Regions

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 added drive/driven sprocket, drive chain and muffler to the scope of application from March 24, 2019 at customs clearance. Brazilian government issued lighting regulation based on previous UNECE regulations; these regulations were implemented from January 1, 2019. On January 31, 2020, CONTRAN implemented new requirements for license plates based on the Mercosur standards. In addition, the requirements for holes for sealing of license plates have been repealed, since QR codes are printed on the plates instead.

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. Currently, rulemaking activities regarding research are led by CARB.

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

In November 2017, CARB has published a final regulation to amend California’s evaporative emission regulation for small off-road spark-ignition equipment.

 

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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 certifications and January 1, 2019 for the engines newly placed in the market.

India

The Ministry of Environment is studying the next stage of exhaust emission regulations.

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 development.

In 2019, Chinese authorities strengthened monitoring of emissions in the market, and emission control regulations were enacted in each province and city.

Thailand

In 2019, the Thai Ministry of Industry issued a draft standard for environmental performance of small air-cooled gasoline engines.

2. Recycling / Chemicals and hazardous substances

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) had been wholly revised and most power products were within its scope after 2019.

China

On July 1, 2016, a regulation similar to European RoHS has entered into force. The first list of target products was published on March 12, 2018.

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.

Agricultural Technology Innovation Engineering Research Center of National Agriculture and Food Research Organization has decided to conduct safety inspection of agricultural machinery that has replaced agricultural machinery safety appraisal from July 31, 2018.

In 2020, the METI began considering introduction of a warning label regarding safety of snow blowers.

 

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The United States

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 generator rated 19kW and below. This regulation was proposed to address the carbon monoxide poisoning injuries occurring from portable generators.

In April 2018, an American National Standard Institute (ANSI) Standard for portable generators were amended.

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 expired in April 2018.

On January 10, 2018, the European Commission issued a notice with regard to Brexit and EU rules in the field of industrial products.

In the United Kingdom, on September 13, 2018, the Department for Business, Energy and Industrial Strategy (BEIS) issued a guidance in the form of a technical notice to explain the future arrangement on the regulations for most products subject to the new EU rules.

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.

In 2019, the EU Commission began discussions for a revision of the Machinery Directive.

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.

In 2019, a recommended standard for lawn mower safety requirements was issued by the State Administration for Market Regulation (SAMR).

Preparing for the Future

Management Challenges

The business environment surrounding Honda has come to a major turning point. Values are diversifying, the population is aging, urbanization is accelerating, climate change is worsening, and the industrial structure is changing due to progress in technologies such as the use of electric-powered motors, autonomous driving and IoT, all on a global basis. It is vital to ensure “strong products, strong Mono-zukuri (the art of making things) and strong businesses” which are essential for future growth.

Looking at the market environment of Motorcycle business operations, competition with not only existing manufacturers but also emerging manufacturers is intensifying. The operating environment continues to change more rapidly than ever as seen by the need to make efforts to deal with tighter environmental regulations in each country and expansion of new markets.

 

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In Automobile business operations, Honda will create products that can immediately respond to changes in the environment and satisfy customer needs with strong Mono-zukuri, and will develop a strong business operation structure that can deliver products to the world in a timely manner.

The Life creation and other businesses will evolve into a function to create new value for “mobility” and “daily lives,” with the addition of “new businesses for the future,” including the energy business, to the existing “provision of power products.” Honda will broaden the domain and promote businesses under the concept of “Life creation business.”

Challenges to be Addressed Preferentially

Considering the business environment, Honda will work on the following new challenges directed at the next generation to provide value unique to Honda with a view to contributing to solving various social issues while continuing to achieve sustainable growth.

1. Prepare for future growth

Next-generation technologies

In the automobile industry in the future, the ability to respond to electrification, driver-assistive technologies, connected technologies and other technological innovations will likely determine the competitiveness of a company. Honda will work to develop products and services equipped with such next-generation technologies in the Motorcycle, Automobile and Life creation businesses, and ensure business feasibility as early as possible.

As for electrification, Honda will further expand the lineup of hybrid vehicles based on electric-powered motor technology it has been developing, and proactively introduce zero-emission vehicles.

Regarding driver-assistive technologies, Honda will work to promote and evolve “Honda SENSING,” a safety and driver-assistive system, for the purpose of preventing accidents.

By continuing to push ahead with efforts for joint development and commercialization in preparation for future society while utilizing partnerships with other companies, Honda will aim to realize a clean and safe / secure society.

New businesses

In “Honda eMaaS,” Honda’s energy technology is expected to contribute to the effective utilization of electric power for society as a whole. For example, Honda’s electrified mobility and energy equipment function as temporary electric power storage/discharge devices, contributing to stabilization of electric power. To this end, in the mobility service, efforts need to be made in the areas of mobility and goods transport services using electric vehicles. In the energy service, efforts need to be made in the area of mobile power supply, by not only “using” energy equipment as a power source for mobility but also enabling them to “create” electric power and “connect” with the power supplies for the household so that electricity can be used efficiently whenever and wherever needed.

Honda intends to serve people worldwide with the “joy of expanding their life’s potential” by proposing solutions in these areas.

2. Solidify existing businesses

Honda will enhance the business strategy formulation function by steadily proceeding with the next initiatives, and build a highly competitive Mono-zukuri foundation to realize strong businesses.

 

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Build a structure to realize strategies

In order to build strong businesses that can immediately respond to changes in the environment and can provide products that satisfy customer needs in a timely manner, Honda has established a unified operational structure which integrates S-E-D-B (Sales, Engineering, Development and Buying) areas.

This enables the formulation of business strategies based on a big-picture view of product planning, development, buying/purchasing, engineering/production and sales, and the swift implementation of such strategies. At the same time, Honda will realize Mono-zukuri reform and stable production with high-precision development of new models through frontloading and operation which integrates the entire process from development through mass-production.

Mono-zukuri reform

In the Automobile business, Honda has strengthened its global models and regional models according to the needs of each region, with the aim of manufacturing challenging products unique to Honda. Efficient Mono-zukuri, in addition to product appeal, is indispensable for further enhancing the competitiveness of such models. To this end, Honda is working to strengthen the structure in each area. Introducing the Honda Architecture, which is a company-wide initiative that increases the efficiency of development and expands parts-sharing for mass-production models, Honda will sequentially apply it, starting with the global models, and expand its application. By doing so, Honda will enhance the efficiency of existing businesses and repurpose those man-hours to conduct research and development in advanced areas, thereby accelerating development for the future.

Steady progress is being made in optimizing the production capacity in all regions, and Honda will improve its global capacity utilization rate.

Further improve quality

To achieve a new level of outstanding quality of products, Honda has continued activities to further improve quality at every stage: design, development, production, sales and service including suppliers. Going forward, Honda will team up with other companies, including those from other industries, to challenge new forms of mobility that incorporate electrification, driver-assistive technologies and IoT in creating new value through open innovation. To that end, Honda will evolve its activities to realize a new level of outstanding quality, by pursuing the utmost quality not only in products and services provided to customers but also in every area of business at all points of customer contact, alongside evolution in “mobility” and “daily lives.”

Also, in the Automobile business, in April 2020 the quality innovation departments for all operations were integrated, and Quality Innovation Operations was newly established and commenced activities.

Continue 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 aims to be a company that society, which includes our shareholders, our investors and our customers, wants to exist.

 

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C. Organizational Structure

As of March 31, 2020, the Company had 85 Japanese subsidiaries and 272 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 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  

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  

 

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D. Property, Plants and Equipment

The following table sets out information, as of March 31, 2020, with respect to Honda’s principal manufacturing facilities, all of which are owned by Honda:

 

Location

   Number of
Employees
    

Principal Products Manufactured

Sayama, Saitama, Japan

     5,295      Automobiles

Naka-ku, Hamamatsu, Shizuoka, Japan

     2,097      Power products and transmissions

Suzuka, Mie, Japan

     6,180      Automobiles

Ozu-machi, Kikuchi-gun, Kumamoto, Japan

     2,633      Motorcycles, all-terrain vehicles, power products and engines

Greensboro, North Carolina, U.S.A.

     931      Aircraft

Burlington, North Carolina, U.S.A.

     111      Aircraft engines

Marysville, Ohio, U.S.A.

     5,514      Automobiles

Anna, Ohio, U.S.A.

     2,617      Engines

East Liberty, Ohio, U.S.A.

     2,227      Automobiles

Lincoln, Alabama, U.S.A.

     4,809      Automobiles and engines

Greensburg, Indiana, U.S.A.

     2,529      Automobiles

Alliston, Canada

     4,308      Automobiles and engines

El Salto, Mexico

     235      Motorcycles

Celaya, Mexico

     4,841      Automobiles

Swindon, U.K

     2,836      Automobiles and engines

Gebze, Turkey

     1,096      Motorcycles and automobiles

Gurugram, India

     2,601      Motorcycles

Greater Noida, India

     2,687      Automobiles

Alwar, India

     2,609      Motorcycles and automobiles

Narasapura, India

     1,843      Motorcycles

Ahemdabad, India

     837      Motorcycles

Karawang, Indonesia

     2,880      Automobiles and engines

Melaka, Malaysia

     2,284      Automobiles

Ayutthaya, Thailand

     2,779      Automobiles

Prachinburi, Thailand

     1,250      Automobiles

Bangkok, Thailand

     3,547      Motorcycles and power products

Phuc Yen, Vietnam

     4,584      Motorcycles and automobiles

Duy Tien, Vietnam

     521      Motorcycles

Buenos Aires, Argentina

     1,007      Motorcycles and automobiles

Sumare, Brazil

     2,172      Automobiles

Itirapina, Brazil

     1,025      Automobiles

Manaus, Brazil

     6,570      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, 2020, the Company’s property, with a net book value of approximately ¥1.4 billion, was subject to specific mortgages securing indebtedness.

Capital Expenditures

Capital expenditures in the fiscal year ended March 31, 2020 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.

 

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Total capital expenditures for the year amounted to ¥2,620.5 billion, increased by ¥155.2 billion from the previous year. Also, total capital expenditures, excluding equipment on operating leases, for the year amounted to ¥375.6 billion, decreased by ¥50.8 billion from the previous year. Spending by business segment is shown below.

 

    Fiscal years ended March 31,  
    2019     2020     Increase
(Decrease)
 
    Yen (millions)  

Motorcycle Business

  ¥ 59,288     ¥ 67,827     ¥ 8,539  

Automobile Business

    354,388       293,771       (60,617

Financial Services Business

    2,039,126       2,245,073       205,947  

Financial Services Business (Excluding Equipment on Operating Leases)

    392       180       (212

Life Creation and Other Businesses

    12,451       13,865       1,414  

Total

  ¥ 2,465,253     ¥ 2,620,536     ¥ 155,283  

Total (Excluding Equipment on Operating Leases)

  ¥ 426,519     ¥ 375,643     ¥ (50,876

Intangible assets are not included in the table above.

In Motorcycle business, we made capital expenditures of ¥67,827 million in the fiscal year ended March 31, 2020. 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 ¥293,771 million in the fiscal year ended March 31, 2020. 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 Financial services business, capital expenditures excluding equipment on operating leases amounted to ¥180 million in the fiscal year ended March 31, 2020, while capital expenditures for equipment on operating leases were ¥2,244,893 million.

In Life creation and other businesses, capital expenditures of ¥13,865 million in the fiscal year ended March 31, 2020, were deployed to upgrade, streamline, and modernize manufacturing facilities, and to improve R&D facilities.

Plans after fiscal year 2020

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.

However, Honda has not determined the plans for significant capital expenditures for the fiscal year ending March 31, 2021 since Honda is unable to reasonably calculate the impacts relating to the spread of COVID-19.

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.

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.

 

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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 in the fiscal year ended March 31, 2020, until the fiscal third quarter, the United States economy continued to recover, mainly due to improvement in employment conditions and gradually growing personal consumption. Europe saw a weak economic recovery, mainly due to deterioration of employment conditions and a gradual decline in personal consumption. In the Asian economies, India, Thailand and Indonesia showed weakness while China’s economy experienced a moderate slowdown. The Japanese economy saw a gradual recovery, mainly due to improvement in employment conditions and an upturn in personal consumption, in addition to moderate growth in capital investment. The spread of COVID-19 in the fiscal fourth quarter led to a global economic slowdown. For the time being, a further downturn in the economy is expected.

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

Impacts relating to the spread of COVID-19 on Honda’s consolidated financial results

The spread of COVID-19 has caused the global economic slowdown and also have affected Honda’s consolidated financial results for the fiscal fourth quarter.

Resulting from travel restriction measures by government, Honda’s production bases in Japan and overseas were also affected by suspended or reduced production mainly due to restrictions on employees’ commute to the workplaces and delays in the supply of parts within the supply chain. Some dealers in Japan and overseas were obliged to suspend business, shorten business hours, or reduce services such as inspections and repairs. Customer credit risk and other factors were affected by changes in forecast, including an increase in unemployment rate and decline in used vehicle prices due to the downturn of economy.

In the Automobile business, decreased unit sales of automobiles mainly in North America was a component of factors of a decrease in operating profit. Share of profit of investments accounted for using the equity method also decreased due to a decrease in unit sales of automobiles in China. In the Financial services business, selling, general and administrative expenses increased due to an increase in allowance for credit losses mainly in North America.

In addition, see “Risks relating to the spread of coronavirus disease 2019 (COVID-19)” in Item 3.D. “Risk Factors”.

Overview of Fiscal Year 2020 Operating Performance

Honda’s consolidated sales revenue for the fiscal year ended March 31, 2020, decreased from the fiscal year ended March 31, 2019, due mainly to decreased sales revenue in the Automobile business as well as negative foreign currency translation effects, which was partially offset by increased sales revenue in the Financial services business. Operating profit decreased from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales revenue and model mix as well as negative foreign currency effects, which was partially offset by continuing cost reduction as well as decreased selling, general and administrative expenses.

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.

 

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Motorcycle Business

Honda’s consolidated unit sales of motorcycles, all-terrain vehicles (ATVs) and side-by-sides (SxS) in fiscal year 2020 totaled 12,426 thousand units, a decrease of 6.0% from the previous fiscal year, due mainly to decreases primarily in India and Thailand, which offset increases in sales in Brazil.

Automobile Business

Honda’s consolidated unit sales of automobiles in fiscal year 2020 totaled 3,318 thousand units, a decrease of 11.5% from the previous fiscal year, due mainly to decreases in sales units primarily in Asia and North America.

Life Creation and Other Businesses

Honda’s consolidated unit sales of power products in fiscal year 2020 totaled 5,701 thousand units, a decrease of 9.5% from the previous fiscal year, due mainly to decreases in sales units primarily in North America and Asia.

Fiscal Year 2020 Compared with Fiscal Year 2019

Sales Revenue

Honda’s consolidated sales revenue for the fiscal year ended March 31, 2020, decreased by ¥957.6 billion, or 6.0%, to ¥14,931.0 billion from the fiscal year ended March 31, 2019, due mainly to decreased sales revenue in the Automobile business as well as negative foreign currency translation effects, which was partially offset by increased 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 decreased by approximately ¥599.2 billion, or 3.8%, compared to the decrease as reported of ¥957.6 billion, which includes negative foreign currency translation effects.

Operating Costs and Expenses

Operating costs and expenses decreased by ¥864.8 billion, or 5.7%, to ¥14,297.3 billion from the previous fiscal year. Cost of sales decreased by ¥729.2 billion, or 5.8%, to ¥11,851.6 billion from the previous fiscal year, due mainly to a decrease in costs attributable to decreased consolidated sales revenue in the Automobile business. Selling, general and administrative expenses decreased by ¥132.8 billion, or 7.5%, to ¥1,641.5 billion from the previous fiscal year. Research and development expenses totaled to ¥804.1 billion basically unchanged from the previous fiscal year.

Operating Profit

Operating profit decreased by ¥92.7 billion, or 12.8%, to ¥633.6 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales revenue and model mix as well as negative foreign currency effects, which was partially offset by continuing cost reduction as well as decreased selling, general and administrative expenses. Honda estimates that by excluding negative foreign currency effects of approximately ¥105.8 billion, operating profit would have increased by approximately ¥13.1 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

 

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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 decreased by ¥189.4 billion, or 19.3%, to ¥789.9 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 negative impact of ¥64.6 billion, due mainly to a decrease in profit attributable to decreased sales revenue at affiliates and joint ventures in Asia.

Finance income and finance costs had a negative impact of ¥32.1 billion, due mainly to effect from gains or losses on foreign exchange. For further details, see note “(22) Finance Income and Finance Costs” to the accompanying consolidated financial statements.

Income Tax Expense

Income tax expense decreased by ¥23.1 billion, or 7.6%, to ¥279.9 billion from the previous fiscal year. The average effective tax rate increased by 4.5 percentage points to 35.4% 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 ¥166.3 billion, or 24.6%, to ¥509.9 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 ¥154.5 billion, or 25.3%, to ¥455.7 billion from the previous fiscal year.

Profit for the Year Attributable to Non-controlling Interests

Profit for the year attributable to non-controlling interests decreased by ¥11.7 billion, or 17.9%, to ¥54.1 billion from the previous fiscal year.

Business Segments

Motorcycle Business

Honda’s consolidated unit sales of motorcycles, all-terrain vehicles (ATVs) and side-by-sides (SxS) totaled 12,426 thousand units, decreased by 6.0% from the previous fiscal year, due mainly to a decrease in consolidated unit sales in Asia.

Sales revenue from external customers decreased by ¥40.8 billion, or 1.9%, to ¥2,059.3 billion from the previous fiscal year, due mainly to decreased consolidated unit sales as well as negative foreign currency translation effects. The impact of price changes was immaterial on sales revenue. Honda estimates that by

 

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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 ¥24.8 billion, or 1.2%, compared to the decrease as reported of ¥40.8 billion, which includes negative foreign currency translation effects.

Operating costs and expenses decreased by ¥34.8 billion, or 1.9%, to ¥1,773.6 billion from the previous fiscal year. Cost of sales decreased by ¥11.6 billion, or 0.8%, to ¥1,494.6 billion, due mainly to a decrease in costs attributable to decreased consolidated unit sales as well as negative foreign currency effects. Selling, general and administrative expenses decreased by ¥16.0 billion, or 7.4%, to ¥199.6 billion. Research and development expenses decreased by ¥7.1 billion, or 8.3%, to ¥79.3 billion.

Operating profit decreased by ¥5.9 billion, or 2.0%, to ¥285.6 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales volume and model mix as well as negative foreign currency effects, which was partially offset by continuing cost reduction.

Japan

Total industry demand for motorcycles in Japan* was approximately 360 thousand units in fiscal year 2020, a decrease of approximately 3% from the previous fiscal year.

Honda’s consolidated unit sales in Japan decreased 1.0% to 205 thousand units in fiscal year 2020, a decline from the previous fiscal year, mainly due to decreases primarily in sales of the Super Cub 110, which offset the increases primarily in sales of the Tact.

 

* 

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 1% from the previous year to approximately 660 thousand units in calendar year 2019.

Honda’s consolidated unit sales in North America increased 9.6% from the previous fiscal year to 330 thousand units in fiscal year 2020. This was mainly due to an increase in sales of side-by-sides (SxS), led by the Talon 1000R primarily in the United States.

 

* 

Source: MIC (Motorcycle Industry Council)

  

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

Europe

Total demand for motorcycles in Europe* increased around 4% from the previous year to approximately 960 thousand units in calendar year 2019.

Honda’s consolidated unit sales in Europe decreased 4.0% from the previous fiscal year to 239 thousand units in fiscal year 2020, mainly due to decreases primarily in sales of the SH300i, which offset increases primarily in sales of the CB650R.

 

* 

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 7% from the previous year to approximately 41,090 thousand units in calendar year 2019.

 

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Looking at market conditions by country, in calendar year 2019, demand in India decreased around 13% from the previous year to approximately 18,790 thousand units. Demand in Indonesia increased around 3% from the previous year to approximately 6,500 thousand units. Demand in China decreased around 6% from the previous year to approximately 6,500 thousand units. Demand in Vietnam decreased around 4% from the previous year to approximately 3,250 thousand units. Demand in Pakistan decreased around 3% from the previous year to approximately 2,050 thousand units. Demand in Thailand decreased around 3% from the previous year to approximately 1,740 thousand units.

Honda’s consolidated unit sales in Asia were 10,348 thousand units in fiscal year 2020, a decrease by 7.6% from the previous fiscal year, mainly due to decreases primarily in sales of the Activa model in India, which offset increases primarily in sales of such commuter models as the RS150R in Malaysia.

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 2020 decreased around 2.3% from the previous fiscal year to approximately 4,850 thousand units, mainly due to decreases primarily in sales of the BeAT model, which offset increases primarily in sales of the new Genio model.

 

* 

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, increased around 13% from the previous year to approximately 1,080 thousand units in calendar year 2019.

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales increased 3.7% from the previous fiscal year to 1,304 thousand units in fiscal year 2020 due mainly to an increase in sales of the Elite 125 in Brazil.

 

* 

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

Automobile Business

Honda’s consolidated unit sales of automobiles totaled 3,318 thousand units, decreased by 11.5% from the previous fiscal year, due mainly to a decrease in consolidated unit sales in all regions.

Sales revenue from external customers decreased by ¥1,113.0 billion, or 10.1%, to ¥9,959.0 billion from the previous fiscal year, due mainly to decreased 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 decreased by approximately ¥872.9 billion, or 7.9%, compared to the decrease as reported of ¥1,113.0 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales decreased by ¥1,093.1 billion, or 9.7%, to ¥10,194.6 billion from the previous fiscal year.

Operating costs and expenses decreased by ¥1,036.7 billion, or 9.4%, to ¥10,041.3 billion from the previous fiscal year. Cost of sales decreased by ¥878.6 billion, or 9.8%, to ¥8,124.9 billion, due mainly to a decrease in costs attributable to decreased consolidated unit sales. Selling, general and administrative expenses decreased by ¥163.1 billion, or 11.8%, to ¥1,221.4 billion. Research and development expenses increased by ¥5.1 billion, or 0.7%, to ¥694.9 billion.

Operating profit decreased by ¥56.3 billion, or 26.9%, to ¥153.3 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales volume and model mix as well as negative foreign currency effects, which was partially offset by decreased selling, general and administrative expenses as well as continuing cost reduction.

 

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

 

    Fiscal year ended
March 31,
 
    2019     2020  

Passenger cars:

    50     48
Accord, Brio, City, Civic, Crider, Fit/Jazz    

Light trucks:

    43     45
CR-V, Freed, Odyssey, Pilot, Vezel/HR-V, XR-V    

Mini vehicles:

    7     7

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 20% lower and our mini vehicles category was approximately 45% lower than total weighted average contribution margin for the fiscal year ended March 31, 2020. 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 4% from the previous fiscal year to approximately 5,030 thousand units in fiscal year 2020.

Honda’s consolidated unit sales in Japan decreased 8.4% from the previous fiscal year to 589 thousand units*2 in fiscal year 2020. This was mainly because of the impact of restrictions on the supply of parts for the new N-WGN, which offset increases primarily in sales of the Freed.

Honda’s unit production of automobiles in Japan decreased 11.4% from the previous fiscal year to 808 thousand units in fiscal year 2020. This was mainly because of decreases due to effects of restrictions on the supply of parts for the new N-WGN.

 

*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, decreased around 1% from the previous year to approximately 17,040 thousand units in calendar year 2019. This result reflected decreased demand for passenger cars, despite a continued increase for light trucks.

 

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Honda’s consolidated unit sales in North America decreased 6.6% from the previous fiscal year to 1,825 thousand units in fiscal year 2020. This decrease was mainly attributable to the effect of a decrease in sales of the Civic model, despite increases primarily in sales of the Passport model.

Honda manufactured 1,736 thousand units in fiscal year 2020, a decrease of 3.7% from the previous fiscal year, mainly due to decreases in demand for passenger cars.

 

* 

Source: Autodata

Europe

Total demand for automobiles in Europe* decreased around 1% from the previous year to approximately 15,800 thousand units in calendar year 2019, mainly due to the slowdown in the diesel market.

Honda’s consolidated unit sales in Europe decreased 21.3% from the previous fiscal year to 133 thousand units in fiscal year 2020, mainly due to decreases primarily in sales of the Civic model.

Unit production at Honda’s U.K. plant in fiscal year 2020 decreased 36.8% from the previous fiscal year to 95 thousand units, mainly attributable to the effect of a decrease in sales of the Civic model.

 

* 

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

Asia

Total demand for automobiles in China, the largest market within Asia, decreased around 8% from the previous year to approximately 25,760 thousand units*1 in calendar year 2019. Total demand for automobiles in other countries in Asia decreased around 9% from the previous calendar year to approximately 7,810 thousand units*2. This was mainly due to decreases in demand in India and Indonesia.

Honda’s consolidated unit sales in Asia decreased 23.3% from the previous fiscal year to 563 thousand units in fiscal year 2020. The decrease was mainly attributable to the decrease in sales of the Amaze in India, and the City in Malaysia.

Honda’s consolidated unit sales do not include unit sales of Dongfeng Honda Automobile Co., Ltd. and GAC Honda Automobile Co., Ltd., both of which are joint ventures accounted for using the equity method in China. Unit sales in China decreased 7.3% from the previous fiscal year to 1,389 thousand units in fiscal year 2020. The decrease was mainly attributable to a decrease in sales of the Fit model, despite the effect of launching the new Envix model and the Inspire.

Honda’s unit production by consolidated subsidiaries in Asia decreased 24.4% from the previous fiscal year to 606 thousand units*3 in fiscal year 2020.

Meanwhile, unit production by Chinese joint ventures Dongfeng Honda Automobile Co., Ltd. and GAC Honda Automobile Co., Ltd. decreased 8.1% from the previous fiscal year to 1,370 thousand units in fiscal year 2020.

 

*1 

Source: CAAM (China Association of Automobile Manufacturers)

 

*2 

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

 

*3 

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

 

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Other Regions

Total industry demand for automobiles in Brazil, the principal market within Other Regions, increased around 8% from the previous year to approximately 2,660 thousand units* in calendar year 2019.

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales decreased 16.1% from the previous fiscal year to 208 thousand units in fiscal year 2020, mainly due to decreases primarily in sales of the City and Fit models in Brazil.

Unit production at Honda’s plant in Brazil decreased 10.9% from the previous fiscal year to 124 thousand units in fiscal year 2020.

 

* 

Source: ANFAVEA (Associação Nacional dos Fabricantes de Veiculos Automotores (the Brazilian Automobile Association)) The total 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, 2020, decreased by ¥66.8 billion, or 0.7%, to ¥9,787.2 billion from March 31, 2019. 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, 2020 would have increased by approximately ¥123.3 billion, or 1.3%, compared to the previous fiscal year.

Sales revenue from external customers increased by ¥221.6 billion, or 9.4%, to ¥2,586.9 billion from the previous fiscal year, due mainly to increased revenues on disposition of lease vehicles and operating lease revenues. 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 ¥266.1 billion, or 11.2%, compared to the increase as reported of ¥221.6 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales increased by ¥220.8 billion, or 9.3%, to ¥2,600.9 billion from the previous fiscal year.

Operating costs and expenses increased by ¥237.1 billion, or 11.1%, to ¥2,381.2 billion from the previous fiscal year. Cost of sales increased by ¥187.5 billion, or 9.3%, to ¥2,214.0 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased revenues on disposition of lease vehicles and operating lease revenues. Selling, general and administrative expenses increased by ¥49.6 billion, or 42.2%, to ¥167.2 billion from the previous fiscal year, due mainly to an increase in allowance for credit losses.

Operating profit decreased by ¥16.2 billion, or 6.9%, to ¥219.7 billion from the previous fiscal year, due mainly to increased selling, general and administrative expenses, which was partially offset by an increase in profit attributable to increased sales revenue.

Life Creation and Other Businesses

Honda’s consolidated unit sales of power products totaled 5,701 thousand units, decreased by 9.5% from the previous fiscal year, due mainly to a decrease in consolidated unit sales in all regions.

Sales revenue from external customers decreased by ¥25.3 billion, or 7.2%, to ¥325.6 billion from the previous fiscal year, due mainly to decreased consolidated unit sales in Life creation business. Honda estimates

 

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that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have decreased by approximately ¥17.2 billion, or 4.9%, compared to the decrease as reported of ¥25.3 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales decreased by ¥26.6 billion, or 7.1%, to ¥350.6 billion from the previous fiscal year.

Operating costs and expenses decreased by ¥12.4 billion, or 3.2%, to ¥375.7 billion from the previous fiscal year. Cost of sales decreased by ¥8.4 billion, or 2.8%, to ¥292.6 billion, due mainly to a decrease in costs attributable to decreased consolidated unit sales in Life creation business. Selling, general and administrative expenses decreased by ¥3.2 billion, or 5.7%, to ¥53.3 billion. Research and development expenses decreased by ¥0.7 billion, or 2.4%, to ¥29.7 billion from the previous fiscal year.

Operating loss was ¥25.0 billion, an increase of ¥14.1 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales volume and model mix. In addition, operating loss of aircraft and aircraft engines included in the Life creation and other businesses was ¥42.2 billion, an increase of ¥2.0 billion from the previous fiscal year.

Japan

Honda’s consolidated unit sales in Japan decreased 7.1% from the previous fiscal year to 312 thousand units in fiscal year 2020, mainly due to a decrease in sales of OEM engines* and other factors, which offset the increase primarily in the sales of generators.

 

* 

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 decreased 6.6% from the previous fiscal year to 2,848 thousand units in fiscal year 2020, mainly due to a decrease in the sales of OEM engines, which offset an increase primarily in the sales of lawnmowers.

Europe

Honda’s consolidated unit sales in Europe decreased 14.1% from the previous fiscal year to 845 thousand units in fiscal year 2020, mainly due to a decrease in sales of OEM engines and lawnmowers.

Asia

Honda’s consolidated unit sales in Asia decreased 11.8% from the previous fiscal year to 1,375 thousand units in fiscal year 2020. This was mainly due to a decrease in sales of OEM engines and brush cutters.

Other Regions

Honda’s consolidated unit sales in Other Regions (including South America, the Middle East, Africa, Oceania and other areas) decreased 13.9% from the previous fiscal year to 321 thousand units in fiscal year 2020, mainly due to decreases in the sales of OEM engines and water pumps.

Geographical Information

Japan

In Japan, sales revenue from domestic and export sales decreased by ¥425.3 billion, or 8.8%, to ¥4,422.9 billion from the previous fiscal year, due mainly to decreased sales revenue in the Automobile business.

 

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Operating loss was ¥28.1 billion, a decrease of ¥28.1 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales revenue and model mix as well as negative foreign currency effects, which was partially offset by decreased selling, general and administrative expenses.

North America

In North America, where the United States is the principal market, sales revenue decreased by ¥467.1 billion, or 5.2%, to ¥8,556.8 billion from the previous fiscal year, due mainly to decreased sales revenue in the Automobile business as well as negative foreign currency translation effects, which was partially offset by increased sales revenue in the Financial services business. Operating profit increased by ¥5.5 billion, or 1.9%, to ¥305.3 billion from the previous fiscal year, due mainly to continuing cost reduction as well as decreased selling, general and administrative expenses, which was partially offset by a decrease in profit attributable to decreased sales revenue and model mix.

Europe

In Europe, sales revenue decreased by ¥154.8 billion, or 16.7%, to ¥772.5 billion from the previous fiscal year, due mainly to decreased sales revenue in the Automobile business. Operating profit was ¥14.9 billion, an increase of ¥21.6 billion from the previous fiscal year, due mainly to continuing cost reduction as well as an increase in profit attributable to increased sales revenue and model mix.

Asia

In Asia, sales revenue decreased by ¥412.5 billion, or 9.7%, to ¥3,859.7 billion from the previous fiscal year, due mainly to decreased sales revenue in the Automobile business. Operating profit decreased by ¥84.6 billion, or 20.9%, to ¥319.5 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales revenue and model mix, which was partially offset by continuing cost reduction.

Other Regions

In Other Regions, sales revenue decreased by ¥70.8 billion, or 9.3%, to ¥693.6 billion from the previous fiscal year, due mainly to decreased sales revenue in the Automobile business as well as negative foreign currency translation effects. Operating profit increased by ¥14.6 billion, or 64.9%, to ¥37.2 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses as well as continuing cost reduction, which was partially offset by negative foreign currency effects.

Fiscal Year 2019 Compared with Fiscal Year 2018

Sales Revenue

Honda’s consolidated sales revenue for the fiscal year ended March 31, 2019, increased by ¥527.4 billion, or 3.4%, to ¥15,888.6 billion from the fiscal year ended March 31, 2018, due mainly to increased sales revenue in all business operations. 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 ¥787.0 billion, or 5.1%, compared to the increase as reported of ¥527.4 billion, which includes negative foreign currency translation effects.

Operating Costs and Expenses

Operating costs and expenses increased by ¥634.6 billion, or 4.4%, to ¥15,162.2 billion from the previous fiscal year. Cost of sales increased by ¥580.3 billion, or 4.8%, to ¥12,580.9 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased consolidated sales revenue in all business operations,

 

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the impact to Europe related to changes of the global automobile production network and capability. Selling, general and administrative expenses totaled to ¥1,774.3 billion basically unchanged from the previous fiscal year, due mainly to the impact to Europe related to changes of the global automobile production network and capability, which was partially offset by the loss related to the settlement of multidistrict class action litigation in the previous fiscal year. Research and development expenses increased by ¥55.0 billion, or 7.3%, to ¥806.9 billion from the previous fiscal year.

Operating Profit

Operating profit decreased by ¥107.1 billion, or 12.9%, to ¥726.3 billion from the previous fiscal year, due mainly to the impact to Europe related to changes of the global automobile production network and capability as well as negative foreign currency effects, which was partially offset by continuing cost reduction and the loss related to the settlement of multidistrict class action litigation in the previous fiscal year. Honda estimates that by excluding negative foreign currency effects of approximately ¥160.3 billion, operating profit would have increased by approximately ¥53.1 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 decreased by ¥135.5 billion, or 12.2%, to ¥979.3 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 negative impact of ¥18.8 billion, due mainly to a decrease in profit at affiliates and joint ventures in Asia.

Finance income and finance costs had a negative impact of ¥9.5 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 ¥316.7 billion to ¥303.0 billion from the previous fiscal year, due mainly to the impacts of the enactment of the Tax Cuts and Jobs Act in the United States in the previous fiscal year. The average effective tax rate increased by 32.1 percentage points to 30.9% 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 ¥452.3 billion, or 40.1%, to ¥676.2 billion from the previous fiscal year, due mainly to the impacts of the enactment of the Tax Cuts and Jobs Act in the United States in the previous fiscal year.

 

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Profit for the Year Attributable to Owners of the Parent

Profit for the year attributable to owners of the parent decreased by ¥449.0 billion, or 42.4%, to ¥610.3 billion from the previous fiscal year.

Profit for the Year Attributable to Non-controlling Interests

Profit for the year attributable to non-controlling interests decreased by ¥3.3 billion, or 4.8%, to ¥65.9 billion from the previous fiscal year.

Business Segments

Motorcycle Business

Honda’s consolidated unit sales of motorcycles, all-terrain vehicles (ATVs) and side-by-sides (SxS) totaled 13,215 thousand units, increased by 2.0% from the previous fiscal year, due mainly to an increase in consolidated unit sales in Asia and Other regions.

Sales revenue from external customers increased by ¥61.4 billion, or 3.0%, to ¥2,100.1 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 ¥160.1 billion, or 7.9%, compared to the increase as reported of ¥61.4 billion, which includes negative foreign currency translation effects.

Operating costs and expenses increased by ¥36.8 billion, or 2.1%, to ¥1,808.5 billion from the previous fiscal year. Cost of sales increased by ¥39.5 billion, or 2.7%, to ¥1,506.3 billion, due mainly to an increase in costs attributable to increased consolidated unit sales. Selling, general and administrative expenses decreased by ¥3.8 billion, or 1.7%, to ¥215.6 billion. Research and development expenses increased by ¥1.1 billion, or 1.3%, to ¥86.5 billion.

Operating profit increased by ¥24.6 billion, or 9.2%, to ¥291.6 billion from the previous fiscal year, due mainly to an increase in profit attributable to increased sales volume and model mix.

Japan

Total industry demand for motorcycles in Japan* was approximately 370 thousand units in fiscal year 2019, a decrease of approximately 1% from the previous fiscal year.

Honda’s consolidated unit sales in Japan increased 24.0% to 207 thousand units in fiscal year 2019, a substantial increase from the previous fiscal year, mainly due to increases in sales of the PCX and Cross Cub 110.

 

* 

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 660 thousand units in calendar year 2018.

Honda’s consolidated unit sales in North America decreased 3.8% from the previous fiscal year to 301 thousand units in fiscal year 2019. This was mainly due to a decrease in sales of ATVs, despite the effect of launching new models such as the Monkey, primarily in the United States.

 

* 

Source: MIC (Motorcycle Industry Council) The total includes motorcycles and ATVs, but does not include side-by-sides (SxS).

 

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Europe

Total demand for motorcycles in Europe* increased around 1% from the previous year to approximately 920 thousand units in calendar year 2018.

Honda’s consolidated unit sales in Europe increased 6.4% from the previous fiscal year to 249 thousand units in fiscal year 2019, mainly reflecting the effect of launching the new model Monkey and a full model change of the Forza.

 

* 

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 6% from the previous year to approximately 44,270 thousand units in calendar year 2018.

Looking at market conditions by country, in calendar year 2018, demand in India increased about 13% from the previous year to approximately 21,620 thousand units. Demand in China decreased around 11% from the previous year to approximately 7,040 thousand units. Demand in Indonesia increased around 7% from the previous year to approximately 6,300 thousand units. Demand in Vietnam increased around 2% from the previous year to approximately 3,340 thousand units. Demand in Pakistan increased around 7% from the previous year to approximately 2,100 thousand units. Demand in Thailand decreased around 1% from the previous year to approximately 1,790 thousand units.

Honda’s consolidated unit sales in Asia increased 0.7% from the previous fiscal year to 11,201 thousand units in fiscal year 2019. This was mainly due to an increase in sales of scooter models such as the Vision in Vietnam, among other factors, despite a decrease in India due to the impact of revisions to the mandatory vehicle liability insurance requirement.

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 2019 increased around 13.3% from the previous fiscal year to approximately 4,970 thousand units due mainly to increases in sales of the PCX and Scoopy models.

 

* 

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, increased about 18% from the previous year to approximately 950 thousand units in calendar year 2018.

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales increased 12.2% from the previous fiscal year to 1,257 thousand units in fiscal year 2019 due mainly to an increase in sales of the CG160 in Brazil.

 

* 

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

Automobile Business

Honda’s consolidated unit sales of automobiles totaled 3,748 thousand units, increased by 1.6% from the previous fiscal year, due mainly to an increase in consolidated unit sales in North America.

 

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Sales revenue from external customers increased by ¥219.9 billion, or 2.0%, to ¥11,072.1 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 ¥373.3 billion, or 3.4%, compared to the increase as reported of ¥219.9 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales increased by ¥242.5 billion, or 2.2%, to ¥11,287.7 billion from the previous fiscal year.

Operating costs and expenses increased by ¥406.7 billion, or 3.8%, to ¥11,078.0 billion from the previous fiscal year. Cost of sales increased by ¥352.2 billion, or 4.1%, to ¥9,003.6 billion, due mainly to an increase in costs attributable to increased consolidated unit sales. Selling, general and administrative expenses totaled to ¥1,384.6 billion basically unchanged from the previous fiscal year. Research and development expenses increased by ¥49.3 billion, or 7.7%, to ¥689.8 billion.

Operating profit decreased by ¥164.1 billion, or 43.9%, to ¥209.6 billion from the previous fiscal year, due mainly to the impact to Europe related to changes of the global automobile production network and capability, which was partially offset by continuing cost reduction and the loss related to the settlement of multidistrict class action litigation in the previous fiscal year.

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

 

     Fiscal year ended
March 31,
 
         2018             2019      

Passenger cars:

     50     50
Accord, City, Civic, Crider, Fit/Jazz     

Light trucks:

     44     43
CR-V, Freed, Odyssey, Pilot, Vezel/HR-V, XR-V     

Mini vehicles:

     6     7
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 35% higher, our passenger cars category was approximately 20% lower and our mini vehicles category was approximately 50% lower than total weighted average contribution margin for the fiscal year ended March 31, 2019. 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 1% from the previous fiscal year to approximately 5,260 thousand units in fiscal year 2019.

 

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Honda’s consolidated unit sales in Japan increased 2.6% from the previous fiscal year to 643 thousand units*2 in fiscal year 2019. This was mainly due to the effect of launching the new model N-VAN and an increase in sales of the N-BOX.

Honda’s unit production of automobiles in Japan increased 10.0% from the previous fiscal year to 912 thousand units in fiscal year 2019. This was mainly due to increases in export volume and domestic sales 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, remained basically unchanged from the previous year at approximately 17,270 thousand units in calendar year 2018. This result reflected a continued increase for light trucks, which offset decreased demand for passenger cars.

Honda’s consolidated unit sales in North America increased 2.7% from the previous fiscal year to 1,954 thousand units in fiscal year 2019. This increase was mainly attributable to the effect of a full model change of the Insight model and an increase in sales of the CR-V model, despite the restrictions on supply caused by the impact of flooding in Mexico.

Honda manufactured 1,802 thousand units in fiscal year 2019, a decrease of 3.4% from the previous fiscal year, mainly reflecting the impact of flooding in Mexico.

 

* 

Source: Autodata

Europe

Total demand for automobiles in Europe* remained basically unchanged from the previous year at approximately 15,620 thousand units in calendar year 2018, mainly due to the slowdown in the diesel market, despite growth in the SUV market and other factors.

Honda’s consolidated unit sales in Europe decreased 7.7% from the previous fiscal year to 169 thousand units in fiscal year 2019. This was mainly due to decreased sales of diesel vehicles.

Unit production at Honda’s U.K. plant in fiscal year 2019 decreased 8.1% from the previous fiscal year to 151 thousand units, mainly due to the termination of production of the CR-V model.

 

* 

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 China, the largest market within Asia, decreased around 3% from the previous year to approximately 28,030 thousand units*1 in calendar year 2018. Total demand for automobiles in other countries in Asia increased about 8% from the previous calendar year to approximately 8,560 thousand units*2. This was mainly due to increases in demand in India and Thailand.

 

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Honda’s consolidated unit sales in Asia increased 1.2% from the previous fiscal year to 734 thousand units in fiscal year 2019. This increase was mainly attributable to the effect of a full model change of the Amaze model in India and an increase in sales of the Jazz model in Thailand, despite a decline in sales in Indonesia among other factors.

Honda’s consolidated unit sales do not include unit sales of Dongfeng Honda Automobile Co., Ltd. and GAC Honda Automobile Co., Ltd., both of which are joint ventures accounted for using the equity method in China. Unit sales in China increased 3.9% from the previous fiscal year to 1,499 thousand units in fiscal year 2019. The increase was mainly attributable to an increase in sales of the Civic model and the effect of a full model change of the Crider model.

Honda’s unit production by consolidated subsidiaries in Asia increased 0.5% from the previous fiscal year to 802 thousand units*3 in fiscal year 2019.

Meanwhile, unit production by Chinese joint ventures Dongfeng Honda Automobile Co., Ltd. and GAC Honda Automobile Co., Ltd. increased 2.8% from the previous fiscal year to 1,491 thousand units in fiscal year 2019.

 

*1 

Source: CAAM (China Association of Automobile Manufacturers)

*2 

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

*3 

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

Other Regions

Total industry demand for automobiles in Brazil, the principal market within Other Regions, increased around 14% from the previous year to approximately 2,470 thousand units* in calendar year 2018. The increase was supported by the gradual economic recovery among other factors.

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales decreased 1.6% from the previous fiscal year to 248 thousand units in fiscal year 2019 mainly due to a decrease in sales of the WR-V model, despite an increase in sales of the Civic model in Brazil.

Unit production at Honda’s plant in Brazil increased 1.1% from the previous fiscal year to 139 thousand units in fiscal year 2019.

 

* 

Source: ANFAVEA (Associação Nacional dos Fabricantes de Veiculos Automotores (the Brazilian Automobile Association))

  

The total 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, 2019, increased by ¥807.9 billion, or 8.9%, to ¥9,854.0 billion from March 31, 2018. 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, 2019 would have increased by approximately ¥513.7 billion, or 5.7%, compared to the previous fiscal year.

 

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Sales revenue from external customers increased by ¥242.1 billion, or 11.4%, to ¥2,365.3 billion from the previous fiscal year, due mainly to increased revenues on disposition of lease vehicles and operating lease revenues. 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 ¥245.6 billion, or 11.6%, compared to the increase as reported of ¥242.1 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales increased by ¥242.7 billion, or 11.4%, to ¥2,380.0 billion from the previous fiscal year.

Operating costs and expenses increased by ¥202.8 billion, or 10.5%, to ¥2,144.0 billion from the previous fiscal year. Cost of sales increased by ¥200.1 billion, or 11.0%, to ¥2,026.5 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased revenues on disposition of lease vehicles and operating lease revenues. Selling, general and administrative expenses increased by ¥2.7 billion, or 2.4%, to ¥117.5 billion.

Operating profit increased by ¥39.8 billion, or 20.3%, to ¥235.9 billion from the previous fiscal year, due mainly to an increase in profit attributable to increased sales revenue.

Life Creation and Other Businesses

Honda’s consolidated unit sales of power products totaled 6,301 thousand units, increased by 0.6 % from the previous fiscal year, due mainly to increased consolidated unit sales in Asia.

Sales revenue from external customers increased by ¥3.9 billion, or 1.1%, to ¥350.9 billion from the previous fiscal year, due mainly to increased consolidated unit sales in power products. 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 ¥7.8 billion, or 2.3%, compared to the increase as reported of ¥3.9 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales increased by ¥6.0 billion, or 1.6%, to ¥377.2 billion from the previous fiscal year.

Operating costs and expenses increased by ¥13.6 billion, or 3.6%, to ¥388.1 billion from the previous fiscal year. Cost of sales increased by ¥13.8 billion, or 4.8%, to ¥301.1 billion, due mainly to an increase in costs attributable to increased consolidated unit sales in Life creation business. Selling, general and administrative expenses decreased by ¥4.8 billion, or 7.8%, to ¥56.5 billion. Research and development expenses increased by ¥4.6 billion, or 17.8%, to ¥30.5 billion from the previous fiscal year.

Operating loss was ¥10.9 billion, an increase of ¥7.5 billion from the previous fiscal year, due mainly to an increase in research and development expenses as well as negative foreign currency effects. In addition, operating loss of aircraft and aircraft engines included in the Power product and other businesses segment was ¥40.2 billion, an improvement of ¥1.6 billion from the previous fiscal year.

Japan

Honda’s consolidated unit sales in Life creation business operations in Japan increased 12.0 % from the previous fiscal year to 336 thousand units in fiscal year 2019 mainly due to an increase in sales of OEM engines* and 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 1.2% from the previous fiscal year to 3,049 thousand units in fiscal year 2019 mainly attributable to an increase in sales of OEM engines, despite a decline in sales of generators.

 

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Europe

Honda’s consolidated unit sales in Europe decreased 3.7% from the previous fiscal year to 984 thousand units in fiscal year 2019 mainly due to decreases in sales of lawnmowers and trimmers.

Asia

Honda’s consolidated unit sales in Asia increased 3.1% from the previous fiscal year to 1,559 thousand units in fiscal year 2019. This was mainly due to an increase in sales of OEM engines.

Other Regions

Honda’s consolidated unit sales in Other Regions (including South America, the Middle East, Africa, Oceania and other areas) decreased 10.3% from the previous fiscal year to 373 thousand units in fiscal year 2019 mainly due to a decline in sales of lawnmowers.

Geographical Information

Japan

In Japan, sales revenue from domestic and export sales increased by ¥367.6 billion, or 8.2%, to ¥4,848.3 billion from the previous fiscal year, due mainly to increased sales revenue in all business operations. Operating profit decreased ¥86.9 billion, or 100.0%, from the previous fiscal year, due mainly to the impact to Europe related to changes of the global automobile production network and capability as well as an increase in research and development expenses, which was partially offset by decreased selling, general and administrative expenses.

North America

In North America, where the United States is the principal market, sales revenue increased by ¥439.3 billion, or 5.1%, to ¥9,023.9 billion from the previous fiscal year, due mainly to increased sales revenue in the Automobile business and Financial services business. Operating profit increased by ¥21.2 billion, or 7.6%, to ¥299.7 billion from the previous fiscal year, due mainly to the loss related to the settlement of multidistrict class action litigation in the previous fiscal year and continuing cost reduction, which was partially offset by increased selling, general and administrative expenses.

Europe

In Europe, sales revenue increased by ¥10.2 billion, or 1.1%, to ¥927.4 billion from the previous fiscal year, due mainly to increased sales revenue in the Motorcycle business. Operating loss was ¥6.6 billion, a decrease of 22.4 billion from the previous fiscal year, due mainly to the impact to Europe related to changes of the global automobile production network and capability, which was partially offset by continuing cost reduction.

Asia

In Asia, sales revenue increased by ¥51.2 billion, or 1.2%, to ¥4,272.2 billion from the previous fiscal year, due mainly to increased sales revenue in Motorcycle business, which was partially offset by negative foreign currency effects. Operating profit totaled to ¥404.2 billion basically unchanged from the previous fiscal year, due mainly to continuing cost reduction as well as an increase in profit attributable to increased sales revenue and model mix, which was partially offset by increased selling, general and administrative expenses.

Other Regions

In Other Regions, sales revenue decreased by ¥73.0 billion, or 8.7%, to ¥764.4 billion from the previous fiscal year, due mainly to negative foreign currency effects, which was partially offset by increased sales revenue

 

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in the Motorcycle business and Automobile business. Operating profit decreased by ¥21.2 billion, or 48.4%, to ¥22.6 billion from the previous fiscal year, due mainly to negative foreign currency effects, which was partially offset by continuing cost reduction.

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.

As of the date of this report, although it is difficult to reasonably predict the severity and duration of the spread of COVID-19, we accounted for estimates using assumptions where corporate economic activities restart and market gradually recovers as the spread of COVID-19 slows down, based upon the information available. As uncertainties in market trend and economic conditions may remain persistent considering duration of the spread of COVID-19 and countermeasures taken by each country and region, actual results in any future periods could differ materially from the estimates.

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.

 

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

The changes in the provision for those product warranties and sales revenue for the years ended March 31, 2018, 2019 and 2020 are as follows:

 

    Yen (millions)  
    2018     2019     2020  

Provisions for product warranties

     

Balance at beginning of year

  ¥ 520,130     ¥ 457,596     ¥ 458,482  
 

 

 

   

 

 

   

 

 

 

Effect of changes in accounting policy

  ¥ —       ¥ (4,536   ¥ —    
 

 

 

   

 

 

   

 

 

 

Adjusted balance at beginning of year

  ¥ 520,130     ¥ 453,060     ¥ 458,482  
 

 

 

   

 

 

   

 

 

 

Provision*

  ¥ 219,575     ¥ 247,194     ¥ 212,275  

Write-offs

    (239,903     (231,230     (250,522

Reversal

    (30,022     (17,596     (26,843

Exchange differences on translating foreign operations

    (12,184     7,054       (12,703
 

 

 

   

 

 

   

 

 

 

Balance at end of year

  ¥ 457,596     ¥ 458,482     ¥ 380,689  
 

 

 

   

 

 

   

 

 

 

Sales revenue

  ¥ 15,361,146     ¥ 15,888,617     ¥ 14,931,009  

 

* 

Provisions for product warranties accrued during the period for the years ended March 31, 2018, 2019 and 2020 are ¥219.5 billion, ¥247.1 billion and ¥212.2 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. Credit risk on consumer finance receivables can be affected by general economic conditions. Adverse changes such as a rise in unemployment 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 expected credit loss on receivables from financial services. Our finance subsidiaries evaluate these estimates, at minimum, on a quarterly basis.

 

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The allowance for credit losses is measured at amounts according to the three-stage expected credit loss (ECL) model:

 

  Stage 1

12-month ECL for financial assets without a significant increase in credit risk since initial recognition

 

  Stage 2

Lifetime ECL for financial assets with a significant increase in credit risk since initial recognition but that are not credit-impaired

 

  Stage 3

Lifetime ECL for credit-impaired financial assets

Lifetime ECL represents ECL that results from all possible default events over the expected life of a financial asset. 12-month ECL is the portion of lifetime ECL that results from default events that are possible within 12 months after the reporting date. ECL is a probability-weighted estimate of the difference between the contractual cash flows and the cash flows that the entity expects to receive, discounted at the original effective interest rates.

To determine whether credit risk has increased significantly, consumer finance receivables are assessed both individually and collectively. Individual assessments are based on delinquencies. Consumer finance receivables 30 days or greater past due have historically experienced increased default rates and therefore are considered to have a significant increase in credit risk. Collective assessments are performed for groups of consumer finance receivables with shared risk characteristics such as the period of initial recognition, collateral type, original term, and credit score considering relative changes in expected default rates since initial recognition. Dealer finance receivables are assessed at the individual dealership level to determine whether credit risk has increased significantly considering payment performance and other factors such as changes in the financial condition of the dealership and compliance with debt covenants.

Our definition of default on receivables from financial services varies depending on internal risk management practices of each of our finance subsidiaries. Our most significant finance subsidiary located in the United States considers delinquencies of 60 days past due to be in default. Collection efforts on consumer finance receivables are escalated after becoming 60 days past due including repossession of the underlying vehicles if it has been determined that the borrower is unable to perform on their obligations. Defaulted consumer finance receivables are considered to be credit-impaired. Dealer finance receivables are considered to be credit-impaired when there is evidence we will be unable to collect all amounts due in accordance with the original contractual terms including significant financial difficulty of the dealership, a breach of contract, such as a default or delinquency, or bankruptcy.

At the finance subsidiary in the United States, the estimated uncollectible portion of consumer finance receivables are written-off at 120 days past due or upon repossession of the underlying vehicle. Although various statutory regulations limit the length of time and circumstances when enforcement activities can be taken, in general, the outstanding contractual balances continue to be subject to enforcement activities for several years after write-offs. The portion of outstanding contractual balances that is estimated to be uncollectible reflects our expectations of collections from enforcement activities. Dealer finance receivables are written-off when there is no reasonable expectation of recovery.

At the finance subsidiary in the United States, ECL of consumer finance receivables is measured for groups of financial assets with shared risk characteristics by reflecting historical results, current conditions, and forward-looking factors such as unemployment rates, used vehicles prices, and consumer debt service burdens. Estimated losses on operating leases due to early terminations are also measured collectively, using estimation techniques similar to those applied for consumer finance receivables.

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

 

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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 remeasurement and allowance for credit losses. If we had experienced a 10% increase in write-offs during fiscal year 2020, the remeasurement for fiscal year 2020 and the allowance balance at the end of fiscal year 2020 would have increased by approximately ¥9.6 billion and ¥6.3 billion, respectively. Note that this sensitivity analysis may be asymmetric and is specific to the base conditions in fiscal year 2020.

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, 2018

   Retail     Finance
lease
    Wholesale     Total  

Allowance for credit losses

        

Balance at beginning of year

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

 

 

   

 

 

   

 

 

   

 

 

 

Provision

   ¥ 36,037     ¥ 214     ¥ 336     ¥ 36,587  

Write-offs

     (39,478     (299     (271     (40,048

Recoveries

     8,368       50       13            8,431  

Exchange differences on translating foreign operations

     (1,718     47       5       (1,666
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 32,076     ¥ 821     ¥ 1,906     ¥ 34,803  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of receivables from financial services

   ¥ 4,187,420     ¥ 165,156     ¥ 651,141     ¥ 5,003,717  

Average balance of receivables from financial services

   ¥ 4,283,938     ¥ 178,083     ¥ 608,199     ¥ 5,070,220  

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

     0.73     0.14     0.04     0.62

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

     0.77     0.50     0.29     0.70

 

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     Yen (millions)  

For the year ended March 31, 2019

   Retail     Finance
lease
    Wholesale     Total  

Allowance for credit losses

        

Balance at beginning of year

   ¥ 32,076     ¥ 821     ¥ 1,906     ¥ 34,803  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of changes in accounting policy

   ¥ 4,599     ¥ —       ¥ —       ¥ 4,599  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted balance at beginning of year

   ¥ 36,675     ¥ 821     ¥ 1,906     ¥ 39,402  
  

 

 

   

 

 

   

 

 

   

 

 

 

Remeasurement

   ¥ 33,873     ¥ 92     ¥ 755     ¥ 34,720  

Write-offs

     (30,986     (125     153       (30,958

Exchange differences on translating foreign operations

     198       (58     (101     39  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 39,760     ¥ 730     ¥ 2,713     ¥ 43,203  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of receivables from financial services

   ¥ 4,602,848     ¥ 142,855     ¥ 712,214     ¥ 5,457,917  

Average balance of receivables from financial services

   ¥ 4,462,772     ¥ 150,766     ¥ 661,846     ¥ 5,275,384  

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

     0.69     0.08     (0.02 )%      0.59

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

     0.86     0.51     0.38     0.79

 

     Yen (millions)  

For the year ended March 31, 2020

   Retail     Finance
lease
    Wholesale     Total  

Allowance for credit losses

        

Balance at beginning of year

   ¥ 39,760     ¥ 730     ¥ 2,713     ¥ 43,203  
  

 

 

   

 

 

   

 

 

   

 

 

 

Remeasurement

   ¥ 54,833     ¥ 142     ¥ 1,905          ¥ 56,880  

Write-offs

     (31,436     (130     (1,784     (33,350

Exchange differences on translating foreign operations

     (2,916     (52     (297     (3,265
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   ¥ 60,241     ¥ 690     ¥ 2,537     ¥ 63,468  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of receivables from financial services

   ¥ 4,440,364     ¥ 125,958     ¥ 666,992     ¥ 5,233,314  

Average balance of receivables from financial services

   ¥ 4,552,643     ¥ 132,568     ¥ 651,139     ¥ 5,336,350  

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

     0.69     0.10     0.27     0.62

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

     1.36     0.55     0.38     1.21

Honda has adopted IFRS 9 issued in July 2014 with a date of initial application of April 1, 2018. Comparative amounts for the year ended March 31, 2018 represent the allowance for credit losses under previous accounting policies. Details of previous accounting policies are described in “(j) Impairment” of note “(3) Significant Accounting Policies” to the accompanying consolidated financial statements.

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

 

     Yen (millions)  
         2018              2019              2020      

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

   ¥ 3,437      ¥ 4,436      ¥ 3,046  

Impairment losses on operating leases due to early termination

   ¥ 11,911      ¥ 11,217      ¥ 36,037  

 

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Fiscal Year 2020 Compared with Fiscal Year 2019

The remeasurement for credit losses on receivables from financial services for the fiscal year ended March 31, 2020 increased by ¥22.1 billion, or 63.8%, from the fiscal year ended March 31, 2019. Write-offs of receivables from financial services for the fiscal year ended March 31, 2020 increased by ¥2.3 billion, or 7.7%, from the fiscal year ended March 31, 2019.

Impairment losses on operating leases due to early termination for the fiscal year ended March 31, 2020 increased by ¥24.8 billion, or 221.3%, from the fiscal year ended March 31, 2019.

The increase in the remeasurement for credit losses and impairment losses on operating leases due to early termination is primarily due to an increase in credit risk by estimated impact of the spread of COVID-19 in our North American finance subsidiaries. As a result of the spread of COVID-19, the economy is experiencing a deterioration resulting in an adverse change in forward-looking factors such as unemployment rates and used vehicles prices. An adverse change in forward-looking factors has resulted in an increase in credit risk in our North American finance subsidiaries.

The increase in write-offs was primarily attributable to higher default frequencies of retail loans for consumers with higher credit risk and those loans of used vehicles in our North American finance subsidiaries.

Fiscal Year 2019 Compared with Fiscal Year 2018

The remeasurement for credit losses on receivables from financial services for the fiscal year ended March 31, 2019 decreased by ¥1.8 billion, or 5.1%, from the provision for fiscal year ended March 31, 2018. Net write-offs of receivables from financial services for the fiscal year ended March 31, 2019 decreased by ¥0.6 billion, or 2.1%, from the fiscal year ended March 31, 2018. The decrease in the remeasurement for credit losses and net write-offs was attributable to foreign currency translation effects in our finance subsidiary in Other Regions.

Although the actual impairment losses on operating leases due to early termination we realized during the fiscal year ended March 31, 2019 continued to increase compared to prior years, the rate of increase has slowed. As a result, impairment losses on operating leases due to early termination for the fiscal year ended March 31, 2019 decreased by ¥0.6 billion, or 5.8%, from the fiscal year ended March 31, 2018.

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 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.

 

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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, 2020 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 ¥7.5 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 ¥1.4 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 2020. 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, 2020 were 0.6% and 1.6%, respectively. Our assumed discount rate and rate of salary increase for foreign plans as of March 31, 2020 were 2.5 - 3.8% and 2.0 - 2.8%, 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.

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

 

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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, 2019 and 2020. 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, bank loans, corporate bonds and commercial paper. 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 ¥532.0 billion as of March 31, 2020. 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 and equipment on operating leases, commercial paper and corporate bonds. The year-end balance of liabilities associated with these finance subsidiaries’ funding for Financial services business was ¥ 7,002.4 billion as of March 31, 2020.

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

Cash Flows

Fiscal Year 2020 Compared with Fiscal Year 2019

Consolidated cash and cash equivalents on March 31, 2020 increased by ¥178.2 billion from March 31, 2019, to ¥2,672.3 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 ¥979.4 billion of cash inflows. Cash inflows from operating activities increased by ¥203.4 billion compared with the previous fiscal year, due mainly to a decrease in receivables from financial services, despite increased payments for parts and raw materials.

 

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Net cash used in investing activities amounted to ¥619.4 billion of cash outflows. Cash outflows from investing activities increased by ¥41.9 billion compared with the previous fiscal year, due mainly to increased payments for additions to and internally developed intangible assets as well as decreased proceeds from sales and redemptions of other financial assets, which was partially offset by decreased payments for additions to property, plant and equipment.

Net cash used in financing activities amounted to ¥87.4 billion of cash outflows. Cash outflows from financing activities increased by ¥110.3 billion compared with the previous fiscal year, due mainly to increased repayments of financing liabilities as well as purchases of treasury stock.

Fiscal Year 2019 Compared with Fiscal Year 2018

Consolidated cash and cash equivalents on March 31, 2019 increased by ¥237.6 billion from March 31, 2018, to ¥2,494.1 billion. The reasons for the increases or decreases for each cash flow activity, when compared with the previous fiscal year, are as follows:

Net cash provided by operating activities amounted to ¥775.9 billion of cash inflows. Cash inflows from operating activities decreased by ¥211.6 billion compared with the previous fiscal year, due mainly to an increase in payments for parts and raw materials, which was partially offset by an increase in cash received from customers.

Net cash used in investing activities amounted to ¥577.5 billion of cash outflows. Cash outflows from investing activities decreased by ¥37.5 billion compared with the previous fiscal year, due mainly to an increase in proceeds from sales and redemptions of other financial assets.

Net cash provided by financing activities amounted to ¥22.9 billion of cash inflows. Cash inflows from financing activities increased by ¥197.2 billion compared with the previous fiscal year, due mainly to an increase in proceeds from financing liabilities, which was partially offset by an increase in repayments of financing liabilities.

Liquidity

The ¥2,672.3 billion in cash and cash equivalents as of March 31, 2020 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, 2020 corresponds to approximately 2.1 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 ¥1,140.0 billion have committed lines of credit equivalent to ¥1,084.9 billion that serve as alternative liquidity for the commercial paper issued regularly to replace debt. Honda believes it currently has sufficient credit limits, extended by prominent international banks, as of the date of the filing of Honda’s Form 20-F.

Honda’s financing liabilities as of March 31, 2020 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.

 

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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, 2020.

 

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

Moody’s Investors Service

     P-2        A3  

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. Product-related R&D is conducted mainly by the Company, Honda R&D Co., Ltd., and Honda R&D Americas, Inc. 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. In the fiscal year ended March 31, 2020, the Company and the motorcycle development division of Honda R&D Co., Ltd. were integrated with an aim to transition from the current structure where sales, development, manufacturing and procurement divisions operate independently to a new structure where each process of planning and concept making, development, launch and mass-production of a new product are coordinated closely.

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, Honda is engaged in research and development with the policy of ‘maximizing the organizational climate of self-challenge and forming a Mono-zukuri (the art of making things) team capable of continually creating products that delight our customers by overcoming changes in the business environment and offering reasonable prices.’

Among major technological achievements, in June 2019 we adopted the Honda Enhanced Smart Power (eSP) environmental engine that complies with the new Bharat Stage VI (BS6) emission standard, for the first time in an Indian model of the Activa series, a key series supporting Honda’s motorcycle business as the leading model in the Indian market. Honda developed the world’s first tumble flow technology through integrated die-casting process. It produces tumble flow by optimizing inlet port shape and using reverse flow phenomenon, without adding additional components. These technologies, along with the Programmed Fuel Injection (PGM-FI) and the Idling Stop System, deliver 10% more mileage compared to existing models.

 

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Likewise, in June 2019 we developed a new frame, enhanced Smart Architecture Frame (eSAF), which was used in the Genio for the Indonesian market. The new frame eSAF is at least 8% lighter than conventional frames while increasing rigidity, through such means as using high-tensile materials and optimized the cross-section shape. This contributes to a smooth drive and extremely comfortable ride. We will sequentially adopt the eSAF for other models on a rolling basis.

Additionally, in March 2020 we launched the CBR1000RR-R FIREBLADE and CBR1000RR-R FIREBLADE SP. The CBR1000RR-R FIREBLADE is the top flagship of the CBR series, using advanced electronic control technologies to support sports riding. It continues the pursuit of ‘Total Control—maximizing the joy of riding’ that we have followed since the maiden model CBR900RR, while also combining body packaging pursuing maneuverability with a high-output power unit providing excellent output characteristic control, in order to fully utilize the advanced performance on the track and in races.

In December 2019, we announced the BENLY e: business-use electric scooters. The BENLY e: models were developed as business-use electric scooters while giving consideration to user-friendliness in use for various pick-up/delivery services, featuring a large and flat rear deck and a reverse assist function to increase user convenience in case the scooter needs to be turned around to face the opposite direction in a narrow space or on an inclined surface. BENLY e: models are powered by two units of the Honda Mobile Power Pack detachable battery. In addition to outstanding environmental performance, which can be achieved only by clean and quiet electric mobility products, BENLY e: models demonstrate powerful and smooth starting and hill climbing performance even when carrying cargo. They began service for postal delivery in January 17, 2020.

R&D expenditures in this segment incurred during the fiscal years ended March 31, 2018, 2019 and 2020 were ¥79.4 billion, ¥85.1 billion and ¥83.6 billion, respectively.

Automobile Business

In the Automobile business, Honda is engaged in research and development under the policies of ‘aim for research laboratories that are one step ahead,’ ‘change awareness and behavior in times of industry revolution’ and ‘pursue value from the perspective of the customer and continue to create high quality products with high quality working methods toward realizing Honda’s vision for 2030.’

Among major technological achievements, in February 2020 we launched the new FIT compact car model. The new FIT offers four dimensions of comfort: (1) ‘Comfortable view’ which provides peace of mind to its occupants; (2) ‘Seating comfort’ of both front and rear seats which makes even long driving less tiring for all occupants; (3) ‘Ride comfort’ achieved by Honda’s original e:HEV hybrid system, which is equipped in the compact car for the first time; and (4) ‘Usability’ which supports comfortable mobility for all occupants, featuring various storage spaces laid out based on earnest considerations of how occupants see things and move inside the vehicle, and sufficient cargo space capacity.

The all-new FIT became the first model sold in Japan equipped with the Honda CONNECT on-board communication module developed exclusively for Honda vehicles, and Honda began Honda Total Care Premium, a connected service which enhances customers’ comfort and peace of mind in their daily lives with cars. Honda Total Care Premium is an evolution of the Honda Total Care Emergency Support Center, which provides safe and secure service 24-7.

In August 2019, we began sales of the all-new N-WGN/N-WGN Custom mini-vehicle. The new N-WGN was developed striving for a vehicle which blends in to the daily life of each and every customer, can be used comfortably by anyone and has friendliness. All-new N-WGN features firm, yet substantial-looking surfaces which cover the entire vehicle from the front-end and doors all the way through the tailgate. While looking clean and simple, the box-shaped body hints at the spaciousness of the cabin. Together with the round headlights, the exterior design expresses a friendliness and solid sense of security which blends in to people’s daily lives. The

 

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ground height of the cargo space floor was lowered to make it easier to load heavy or tall items. With the use of a cargo board, which comes with the vehicle, the cargo space can be divided into upper and lower areas. Multiple cargo space arrangements are possible to accommodate the different needs of customers.

Additionally, in February 2020 we launched the new ACCORD in Japan. This 10th generation of the ACCORD model has received high accolades at the global level, including winning 2018 North American Car of the Year from the North American jury of automotive journalists in January 2018, and Best Hybrid Car of the Year in January 2019 from Sina.com, a portal site boasting 230 million registered users in China. The structure of the new ACCORD was revised from the platform up, achieving a low, wide, and clean design while making a substantial step forward in the evolution of driving and interior space that are fundamental requirements of the ACCORD. The power train is equipped with Honda’s unique e:HEV hybrid system, with the powerful acceleration and smooth drive that only two motors can deliver.

In November 2019, we unveiled the new CITY compact sedan in Thailand for the first time in the world. This fifth generation in the CITY lineage has been reborn with a sporty and sharp exterior and a high-quality, functional interior design, while retaining the popular roomy interior despite being a compact sedan. While complying with the latest environmental standards, we have achieved both powerful driving that surpasses the current 1.5-liter naturally aspirated engine and outstanding fuel efficiency. After the launch of the new CITY in Thailand, we will launch it successively in other countries as well.

R&D expenditures in this segment incurred during the fiscal years ended March 31, 2018, 2019 and 2020 were ¥625.0 billion, ¥703.6 billion and ¥707.2 billion, respectively.

Life Creation and Other Businesses

In the Life creation and other businesses, Honda is engaged in research and development based on the policy of ‘creating the lifestyles of the future, taking usefulness and joy to the next level.’

Among major technological achievements, in June 2019 we added a new type to the large 4-stroke marine outboard motor, popular for their top-of-class power performance and economy, which features a newly developed Drive-By-Wire (DBW) electronic throttle control system, and announced the new BF175 model equipped with the DBW. This is the first time that the newly developed DBW has been used in Honda marine outboard engines, delivering smooth and reliable shift operation, and quick and accurate throttle operation. It also enables easy operation of up to four units installed, and the two separate communication lines make the system highly reliable.

By connecting electric mobility with energy services, Honda aims to enable freedom of movement while expanding the use of renewable energy. One of the means of achieving this is the Honda Mobile Power Pack portable battery, and we are focusing on research and development of systems that incorporate it. Honda Mobile Power Pack Exchanger can simultaneously charge multiple Mobile Power Packs, supply replacement batteries at street-corner locations to compact electric mobility users, and uses surplus power to recharge the Mobile Power Packs, in an aim to realize efficient energy utilization. Additionally, the Honda Mobile Power Pack Charge & Supply Concept, combined with Mobile Power Packs, not only provides charging for mobility, but also can be used as an emergency power source or as a permanent power supply in a wide array of lifestyle possibilities. In this way, we are striving to create new value, aiming to ‘serve people worldwide with the joy of expanding their life’s potential.’

In aircraft business, Honda has created new value with uniquely developed leading-edge technology. We have been building an operating base in order to grow our aircraft business from a long-term perspective. In August 2019, we obtained type certification for the HondaJet Elite in China, and delivered the first aircraft of this model to China in December. We also announced the installation of a medevac configuration on the HondaJet Elite, making HondaJet multi-purpose. In calendar year 2019, the HondaJet became the most delivered aircraft in the world in the small jet category for the third consecutive year, and more than around 150 aircraft are operating worldwide.

 

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R&D expenditures in this segment during the fiscal years ended March 31, 2018, 2019 and 2020 were ¥26.2 billion, ¥31.2 and ¥30.5 billion, respectively.

Patents and Licenses

As of March 31, 2020, Honda owned more than 18,800 patents in Japan and more than 25,500 patents abroad. Honda also had applications pending for more than 7,200 patents in Japan and for more than 15,000 patents abroad. While Honda considers that, in the aggregate, Honda’s patents are important, it does not consider any one of such patents, or any related group of them, to be of such importance that the expiration or termination thereof would materially affect Honda’s business.

D. Trend Information

See Item 5.A “Operating Results” 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 potential obligation as of March 31, 2020 was ¥63.6 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, 2020, we guaranteed ¥10.1 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 potential obligation to make future payments in the event of defaults is ¥10.1 billion. As of March 31, 2020, 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, 2020:

Contractual Obligations

 

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

Financing liabilities

   ¥ 7,593,927      ¥ 3,341,226      ¥ 2,858,357      ¥ 1,106,303      ¥ 288,041  

Other financial liabilities

     539,159        140,326        125,857        42,049        230,927  

Purchase and other commitments*1

     80,670        74,028        5,756        886        —    

Contributions to defined benefit pension plans*2

     42,174        42,174        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 8,255,930      ¥ 3,597,754      ¥ 2,989,970      ¥ 1,149,238      ¥ 518,968  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

*1 

Honda had commitments for purchases of property, plant and equipment as of March 31, 2020.

*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.

 

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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 companies 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.

The following table provides the names of all the members of the Board of Directors (including the Audit and Supervisory Committee Members). Also the names of the operating officers (who are not concurrently the members of the Board of Directors) of the Company and the current positions held by such persons are provided below.

 

Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Chairman and Director

     

Toshiaki Mikoshiba

(November 15, 1957)

  Joined Honda Motor Co., Ltd. in April 1980     *2       43,900  
 

 

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
   
 

President and Director of Honda North America, Inc.,

appointed in April 2016

   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 
 

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

appointed in April 2016

   
  In Charge of Sales and Marketing of the Company,
appointed in April 2017
   
  Senior Managing Director,
appointed in June 2017
   
 

President, Chief Executive Officer and Director of Honda North America, Inc.,

appointed in April 2018

   
 

Chairman, Chief Executive Officer and Director of Honda North America, Inc.,

appointed in November 2018

   
 

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

appointed in November 2018

   
 

Chairman and Director of the Company,

appointed in April 2019 (presently held)

   
 

Chairman of the Board of Directors,

appointed in April 2019 (presently held)

   
 

Director in Charge of Government and Industry Relations,

appointed in April 2019 (presently held)

   

 

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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     *2       38,600  
 

 

General Manager of Automobile Purchasing Division II
for Purchasing Operations,
appointed in April 2008

   
  Operating Officer,
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) of the Company,
appointed in April 2013
   
  Vice President of Honda Motor (China) Investment Co., Ltd.,
appointed in April 2013
   
  Vice President of Honda Motor (China) Technology Co., Ltd.,
appointed in November 2013
   
  Managing Officer of the Company,
appointed in April 2014
   
  Senior Managing Officer,
appointed in April 2015
   
  President, Chief Executive Officer and Representative Director,
appointed in June 2015
   
  Chief Executive Officer,
appointed in April 2017 (presently held)
   
  President and Representative Director,
appointed in June 2017 (presently held)
   
 

Director in Charge of Research & Development

(Research & Development, Intellectual Property and Standardization),

appointed in April 2019

   

 

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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     *2       38,700  
 

 

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) of the Company,
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,
appointed in April 2011
   
 

Operating Officer,

appointed in June 2011
(resigned from position as Director)

   
  President of Honda Motor (China) Technology Co., Ltd.,
appointed in November 2013
   
  Managing Officer of the Company,
appointed in April 2014
   
  Senior Managing Officer,
appointed in April 2016
   
  Executive Vice President, Executive Officer and
Representative Director,
appointed in June 2016
   
  Risk Management Officer,
appointed in June 2016
   
  Corporate Brand Officer,
appointed in June 2016 (presently held)
   
  Chief Operating Officer,
appointed in April 2017 (presently held)
   
 

In Charge of Strategy, Business Operations and Regional Operations,

appointed in April 2017

   
  Executive Vice President and Representative Director,
appointed in June 2017 (presently held)
   
 

Director in Charge of Strategy, Business Operations and Regional Operations,

appointed in April 2019 (presently held)

   
 

Chief Officer for Automobile Operations,

appointed in April 2019

   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Senior Managing Directors

     

Kohei Takeuchi

(February 10, 1960)

  Joined Honda Motor Co., Ltd. in April 1982     *2       27,900  
 

 

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

   
  Operating Officer,
appointed in April 2011
   
  Chief Officer for Business Management Operations,
appointed in April 2013
   
  Operating Officer and Director,
appointed in June 2013
   
  Managing Officer and Director,
appointed in April 2015
   
  Senior Managing Officer and Director,
appointed in April 2016
   
  Chief Officer for Driving Safety Promotion Center,
appointed in April 2016 (presently held)
   
  Chief Financial Officer
(Accounting, Finance, Human Resources, Corporate Governance and IT),
appointed in April 2017
   
  Senior Managing Director,
appointed in June 2017 (presently held)
   
 

Chief Financial Officer and Director in Charge of Finance and Administration
(Accounting, Finance, Human Resources, Corporate Governance and IT),

appointed in April 2019

   
 

Compliance Officer,

appointed in April 2019 (presently held)

   
 

Chief Financial Officer and Director in Charge of Finance and Administration
(Accounting, Finance, Human Resources, and Corporate Governance),

appointed in April 2020 (presently held)

   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Toshihiro Mibe

(July 1, 1961)

  Joined Honda Motor Co., Ltd. in April 1987     *2       19,400  
 

 

Managing Officer of Honda R&D Co., Ltd.,
appointed in April 2012

   
  Operating Officer of the Company,
appointed in April 2014
   
  Executive in Charge of Powertrain Business for Automobile Operations,
appointed in April 2014
   
  Head of Powertrain Production Supervisory Unit of Automobile Production for Automobile Operations,
appointed in April 2014
   
  Executive in Charge of Powertrain Business and Drivetrain Business for Automobile Operations,
appointed in April 2015
   
  Head of Drivetrain Business Unit in Automobile Production for Automobile Operations,
appointed in April 2015
   
  Senior Managing Officer and Director of Honda R&D Co., Ltd.,
appointed in April 2016
   
  Managing Officer of the Company,
appointed in April 2018
   
  Executive Vice President and Director of Honda R&D Co., Ltd.,
appointed in April 2018
   
  President and Representative Director of Honda R&D Co., Ltd.,
appointed in April 2019 (presently held)
   
 

In Charge of Intellectual Property and Standardization of the Company,

appointed in April 2019

   
 

Senior Managing Officer,

appointed in April 2020

   
  In Charge of Mono-zukuri (Research & Development, Production, Purchasing, Quality, Parts, Service, Intellectual Property, Standardization and IT),
appointed in April 2020
   
  Risk Management Officer,
appointed in April 2020 (presently held)
   
 

Senior Managing Director,

appointed in June 2020 (presently held)

   
  Director in Charge of Mono-zukuri (Research & Development, Production, Purchasing, Quality, Parts, Service, Intellectual Property, Standardization and IT),
appointed in June 2020 (presently held)
   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Directors

     

Hiroko Koide

(August 10, 1957)

  Joined J. Walter Thompson Japan K.K. (currently J. Walter Thompson Japan G.K.) in September 1986     *2       300  
  Joined Nippon Lever K.K. (currently Unilever Japan K.K.) in May 1993    
 

Director of Nippon Lever K.K.,

appointed in April 2001 (resigned in March 2006)

   
 

General Manager of Marketing Management Division, Masterfoods Ltd. (currently Mars Japan Limited),

appointed in April 2006

   
 

Chief Operating Officer of Mars Japan Limited,

appointed in April 2008 (resigned in August 2010)

   
 

President and Representative Director of Parfums Christian Dior Japon K.K.,

appointed in November 2010 (resigned in January 2012)

   
 

Outside Director of Kirin Co., Ltd.,

appointed in January 2013 (resigned in March 2018)

   
 

Senior Vice President of Global Marketing, Newell Rubbermaid Inc. (U.S.) (currently Newell Brands Inc. (U.S.)),

appointed in April 2013 (resigned in February 2018)

   
 

Outside Director of Mitsubishi Electric Corporation,

appointed in June 2016 (presently held)

   
 

Director of Vicela Japan Co., Ltd.,

appointed in April 2018 (resigned in March 2019)

   
 

Director of the Company,

appointed in June 2019 (presently held)

   
 

Outside Director of J-OIL MILLS, Inc.,

appointed in June 2019 (presently held)

   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Fumiya Kokubu

(October 6, 1952)

  Joined Marubeni Corporation in April 1975     *2       —    
 

 

Senior Managing Executive Officer of Marubeni Corporation,

appointed in April 2010

   
 

Senior Executive Vice President of Marubeni Corporation,

appointed in April 2012

   
 

Senior Executive Vice President, Member of the Board of Marubeni Corporation,

appointed in June 2012

   
 

President and CEO, Member of the Board of Marubeni Corporation,

appointed in April 2013

   
 

Chairman of the Board of Marubeni Corporation,

appointed in April 2019 (presently held)

   
 

Outside Director of Taisei Corporation,

appointed in June 2019 (presently held)

   
 

Director of the Company,

appointed in June 2020 (presently held)

   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Takanobu Ito

(August 29, 1953)

  Joined Honda Motor Co., Ltd. in April 1978     *2       51,000  
 

 

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 for Motor Sports of the Company,
appointed in April 2004
   
  General Manager of Suzuka Factory for Production Operations,
appointed in April 2005
   
  Managing Officer,
appointed in June 2005
   
  Chief Officer for Automobile Operations,
appointed in April 2007
   
  Senior Managing Director,
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,
appointed in April 2011
   
  Chief Officer for Automobile Operations,
appointed in April 2011
   
  Director and Advisor,
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

    *3       45,700  
 

 

Responsible for Human Resources and Associate Relations
and General Manager of Human Resources Division for Business Support Operations,
appointed in April 2007

   
  Operating Officer,
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,
appointed in June 2010
   
  Operating Officer and Director,
appointed in April 2011
   
  Compliance Officer,
appointed in April 2012
   
  Managing Officer and Director,
appointed in April 2013
   
  Corporate Auditor (Full-time),
appointed in June 2016
   
  Director (Full-time Audit and Supervisory Committee Member),
appointed in June 2017 (presently held)
   

Masafumi Suzuki

(April 23, 1964)

 

Joined Honda Motor Co., Ltd. in April 1987

    *3       51,420  
 

 

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 (Full-time Audit and Supervisory Committee Member),

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
 

Hideo Takaura

(June 19, 1949)

 

Registered as Japanese Certified Public Accountant in May 1977

    *3       2,000  
 

 

Chief Executive Officer of PricewaterhouseCoopers Aarata (currently, PricewaterhouseCoopers Aarata LLC),
appointed in September 2006

   
 

Representative Partner of PricewaterhouseCoopers Aarata,

appointed in May 2009 (resigned in June 2009)

   
 

Outside Auditor of Innovation Network Corporation of Japan (currently Japan Investment Corporation),

appointed in July 2009 (presently held)

   
  Corporate Auditor of the Company,
appointed in June 2015
   
  Director (Audit and Supervisory Committee Member),
appointed in June 2017 (presently held)
   
  Outside Director of Tokyo Electric Power Company Holdings, Inc.,
appointed in June 2017 (presently held)
   
 

Outside Auditor of INCJ, Ltd.,

appointed in September 2018 (presently held)

   

Mayumi Tamura

(May 22, 1960)

 

Executive Officer, SVP and Chief Financial Officer of The Seiyu, Ltd. (currently Seiyu G.K.),

appointed in June 2007

    *3       2,000  
 

Executive Officer, SVP and Chief Financial Officer of Seiyu G.K. and Wal-Mart Japan Holdings G.K. (currently Wal-Mart Japan Holdings K.K.),

appointed in May 2010 (resigned in July 2013)

   
  Corporate Auditor of the Company,
appointed in June 2015
   
 

Director (Audit and Supervisory Committee Member),

appointed in June 2017 (presently held)

   
 

Outside Director of Hitachi High-Technologies Corporation

(currently Hitachi High-Tech Corporation),

appointed in June 2017 (presently held)

   
 

Outside Director of SHIMIZU CORPORATION,

appointed in June 2019 (presently held)

   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term     Number of
Shares Owned
 

Kunihiko Sakai

(March 4, 1954)

 

Public Prosecutor of Tokyo District Public Prosecutors’ Office,

appointed in April 1979

    *3       300  
 

 

Public Prosecutor of Nagano District Public Prosecutors’ Office, appointed in March 1980

   
 

Public Prosecutor of Tokyo District Public Prosecutors’ Office,

appointed in March 1983

   
  First Secretary of Embassy of Japan in the United States of America, appointed in July 1990    
 

Public Prosecutor of Tokyo District Public Prosecutors’ Office,

appointed in April 1994

   
 

Senior Counsel of Minister’s Secretariat of Ministry of Justice,

appointed in July 1998

   
 

Public Prosecutor of Tokyo High Public Prosecutors’ Office and Assistant Director of Public Security Department of Tokyo District Public Prosecutors’ Office,

appointed in April 2000

   
 

Director of the United Nations Asia and Far East Institute for the Prevention of Crime and the Treatment of Offenders,

appointed in April 2002

   
 

Director of Trial Department of Tokyo High Public Prosecutors’ Office,

appointed in July 2005

   
 

Public Prosecutor of Supreme Public Prosecutors’ Office,

appointed in July 2006

   
  Chief Public Prosecutor of Nara District Public Prosecutors’ Office, appointed in June 2007    
 

Director-General of General Affairs Department of Supreme Public Prosecutors’ Office,

appointed in July 2008

   
 

Director of Lay Judge Trial Department of Supreme Public Prosecutors’ Office,

appointed in June 2010

   
 

Chief Public Prosecutor of Nagoya District Public Prosecutors’ Office,

appointed in October 2010

   
  President of Research and Training Institute of Ministry of Justice, appointed in June 2012    
 

Superintending Prosecutor of Takamatsu High Public Prosecutors’ Office,

appointed in July 2014

   
 

Superintending Prosecutor of Hiroshima High Public Prosecutors’ Office,

appointed in September 2016 (resigned in March 2017)

   

 

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Name
(Date of birth)

 

Current Positions and Biographies with Registrant

  Term   Number of
Shares Owned
  Registered with the Dai-Ichi Tokyo Bar Association in April 2017    
 

Advisor Attorney to TMI Associates,

appointed in April 2017 (presently held)

   
 

Audit and Supervisory Board Member (Outside) of Furukawa Electric Co., Ltd.,

appointed in June 2018 (presently held)

   
 

Director (Audit and Supervisory Committee Member) of the Company,

appointed in June 2019 (presently held)

   

 

 

*1

Directors (including Audit and Supervisory Committee Members) Ms. Hiroko Koide, Mr. Fumiya Kokubu, Mr. Hideo Takaura, Ms. Mayumi Tamura and Mr. Kunihiko Sakai are Outside Directors.

*2

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, 2021 after his/her election to office at the close of the ordinary general meeting of shareholders on June 19, 2020.

*3

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, 2021 after his/her election to office at the close of the ordinary general meeting of shareholders on June 19, 2019.

*4

The Company adopts an operating officer system to strengthen operations in regions and local workplaces, and implement quick and appropriate decisions. Senior Managing Officers, and Managing 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 under the operating officer system, as voluntarily disclosed in Japan, are as follows:

 

Managing Officers

  

Michimasa Fujino

   President and Director of Honda Aircraft Company, LLC

Shinji Aoyama

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

Noriya Kaihara

   Head of Business Supervisory Unit for Automobile Operations

Mitsugu Matsukawa

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

Noriaki Abe

   Chief Officer for Motorcycle Operations

Yasuhide Mizuno

   Chief Officer for Automobile Operations

Katsushi Inoue

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

Hisao Takahashi

   General Manager of Mono-zukuri Center for Automobile Operations
   Director of Honda R&D Co., Ltd.

 

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

 

*5

The Company introduced the Operating Executive position effective April 1, 2020, with the aim of advancing its corporate executive structure and enabling the Company to address changes in the business environment with greater speed and flexibility. Operating Executives will engage in company operations, with responsibility for business execution in their respective areas under the direction and supervision of management. Operating Executives 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.

B. Compensation

The Company’s remuneration structure for the officers shall be designed with the aim of motivating them to contribute not only to short-term, but also to mid- to long-term business results, to enable the sustainable enhancement of the corporate value, and shall consist of a fixed monthly remuneration paid as compensation for the performance of their duties, an executive bonus linked to the business results for the relevant business year, and a stock compensation linked to mid- to long-term business results.

Monthly remuneration shall be paid in an amount that is suitable for attracting diverse and exceptional human resources, while taking into consideration the payment standards of other companies etc.

Executive bonuses shall be determined by a resolution of the Board of Directors taking into consideration the business results of each business year, dividends to shareholders, the standards of bonuses of employees and other matters.

Stock compensation shall be paid in the Company’s stock and money and linked to business results in the mid- to long-term based on the standards and procedures approved by the Board of Directors, so that the stock compensation functions as a sound incentive aimed at sustainable growth.

Remuneration of the executive Directors and the Operating Officers shall consist of monthly remuneration paid based on the remuneration standards approved by the Board of Directors as well as executive bonuses and stock compensation.

Remuneration paid to the outside Directors and other non-executive Directors (excluding Audit and Supervisory Committee Members) shall consist only of monthly remuneration based on remuneration standards approved by the Board of Directors.

Remuneration of the Directors who are members of the Audit and Supervisory Committee shall consist only of monthly remuneration determined by discussion among Directors who are members of the Audit and Supervisory Committee.

Regarding remuneration and other related matters, it was approved at the Ordinary General Meeting of Shareholders held on June 15, 2017 that the amount of remuneration for Directors (excluding Audit and Supervisory Committee Members) shall be no more than 1,160 million yen per year, while the remuneration for Outside Directors shall be no more than 34 million yen, and the remuneration for Directors who are Audit and Supervisory Committee Members shall be no more than 270 million per year. At the time of the approval, there were nine Directors (of which two are Outside Directors; excluding Director who are Audit and Supervisory Committee Members) and there were five Directors who belong to the Audit and Supervisory Committee.

 

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Besides the amount of the remuneration provided above, it was approved at the Ordinary General Meeting of Shareholders held on June 14, 2018 that, for the Directors and Operating Officers who conduct business execution and who are residents of Japan, a new stock compensation scheme providing delivery or grant of shares in the Company and monetary compensation in an amount equivalent to the conversion proceeds of shares in the Company along with the dividends on shares in the Company will be introduced. The maximum amount of funds contributed by the Company was set at 3,910 million yen for the trust period (approximately three years). At the time of the approval, five Directors and 16 Operating Officers were eligible for this scheme.

The Board of Directors has the authority to determine policies relating to determination of the amount of remuneration paid to the Company’s Directors as well as the relevant calculation methods. The scope of such authority and discretionary power of the Board of Directors to determine and approve the remuneration standards as well as the amount of remuneration paid to the Directors shall be within the allowed amount of remuneration set by the Ordinary General Meeting of Shareholders. If the Board of Directors seeks to determine or change the remuneration structure or the remuneration standards for the Directors, it shall discuss the matter after hearing the opinions formed in advance by the Audit and Supervisory Committee.

In the process of determining the remuneration of Directors for this business year, changes in the remuneration standards as well as introduction of a new stock compensation scheme were approved at the meeting of the Board of Directors held on May 15, 2018. In addition, the amounts of bonus to be paid to Directors were decided at the meeting of the Board of Directors held on May 12, 2020. Furthermore, changes in the remuneration standards as well as introduction of a new stock compensation scheme were approved at the meeting of the Board of Directors on May 15, 2018, based on the opinions that the suggested change and procedures were appropriate by the Audit and Supervisory Committee Meeting held on May 9, 2018.

Remuneration of executive Directors shall consist of performance-linked remuneration and other kinds of remuneration, whose ratio will be determined as follows. If performance-linked remuneration is paid at the base amount, 50% of the total remuneration will consist of performance-linked remuneration, such as the bonus and stock compensation, and the rest 50% will consist of other kinds of remuneration.

In order to advance the Company’s sustainable growth and enhance its corporate value over the mid- to long-term by sharing common interests with the shareholders through having a shareholding in the Company, even Directors and Operating Officers who are not eligible for stock compensation shall acquire the Company’s stock by contributing a certain portion of their fixed remuneration to the Officers Shareholding Association.

Directors and Operating Officers shall continuously hold throughout their term of office and for one year after their retirement any stock of the Company acquired as stock compensation or acquired through the Officers Shareholding Association.

In addition, regarding the guideline for performance-linked remuneration, the bonus amount is determined based on the business results of each business year, dividends paid to shareholders and the standards of bonuses of employees and other factors. The guideline for stock compensation is determined based on financial indicators, such as consolidated operating margin, and the degree of growth in non-financial indicators, such as brand value and ESG (Environmental, Social and Governance).

The above guideline determining the amount of bonus is selected in order to measure the degree of contribution to corporate value for each business year and to measure the degree of achievement of corporate responsibility to shareholders and employees. The above guideline determining the amount of stock compensation is selected in order to achieve sustainable growth and enhancement of corporate value over the mid- to long term.

Regarding the amount of performance-linked remuneration, while a specific target of the guideline is not set, the amount of bonus is determined at each meeting of the Board of Directors based on the relationship between the guidelines and amounts of bonus paid in the past as well as of the current business condition and future prospects.

 

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The amount of stock compensation is determined within the range of 50%-150% of the performance coefficient based on the degree of growth of the Company during the most recent three fiscal years and calculated using the method determined at the Board of Directors.

The total amount of fixed monthly remuneration paid to the Company’s Directors during the fiscal year ended March 31, 2020 was ¥691 million. This amount includes fixed monthly remuneration paid to two Directors and one Audit and Supervisory Committee Member who retired during the fiscal year. The amount of fixed monthly remuneration paid to the Directors includes amount of fixed monthly remuneration paid to those Directors who were also Directors or Corporate Auditors of subsidiaries of the Company.

The total amount of bonuses and stock compensation for the Company’s Directors accrued for the fiscal year ended March 31, 2020 were ¥101 million and ¥140 million, respectively.

The amounts of fixed monthly remuneration paid, bonuses and stock compensation accrued during the year ended March 31, 2020 are as follows:

 

     Fixed remuneration      Performance-linked remuneration      Total  
     Remuneration      Bonus      Stock
compensation
        
     Number
of persons
     Yen
(millions)
     Number
of persons
     Yen
(millions)
     Number
of persons
     Yen
(millions)
     Yen
(millions)
 

Directors excluding Audit and Supervisory Committee Members and outside Directors

     7      ¥ 460        4      ¥ 101        5      ¥ 140      ¥ 702  

Outside Directors excluding Audit and Supervisory Committee Members

     3        33        —          —          —          —          33  

Audit and Supervisory Committee Members excluding outside Directors

     2        145        —          —          —          —          145  

Outside Audit and Supervisory Committee Members

     4        50        —          —          —          —          50  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

         16      ¥ 691              4      ¥ 101              5      ¥ 140      ¥ 932  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The amount of fixed monthly remuneration paid to Toshiaki Mikoshiba during the fiscal year ended March 31, 2020 was ¥108 million.

The amount of fixed monthly remuneration paid to Takahiro Hachigo during the fiscal year ended March 31, 2020 was ¥91 million. The amount of bonus and stock compensation for Takahiro Hachigo accrued for the fiscal year ended March 31, 2020 were ¥36 million and ¥47 million, respectively.

The amount of fixed monthly remuneration paid to Seiji Kuraishi during the fiscal year ended March 31, 2020 was ¥59 million. The amount of bonus and stock compensation for Seiji Kuraishi accrued for the fiscal year ended March 31, 2020 were ¥23 million and ¥30 million, respectively.

The Board Incentive Plan

The Company resolved to introduce a new stock compensation scheme (the “Scheme”) for Directors and Operating Officers who conduct business execution and who are residents of Japan at its Board of Directors meeting on May 15, 2018 and the 94th Ordinary General Meeting of Shareholders on June 14, 2018 (the approval at such Meeting of Shareholders, the “Shareholder Approval”). The Company resolved to introduce of Operating Executive position at its Board of Directors meeting on February 18, 2020. In addition, the Company resolved to expand the Scheme to a part of Operating Executives (hereinafter Directors, Operating Officers and a

 

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part of Operating Executives, covered by the Scheme referred to as “Directors, Etc.”). The Scheme is a stock compensation scheme that uses a “BIP (Board Incentive Plan) trust” (a “BIP Trust”), which is similar to performance share and restricted stock compensation plans used in the United States. Under the Scheme, Directors, Etc. will be awarded and receive the Company shares and money in accordance with their positions and the degree of growth in management indicators of the Company, such as financial results and corporate value. The Scheme was introduced for the purpose of further motivating Directors, Etc. to pursue sustained improvement of corporate value of the Company in the medium to long term as well as common interests with shareholders.

The basic structure of the Scheme and the payment methods thereunder are in principle as set forth below:

The Company will entrust money within the scope prescribed in the Shareholder Approval and create a BIP Trust, beneficiaries of which are Directors Etc. who satisfy beneficiary requirements.

The BIP Trust will be an individually-operated specified trust of money other than cash trust (third party beneficiary trust). In accordance with the instructions of the trust administrator, a third party certified public accountant who has no interests in the Company, the BIP Trust will acquire the Company’s shares of common stock from the stock market using the source of the fund. The number of shares to be acquired shall be within the scope prescribed in the Shareholder Approval.

The trust agreement creating the BIP Trust is entered into effect and the Scheme is effective on August 20, 2018. During the term of the BIP Trust, which is from August 20, 2018 to August 31, 2021, the Company shall grant Directors Etc. base points determined by their positions, taking into consideration factors including work responsibilities and duties.

The trustees of the BIP Trust are Mitsubishi UFJ Trust and Banking Corporation and The Master Trust Bank of Japan, Ltd. We set ¥2,409 million as the amount of the trust money, which includes remunerations and expenses relating to maintenance of the trust. While up to 1,310,000 shares of the Company’s common stock were originally planned to be bought from the market for the purpose of this BIP Trust, 713,600 shares were actually bought for this purpose during the period from August 22, 2018 to August 31, 2018. The Company is the holder of vested rights, and the residual assets the Company can receive during the liquidation of the BIP Trust will be limited to the amount of reserve fund for maintenance of the trust. The voting rights of the shares of common stock held by the BIP Trust will not be exercised.

C. Board Practices

See Item 6.A “Directors and Senior Management” for information concerning the Company’s Directors (including Audit and Supervisory Committee Members) required by this item.

D. Employees

The following tables list the number of Honda full-time employees as of March 31, 2018, 2019 and 2020.

As of March 31, 2018

 

Total

  

Motorcycle
Business

  

Automobile
Business

  

Financial Services
Business

  

Life Creation and
Other Businesses

215,638

   44,289    159,328    2,370    9,651

 

  

 

  

 

  

 

  

 

As of March 31, 2018, Honda had 215,638 full-time employees, including 150,883 local nationals employed in its overseas operations.

 

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As of March 31, 2019

 

Total

  

Motorcycle
Business

  

Automobile
Business

  

Financial Services
Business

  

Life Creation and
Other Businesses

219,722

   45,319    162,278    2,442    9,683

 

  

 

  

 

  

 

  

 

As of March 31, 2019, Honda had 219,722 full-time employees, including 153,215 local nationals employed in its overseas operations.

As of March 31, 2020

 

Total

  

Motorcycle
Business

  

Automobile
Business

  

Financial Services
Business

  

Life Creation and
Other Businesses

218,674

   47,013    159,555    2,455    9,651

 

  

 

  

 

  

 

  

 

As of March 31, 2020, Honda had 218,674 full-time employees, including 151,530 local nationals employed in its overseas operations.

Most of the Company’s regular employees in Japan, except management personnel, are required by the terms of the Company’s collective bargaining agreement with its labor union to become members of the Federation of All Honda Workers’ Union (AHWU), which is affiliated with the Japan Council of the International Metalworkers’ Federation. Approximately 85% of the employees of the Company and its Japanese subsidiaries were members of AHWU as of March 31, 2020.

In Japan, basic wages are negotiated annually and the average increases in wages of the Company’s employees in the fiscal year ended March 31, 2018, 2019 and 2020 were 2.5%, 2.4% and 2.1%, respectively. In addition, in accordance with Japanese custom, each employee is paid a semi-annual bonus. Bonuses are negotiated during wage negotiations and are based on the overall performance of the Company or the applicable subsidiary in the previous year, the outlook for the current year and other factors.

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

E. Share Ownership

The total amount of the Company’s voting securities owned by its Directors (including Audit and Supervisory Committee Members) as a group as of June 19, 2020 is as follows.

 

Title of Class

 

Amount Owned

 

% of Class

Common Stock   321,220 shares   0.019%

The Company’s full-time employees are eligible to participate in the Honda Employee Shareholders’ Association, whereby participating employees contribute a portion of their salaries to the Association and the Association purchases shares of the Company’s Common Stock on their behalf. As of March 31, 2020, the Association owned 6,726,249 shares of the Company’s common stock.

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

As of March 31, 2020, 1,811,428,430 shares of Honda’s Common Stock were issued and 1,726,609,786 shares were outstanding.

 

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The following table shows the shareholders of record that owned 5% or more of the issued shares of Honda’s Common Stock as of March 31, 2020:

 

Name

   Shares owned
(thousands)
   Ownership
(%)

The Master Trust Bank of Japan, Ltd. (Trust Account)

   133,949    7.8

Japan Trustee Services Bank, Ltd. (Trust Account)

   114,252    6.6

According to a statement on Schedule 13G (Amendment No. 16) filed by Mitsubishi UFJ Financial Group, Inc. with the SEC on February 13, 2020, Mitsubishi UFJ Financial Group, Inc. directly and indirectly held, as of December 31, 2019, 106,676,770 shares, or 6.1% of the then issued shares, of Honda’s Common Stock. According to a statement on Schedule 13G (Amendment No. 5) filed by BlackRock, Inc. with the SEC on February 5, 2020, BlackRock, Inc. directly and indirectly held, as of December 31, 2019, 102,081,823 shares, or 5.6% of the then issued shares, of Honda’s Common Stock. According to a statement on Schedule 13G (Amendment No. 3) filed by Sumitomo Mitsui Trust Holdings, Inc. with the SEC on February 12, 2020, Sumitomo Mitsui Trust Holdings, Inc. directly and indirectly held, as of December 31, 2019, 101,221,100 shares, or 5.6% of the then issued shares, of Honda’s Common Stock.

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

ADSs representing American Depositary Shares are issued by JPMorgan Chase Bank, N.A., as Depositary. The normal trading unit is 100 American Depositary Shares. Total issued shares of Honda as of the close of business on March 31, 2020 were 1,811,428,430 shares of Common Stock, of which 53,915,262 shares represented by ADSs and 243,552,457 shares not represented by ADSs were owned by residents of the United States. The number of holders of record of the Company’s shares of Common Stock in the United States was 242 at March 31, 2020.

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

B. Related Party Transactions

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

During the fiscal year ended March 31, 2020, Honda had sales of ¥832.5 billion and purchases of ¥1,408.1 billion with affiliates and joint ventures accounted for using the equity method. As of March 31, 2020, Honda had receivables of ¥223.2 billion from affiliates and joint ventures, and had payables of ¥135.3 billion to affiliates and joint ventures.

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

C. Interests of Experts and Counsel

Not applicable.

Item 8. Financial Information

A. Consolidated Statements and Other Financial Information

1 – 3. Consolidated Financial Statements

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

 

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4. Not applicable.

5. Not applicable.

6. Export Sales

See “Item 4—Information on the Company—Marketing and Distribution—Overseas Sales”.

7. Legal Proceedings

Various legal proceedings are pending against us. We believe that such proceedings constitute ordinary routine litigation incidental to our business.

Honda is subject to potential liability under various lawsuits and claims. Honda recognizes a provision for loss contingencies 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. Honda reviews these pending lawsuits and claims periodically and adjusts the amounts recognized for these contingent liabilities, if necessary, by considering the nature of lawsuits and claims, the progress of the case and the opinions of legal counsel.

With respect to product liability, personal injury claims or lawsuits, Honda believes that any judgment that may be recovered by any plaintiff for general and special damages and court costs will be adequately covered by Honda’s insurance and provision. Punitive damages are claimed in certain of these lawsuits.

After consultation with legal counsel, and taking into account all known factors pertaining to existing lawsuits and claims, Honda believes that the ultimate outcome of such lawsuits and pending claims should not result in liability to Honda that would be likely to have an adverse material effect on its consolidated financial position or results of operations.

Class actions related to airbag inflators

Honda has been conducting market-based measures in relation to airbag inflators. Honda recognizes a provision for specific warranty 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. There is a possibility that Honda will need to recognize additional provisions when new evidence related to the product recalls arise, however, it is not possible for Honda to reasonably estimate the amount and timing of potential future losses as of the date of this report.

In the United States and Canada, various class action lawsuits and civil lawsuits related to the above mentioned market-based measures were filed against Honda. The plaintiffs claimed for properly functioning airbag inflators, compensation of economic losses including incurred costs and the decline in the value of vehicles, as well as punitive damages.

Most of the class action lawsuits in the United States were transferred to the United States District Court for the Southern District of Florida and consolidated into a multidistrict class action litigation. For the year ended March 31, 2018, Honda has reached a settlement with the plaintiffs of the multidistrict class action litigation in the United States. Honda recognized the settlement of ¥53,739 million as selling, general and administrative expenses, which includes funds contributed to enhance airbag inflator recall activities. The final approval of the settlement from court was completed as July 31, 2018(U.S. local time).

8. Profit Redistribution Policy

The Company strives to carry out its operations worldwide from a global perspective and to increase its corporate value. With respect to the redistribution of profits to its shareholders, which we consider to be one of the most important management issues, the Company’s basic policy is to determine such distributions after

 

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taking into account, among others, its retained earnings for future growth and consolidated earnings performance based on a long-term perspective. With respect to dividends, the present goal is to realize a return ratio (i.e. the ratio of the total of the dividend payment to consolidated profit for the year attributable to owners of the parent) of approximately 30%.

The Company’s basic policy for dividends is to make quarterly distributions. The Company may determine dividends from surplus by a resolution of the Board of Directors.

The Company may also acquire its own shares at a timing that it deems optimal, with the goal of improving efficiency of the Company’s capital structure and implementing a flexible capital strategy.

Retained earnings will be allocated toward financing R&D activities that are essential for the future growth of the Company as well as for capital expenditures and investment programs that will expand its operations for the purpose of improving business results and maintaining the Company’s sound financial condition.

The Company determined total dividends for the year ended March 31, 2020 were ¥112 per share, an increase of ¥1 from the annual dividends paid for the year ended March 31, 2019. Quarterly dividends per share for the year ended March 31, 2020 were as follows: the first quarter ¥28, the second quarter ¥28, the third quarter ¥28, the fourth quarter ¥28 per share.

Details of Distribution of Surplus (Record dates of the fiscal year ended March 31, 2020)

 

     Resolution of
the Board of
Directors
     Resolution of
the Board of
Directors
     Resolution of
the Board of
Directors
     Resolution of
the Board of
Directors
 
     August 2, 2019      November 8, 2019      February 7, 2020      May 12, 2020  
Dividend per Share of Common Stock
(yen)
     28.00        28.00        28.00        28.00  
Total Amount of Dividends
(millions of yen)
     49,287        49,287        48,932        48,363  

B. Significant Changes

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

Item 9. The Offer and Listing

A. Offer and Listing Details

Honda’s shares have traded on the Tokyo Stock Exchange (TSE) since its shares were first listed on the TSE in 1957. Our ordinary shares are traded on the TSE under the symbol “7267”.

Since February 11, 1977, American Depositary Shares (each representing one share of Common Stock and evidenced by American Depositary Receipts (ADRs)) have been listed and traded on the New York Stock Exchange (the NYSE) under the symbol “HMC”, having been traded on the over-the-counter markets in the United States since 1962.

B. Plan of Distribution

Not applicable.

C. Markets

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

 

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D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

Item 10. Additional Information

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

Set forth below is certain information relating to Honda’s Common Stock, including brief summaries of the relevant provisions of Honda’s Articles of Incorporation and Share Handling Regulations as currently in effect, and of the Company Law of Japan (the “Company Law”) and related legislation. Additionally, the information called for by Items 10.B.3, 4, 5, 6, 7, 8, 9 and 10 of Form 20-F is included in Exhibit 2.7 to this Annual Report “Description of rights of each class of securities registered under Section 12 of the Securities Exchange Act of 1934—Common Stock” and is incorporated by reference herein.

Objects and Purposes

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

Electricity generation and supply and sale of electricity.

 

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

Provisions Regarding Directors

There is no provision in Honda’s Articles of Incorporation as to a Director’s power to vote on a proposal, arrangement or contract in which the Director is materially interested, but the Company Law and Honda’s regulations of the Board of Directors provide that such Director is required to refrain from voting on such matters at the Board of Director’s meetings.

The Company Law provides that compensation for directors is determined at a general meeting of shareholders of a company, provided that, in the case of a company which adopts a “company with an audit and supervisory committee” corporate governance system (the “Audit and Supervisory Committee system”) including Honda, compensation for directors who are Audit and Supervisory Committee members and that for directors who are not such members are separately determined. Within the upper limit approved by the shareholders’ meeting, the board of directors will determine the amount of compensation for each director and may leave such decision to the president’s discretion by its resolution, provided, however, that unless individual amount of compensation for each of directors who are Audit and Supervisory Committee members has been determined in the articles of incorporation or by a general meeting of shareholders, such amount shall be determined by discussion among such directors who are Audit and Supervisory Committee members.

The Company Law provides that a significant loan from a third party to a company should be approved by the board of directors.

There is no mandatory retirement age for directors under the Company Law or Honda’s Articles of Incorporation.

The Company Law provides that any articles of incorporation of a company having no restriction on a transfer of its shares, including Honda, may not provide any requirement concerning the number of shares one individual must hold in order to qualify him or her as a director.

Shareholders’ Register Manager

Until June 19, 2020, Sumitomo Mitsui Trust Bank, Limited, located at 4-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo, 100-8233, Japan, was Shareholders’ Register Manager for Honda’s shares. With effect from June 20, 2020, Mitsubishi UFJ Trust and Banking Corporation, located at 4-5 Marunouchi 1-chome, Chiyoda-ku, Tokyo, 100-8212, Japan, is the Shareholders’ Register Manager for Honda’s shares. Mitsubishi UFJ Trust and Banking Corporation maintains Honda’s register of shareholders and records the names and addresses of its shareholders and other relevant information in its register of shareholders upon notice thereof from JASDEC, as described in Exhibit 2.7 to this Annual Report “Description of rights of each class of securities registered under Section 12 of the Securities Exchange Act of 1934—Common Stock—Rights of the Shares—Record Date”.

C. Material Contracts

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

D. Exchange Controls

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

 

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E. Taxation

Japanese Taxes

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

 

   

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

 

   

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

 

   

any tax treaty between Japan and their country of residence.

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

In the absence of any applicable tax treaty, convention or agreement reducing the maximum rate of withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to a non-resident of Japan or a non-Japanese corporation is (a) 20.42% for dividends to be paid on or before December 31, 2037, and (b) 20% for dividends to be paid thereafter. With respect to dividends paid on listed shares issued by Japanese corporations (such as Honda’s shares) to a non-resident of Japan or a non-Japanese corporation, the aforementioned 20.42% or 20% withholding tax rate is reduced to (i) 15.315% for dividends to be paid on or before December 31, 2037, and (ii) 15% for dividends to be paid thereafter, except for dividends paid to any individual shareholder who holds 3% or more of the issued shares of that corporation. Japan has entered into income tax treaties, conventions or agreements, whereby the maximum withholding tax rate is generally set at 15% or 10% for portfolio investors (15% under the income tax treaties with, among others, Belgium, Canada, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, New Zealand, Norway, Singapore, and Spain, and 10% under the income tax treaties with, among others, Australia, France, the Netherlands, Portugal, Sweden, Switzerland, the United Kingdom, and the United States).

Pursuant to the Convention Between the United States of America and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “U.S.-Japan Tax Treaty”), a portfolio investor that is a U.S. holder is generally subject to Japanese withholding tax on dividends on shares at a rate of 10%. Under Japanese tax law, the maximum rate applicable under the tax treaties, conventions or agreements shall be applicable except when such maximum rate is more than the Japanese statutory rate.

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

United States Taxes

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

This section is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect, as well as on

 

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the U.S.-Japan Tax Treaty (the “Treaty”). These authorities are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.

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

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

If a partnership holds the shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding the shares or ADSs should consult its tax advisor with regard to the U.S. federal income tax treatment of an investment in the shares or ADSs.

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

Taxation of Dividends

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

Dividends paid to a noncorporate U.S. holder that constitute qualified dividend income will be taxable to such U.S. holder at the preferential rates applicable to long-term capital gains provided that the noncorporate U.S. holder holds the shares or ADSs with respect to which the dividends are paid for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends that Honda pays with respect to the shares or ADSs generally will be qualified dividend income if, in the year you receive the dividend, the ADSs are readily tradable on an established securities market in the United States. Our ADSs are listed on the New York Stock Exchange and we therefore expect that dividends that you receive on the ADSs will be qualified dividend income. Dividends that Honda pays with respect to the shares generally will be qualified dividend income if we are eligible for the benefits of the Treaty in the year that you receive the dividend. We believe that we are currently eligible for the benefits of the Treaty, and we therefore believe that dividends on the shares are currently qualified dividend income. There can be no assurance, however, that we will continue to qualify under the Treaty in future taxable years.

 

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A U.S. holder must include the dividend in its taxable income when the holder, in the case of shares, or the Depositary, in the case of ADSs, receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. The amount of the dividend distribution that a U.S. holder must include in its income will be the U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S. dollar rate on the date of the dividend distribution, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the U.S. holder includes the dividend payment in income to the date it converts the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the U.S. for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of U.S. holder’s basis in the shares or ADSs and thereafter as capital gain. However, Honda does not expect to calculate earnings and profits in accordance with U.S. federal income tax principles. Accordingly, a U.S. holder should expect to generally treat distributions that Honda makes as dividends.

Subject to certain limitations, the Japanese tax withheld in accordance with the Treaty and paid over to Japan will be creditable or deductible against a U.S. holder’s United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the preferential tax rates. To the extent a refund of the tax withheld is available to a U.S. holder under Japanese law or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against the U.S. holder’s United States federal income tax liability.

Dividends will generally be income from sources outside the United States and will generally be “passive” income for purposes of computing the foreign tax credit allowable to such U.S. holder.

Taxation of Capital Gains

Subject to the PFIC rules discussed below, if a U.S. holder sells or otherwise disposes of its shares or ADSs, it will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount that it realizes and its tax basis, determined in U.S. dollars, in its shares or ADSs. Capital gain of a noncorporate U.S. holder is generally taxed at preferential rates where the property is held for more than one year. The gain or loss will generally be income or loss from sources within the U.S. for foreign tax credit limitation purposes.

Passive Foreign Investment Company (PFIC) Rules

Honda believes its shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes. This conclusion is a factual determination that is made annually and thus may be subject to change.

In general, Honda will be a PFIC with respect to a U.S. holder if for any taxable year in which such holder held shares or ADSs of Honda:

 

   

at least 75% of Honda’s gross income for the taxable year is passive income; or

 

   

at least 50% of the value, determined on the basis of a quarterly average, of Honda’s assets is attributable to assets that produce or are held for the production of passive income.

Passive income generally includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation, and as receiving directly its proportionate share of the other corporation’s income.

 

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If Honda is treated as a PFIC, and a U.S. holder does not make a mark-to-market election, as described below, that U.S. holder will be subject to special rules with respect to:

 

   

any gain it realizes on the sale or other disposition of its shares or ADSs; and

 

   

any excess distribution that Honda makes to the U.S. holder (generally, any distributions to it during a single taxable year that are greater than 125% of the average annual distributions received by it in respect of the shares or ADSs during the three preceding taxable years or, if shorter, its holding period for the shares or ADSs).

Under these rules:

 

   

the gain or excess distribution will be allocated ratably over the U.S. holder’s holding period for the shares or ADSs,

 

   

the amount allocated to the taxable year in which it realized the gain or excess distribution will be taxed as ordinary income,

 

   

the amount allocated to each prior year, with certain exceptions, will be taxed at the highest tax rate in effect for that year, and

 

   

the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.

Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.

If a U.S. holder owns shares or ADSs in a PFIC that are treated as marketable stock, such U.S. holder may make a mark-to-market election. If a U.S. holder makes this election, it will not be subject to the PFIC rules described above. Instead, in general, a U.S. holder will include as ordinary income each year the excess, if any, of the fair market value of its shares or ADSs at the end of the taxable year over its adjusted basis in its shares or ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. A U.S. holder will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. holder’s basis in the shares or ADSs will be adjusted to reflect any such income or loss amounts.

Shares or ADSs held by a U.S. holder will be treated as stock in a PFIC if Honda was a PFIC at any time during the U.S. holder’s holding period in its shares or ADSs, even if Honda is not currently a PFIC, unless a U.S. holder has made a mark-to-market election with respect to its shares or ADSs or the U.S. holder has otherwise made a “purging election” with respect to its shares or ADSs.

In addition, notwithstanding any election that a U.S. holder makes with regard to the shares or ADSs, dividends that a U.S. holder receives from Honda will not constitute qualified dividend income to such U.S. holder if Honda is a PFIC (or is treated as a PFIC with respect to such U.S. holder) in either the taxable year of the distribution or the preceding taxable year. Dividends that a U.S. holder receives that do not constitute qualified dividend income are not eligible for taxation at the preferential rates applicable to qualified dividend income. Instead, the U.S. holder must include the gross amount of any such dividend paid by Honda out of Honda’s accumulated earnings and profits (as determined for United States federal income tax purposes) in the U.S. holder’s gross income, and it will be subject to tax at rates applicable to ordinary income.

If a U.S. holder owns shares or ADSs during any year that Honda is a PFIC with respect to such U.S. holder, it must file Internal Revenue Service Form 8621, subject to certain applicable exceptions set forth in Internal Revenue Service regulations. Each U.S. holder should consult its own tax advisors regarding the PFIC rules and potential filing and other requirements.

 

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F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

Honda is subject to the information requirements of the Securities Exchange Act of 1934 and, in accordance therewith, it will file annual reports on Form 20-F and furnish other reports and information on Form 6-K with the Securities and Exchange Commission. These reports and other information can be inspected without charge at the public reference room at the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. You can also obtain copies of such material by mail from the public reference room of the Securities and Exchange Commission at prescribed fees. You may obtain information on the operation of the Securities and Exchange public reference room by calling the Securities and Exchange Commission in the United States at 1-800-SEC-0330. The Securities and Exchange Commission also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. Also, as a foreign private issuer, Honda is exempt from the rules under the Securities Exchange Act of 1934 prescribing the furnishing and content of proxy statements to shareholders.

I. Subsidiary Information

Not applicable.

Item 11. Quantitative and Qualitative Disclosure about Market Risk

The information required under this Item 11 is set forth in “(b) Market Risk” of note “(25) Financial Risk Management” to the accompanying consolidated financial statements.

Item 12. Description of Securities Other than Equity Securities

A. Debt Securities

Not applicable.

B. Warrants and Rights

Not applicable.

C. Other Securities

Not applicable.

D. American Depositary Shares

3. Fees and charges

JPMorgan Chase Bank, N.A., as ADR depositary, collects fees for delivery and surrender of ADSs directly from investors, or from intermediaries acting for them, depositing ordinary shares or surrendering ADSs for the purpose of withdrawal. The ADR depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of the distributable property to pay the fees.

 

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The charges of the ADR depositary payable by investors are as follows:

 

Category
(as defined by SEC)

  

Depositary Actions

 

Associated Fee

(a) Depositing or substituting the underlying shares   

Each person to whom ADRs are issued against deposits of Shares, including deposits and issuances in respect of:

 

•  Share distributions, stock split, rights, merger

 

•  Exchange of securities or any other transaction or event or other distribution affecting the ADSs or the deposited securities

  USD 5.00 for each 100 ADSs (or portion thereof) evidenced by the new ADRs delivered
(b) Receiving or distributing dividends    Not applicable  
(c) Selling or exercising rights    Distribution or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities   USD 5.00 for each 100 ADSs (or portion thereof)
(d) Withdrawing an underlying security    Acceptance of ADRs surrendered for withdrawal of deposited securities   USD 5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered
(e) Transferring, splitting or grouping receipts    Transfers, combining or grouping of depositary receipts   USD 2.50 per ADS certificate
(f) General depositary services, particularly those charged on an annual basis    Not applicable  

Category

  

Depositary Actions

 

Associated Fee

(g) Expenses of the depositary   

Expenses incurred on behalf of holders in connection with

 

•  Compliance with foreign exchange control regulations or any law or regulation relating to foreign investment

 

•  The depositary’s or its custodian’s compliance with applicable law, rule or regulation

 

•  Stock transfer or other taxes and other governmental charges

 

•  Cable, telex, facsimile transmission/delivery

 

•  Expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency)

 

•  Any other charge payable by the depositary or its agents

  Expenses payable at the sole discretion of the depositary by billing holders or by deducting charges from one or more dividends or other cash distributions

 

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4. Direct / Indirect Payment Disclosure

Honda does not receive any reimbursement from the depositary bank. JPMorgan Chase Bank, N.A. agreed to waive an out-of-pocket expense of $50,000 associated with the administration of the ADR program. The out-of-pocket expenses relate to depositary service administration, including but not limited to, dividend disbursement and proxy process. From April 1, 2019 to March  31, 2020, the Depositary waived $181,025.15 in expenses related to the Ordinary General Meeting of Shareholders.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

None.

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

None.

Item 15. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and participation of our management, including our Chief Executive Officer and Chief Financial Officer, we performed an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934) as of March 31, 2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of that date.

Management’s Report on Internal Control over Financial Reporting

The management of Honda is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.

Our management assessed the effectiveness of internal control over financial reporting as of March 31, 2020 based on the criteria established in “Internal Control-Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, our management concluded that our internal control over financial reporting was effective as of March 31, 2020.

 

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The Company’s independent registered public accounting firm has audited the effectiveness of the Company’s internal control over financial reporting, as stated in their report which is included herein.

Changes in Internal Control over Financial Reporting

No significant changes were made in our internal control over financial reporting for the fiscal year ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 16A. Audit Committee Financial Expert

Honda’s Audit and Supervisory Committee has determined that Mr. Masafumi Suzuki and Mr. Hideo Takaura are each qualified as an “audit committee financial expert” as defined by the rules of the SEC. Additionally, Mr. Suzuki and Mr. Takaura each meet the independence requirements applicable under Section 303A.06 of the New York Stock Exchange Listed Company Manual.

Item 16B. Code of Ethics

Honda has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of Honda’s code of ethics is attached as an exhibit to this Annual Report on Form 20-F.

Item 16C. Principal Accountant Fees and Services

KPMG AZSA LLC has served as Honda’s independent registered public accounting firm for each of the fiscal years in the three-year period ended March 31, 2020, for which audited financial statements appear in this Annual Report on Form 20-F.

The following table presents the aggregate fees for professional services and other services rendered by KPMG AZSA LLC and the various member firms of KPMG International to Honda in fiscal year 2019 and 2020:

 

     Yen (millions)  
     2019      2020  

Audit Fees

   ¥ 4,374      ¥ 4,210  

Audit-Related Fees

     129        157  

All Other Fees

     9        19  
  

 

 

    

 

 

 

Total

   ¥ 4,512      ¥ 4,386  
  

 

 

    

 

 

 

“Audit Fees” means fees for audit services, which are professional services provided by independent auditors for the audit of our annual financial statements or for services that are normally provided by independent auditors with respect to any submissions required under applicable laws and regulations.

“Audit-Related Fees” means fees for audit-related services, which are assurance services provided by independent auditors that are reasonably related to the carrying out of auditing or reviewing of our financial reports and other related services. This category includes fees for agreed-upon or expanded audit procedures related to accounting and/or other records.

“All Other Fees” mainly includes fees for services rendered with respect to advisory services.

 

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Pre-approval policies and procedures of the Audit and Supervisory Committee

Under applicable SEC rules, the Audit and Supervisory Committee must pre-approve audit services, audit-related services, tax services and other services to be provided by the principal accountant to ensure that the independence of the principal accountant under such rules is not impaired as a result of the provision of any of these services.

While, as a general rule, specific pre-approval must be obtained for these services to be provided, the Audit and Supervisory Committee has adopted pre-approval policies and procedures which list particular audit and non-audit services that may be provided without specific pre-approval. The Audit and Supervisory Committee reviews this list of services on an annual basis, and is informed of each such service that is actually provided.

All services to be provided to us by the principal accountant and its affiliates which are not specifically set forth in this list must be specifically pre-approved by the Audit and Supervisory Committee.

None of the services described above in this Item 16C. were waived from the pre-approval requirements pursuant to Rule 2-01(c)(7)(i)(C) of Regulation S-X.

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

Not applicable.

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

The following table sets forth certain information with respect to purchases by Honda of its own shares during the fiscal year ended March 31, 2020. There were no purchases of Honda’s shares by its affiliated purchasers during that fiscal year.

 

Period

   (a)
Total
Number of
Shares
Purchased*1
     (b)
Average
Price Paid
per Share
     (c)
Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
     (d)
Maximum Yen
Amount of Shares
that May Yet Be
Purchased Under
the Plans or
Programs*2
 

April 1 to April 30, 2019

     186      ¥ 3,159        —          —    

May 1 to May 31, 2019

     416      ¥ 2,977        —          —    

June 1 to June 30, 2019

     300      ¥ 2,763        —          —    

July 1 to July 31, 2019

     180      ¥ 2,818        —          —    

August 1 to August 31, 2019

     246      ¥ 2,514        —          —    

September 1 to September 30, 2019

     190      ¥ 2,670        —          —    

October 1 to October 31, 2019

     88      ¥ 2,827        —          —    

November 1 to November 30, 2019

     8,151,402      ¥ 3,097        8,151,100      ¥ 74,755,103,500  

December 1 to December 31, 2019

     4,521,159      ¥ 3,146        4,520,900      ¥ 60,531,524,100  

January 1 to January 31, 2020

     4,665,090      ¥ 2,994        4,664,900      ¥ 46,562,893,550  

February 1 to February 29, 2020

     7,614,406      ¥ 2,930        7,614,200      ¥ 24,253,328,350  

March 1 to March 31, 2020

     8,049,038      ¥ 2,551        8,048,900      ¥ 3,723,706,200  
  

 

 

    

 

 

    

 

 

    

Total

     33,002,701      ¥ 2,871        33,000,000     
  

 

 

    

 

 

    

 

 

    

 

*1 

For each month, the number of shares shown in column (a) in excess of the number of shares shown in column (c) represents the aggregate number of shares representing less than one unit that Honda purchased from the holders thereof upon their request. For an explanation of the right of such holders, see “Japanese

 

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Unit Share System” and “Right of a Holder of Shares Representing Less Than One Voting Unit to Require Honda to Purchase or Sell Its Shares” under Item 10.B of this Annual Report. Total number of shares purchased does not include purchases of BIP trust.

 

*2 

During the year ended March 31, 2020, the following share repurchase program was in effect:

Share repurchase was resolved at the meeting of the Board of Directors pursuant to the articles of incorporation Date of announcement: November 8, 2019

Maximum number of shares authorized to be repurchased: 33,000,000

Maximum yen amount authorized to be used for repurchase: ¥100,000,000,000

Repurchased period: from November 11, 2019 to March 31, 2020

(This program expired on the last day of the repurchase period referred to above.)

Item 16F. Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G. Corporate Governance

Companies listed on the New York Stock Exchange (the “NYSE”) must comply with certain standards regarding corporate governance under Section 303A of the NYSE Listed Company Manual.

However, listed companies that are foreign private issuers, such as Honda, are permitted to follow home country practice in lieu of certain provisions of Section 303A.

The following table shows the significant differences between the corporate governance practices followed by U.S. listed companies under Section 303A of the NYSE Listed Company Manual and those followed by Honda.

 

Corporate Governance Practices Followed by
NYSE-listed U.S. Companies

 

Corporate Governance Practices Followed by Honda

A NYSE-listed U.S. company must have a majority of directors meeting the independence requirements under Section 303A of the NYSE Listed Company Manual.   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 (to which amendments on this system were 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.
  For Japanese companies which employ the Audit and Supervisory Committee system, including Honda, Japan’s Company Law requires that such companies 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 an audit and supervisory committee, which shall consist of three or more directors, a majority of which shall be “outside directors” as defined below. Honda’s Articles of Incorporation provides for its Board of Directors consisting of no more than 20 members of whom no more than seven Directors shall be Audit and Supervisory Committee Members.

 

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Corporate Governance Practices Followed by
NYSE-listed U.S. Companies

 

Corporate Governance Practices Followed by Honda

  Honda currently has eight Directors who are not Audit and Supervisory Committee Members and five Directors who are Audit and Supervisory Committee Members. Within those Directors, two out of eight Directors who are not Audit and Supervisory Committee Members and three out of five Directors who are Audit and Supervisory Committee Members are Outside Directors. Under Japan’s Company Law, directors who are not audit and supervisory committee members and directors who are such members shall be separately elected by shareholders at a general meeting of shareholders. In addition, Japan’s Company Law provides that dismissal of any of directors who are audit and supervisory committee members shall be approved by a “special resolution” of a general meeting of shareholders. Under the Articles of Incorporation of Honda, the quorum for a special resolution is one-third of the total number of voting rights, and the approval of not less than two-thirds of the voting rights held by the shareholders present at the meeting is required for adopting a special resolution.
 

 

“Outside director” is defined as a director who meets 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.

 

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Corporate Governance Practices Followed by
NYSE-listed U.S. Companies

 

Corporate Governance Practices Followed by Honda

  After the enforcement of the revision of the Company Law promulgated on December 11, 2019, listed companies like Honda shall have at least one “outside director”.
 

 

In addition, the listing rules of the Tokyo Stock Exchange, which Honda is subject to (but reference to “corporate auditor” below is not applicable to Honda), require listed companies to have at least one “independent” director or corporate auditor, and to make efforts to have at least one “independent” director. Requirements for an independent director/corporate auditor are more stringent than those for outside directors or outside corporate auditors. Unlike an outside director/corporate auditor, an independent director/corporate auditor may not be (a) a person who is, or has been until recently, a major business counterparty or an executive director, executive officer, manager or employee of the major business counterparties, (b) a person who is, or has been until recently, a professional advisor receiving significant remuneration from the company, (c) a person who has been, for ten years prior to the assumption of office, a director, executive officer, manager or employee, or corporate auditor of the parent company or an executive director or executive officer, manager or employee of the parent company’s subsidiaries, or (d) a relative of persons mentioned in (a), (b) and (c) or a relative of certain scope of persons such as directors of the parent company or any of its subsidiaries.

 

Currently Honda has five Outside Directors all of whom are also independent Directors.

A NYSE-listed U.S. company must have an audit committee composed entirely of independent directors meeting the independence requirements under Section 303A.02 of the NYSE Listed Company Manual, and the audit committee must have at least three members.   On June 15, 2017, pursuant to a resolution of the Ordinary General Meeting of Shareholders, 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, and had relied on an exemption available to foreign private issuers with Board of Corporate Auditors meeting certain criteria established under their home country law with respect to the requirements of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 relating to listed company audit committees. Following the establishment of the Audit and Supervisory Committee and the termination of the Board of Corporate Auditors, Honda is required to satisfy the requirements set forth Rule 10A-3 under the U.S. Securities Exchange Act

 

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Corporate Governance Practices Followed by
NYSE-listed U.S. Companies

 

Corporate Governance Practices Followed by Honda

  of 1934 relating to listed company audit committees. However, as a foreign private issuer, Honda is not subject to the independence requirements applicable to U.S. issuers pursuant to Section 303A.02 of the NYSE Listed Company manual. Additionally, as a foreign private issuer, Honda is not subject to the requirement under the Section 303A.07 of the NYSE Listed Company manual that the audit committee be made up of at least three members.
  Under Japan’s 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 a proposal 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. Under Japan’s Company Law, each director who is an audit and supervisory committee member has a two-year term. In contrast, the term of each director who is not such member is one year.
A NYSE-listed U.S. company must have a nominating/corporate governance committee entirely of independent directors.  

Honda’s Directors are elected at a general meeting of shareholders. Its Board of Directors does not have the power to fill vacancies thereon.

 

A proposal by Honda’s Board of Directors to elect a Director who is an Audit and Supervisory Committee Member must be approved by the Audit and Supervisory Committee. In addition, the Audit and Supervisory Committee is empowered to request that Honda’s Directors submit a proposal to a general meeting of shareholders for election of a Director who is an Audit and Supervisory Committee Member.

 

The Directors who are Audit and Supervisory Committee Members have the right to state their opinion concerning the proposed election, dismissal or resignation of a Director who is an Audit and Supervisory Committee Member at the general meeting of shareholders. In addition, the Audit and

 

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Corporate Governance Practices Followed by
NYSE-listed U.S. Companies

 

Corporate Governance Practices Followed by Honda

  Supervisory Committee has the right to state its opinion through an Audit and Supervisory Committee Member selected by the Committee concerning the proposed election, dismissal or resignation of a Director who is not an Audit and Supervisory Committee Member at the general meeting of shareholders.
A NYSE-listed U.S. company must have a compensation committee composed entirely of independent directors. Compensation committee members must satisfy the additional independence requirements under Section 303A.02(a)(ii) of the NYSE Listed Company Manual. A compensation committee must also have authority to retain or obtain the advice of compensation and other advisers, subject to prescribed independence criteria that the committee must consider prior to engaging any such adviser.  

The maximum total amount of compensation for Honda’s Directors is proposed to and voted on by the general meeting of shareholders, provided that the maximum total amount for Honda’s Directors who are Audit and Supervisory Committee Members and that for Honda’s Directors who are not such members shall be separately proposed and voted.

 

Unless individual amount of compensation for each of Honda’s Directors who is an Audit and Supervisory Committee Member has been determined in the Articles of Incorporation or by a general meeting of shareholders, such amount shall be determined by discussion among the Directors who are Audit and Supervisory Committee Members within the maximum total amount approved at the general meeting of shareholders. In addition, unless individual amount of compensation for each of Honda’s Directors who is not Audit and Supervisory Committee Member has been determined in the Articles of Incorporation or by a general meeting of shareholders, such amount shall be determined in accordance with the compensation standards approved by the Board of Directors or a resolution of the Board of Directors within the maximum total amount approved at a general meeting of shareholders.

 

The Directors who are Audit and Supervisory Committee Members have the right to state their opinion concerning compensation for Directors who are Audit and Supervisory Committee Members at the general meeting of shareholders. The Audit and Supervisory Committee has the right to state its opinion through an Audit and Supervisory Committee Member selected by the Committee concerning compensation for Directors who are not Audit and Supervisory Committee Members.

 

In addition to the above, after the enforcement of the revision of the Company Law promulgated on December 11, 2019, large-scaled companies under certain categories including Honda shall establish the compensation policy as well as explain at a general

 

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Corporate Governance Practices Followed by
NYSE-listed U.S. Companies

 

Corporate Governance Practices Followed by Honda

  meeting of shareholders the reason why the compensation proposed to such shareholders’ meeting is appropriate.
A NYSE-listed U.S. company must generally obtain shareholder approval with respect to any equity compensation plan.   Pursuant to a resolution of the Ordinary General Meeting of Shareholders in June 2018, Honda implemented a new stock compensation scheme (the “Scheme”) for Honda’s Directors, Senior Managing Officers and Managing Officers (from April 1, 2020, the Scheme applies to a part of the Operating Executives as well) who conduct business execution and who are residents of Japan (collectively, “Directors Etc.”). Under the Scheme, which uses a Board Incentive Plan trust (the “BIP Trust”), Honda’s shares and money will be delivered and paid to Directors Etc. in accordance with their positions and the degree of growth in management indicators of Honda such as performance and corporate value. The period of the BIP Trust shall be from August 2018 to August 2021 (scheduled), provided, however, that this period may be extended for another three years by amending the trust agreement and entrusting additional amounts to the BIP Trust within the scope of the approval at the Ordinary General Meeting of Shareholders.

Item 16H. Mine Safety Disclosure

Not applicable.

PART III

Item 17. Financial Statements

Not applicable.

Item 18. Financial Statements

See Consolidated Financial Statements attached hereto.

 

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Item 19. Exhibits

 

    1.1         Articles of Incorporation of the registrant (English translation)
    1.2         Share Handling Regulations of the registrant (English translation)
    1.3         Regulations of the Board of Directors of the registrant (English translation)
    1.4         Regulations of the Audit and Supervisory Committee of the registrant (English translation)
    2.1         Specimen common stock certificates of the registrant (English translation) (1)
    2.2         Deposit Agreement dated as of December 19, 1962, as amended and restated as of October 1, 1982 (including changes from Amendment to Deposit Agreement dated as of April 1, 1989) among the registrant, Morgan Guaranty Trust Company of New York (now JPMorgan Chase Bank, N.A.), as Depositary, and all owners and holders from time to time of American Depositary Receipts and European Depositary Receipts, including the form of American Depositary Receipt (2)
    2.3         Form of Amendment No. 2 to Deposit Agreement dated as of April, 1995, among the parties referred to in Exhibit 2.2 above (2)
    2.4         Form of Amendment No. 3 to Deposit Agreement dated as of January, 2002, among the parties referred to in Exhibit 2.2 above (3)
    2.5         Form of Amendment No. 4 to Deposit Agreement dated as of June, 2006, among the parties referred to in Exhibit 2.2 above (4)
    2.6         Form of Amendment No. 5 to Deposit Agreement dated as of June, 2007, among the parties referred to in Exhibit 2.2 above (5)
    2.7         Description of rights of each class of securities registered under Section 12 of the Securities Exchange Act of 1934
    8.1         List of Significant Subsidiaries (See “Organizational Structure” in Item 4.C of this Form 20-F)
  11.1         Code of Ethics (6)
  12.1         Certification of the principal executive officer required by 17 C.F.R. 240. 13a-14(a)
  12.2         Certification of the principal financial officer required by 17 C.F.R. 240. 13a-14(a)
  13.1         Certification of the chief executive officer required by 18 U.S.C. Section 1350
  13.2         Certification of the chief financial officer required by 18 U.S.C. Section 1350
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema
101.CAL    XBRL Taxonomy Extension Calculation Linkbase
101.DEF    XBRL Taxonomy Extension Definition Linkbase
101.LAB    XBRL Taxonomy Extension Label Linkbase
101.PRE    XBRL Taxonomy Extension Presentation Linkbase

 

(1)

Incorporated by reference to the registrant’s Annual Report on Form 20-F filed on September 27, 2001. (P)

(2)

Incorporated by reference to the Registration Statement on Form F-6 (File No. 33-91842) filed on May 1, 1995. (P)

(3)

Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-14228) filed on December 20, 2001. (P)

 

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(4)

Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-114874) filed on June 28, 2006.

(5)

Incorporated by reference to the Registration Statement on Form F-6 (File No. 333-143589) filed on June 8, 2007.

(6)

Incorporated by reference to the registrant’s Annual Report on Form 20-F filed on July 9, 2004.

The Company has not included as exhibits certain instruments with respect to its long-term debt, the amount of debt authorized under each of which does not exceed 10% of its total assets, and it agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

(P) Paper exhibits

 

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HONDA MOTOR CO., LTD.

(Honda Giken Kogyo Kabushiki Kaisha)

(A Japanese Company)

AND SUBSIDIARIES

Consolidated Financial Statements

and

Reports of Independent Registered

Public Accounting Firm

March 31, 2020

 

To be Included in

The Annual Report

Form 20-F

Filed with

The Securities and Exchange Commission

Washington, D.C., U.S.A.


Table of Contents

HONDA MOTOR CO., LTD. AND SUBSIDIARIES

Index to Consolidated Financial Statements

 

Reports of Independent Registered Public Accounting Firm

     F-3  

Consolidated Statements of Financial Position – March  31, 2019 and 2020

     F-7  

Consolidated Statements of Income – Years ended March  31, 2018, 2019 and 2020

     F-8  

Consolidated Statements of Comprehensive Income – Years ended March 31, 2018, 2019 and 2020

     F-9  

Consolidated Statements of Changes in Equity – Years ended March 31, 2018, 2019 and 2020

     F-10  

Consolidated Statements of Cash Flows – Years ended March  31, 2018, 2019 and 2020

     F-11  

Notes to Consolidated Financial Statements

     F-12  

Financial statements of affiliates and joint ventures are omitted because such affiliates and joint ventures are not individually significant.

 

F-2


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Honda Motor Co., Ltd.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of Honda Motor Co., Ltd. and subsidiaries (the Company) as of March 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended March 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2020, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated June 19, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

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Table of Contents

Evaluation of the provision for specific warranty programs

As discussed in Note 17 to the consolidated financial statements, the Company’s provisions for product warranties balance as of March 31, 2020 was ¥ 380,689 million, which included the provision for specific warranty programs such as product recalls. The provision for specific warranty programs represents the estimated future warranty costs that are covered under such programs. The estimated future warranty costs are provided based on historical warranty claim experience with consideration given to the expected level of future warranty costs, including the expected number of units to be affected and the average repair cost per unit for warranty claims.

We identified the evaluation of the provision for specific warranty programs as a critical audit matter. A high degree of auditor judgment was required to evaluate the Company’s estimate of the expected number of units to be affected and the average repair cost per unit, due to the subjective nature of such assumptions.