Weak market demand is the root of the problem

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Under the fierce attack of independent new energy vehicles, joint venture brands are suffering from unprecedented impacts, with layoffs, production cuts, store closures, and even factory sales becoming common occurrences. Even a strong brand like Honda needs to further seek survival by reducing production capacity.

Following Honda's announcement in July to close and suspend two fuel vehicle factories in China, cutting 50,000 units of production capacity, news emerged in August that Honda intends to further reduce total new vehicle production capacity in the Chinese market by 200,000 units, equivalent to a total reduction of 250,000 units.

The reasons for Honda's production cuts in China are not difficult to understand. Sales of fuel vehicles are no longer what they used to be, while the pure electric business has shown no signs of improvement, resulting in a gap between old and new models, and excess production capacity. Reducing capacity can further reduce operational costs for the company.

In the context of the new energy era, Honda's difficulties in China are merely a microcosm of multinational brands. Facing the fierce competition from independent new energy vehicles, multinational brands, including Honda, are struggling. Whether they have the resilience to withstand future challenges and how to survive the painful transition to electrification are both difficult issues facing Honda.

From Short Supply to Excess Supply

In previous years, Honda relied on its brand reputation and product value to achieve remarkable results in the Chinese market. In the era of fuel vehicles, Honda had the reputation of "buying an engine and getting a car for free," with well-known products such as its red-headed engines and VTEC technology, which contributed to Honda's sales myth.

It can be said that at that time, Honda, like BYD today, could essentially launch a hit model with every new release. Whether it was sedans like the Fit and Civic or SUVs like the CR-V and Odyssey, Honda had a high degree of popularity in their respective segments. The CR-V, in particular, sold over 30,000 units per month during its peak sales period, leading to situations where demand exceeded supply and prices were increased for vehicle delivery.

As time passed, with the rise of independent new energy technologies, Honda, which focuses on fuel vehicles, gradually lost its market competitiveness and has now reached a point where it must cut production capacity to survive. Behind this is Honda's declining market performance in China year after year, with its models now in a state of excess supply.

Honda's sales in China peaked in 2020 at 1.627 million units, followed by a continuous decline, with sales figures for 2021, 2022, and 2023 being 1.5615 million, 1.3731 million, and 1.2342 million units, respectively, representing year-on-year declines of 3.17%, 4.93%, and 13.66%. In 2024, Honda's market share has been further eroded by independent new energy vehicles.

Of course, there are many reasons for Honda's declining sales in recent years, such as the pandemic, price wars, and supply chain changes. However, regardless of the reasons, Honda's declining performance in China is sufficient to demonstrate that the Japanese giant's appeal in the country is no longer what it once was. The fading of fuel vehicles and the lackluster performance of new energy vehicles are among the main reasons for Honda's production cuts in China.

As Honda CEO Takeji Aoyama said at an earnings briefing at the end of last year, "Poor performance of traditional fuel vehicles and inherent weaknesses in new energy models are important reasons for Honda's sluggish sales."

In fact, Honda's declining sales are just a microcosm of the Japanese automotive industry. The main business of Japanese cars is fuel vehicles, but their market share continues to shrink, while the new energy vehicle market is a different story. In July, the market penetration rate of new energy passenger vehicles exceeded 50% for the first time, reaching 51.1%, indicating that green license plates have become the majority, while the market share of blue license plates is gradually decreasing.

Against this market backdrop, the retail share of Japanese brands in July was only 12.9%, a year-on-year decrease of 3 percentage points, while the domestic retail share of independent brands was 61.8%, an increase of 8.5 percentage points year-on-year. This shifting of market shares demonstrates that Japanese cars, which have traditionally been sold on the basis of fuel efficiency and durability, have lost their advantages in the face of new energy vehicles.

Slow Transformation is a Chronic Problem

If the fading glory of fuel vehicles is the original sin of Honda's declining sales, then slow electrification transformation is Honda's chronic problem in the wave of new energy.

In fact, Honda has been considering electrification since 2013. As early as 2013, Makoto Kurashige, then Executive Chairman and China CEO of Honda Motor Co., Ltd., had already pointed the way for Honda's electrification transformation. The ninth-generation Accord, which was launched at that time, was the first to feature the i-MMD hybrid system. The essence of this system lies in its highly electrified architecture and strong scalability, allowing for plug-in hybrids by increasing battery capacity and pure electric vehicles by removing the engine. It is even compatible with hydrogen fuel cell vehicles.

Kurashige also planned to localize Honda's hybrid technology. To achieve this, Honda considered producing the core hybrid technologies, such as batteries and motors, locally in China to reduce costs and increase efficiency.

Obviously, Honda was slow to execute its electrification transformation strategy. Honda's electrification strategy for the Chinese market was only announced in October 2021, accompanied by the introduction of the pure electric vehicle brand e:N. By then, independent new energy vehicle companies had already risen to prominence in the market, and their launch speed was accelerating. However, Honda only brought its first pure electric model, the e:NS1, to market in June last year, lagging behind both independent brands and joint venture automakers like Volkswagen in terms of transformation speed.

The reasons for Honda's slow electrification transformation are similar to those of other automotive giants. On the one hand, the corporate system is vast, with intertwined interests among various departments within the company, making transformation difficult. Decision-makers need to mobilize various resources and weigh the interests of all parties, resulting in significant resistance during the transformation process.

On the other hand, the cost of technology switching is too high, and losses in the pure electric vehicle business are common. Currently, only a handful of companies in the new energy vehicle market are profitable. Regarding the benefits of electrification transformation, large companies have many shareholders with differing opinions, ultimately missing the golden development period.

Seeking Change for a Way Out

To regroup, Honda has had to undertake a series of strategic reforms. Earlier, Honda stated that it would invest 10 trillion yen in electrification and software by 2030. In May of this year, Honda reiterated its goal of achieving 100% global sales of pure electric and fuel cell vehicles by 2040, with a focus on the Chinese market. Honda plans to launch 10 pure electric models in China by 2027 and achieve 100% sales of pure electric vehicles by 2035. In addition to the e:N series, Honda will continue to expand its electric vehicle lineup with a new pure electric brand, "Ye."

Honda's current fuel product portfolio is overcapacitated, while demand for pure electric vehicles is increasing. To support mass production of pure electric vehicles, Honda has closed two factories in China and focused more resources and energy on new energy factories, planning to build two new new energy factories to compensate for reduced capacity at fuel vehicle factories.

To better meet market demand for electric products, Honda has also made changes in internal management, talent selection, and supply chain.

It is understood that the Ye brand's models are led by a Chinese team, with an average age of only 32 years, making it a relatively young research and development team. In addition, the Ye brand will also cooperate deeply with Chinese parts enterprises, such as sourcing batteries from CATL, using Huawei's central control screens, and collaborating with iFLYTEK on voice interaction systems. It will also integrate with Hangsheng to develop smart cockpits, demonstrating a multi-dimensional localization strategy.

It can be seen that Honda is determined to embrace the Chinese new energy vehicle market in the new energy era. Whether it is the Chinese brand name, Chinese technology, or Chinese manufacturing, Honda is aligning itself with the Chinese market to both localize vehicle features and configurations and reduce production costs.

Hidden Dangers Cannot be Ignored

The risks of electrification transformation are not low, and multinational automakers generally face greater obstacles. Not only are their new energy technologies relatively conservative compared to Chinese automakers, but their brand appeal in the new energy vehicle sector is also weaker. Therefore, multinational automakers' significant investments in resources are unlikely to yield returns in the short term.

To mitigate the risks of electrification transformation, Honda plans to collaborate with Nissan and Mitsubishi in this area. Earlier, Honda, Nissan, and Mitsubishi announced an alliance in pure electric vehicles and intelligence to share the cost of new energy technology research and development and compete with Chinese automakers.

Judging from Honda's various actions, the Japanese giant is also starting to compromise in the face of the new energy wave. It has chosen Chinese components to further localize its products and collaborated with other Japanese automakers to develop new technologies and reduce transformation risks, implementing each step in line with Honda's conservative approach.

However, as Honda moves forward steadily, internal hidden dangers are gradually emerging. It is well known that the core components of new energy vehicles are power batteries and smart cockpits. However, the core components of the Ye brand's models are all made in China, essentially entrusting the lifeblood of the new energy vehicle business to others.

As we all know, earlier, SAIC Motor Group made the remark, "Keep the soul in your own hands," reflecting the traditional automaker's wariness of technology companies. In this era of explosive information technology, batteries, motors, electronic controls, and intelligent driving are all core technologies of new energy vehicles. If Honda relies long-term on Chinese suppliers for key components without building a moat of core technologies, it will be difficult to sustainably thrive in the new energy sector.

Obviously, Honda does not want to lose the Chinese market, the world's largest new energy vehicle market, and has undertaken a series of reforms. However, faced with the sluggish performance of its new energy sector and the fierce competition from Chinese new energy automakers, Honda seems a bit anxious to create pure electric products that meet the needs of Chinese consumers and to make up for the lost market competitiveness of fuel vehicles with pure electric vehicles. Whether the Ye brand can lead Honda out of its difficulties remains to be seen, and the market will ultimately provide a clear answer.