Despite incurring a massive asset write-down from ill-timed electric vehicle bets that led to its first annual loss, Honda Motor Co. (HMC.US) projects a rebound in operating profit for the current fiscal year, issuing an earnings guidance that significantly exceeded market expectations.
Financial results released on Thursday show that for the fiscal year ending March 2026, Honda's sales increased by 0.5% year-over-year to 21.80 trillion yen, while it recorded an operating loss of 414.3 billion yen and a net loss of 353.0 billion yen. This marks the company's first annual operating loss since its founding in 1948. For the fourth quarter alone, the operating loss reached 1.01 trillion yen, far surpassing market expectations of an 804.0 billion yen loss; the net loss was 889.4 billion yen, which was better than the anticipated 962.2 billion yen loss.
The substantial loss in the fourth quarter is primarily attributed to a write-down of up to 2.5 trillion yen (approximately $157 billion) on its electric vehicle business in March. As the global automotive industry shifts toward electrification and automation, Honda has struggled to keep pace with intense competition.
A key driver behind this strategic retreat is the sharp contraction in demand within the North American market. Local EV demand has been only half of the company's previous projections. Furthermore, the relaxation of fossil fuel regulations and adjustments to EV tax credit policies following the new U.S. administration have led to a precipitous decline in EV demand in the United States.
While facing setbacks in North America, Honda confronts deeper structural challenges in China, the world's largest EV market. Although the massive write-down was primarily driven by North American projects, Honda is under unprecedented pressure from local competitors in China. Last year, Honda's battery-electric vehicle sales in China accounted for just 2.5% of its total sales there. The company has fallen significantly behind Chinese leaders like BYD in the iteration speed of software-defined vehicles (SDV) and advanced driver-assistance systems (ADAS).
Due to a disconnect between product competitiveness and development cycles, Honda had previously recognized impairment losses on its investments in China, highlighting the severe challenges it faces from multiple fronts in the global transition to electrification. The automaker had previously warned that it struggles to keep up with emerging Chinese rivals, particularly due to their shorter development cycles and pronounced advantages in software-driven vehicles, including models with advanced driver-assistance features.
In China, Honda has launched several battery-electric models, but market performance has been disappointing. Last year, it sold only 17,000 pure electric vehicles there, representing just 2.5% of its total China sales of approximately 677,000 units. Globally, this figure constitutes only one-fifth of Honda's worldwide EV sales.
In March, Honda also announced it was abandoning a grand plan to jointly develop an electric vehicle with Sony Group and would reconsider the previously established partnership. For the Japanese government's ambitious EV industry blueprint in recent years, this development signifies more than just "one project's failure"; it exposes the multiple pressures traditional Japanese automakers face amid the shift toward electrification.
Despite the heavy losses in the fourth quarter, Honda provided an optimistic outlook for the next fiscal year. The company forecasts an operating profit of 500 billion yen for the fiscal year ending March 2027, far exceeding market expectations of 212.4 billion yen.
For Honda CEO Toshihiro Mibe, the primary task is to curb further losses and stabilize the automotive business before it becomes an excessive burden on the more profitable motorcycle division. Mibe stated on Thursday, "Our biggest regret is that we failed to respond to the industry's rapid changes. We need to get back on track toward sustainable growth."
Christopher Richter, senior analyst at CLSA Securities Japan, commented, "Honda management has long been shielded by the highly profitable motorcycle business, allowing them to mask problems in the automotive division. The motorcycle business has become a crutch for Honda, preventing them from seriously examining the automotive business."
Globally, one out of every three motorcycles sold bears the Honda emblem. Although motorcycle sales account for less than one-fifth of the company's total sales, they contribute the majority of its operating profit. In India, one of the world's fastest-growing motorcycle markets, Honda expects its annual production to reach 8 million units by 2028, up from 6.25 million in 2026.
In March, Honda indicated plans to expand its hybrid vehicle lineup by reallocating resources and streamlining its product offerings to increase production, particularly in North America. The company also plans to strengthen its operations in India, a growth market for both automobiles and motorcycles.
As part of its effort to reallocate resources from pure EVs to hybrids, Honda aims to launch 15 new hybrid models by March 2030, primarily targeting the North American market. Concurrently, its plan to build an EV battery supply chain in Canada has been indefinitely suspended. The company also plans to revitalize its four-wheel vehicle business within three years, identifying North America, India, and Japan as core markets.
Nevertheless, CEO Mibe stated that both automobile and motorcycle sales are expected to grow this fiscal year. Senior auto analyst Tatsuo Yoshida noted, "By applying these next-generation hybrid systems to more models and future new vehicles, Honda may further enhance the competitiveness of its automotive business."
Comments