Honda's Conservatism

For decades, Honda Motor ADR (NYSE: HMC) made safe, reliable, practical vehicles that held their resale values well.

Americans especially liked its Accord and Civic models. Both have stayed best sellers for over thirty years.

So when Toyota Motor ADR (NYSE: TM) recalled millions of faulty vehicles in 2010, Honda stood to benefit. Jesse Toprak, VP for industry trends with TrueCar.com, admits, “We thought Honda would take every Toyota customer.”

But despite Honda shareholders popping champagne and planning steak dinners, it just didn’t happen. Instead, 2010 rode roughshod all over the company.

Sure, overall, global automobile sales recovered. Yet Honda lost market share on both sides of the Atlantic.

In Europe – including Russia, where Asian cars sell well – market share fell from 1.9% a year ago to 1.4%… a 25% drop in sales.

And in the U.S., the company’s largest market, Honda’s share fell to 10.1% in September from 10.7% a year earlier.

Changing Perceptions

It turns out, Toyota’s woes actually hurt Honda’s reputation in the U.S. Of course, it didn’t help that Honda had to recall some cars too.

And so, U.S. customers turned to rival brands. Overall, they may never equate Japanese vehicles with quality like they used to.

Instead, South Korea’s Hyundai particularly attracted Americans’ attention. Just like Honda in the 1970s, it won them over with well-styled, affordable cars during tough economic times.

Certainly, Honda’s latest models got good reviews. But they’re struggling to compete with other newbies like Hyundai’s Sonata or Chevrolet’s Cruze.

Sales of its two new hybrid models – the Insight and sporty CR-Z – both lie well below Honda's expectations. As the aforementioned Toprak said: “The safe-choice perception has not helped Honda in the past year particularly. Consumers are bored with that image.”

On the other side of the Atlantic, the CR-V was a trailblazer when it launched over a decade ago. Now it sits almost ignored in an increasingly crowded sector.

Meanwhile, the soaring yen blunted Honda’s competitive edge in Europe. Most of its new models launched there in the past three years – including the Insight, CR-Z and Accord – were imports, which didn’t help either.

Is Honda’s Management Too Conservative?

On top of all its outside woes, Honda’s management is simply too conservative. It has a policy of not pursuing sales, no matter the economic conditions.

That just hurt it in the recession, as it refused to dole out incentives for car buyers. Even while all of its rivals got down and begged consumers to look their way, it stood firm.

On the plus side, that does make it easier for Honda to maintain its profit margins. And throughout, it held onto one of the industry’s highest loyalty rates in the U.S.

Maintaining that loyalty is another tradition it keeps, and one that works. In December’s JD Power’s Customer Retention Study, Honda and Ford tied for first in customer loyalty.

But as a whole, car buyers have become less faithful to brands. So management needs to start competing vigorously for market share if it wants to cut it in an increasingly competitive environment.

Fortunately, Honda does have new models coming out, like a sportier, redesigned Civic. According to the trade publication Automotive News, the current model was America’s forth best-selling car in the year ending November.

Honda also expects to introduce a redesigned CR-V later this year. Both go a long way in refreshing its model line-up, considering that, along with the all-new Odyssey model, they accounted for 48% of its U.S. sales in 2008.

And in Europe, it recently launched a new version of the Jazz small car (a.k.a. Fit in the U.S.), which it will also offer in a hybrid version. Meanwhile, the European version of the redesignedCivic will go on sale in 2012.

So the good news for Honda shareholders is that the company looks set to compete with all of its new models. Not so certain, is whether management will get more aggressive by offering incentives.

Only time will tell.