Thai Floods Prolong Honda's Uphill RecoveryBy Lacey Plache November 28, 2011
Honda's recovery from the Japanese earthquake gained momentum the past couple months, but now more production disruptions from flooding in Thailand threaten to cause another setback. The threat comes as Honda increased month-over-month sales from September to October, accounting for its first year-over-year increase since April. But limited production caused by the Thai floods could constrain sales of Hondas redesigned 2012 CR-V, which is due to launch December 15 and is expected to be a key contributor to Honda's market share recovery. As a result, Honda must fight an even greater competitive disadvantage to recover lost share and make up sales at a time when competition from redesigned models has heated up in Honda's primary segments.
Possibility Of Lost Sales Looms
Honda originally announced a shutdown of 50 percent of production in the U.S. from October 31 to November 11, as well as a cancellation of Saturday overtime in November. But on November 8, Honda reported an improved outlook with production varying from 50 to 75 percent, depending on plant needs. According to a 2010 statement from Honda, 87 percent of Honda and Acura vehicles sold in the U.S. are also manufactured there. Based on 117,000 units delivered in October, Hondas U.S. supply could be short by 50,000 units or more in December and January. Additionally, Honda idled an unspecified amount of Japanese production, based on individual plant supplies of components from Thailand. As a result, Honda sales are at risk for December, January and possibly beyond, depending on how long the production shutdowns last.
Of course, sales shortfalls due to stalling production do not necessarily equate to lost sales if loyal consumers delay purchases until the vehicles they want become available. Honda brand owners are especially loyal, and the Honda brand typically accounts for around 90 percent of Honda sales. But shortages from the Japanese earthquake revealed that there are limits even to the notorious loyalty of Honda brand owners. During the summer, when Honda deliveries were most affected, the percent of car buyers that traded in a Honda and bought another Honda fell below its pace over the past couple years. Meanwhile, the percent of Hondas new car buyers who traded in a Honda for a Hyundai, Chevrolet or Ford increased. Honda also lost sales to its key Japanese competitors due to its slower recovery. In particular, Nissan, the least affected of the Japanese Big Three, substantially improved its conquests of former Honda brand owners during the summer months.
Since September, though, Hondas loyalty rate has recovered. The brands capture rate of previous Honda owners hit a five year high in October, a reflection of loyal owners who had waited for improved supply. The question remains, though, whether Honda will be able to maintain these capture rates after demand from these buyers are fulfilled.
Honda Recovery Pace At Risk
Hondas overall U.S. market share fell from a 10.6 percent monthly average in 2010 to a low of 7.6 percent post-earthquake. Even though Honda has steadily regained share since that July low, its share only amounted to 9.7 percent in October. And despite surpassing pre-earthquake average levels in September and October, Hondas total inventory currently remains well below its 2010 average. As a result, even a limited decrease in production has the potential to further impact Honda sales.
Besides simply having available product to sell, the most effective way for Honda to regain share is to offer updated versions of its products, especially the top-sellers. Research has shown that new product, whether completely redesigned or just refreshed, consistently results in greater increases in market share than other factors, such as price and advertising. In the coming months, the CR-V, one of Hondas three top-sellers, offers the automaker its best chance to make significant progress in recapturing lost share.
The redesigned 2012 CR-V is currently due to launch in mid-December, which is also about when the current production disruptions will begin to affect Honda supply. Any delays in availability post-launch threaten to decrease the CR-Vs potential share gains since its key competitor, the Ford Escape, will launch its own redesigned model in late spring 2012. The Escape ousted the CR-V from its segment leader position this year, even with an older, less updated model. Early assessments of the new models characterize the Escapes new design as profound. In contrast, these reports describe the CR-V as evolutionary rather than revolutionary. Already, the 2013 Escape saw a bigger surge of consumer interest than the 2012 CR-V after both made their debuts at the Los Angeles Auto Show last week. According to Edmunds.coms site traffic data, the Escape enjoyed a 95-percent lift in average consideration in the days following its unveil last Wednesday. The CR-V, meanwhile, saw a jump of just 25 percent over the same period.
Neither of Hondas other two top-sellersthe Civic and the Accord -- are likely to spur significant share gains in the coming year. Honda debuted a redesigned 2012 Civic in April, but production disruptions from the Japanese earthquake hindered availability. The Civic not only failed to gain share but it even lost its usual top rank within the compact segment to the Chevrolet Cruze for several months. Civic sales also have suffered due to lackluster nature of its redesign.
The Accord will remain unchanged for the 2012 model year. Typically, a top three competitor in the midsize segment, the Accords rank fell to sixth place this summer. Despite stronger sales in September and October, the Accord faces additional challenges in 2012 from a series of refreshed and redesigned competitor products. These vehicles include the 2012 Toyota Camry, the 2013 Chevrolet Malibu, arriving in early 2012 first as the Eco version, and the next-generation 2013 Ford Fusion, which is expected to arrive in the second half of 2012 sporting styling based on Fords recently introduced Evos concept. The redesigned 2013 Accord is expected to launch in November 2012, giving its competitors a head start to leverage their new products and gain share.
Clearly, Honda faces an uphill battle in the year ahead to regain lost share. The latest production disruptions from the Thai floods can only hinder that recovery.