October 27, 2014 / 9:38 AM / in 3 years

Honda second-quarter profit to rise, but recalls cloud outlook

Man are reflected on a Honda Motor car outside the company showroom in Tokyo July 29, 2014. REUTERS/Toru Hanai

TOKYO (Reuters) - Honda Motor Co (7267.T) is likely to post its best July-September profit since the global financial crisis, but a slew of vehicle recalls threatens to delay the roll-out of new models, crimping domestic market sales growth.

Japan’s third-biggest car maker last week apologized for a fifth domestic recall of its Fit hybrid subcompact, prompting a pay cut for CEO Takanobu Ito and a dozen executives. Honda said it would re-examine its process for developing cars, a move that could delay their debuts.

The Fit recalls come on top of more than 5 million cars that Honda has called back in the United States over unrelated issues with Takata Corp’s 7312.T potentially defective airbags that have been linked to four deaths in Honda’s single-biggest market.

Honda first recalled the Fit hybrid in October 2013, just a month after its launch, for defective controls on a newly developed transmission system. The latest recall was to fix noise-related glitches unrelated to the transmission. To date, Honda has recalled 163,885 Fit hybrid vehicles in Japan.

The series of Fit recalls has so far cost 16.5 billion yen ($153 million), though Honda sees minimal impact on its earnings - due on Tuesday. July-September operating profit is forecast to rise just over 7 percent to 184.1 billion yen ($1.7 billion), according to the average of 14 analysts polled by Thomson Reuters I/B/E/S.

The Fit recalls could delay other vehicles designed to use the new transmission, said Koji Endo, autos analyst at Advanced Research Japan.

Analysts expect the recalls and potential development delays to slow Honda’s domestic sales, which the company hopes to push up to a record 990,000 cars in the year to next March.

The Nikkei business daily reported on Monday that aggregate domestic sales at Japan’s eight car makers would drop below 5 million cars for the first time in two years, with Honda seen selling 950,000 cars. Another drag on Honda’s earnings could be a slowdown in high-margin motorcycle sales in Southeast Asia.

“The only bright spot for Honda is the weak yen,” Endo said. “There’s not that much confidence in their three main markets - the U.S., China and Japan. Frankly, Honda’s earnings are going to be a little scary.”

The dollar has risen to 108 yen JPY=, while Honda is assuming an average 101 yen for the year.

MILLIONS MORE?

Clouding the outlook further for Honda is the risk of more Takata-related recalls in the United States, where there is some political pressure to expand a regional recall nationwide. Recalls so far have focused on areas where hot, humid weather may damage the propellant that triggers the airbag in the event of a collision.

Expanding the recalls nationwide would mean an additional 5.3 million cars to fix for various automakers, including Honda, according to Reuters calculations based on data from automakers and the U.S. National Highway Transportation Safety Administration (NHTSA).

In an Oct. 15 letter, two Democratic senators singled out Honda for allegedly failing to report information to the NHTSA about possible defects that could cause fatalities or injury.

Heightened scrutiny over Honda’s response to faulty airbags could hurt its brand value in its most important market. “The concern really isn’t the recall cost, but more the potential for this recall to negatively impact the brand,” said Kurt Sanger, auto analyst at Deutsche Bank in Tokyo.

Shares in Honda have fallen 23 percent this year, while Tokyo’s benchmark Nikkei .N225 is down 5.5 percent.

Additional reporting by Chang-Ran Kim; Editing by Ian Geoghegan

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