Direction of Business Portfolio Transformation
To Continue Being a Company Society Wants to Exist
As stated in its 2030 Vision, Honda has been undertaking initiatives to "Lead the advancement of mobility and enable people everywhere in the world to improve their daily lives," and by doing so, to "Serve people worldwide with the 'joy of expanding their life's potential'." More specifically, we will not only work to achieve carbon neutrality and zero traffic collision fatalities, but also take on the challenge of providing greater value by combining hardware with software and services as a step to transform ourselves into a mobility company that focuses on services and solutions. Society is undergoing a drastic change as digital technology continues to evolve. Amid such a climate, creating and delivering new value suited to customer needs is essential for Honda to continue being a company society wants to exist.
Helping People and Society
In creating and delivering new value, we need to accelerate product electrification toward achieving carbon neutrality, and at the same time, transform our business by shifting from non-recurring hardware (product) sales business centered on development, manufacture and sales of products to a business focusing on and connecting to customers, namely, people. This means evolving into a recurring business, in which Honda, in addition to selling hardware, continues to offer various services and value to our customers after the sale. This will also serve to drive our desire to "help people" and "expand the potential of people's lives," which we have upheld since our founding.
In 2030 onward, we will strengthen our move toward this direction and extend the scope in which we offer value from people to the entire social system. We will provide combined solutions through mobility products to contribute to the resolution of broader social issues. Simultaneously, we will work to provide new value with no time or space restrictions to customers by focusing on the three fields of Honda eVTOL, Honda Avatar Robot and making a foray into the space domain.
Even though these goals will entail significant changes in our previous sense of value and business style, Honda will proceed and make the most of its strengths cultivated to date to transform its business portfolio. By providing new value to customers, we intend to continue being a company society wants to exist.
Financial Foundation and Resource Investments Supporting the Transformation
Strengthening Business Structure to Support the Transformation
To realize the transformation of its business portfolio, Honda as a whole has worked as one team to strengthen our business structure. Particularly in the automobile business, we have adopted the Honda Architecture and endeavored to optimize our production capacity. These efforts have led to a steady improvement in the earnings structure of the automobile business.
In the latest business results in FY2023, the entire Company's return on sales (ROS), which is an indicator of profitability, increased from 4.6% in FY2019 to 5.0%. We faced approximately a 30% decline in the Group's automobile unit sales amid the difficult business environment due to the COVID-19 pandemic and semiconductor shortage. However, as a result of the improvement of break-even point by implementing pricing that reflects increased product value and working to mainly reduce fixed costs in all businesses and regions, we have successfully acquired a better structural capability to generate profits.
The future outlook in the business environment still remains uncertain, with the continued spread of COVID-19 infections and escalation of geopolitical risks. Nonetheless, by further reinforcing the earnings structure built to date, we expect to achieve ROS of 7.0% or higher, which has been our medium- to long-term target, in FY2026. Moreover, with the improved ability to generate free cash flow, the net cash balance at the end of FY2023 was ¥2.7 trillion. Honda was able to maintain a healthy level of net cash balance amid the difficult business environment and is confident that we have already established a financial foundation to generate the investment resources needed for the transformation of our business portfolio.
Resource Investments to Accelerate New Value Creation
Based on the established financial foundation, we plan to allocate roughly ¥8 trillion for research and development expenses over the next 10 years as a resource investment for the transformation. This mainly includes about ¥3.5 trillion in the area of electrification and software technologies, and about ¥1 trillion for preparation for new growth. In the area of electrification and software technologies, we currently have a plan to invest about ¥1.5 trillion over the next decade for the construction of dedicated electric vehicle (EV) plants and for other purposes, and a total amount of resource investment in this area, combined with the research and development expenses, will amount to ¥5 trillion.
Moreover, we will invest in startups with high-potential advanced technologies and business models at a scale of ¥10 billion per year. At the same time, we will utilize alliances to expand the range of Honda technologies and businesses, provide attractive products and services and accelerate the development of new businesses, while carefully choosing what to proceed with independently and what to promote through collaboration.
Diverse Funding Methods Including Green Bonds
In March 2022, Honda issued Green Bonds totaling US$2.75 billion. By allocating the proceeds from these Green Bonds to the development and production of zero-emission vehicles, such as EVs and fuel cell vehicles (FCVs), Honda will work to realize a society with zero environmental impact. We will utilize such external funding methods on an as-needed basis in the future and promote our efforts toward the transformation.
In order to transform our business portfolio, it will be essential to utilize resources generated by strengthening our business structure and make Company-wide efforts to create new value. Going forward, we will strive to further strengthen our business structure, work to ensure more efficient and effective resource management and realize the transformation.
Initiatives for Enhancing Corporate Value
Utilizing ROIC to Strengthen Our Management with a Focus on Capital Cost
When viewing corporate value from a financial perspective, sustained cash flow growth, which will be achieved through the transformation of our business portfolio, and higher capital efficiency are needed to enhance corporate value. In order to ensure appropriate resource management to support the business portfolio transformation, we will utilize the return on invested capital (ROIC) figures to strengthen our management with a focus on capital cost.
In each business, we will utilize optimum management indicators matched to the corresponding business structure and work to continuously generate returns exceeding the capital cost.
In our business domains other than financing, such as motorcycles, automobiles and power products, we will utilize ROIC to lead the generation of resources for the transformation from the viewpoint of financial management. We aim to maximize profit, which is the numerator of ROIC, while optimizing capital invested, which is its denominator, by thoroughly utilizing assets we own and carefully identifying necessary investments. Through these efforts, we aim to increase the capital efficiency and generate a maximum amount of resources to support our transformation.
As for the financial services business, which is basically debt financing, we will use the return on equity (ROE) to balance profitability and soundness in order to optimize capital efficiency and support the transformation.
Distributing Profit with a Focus on Shareholder Returns
In distributing profit, we regard returning profit to shareholders as one of the most important management tasks and will make related decisions from a long-term perspective, while taking into consideration internal reserves for future growth and consolidated business results. We will work to pay dividends stably and continuously at the consolidated dividend payout ratio of about 30% and buy back our own shares as appropriate.
Increasing Trust in Our Management through Proactive Dialogue
We believe that enhancing corporate value requires repeated efforts to make known Honda's appeal and potential throughout the capital markets, in addition to sustained cash flow growth and higher capital efficiency. To this end, we will proactively hold dialogues with shareholders, investors and other stakeholders. Because a correct understanding and fair assessment of the direction of our management are extremely important in transforming our business portfolio, we will provide appropriate information after determining what the capital markets need and want to know. While doing so, we will utilize valuable feedback from stakeholders in our management and link it to enhanced corporate value.
Your continued support for our accomplishments in the future is truly appreciated.