Because of high fixed costs in the industry, exit barriers are high. Competition has kept margins relatively low, so Honda must move volume since they do not have sufficient differentiation to leave the mass market category. Overall, the outlook for the automotive industry is weak for the coming years. One environmental consideration however is with respect to higher fuel costs. While this represents a threat to most industry players, Honda has been at the front of the curve in terms of developing automobiles that utilize alternative fuels. They also have a core competency in developing automobiles with excellent mileage. Indeed, Honda's initial success in the North American automobile market was in marketing its fuel-efficient compact cars in the wake of the oil crisis in the early 1970s.

By the end of that decade, Honda has won enough market share to open a manufacturing operation in the U.S. Thus, higher fuel costs represent an opportunity for Honda to make market share gains at the expense of its competitors, particularly the U.S. automakers.

In the motorcycle market, Honda has dealt with the maturation of its key markets in North America, Japan and Europe by expanding its presence in developing nations. Motorcycles account for 13.5% of sales. At the core of Honda's 10th 3-year plan is leveraging the growth in the Asian and South American markets, where motorcycles play more of an integral role in day-to-day transportation than they do in North America. Despite the economic downturn, these markets are expected to continue to growth, and this growth is expected to at least partially offset declines in Western market automobile sales. As in its automobile division, Honda expects that R&D will play a major role in the development of motorcycle markets. Competition in the developing markets can be difficult, but because these markets are not mature, the degree of competition is not as intense. Furthermore, Honda has established a strong market presence, including distribution networks, in key developing markets. This gives Honda a competitive advantage. Therefore, the competitive environment for Honda in motorcycles in favorable.

Power products represent 2.9% of Honda's business. Competition is intense in this industry and in many products Honda is a minor player. There are few products in which Honda enjoys a competitive advantage. This has resulted in decreases in market share in both Europe and North America. Honda has, however, found new market share in the Middle East and in Asia. However, the competitive environment for power products remains difficult for Honda.

Financing represents 5.6% of Honda's revenues, this up from 4.4% a year ago. The reason for this increase is an improvement in the competitive environment. Honda generally finances the purchase of Honda products. Its main competitors in this market are banks and other financial institutions. The economic crisis has resulted in a credit crunch, particularly in the United States. As a result, Honda has been able to gain market share for its financing arm, as other financial institutions are less willing to lend. As they refuse customers, Honda Finance can win those customers. The longer the credit crunch continues, the better the competitive environment gets for Honda Finance. If the credit crunch extends deep into Europe and Japan, Honda Finance will continue to contribute ever-greater revenues to the company.

Foreign Interests

Honda is an international company and as such is heavily invested in foreign markets. The company first went overseas in 1959 when it entered the U.S. market and twenty years later opened its first overseas production facility there. Honda now has facilities and corporate offices in Japan, the United States, Canada, Brazil, Thailand, the United Kingdom and Germany. Most of these facilities are involved in the manufacture of either automobiles or motorcycles.

In terms of sales, overseas markets are crucial to Honda. Asia, for example, is worth 31% of the company's motorcycle revenues, followed by Other (which includes the burgeoning South American market) which was also a shade over 31%. Asia and Europe contributed 23.5% of automobile revenues, while North America contributed 54.8%. Power products was the only segment in which Japan was the leading region for revenues.

Some of the key emerging markets for Honda at present are India, Brazil and Vietnam in motorcycles; Russia and China in cars; and Russia, Eastern Europe and the Middle East in power products. As a global company, Honda's future is directly tied to its ability to drive new sales in the world's developing economies. These economies provide Honda with not only opportunities for rapid growth, but they also provide environments characterized by less intense competition than can be found in the company's...

This plan is based around the premise that Japan will take the world lead on developing the next wave of technological initiatives, in particular with regards to green technology. At the core of the business plan, therefore, is to ensure that Honda is a major player in these initiatives. To that end, the company has two main objectives: "To create and launch innovative Honda products with world-leading environmental technologies and offer them to a wider range of customers" and "To develop advanced manufacturing systems for the future that will enable Honda to produce such advanced products."
Honda plans to leverage its traditional strength in research & development, both with respect to automobile manufacturing and to motorcycle product development. Honda is introducing a new hybrid in 2009 in its major markets, with an eye towards full-scale market penetration.

These future strategies address primarily medium- and long-term issues. This strategy reflects the long lead times for technological development in the industry and Honda's traditional approach to business. In the long-term, these are sound strategies for growth. Fuel efficiency is going to drive the transportation business in the coming decades, and Honda is taking proactive steps to be at the front of those technologies. The development of such technologies will give Honda a competitive advantage over their competitors, especially those in the United States, such as the Big Three automakers and Harley Davidson.

Honda's medium term strategy is also sound. The company recognizes the lead times for the development of alternative fuel technologies and is therefore not relying on those technologies for medium term growth. Instead, the company is continuing to focus on hybrid technology, motorcycles and other technology that represents more fuel efficient modes of transportation. As a result, they are well-positioned to gain market share during the upcoming "bridge" period between traditional gasoline-oriented technologies and alternative fuel technologies.

In the short-term, Honda is going to have to weather the economic storm. The company has derived growth from some of its smaller markets, but these have no offset sluggish automobile sales in Western markets. For its many products, Honda is still heavily dependent on one main product category and the three developed, mature markets. As a result, Honda's near-term future is expected to be relatively weak.

Judging by their finances, Honda is still well-positioned to weather the economic storm but there is cause for concern about the cash burn rate in the last quarter. Honda needs to find ways to cut costs in the short-term because cash flows from operations have been negative for three quarters now, even though the firm has maintained an accounting profit. Thus, while Honda is well-positioned beyond the next couple of years, there is some concern about the damage the global economic downturn might do to the company's financial strength. If the damage is substantial, Honda's research and development efforts could be stymied, which would reduce its medium and long-term prospects as well.

Honda is also a stock with significant upside potential, pertaining to its ability to develop new markets. When the company was still primarily in the motorcycle business, it entered the U.S. market with a compact car. Such vehicles represented only a tiny portion of the market, but Honda had successfully predicted a spike in fuel prices and subsequent demand for more fuel-efficient vehicles. They had essentially solved a problem that did not yet exist. But by being established in this segment before anybody else took it seriously, Honda was able to capture significant market share in the lucrative U.S. market, a position from which it has never looked back.

With respect to their long-term future, we can see other new product developments taking a similar trajectory. Honda is a leader in robotics, and has begun to dabble in medical supplies. They even purchase a medical supplies company a few years ago to help spearhead the venture.

Thus, we can see that Honda is actively looking to develop new markets for itself, rather than sitting content with its successes in automobiles and motorcycles. The company's relative youth compared with other industrial conglomerates gives them the optimism to look for such growth at a time when other such conglomerates are looking to scale back their ambitious plans.

Therefore, part of Honda's future potential is tied to these products, such as robotics, aircraft and medical supplies. The upside for these ventures is unknown, but each…