Honda’s Annual Profits Decline after 21-Million-Vehicle Recall

Honda Motor has recalled vehicles this year to carry out the replacement of Takata Corporation air bags, with recall volume four times more than the recall announced in 2015. The cost of replacement has negatively affected the Japanese automaker’s annual profits.

Furthermore, stronger yen will reflect on the expectations of a rebound. The net income of Honda decreased to 344.5 billion yen ($3.2 billion) during the fiscal year that ended March 2016 and was 34% less than the expectations. Honda’s Executive Vice President Tetsuo Iwamura stated that the automaker will be recalling 21 million vehicles for replacing Takata air bags.

The company suggested that during the current fiscal year, the profit is likely to increase to 390 billion yen amid an over 10% strengthening of yen during this year. The strength in yen will be reflected in the repatriated value of profit earned out of the country. As per Honda’s expectation, during the current fiscal period, the yen’s value will average 105 per dollar in comparison to 120 per dollar during the last 12 months.

Honda had to suffer fan additional cost of 267 billion yen owing to the recall for Takata air bags. The automaker has been instructed by the US National Highway Traffic Safety Administration to replace an additional 40 million Takata air bag inflators. The replacement has been ordered since the deployment of these air bag inflators might be too strong to rupture and spray plastic and metal debris at motorists.

According to the researchers, device rupturing is primarily caused by the exposure to moisture. Iwamura further revealed that Honda has also made provisions for the replacement of all Takata air bag inflators, which do not have moisture-absorbing desiccant. Those replacements incurred a cost of 436 billion yen and 120 billion yen for Honda during the last and the year before fiscal periods respectively.

According to a story published on the topic by Market Watch, ” Honda Motor Co. swung to a quarterly loss as ballooning costs related to Takata Corp.-made air-bag recalls outweighed strong vehicle sales in the U.S. and China. The company posted a January-March net loss of Yen93.4 billion ($856 million), compared with a net profit of Yen81.9 billion in the same period a year ago. For the current financial year ending March 2017, the auto maker forecast net profit to grow 13% to Yen390 billion. For the year that ended in March, Honda posted Yen344.5 billion in net profit, a 32% decline from a year earlier. Its full-year revenue was Yen14.6 trillion.”

Since late 2012, a falling yen buoyed exports and allowed companies to convert profits made overseas at a more favorable rate. However, the yen is strengthening, currently trading at around 109 to the dollar, compared with around 120 in early January. Auto makers including Toyota Motor Corp. and Fuji Heavy Industries Ltd., maker of Subaru cars, have forecast declining profits this financial year largely because of a rising yen.

“Honda Motor Co posted on Friday a surprise net loss for the fourth quarter as its quality-related costs, mostly to recall Takata-made air bag inflators, nearly quadrupled for the full business year. For the three months ended March 31, Japan’s third-largest automaker by sales posted a net loss of 93.4 billion yen ($859.56 million), compared to the profit of 115.35 billion yen expected in a survey of nine analysts by Thomson Reuters I/B/E/S,” according to a recent Reuters report.

Air bag inflators made by Takata have been blamed for at least 11 deaths, mostly on cars made by Honda, the supplier’s biggest customer. U.S. authorities said earlier this month that Takata must file new defect reports covering 35-40 million additional inflators that will lead to recalls by automakers. Still, Honda forecast a 13.2 percent rise in net profit for the current year, with brisk global auto sales expected to offset the negative impact of a stronger yen.

A report published in Bloomberg News informed, “Honda Motor Co.’s annual profit fell again on the costs of recalling four times the number of vehicles it made last year to replace Takata Corp. air bags. Now a stronger yen will weigh on prospects for a rebound. Net income fell to 344.5 billion yen ($3.2 billion) in the full-year period ended in March, the Tokyo-based automaker said in a statement Friday, missing its forecast by 34 percent. Honda will recall 21 million more vehicles to replace Takata air bags, Executive Vice President Tetsuo Iwamura told reporters.”

Japan’s third-largest automaker took another 267 billion yen charge related to Takata air bag recalls. The U.S. National Highway Traffic Safety Administration has ordered the replacement of as many as 40 million more Takata air bag inflators that can deploy too forcefully, rupture and spray plastic and metal shards at motorists.

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