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Honda Bets on Fuel-Efficient Civic to Extend US Sales Gains

Nov. 6 (Bloomberg) -- Honda Motor Co., Japan's third- largest automaker, expects demand for its Civic compact car to lead a 14th consecutive year of sales gains in the U.S. next year as the company expands production of the fuel-efficient vehicles.

``We just didn't have enough supply this fiscal year,'' Fumihiko Ike, Honda's chief financial officer, said in an interview on Nov. 1. The Tokyo-based company said last month it plans to increase North American production capacity of the Civic by as many as 60,000 vehicles.

Honda's sales growth in the U.S. lagged behind that of rival Toyota Motor Corp. this year after the company underestimated demand for fuel-efficient models. Drivers in the U.S., Honda's most profitable market, switched from trucks and sport-utility vehicles made by General Motors Corp. and Ford Motor Co. as gasoline surpassed $3 a gallon.

``Honda is being flexible in order to overcome supply bottlenecks,'' said Norihito Kanai, a senior research analyst at Meiji Dresdner Asset Management Co., which manages $2.5 billion in equities in Tokyo. ``No one wants to turn customers away.''

The automaker will reduce production of SUVs in Canada to make room for the Civic and plans to build a sixth North American assembly plant in Indiana that will open in 2008. Honda gets almost half its U.S. sales from the Civic and the larger Accord.

Honda shares, which have gained 23.6 percent this year, rose 0.7 percent to 4,160 yen in Tokyo on Thursday.

Low Inventory

The company expects total U.S. sales to rise 3.5 percent to 1.54 million vehicles this fiscal year.

``Once we are past this year, we will have a much better year,'' Ike said, without giving an estimate for 2007 sales. ``Even if we wanted to increase sales this year, we couldn't.''

The company aims to have 45 to 60 days of supply of the Civic on hand compared with 20 days currently, said Ike. The Civic gets about 40 miles to the gallon on highways, double the average mileage of most GM and Ford SUVs.

Inventory of the Civic fell to as low as 10 days in the U.S. earlier this year, while stocks of the Fit compact are currently about 7 days, meaning the company has difficulty meeting demand.

Honda's sales in the U.S. rose 3.9 percent to 1.27 million units in the first 10 months of 2006, while GM sales have dropped 9.3 percent to 3.41 million units and Ford's fell 7.2 percent to 2.34 million units, according to Autodata Corp.

Lagging Toyota

Toyota's U.S. sales grew 12 percent to 2.12 million vehicles over the same time period, as demand surged for Corolla and RAV4 models.

Honda plans to produce a vehicle with a four-cylinder engine in Indiana, Ike said, without elaborating. The company will probably produce small cars, including Civics and Fits, at the $550 million Greensburg facility, according to Koji Endo, an analyst at Credit Suisse Group.

Honda is also boosting production of engines and transmissions at factories in countries including Japan, Brazil and Georgia to supply Civics next year.

The expansion contrasts with job cuts and factory closures at GM and Ford, as demand slumps for GM's Buick sedans and Ford's Explorer SUVs. Ford is cutting 30,000 factory jobs by 2008 as it tries to return its North American operations to profit. GM is also cutting 30,000 U.S. union jobs by the start of 2007. Ford posted a $5.8 billion third-quarter loss, the company's biggest in 14 years.

Profit Forecast

Honda had a second-quarter profit of 128 billion yen ($1.08 billion), 4.3 percent lower than a year earlier, on losses from derivatives related to interest-rate swaps. Toyota may report a 15 percent increase in second-quarter profit to 350 billion yen, according to the median estimate of five analysts surveyed by Bloomberg News.

Honda has two assembly plants in Ohio, one in Ontario, one in Alabama, and one in Mexico. The company also makes transmissions, engines and parts at eight additional North American factories.

The carmaker aims to sell 4.5 million vehicles globally in 2010, a 21 percent increase from expected sales this year, including at least 2 million units in North America and 800,000 in Japan.

While benefiting from demand for small cars, Honda expects demand for Ridgeline light truck and Pilot SUVs to grow as fuel prices drop. Crude oil has fallen about 25 percent since reaching a record of $78.40 a barrel on July 14.

``Once the gasoline price starts to shift toward $2 a gallon from $3, we expect demand for light trucks to recover,'' Ike said. ``In the long run, our profitability in the U.S. will improve.''

To contact the reporter on this story: Kae Inoue in Tokyo at


Honda Bets on Fuel-Efficient Civic to Extend US Sales Gains
Japanese Import Car, New & Used Car, 2007