Signal From Honda (HMC): Global Auto Business Recovering

The automotive industry has been one of the most troubled worldwide over the last two years. High gas prices and low consumer spending have conspired to kill off demand for cars and light trucks. The American market, which produced over 16 million vehicles sales four years ago, may only support 1o million this year.

The US market has not been the only one that has been troubled. Car sales in Europe and Japan have been nearly as bad. Only the Latin American and Chinese markets have held up well and they are not enough to support a prosperous industry on their own.

The American government has staked well over $70 billion in aid to the industry on the belief that more efficiently run versions of GM and Chrysler can make money. That may not be true. It may take the American car market longer to recover than expected. Japanese and Korean auto firms may take enough US market share from the sales of autos made by domestic companies to continue to keep American manufacturers’ financial positions extremely weak.

A possible turnaround in the worldwide auto industry was signaled by Honda’s (HMC) earnings. Most analysts thought Honda would loose money in the second quarter. It posted a small profit. The company also lifted its forecast for the balance of the year.

Honda may be an anomaly. It makes cars that are nearly perfect for current economic conditions.  They are very fuel-efficient and the company’s reputation for quality is well-established. But, the firm does sell cars and light trucks in every major market in the world, so it can only move against the tide for a brief period unless auto sales are actually beginning to improve.

Honda’s results may be the first bit of good news from a troubled car industry, and they are probably a sign that the auto business is at the early stages of getting back on its feet.

Douglas A. McIntyre