Honda Motor Company, Limited

Introduction

Established by Soichiro Honda in 1948, Honda Motor Company, Limited manufactures automobiles, motorcycles, trucks, scooters, robots, jets and jet engines, ATV, water craft, electrical generators, marine engines, lawn and garden equipment, and aeronautical and other mobile technologies (Nazario, 2012). The company’s motto, “The Power of Dreams” is a way of thinking that guides the employees and inspires them to move forward to create innovative products that enhance mobility and benefit society (Honda, n/a). It is the sixth largest automobile manufacturer in the world and the world’s largest motorcycle manufacturer and engine-maker in the world (TrueCar, n/a). In 1949, Honda Motor Company produced its first motorcycle and in 1963, the automobile was first produced. Honda Motor Company became the largest manufacturer in motorcycles in 1964.

Honda T360, the first automobile produced

In 1986, Acura brand was introduced to the American market by Honda Motor Company to gain ground in the luxury vehicle market, as the company wanted to expand its production line and operations, and exports to countries around the world.

Example of an Acura automobile (Acura NSX)

In the recent years, Honda Motor Company has created joint ventures around the world, such as Honda Siel Cars India Ltd, Hero Honda Motorcycles India Ltd, Honda Atlas Cars Pakistan, and many more. The company consists of 190,338 employees working for it worldwide in 2013 (Statista, 2013), and it owns 50 manufacturing facilities worldwide. Its main headquarters is located in Tokyo, Japan, and the president of this industry is Takanobu Ito.

Takanobu Ito, President of Honda Motor Company

Market Structures

Honda Motor Company is an oligopoly because the industry is only competing with a few other dominant automotive industries in Japan, such as Toyota, Nissan, Suzuki, Mazda, and Subaru. In Malaysia, it is competing with the Malaysian and other international companies, such as Proton, Perodua, Ford, Lexus, and Audi. The reason why Honda Motor Company is an oligopoly is because the change of price in the market shares, the results of advertising, and the outcomes of the problems solved in this company will be reflected in the sales of the other companies. Also, the barriers to entry is very high, as a lot of capital is needed if a person wants to start up a business in this industry. It is also a price setter instead of a price taker; therefore, the company is able to set the pricing of their automobiles.

Net Sales for Honda Motor Limited

The graph above shows the net sales of Honda Motor Company persisting and fluctuating through the years; hence, showing the increasing and decreasing of demand of automobiles.

Year 2009 (Elasticity and Shift in Demand)

In the year 2009, the net sales decreased from ¥12,002,834 million to ¥10,011,241 million. One of the reasons is because raw material prices significantly increased worldwide. When the raw material prices increased, the cost of producing an automobile definitely increased; therefore, increasing the price of the automobiles. When the price of the automobiles increased, consumers started being responsive to the price as their income is stagnant, hence, making the elasticity of demand elastic. When the price increased from P1 to P2, the quantity demanded decreased from Q1 to Q2. Therefore, the total revenue decreased because the price increased.

Elasticity of demand

Another reason the net sales decreased is because of the increase of the price of petroleum, which is a complementary good. When the price increased, people used less petrol and stared taking the other means of transportation or carpooled; consequently, the demand for buying new automobiles decreased. The demand curve shifted left to D1; hence, the quantity demanded decreased, and assuming the supply curve did not shift, the price of the automobiles decreased from the initial price to P1 so that the equilibrium could be reached.

  

Decreasing of quantity demanded

Year 2010

The net sales again decreased to ¥8,579,174 million in 2010. When the world went into an economic slump, people started losing their jobs, hence, the unemployment rate was high. Consequently, the purchasing power decreased, as people had less money to spend. This resulted in the fall of demand, therefore, shifting the demand curve left as the quantity demanded decreased.

Year 2011 (Shift in Demand and Supply)

In 2011, the net sales increased to ¥8,936,867 million. This increased in sales was because the Europe’s economic condition improved. Therefore, increasing the consumer’s spending, which increased the purchasing power. When the quantity demanded increased, the demand curve shifted right, and assuming the supply curve stayed the same, the price increased from P to P1 to go back to its equilibrium state.

Increasing of quantity demanded

However, there were a few natural disasters that happened during that year, which cause the suspension of the operation. This also caused the sales to decrease after these incidents. Six plants of production were suspended right after the 8.9 magnitude earthquake and tsunami in Japan (Seeking Alpha, 2011). After the earthquake and tsunami, there was a monsoon in Thailand, resulting in the shortage of parts for output (Muller, 2011). Consequently, the North American production was forced to cut by fifty percent. These incidents shifted the supply curve left, as the quantity supplied decreased from Q to Q1, and assuming the demand curve did not shift, the price went up from the initial price to P1.

Decreasing of quantity supplied

Year 2012

The net sales declined 11.1% from ¥8,936,867 million to ¥7,948,095 million in year 2012 due to the earthquake in Japan and the flooding in Thailand. Likewise, the oil prices rose, and Europe and United States were in a debt crisis. Therefore, people became more sensitive to the change in the price of oil, hence, demanded less for automobiles as the purchasing power decreased.

Year 2013

In year 2013, the net sales increased to ¥9,877,947 million as the demand for automobiles increased. The economic conditions in United States and Japan improved; therefore, decreasing the unemployment rate, which increased the purchasing power. Moreover, a new car model was introduced, resulting in a positive response. This situation increased the quantity demanded for automobiles, shifting the demand curve right.

Substitutes and Complements

Honda Motor Company has many competitors internationally. Hence, when the price of an automobile increases, consumers would search for a cheaper automobile from another industry as a substitute. Furthermore, a consumer’s income would also make he or she sensitive to the change of price; therefore, buying a cheaper car, for example, Proton, as a substitute. Also, when the price of the complementary goods increase, such as petroleum and car batteries increase, consumers tend to decrease the purchasing power and take other means of transport for a period of time. All of these will decrease the quantity demanded and shift the demand curve left.

Economics of Scale

Economics of scale is the falling long-run average cost when a good is produced at a larger scale. When Honda Motor Company produces better technology and more automobiles; the cost of production will decrease. This benefits this company as it will maximize profit and minimize cost.

Expected Future

In the future years, Honda Motor Company’s net sales are expected to decrease. One of the reasons is due to the fact that the resources are depleting.  This will result in an increase of cost for production, which will increase the price of the automobiles, and an increase in the price of the complementary goods. The increase of inflation due to recession will also affect the net sales negatively. Moreover, the fierce competition of other companies will also pull the net sales down. As all these increases, the company will make less profit and consumers will find other means of transportation instead, hence, the decline in demand and supply of this company’s automobiles. Honda Motor Company could also be subjected to investigations, proceedings, and suits under regulations of various jurisdictions (Honda, 2013), and a negative outcome could adversely affect the company. Therefore, it could make a huge economic loss instead of an economic profit.

Conclusion

Honda Motor Company, Limited is an oligopoly that makes an economic profit in the long run, even though its net sales has been declining these past recent years. Through the natural disasters and economic crisis, this company has been recovering and persisting through, as the net sales has been increasing (as seen in the net sales chart above).

Reference List

Honda  (n/a) About Honda. Available from: http://corporate.honda.com/about/ [Accessed 7 January 2014].

Muller, J. (2011) Earthquake, Tsunami, Monsoon – What’s Next for Honda? Locusts?. Available from: http://www.forbes.com/sites/joannmuller/2011/10/31/earthquake-tsunami-monsoon-whats-next-for-honda-locusts/ [Accessed 7 January 2014].

Nazario. (2012) The History of Honda Motor Company. Available from: http://gearheads.org/history-of-honda-motor-company/ [Accessed 7 January 2014].

Seeking Alpha (2011) 5 Automakers Affected by the Japanese Earthquake and Tsunami. Available from: http://seekingalpha.com/article/260124-5-automakers-affected-by-the-japanese-earthquake-and-tsunami [Accessed 7 January 2014].

Statista (2013) Worldwide Number of Honda Employees from 2002 to 2013 . Available from: http://www.statista.com/statistics/267275/worldwide-number-of-honda-employees/ [Accessed 7 January 2014].

TrueCar (n/a) Honda Cars, Prices & Models. Available from: http://www.truecar.com/prices-new/honda/ [Accessed 7 January 2014].