Honda Automobile Business Report 2006

Automobile Business Report 2006

as higher sales of the Step Wagon, which underwent a full model change.

In April 2005, we introduced the all new Airwave station wagon, featuring high utility in a compact body. In May, we released the new Step Wagon, after lowering the vehicle's floor level and center-of-gravity and providing a more user-friendly body size, more internal space and sedan-like driving performance and comfort. In September 2005, we launched the new Civic, featuring an innovative, monoform design and more ample interior space. In March 2006, we began sales of the new Zest minicar, incorporating low-floor design technology for greater cabin room, occupant access and storage space.

In addition to these and other products with new levels of value, we enhanced marketing efficiency by deploying advanced information technologies while strengthening our sales and service capabilities. In these ways, Honda strove to maximize the lifetime satisfaction of its existing customers in Japan, now totaling around 9.0 million

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North America In calendar year 2005, automobile demand in the United States remained high, at around 16.99 million units. In the passenger car segment, we reported an increase in unit sales of the new Civic model, which offers excellent safety features and superb fuel economy. Sales of the Acura TSX, a sport sedan, were also strong. In the light truck segment, the all-new Ridgeline, a next-generation truck launched in March 2005, experienced strong demand, as did the Pilot, a mid-size SUV, and the Odyssey mini-van. As a result, overall sales in North America grew 6.8%, to 1,682,000 units. In October, we launched a new Brazilian-made Fit model in Mexico. Further north, we unveiled the Acura CSX, an Acura-brand entry model designed specifically for the Canadian market. In January 2006, we received "North American Car of the Year" and "North American Truck of the Year" awards for the Civic and the Ridgeline, marking the first time in history that the same manufacturer has won both categories in the same year. In addition, Honda vehicles were selected as Top Picks in five of the 10 automobile categories rated by U.S. Consumer Reports magazine for 2006 models. These rankings reflect excellent feedback on our introduction of models in the passenger car and light truck categories that offer excellent fuel performance and safety features.

Europe

In Europe, overall automobile demand remained almost unchanged in calendar year 2005, at around 17.66 million units. Nevertheless, Honda's unit sales in fiscal 2006 climbed 9.0%, to 291,000 units. This was due mainly to increased sales of the five-door Civic, released in January 2006, after a full model change that resulted in a well-received sporty and sophisticated design, and the FR-V series, which benefited from the addition in August 2005 of a version with the Honda-developed i-CTDi*1 diesel engine, and continued robust sales of the Jazz. To meet growing demand for diesel-powered vehicles in the region and to strengthen our manufacturing system, Honda of the U.K. Manufacturing Limited began assembly of diesel engines. We included a diesel model in the new five-door Civic line, and the Accord, CR-V and FR-V are also available with Honda-developed diesel engines. In these ways, we enhanced our competitiveness in the extremely challenging European market.

*1: i-CTDi
This is a proprietary diesel engine developed by Honda that optimizes combustion through the adoption of a high-pressure fuel injection system, combined with a newly developed emission treatment system. The i-CTDi is also compliant with Euro 4 emission standards for 2005.

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Asia In Asia, total unit sales of automobiles and automobile parts sold by Honda and its subsidiaries and affiliates edged up 1.8%, to 521,000 units. In China, the passenger car market expanded considerably, with demand reaching around 3.20 million units in calendar 2005. Guangzhou Honda, an affiliate accounted for under the equity method, recorded healthy sales of the popular Accord and Odyssey models. Another equity-method affiliate, Dongfeng Honda, enjoyed strong sales of the CR-V. Total unit sales in China of completed vehicles by Honda and its subsidiaries, as well as sales of component parts sets for production to equity-method affiliates amounted to 263,000 units, on par with the preceding term. In February 2006, Dongfeng Honda expanded its capacity to 120,000 vehicles per year, in an effort to meet rapidly expanding Chinese demand. Further, in June 2005, Honda Automobile China became the first passenger car maker in China to export vehicles to Europe from a plant that specializes in the production of export models. In these ways, Honda will continue using its accumulated China-related expertise to deliver top-level products in terms of both improved quality and cost. Demand continued to expand in other Asian markets, with major increases in sales of the City in Pakistan, India and elsewhere. Sales were also up in Taiwan, contributing to strong sales in the Asian region. In terms of manufacturing and R&D, we expanded manufacturing capacity at our plant in India and established an R&D facility in Thailand. These are a few examples of Honda's efforts to strengthen its systems to respond swiftly to diversifying local needs. Other Regions Unit sales in other regions grew 14.2%, to 201,000 units, due mainly to increased sales in South America, Oceania and the Middle East. In Brazil, sales of the locally produced Fit increased. In Australia and the Gulf states, we posted healthy sales of the Accord, Civic and other models.

Upper left: Acura RDX The combination of a turbo engine and Super-Handling All Wheel Drive (SH-AWD) makes the Acura RDX a model with good fuel economy in an entry-premium SUV. (for the North American market)	Upper right: Fit This model is popular because of its good utility and an engine that achieves good drivability as well as fuel economy. (for the North American market)
Lower left: Civic Type R concept This three-door model features a high-performance engine and bold and emotional styling. (for the European market)	Lower right: Civic Strong marks for good driving performance, economy, environmental performance and interior comfort give the Civic an appealingly high level of quality. (for the Chinese market)

Outlook for Fiscal 2007 For fiscal 2007, we expect total unit sales of Honda automobiles to rise 9.7% year-on-year, to 3,720,000 units. In Japan, we launched the new Zest passenger minicar in March 2006. Going forward, we will target further sales increases by strengthening our line-up. For example, we will undertake full model changes for the Stream in mid-2006, followed by the CR-V in the latter half of calendar 2006. In the area of sales and service, too, we will continue striving to maximize lifetime customer satisfaction through various initiatives, including our strategy of integrating our domestic sales channels. As a result, we project unit sales in fiscal 2007 to increase 3.4%, to 720,000 units. In North America, we will launch the Acura RDX, an entry-premium SUV under the Acura brand, in mid-2006. Also within the Acura lineup, we will undertake a full model change of the Acura MDX, a premium SUV. The Honda CR-V, our compact SUV, will undergo a full model change. In the light truck segment, we will further strengthen and upgrade our lineup, with an emphasis on both performance and fuel efficiency. In the passenger car segment, too, we will continue broadening our offerings to meet growing demand for fuel efficient models. For example, in addition to the Civic, which underwent a full model change in September 2005, we began sales of the Fit in April 2006. In these ways, we will target further sales growth in North America by introducing highly attractive models in both the light truck and passenger car segments. This year marks the 20th anniversary since the birth of the Acura brand in the United States. In fiscal 2006, annual unit sales of Acura vehicles in the United States surpassed 200,000 units. To enhance the Acura brand, in mid-2007 we will complete construction of the new Acura Design Center in California to advance the brand identity. On the production side, we will upgrade our Marysville, Ohio, auto plant, which produces the Accord passenger car, making it more responsive to changes in demand. In the year ahead, we will begin production of the Acura RDX light truck in the same facility. In May 2006, we started operating a new transmission assembly plant in Georgia. We will continue to boost the local content of Honda vehicles made in North America. For fiscal 2007, we project unit sales in North America of 1,760,000 units, up 4.6%. In Europe, we plan to follow the five-door Civic by launching a three-door version in late 2006. In mid-2006, we will introduce the Legend sedan to the European market, and in late 2006, we will introduce a CR-V that has undergone a full model change. In July 2006, a new company in the Ukraine, a market which is expecting huge expansion will begin operations, further enhancing our sales capacity. To address increasing demand for diesel-powered vehicles in Europe, we will expand local production capabilities. We project a 10.0% rise in unit sales in Europe, to 320,000 units. In Asia, we expect unit sales in fiscal 2007 to jump 33.4%, to 695,000 units. In the Chinese passenger car market, we believe market demand could easily reach 3.5 to 3.7 million units. In fiscal 2007, we will respond to booming demand for the existing models made by affiliate Guangzhou Honda and Dongfeng Honda by further strengthening these companies' sales networks. We will also expand the annual production capacity of Guangzhou Honda from 240,000 to 360,000 units in the latter half of calendar 2006. This will bring our total annual production capacity in China to 530,000 units, after adding the annual production capacity of Dongfeng Honda and including the production at the consolidated subsidiary Honda Automobile China. In addition to boosting production of completed vehicles, we will strengthen our local manufacturing capabilities with respect to powertrains. For example, we expect to begin producing automobile powertrains at Honda Auto Parts in the first half of calendar 2007. We will also develop the Acura brand in China, with successive rollouts of the Acura RL and Acura TL scheduled from mid-2006. Elsewhere in Asia, we will increase production capacity to meet growing demand. In India, for example, we will begin making Civic models in July 2006 as a footboard for annual capacity of 100,000 units by 2010. In addition, annual production capacity in Pakistan will be doubled from 25,000 to 50,000 units during fiscal 2007, and in Vietnam we will start making automobiles at the rate of 10,000 units per year. These vehicles will go on sale from mid-2006. In other regions, we project unit sales of 225,000 units, up 11.9% from fiscal 2007. This takes into account rising sales of the Civic in Brazil and Australia. In Brazil, where gasoline prices are soaring, we will also start making and selling flex-fuel vehicles*2 in calendar 2006. *2: Flex-fuel vehicles Vehicles that are designed to operate on gasoline, ethanol or a mixture of the two fuels