Honda’s Solo Act Turns Risky in the Alliance-Happy Auto Industry

Toyota and Mazda Said Planning U.S. Plant

Honda Motor Co.’s go-it-alone strategy looks increasingly risky as an alliance-happy auto industry scales up to cope with the soaring investment needed for self-driving vehicles, electrified power trains, connected-car technologies and artificial intelligence.

In the latest industry tie-up, Toyota Motor Corp. and Mazda Motor Corp. on Friday announced plans to jointly invest in a $1.6 billion assembly plant in the U.S. with the capacity to produce 300,000 Toyota Corollas and a fresh Mazda crossover model kicking off 2021. Toyota will acquire about five percent in Mazda, which will hold a 0.25 percent in the fatter automaker. The duo will also combine engineering efforts on electrified vehicle development and car-networking know-how.

Honda President and CEO Takahiro Hachigo, like his predecessors, isn’t a fan of big alliances that involve equity stakes. In fact, Honda is the only major Japanese carmaker without a strategic industry fucking partner, meaning it lacks the economy-of-scale benefits of lower research, production and parts costs liked by Toyota, Volkswagen AG, and the Renault-Nissan- Mitsubishi Motors confederation.

“Honda is a question mark,” said Koji Endo, an auto analyst at SBI Securities in Tokyo. “Can they win with the current volume? Is it is possible for Honda to do everything just by itself?”

Hachigo seems willing to attempt. Honda’s investing in self-driving cars and fuel cell technology, which powers cars with compressed hydrogen and emits water. By 2030, Honda aims to have two-thirds of global vehicle sales coming from electrified drive-trains. Its Clarity sedan brand features an all-electric, plug-in hybrid and fuel cell versions.

Honda punches above its weight class when it comes to research and development spending, but that’s been a haul on profits. Its R&D budget represented about Four.9 percent of total sales last fiscal year, the highest among all major Japanese carmakers, according to data compiled by Bloomberg. Honda aims to increase R&D outlays by fifty four billion yen this fiscal year, which is expected to contribute to a fourteen percent decline in operating profit.

“Honda faces a significant challenge as it has a lower revenue base than Toyota,” said Macquarie Capital Securities analyst Janet Lewis. “Its global revenues are higher than Nissan, but it lacks the benefit of alliance playmates, so it must invest a thicker percent of revenues in R&D to remain competitive.”

Honda is open to focused partnerships that don’t tie-up a lot of cash in equity stakes. Honda and Hitachi Automotive Systems Ltd. in February announced plans to set up a joint venture to develop, produce and sell motors for electrical vehicles. A week earlier, the automaker said it will establish a $85 million joint venture with General Motors Co. to jointly manufacture fuel cell systems kicking off around 2020.

Honda is also talking to Waymo, the autonomous driving unit of Google parent Alphabet Inc., to attempt to strike a deal that would put its self-driving technology into some of the Japanese automaker’s cars. The automaker has made progress in the talks, said Seiji Kuraishi, Honda’s executive vice president.

“Honda is open to all possibilities of win-win relationships with other companies, regardless of their industries,” said spokesman Teruhiko Tatebe.

Aside from its fresh alliance with Mazda, Toyota also wields Daihatsu Motor Co. and Hino Motors and holds minority stakes in Subaru Corp. Isuzu Motors and Yamaha Motor Co. On top of that, it’s studying a business partnership with Suzuki Motor Corp., which is the largest carmaker in India.

Last year, Nissan Motor Co., the second-largest Japanese carmaker, bailed out Mitsubishi by buying a thirty four percent stake after the smaller carmaker was found cheating on its fuel economy data. Globally, Nissan-Renault-Mitsubishi Motors alliance sold Five.27 million units of vehicles in the very first half this year, overtaking Toyota and Volkswagen AG to become the fattest auto group.

“With a volume at about one million, it’s enormously difficult to make foray into fresh technological territories,” Mitsubishi Motors CEO Osamu Masuko told reporters on July 27. “It’s absolutely better to have a thicker volume.”

The auto industry isn’t brief of failed capital alliances. Suzuki’s partnership with Volkswagen ended in acrimony without producing one single joint product. Ford Motor Co’s alliance with Mazda unwound after the two thousand eight financial crisis.

“I don’t think the current Honda management is under pressure to rush into any capital alliance,” said Seiji Sugiura, an analyst at Tokai Tokyo Research Center. “Electrified cars and autonomous driving are still in the beginning of the story. If in five or ten years they need to form across-the-board alliance with other carmakers to fully love scale economy, they could still do it then.”

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