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Investing.com -- S&P Global Ratings has revised its outlook for Honda Motor Co. Ltd. (NYSE:HMC) and its overseas subsidiaries from stable to negative, largely due to the expected impact of U.S. tariff hikes. Despite this, the ’A-’ long-term issuer credit ratings and ’A-2’ short-term issuer credit ratings for the company have been affirmed.
The decision to revise the outlook was influenced by the belief that Honda’s profitability will fall more than previously anticipated due to increased U.S. tariffs. There is now more than a one-in-three chance that the company’s EBITDA margin will fall below 10% and remain there. An EBITDA margin of over 10% is in line with the current ratings on the company.
In April, the U.S. raised tariffs by 25% on automobile imports, and in May, an additional 25% tariff was applied to auto parts. Prior to these increases, S&P Global Ratings had expected Honda’s EBITDA margin to remain at 10.0% to 10.5%, providing a small buffer relative to the current rating. However, the company’s EBITDA margin is now predicted to decline more than 1 percentage point in fiscal 2025 (ends March 31, 2026) due to the impact of the higher U.S. tariffs.
Approximately 40% of Honda’s overall sales come from auto unit sales in the U.S., and about 40% of these units are produced in Canada or Mexico. Around 15% of the company’s total sales of automobiles are attributed to exports to the U.S., making the impact of the tariff hikes relatively high.
In addition to the tariff issue, Honda’s automobile business is expected to face challenges in maintaining global competitiveness. In China, one of its main markets, domestic manufacturers are strengthening due to rapid electrification, while Honda’s year-on-year sales in the country fell about 30% in 2024. The company’s lineup of electric vehicles (EVs) is also less competitive compared to overseas peers, with only a few EV models and limited production capacity.
Despite these challenges, Honda’s hybrid vehicle and motorcycle sales are expected to support stable cash flow. The company holds a high global market share of approximately 15% in hybrids, second only to Japan-based Toyota Motor (NYSE:TM) Corp. In the U.S., one of its core markets, hybrid sales expanded about 40% year on year in 2024. The hybrid market in the U.S. is expected to continue expanding in the next two to three years.
Honda’s motorcycle business, mainly in Southeast Asia, is likely to maintain a strong business foundation with a global market share of about 35%-40% and high profitability with an EBITDA margin of about 20%. The motorcycle business accounts for 30%-40% of the company’s total EBITDA.
To mitigate the impact of tariff increases, Honda is expected to utilize surplus capacity in the U.S., raise prices of some products, reduce costs, change sources of parts to U.S. suppliers from non-U.S. suppliers, and restructure production facilities. These measures are predicted to help the company’s EBITDA margin recover to around 10% over the next two years.
The negative outlook reflects the belief that there is more than a one-in-three chance that Honda’s EBITDA margin will decline to below 10% due to continued tough operating conditions amid higher costs from tariffs and expanded investments in EV development. S&P Global Ratings will consider a downgrade if the likelihood of any of these scenarios increases in the next 24 months.
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