Honda Motor Maintains Innovative Approach To Emission-Free Mobility By 2040

Honda Motor Co. (NYSE:HMC), like its Japanese rival Toyota Motor Corp. (TM), wisely avoided the rush to commit to a hasty, gargantuan investment in battery-electric vehicle technology, cognizant that battery-electric vehicles (BEVs) are a trend being pushed by government while consumers remain hesitant.

Toyota has drawn most of the flak from environmentalists and certain media outlets for slow-walking BEVs in favor of gas-electric hybrids, while Honda also has pursued a strategy to dip its toes into the BEV waters – fortunately, without the public relations fallout. Now both companies look smart – and TM shares, notwithstanding the naysaying, have performed quite well in the meantime.

Part of Honda’s strategy has also been to optimize gas-electric hybrid engines, which have helped make its fleet the most fuel efficient among automakers that aren’t yet pure electric, such as Tesla. Two years ago, 7% of Honda’s cars were hybrids. In the first three quarters of the latest fiscal year 50% were hybrids.

The automaker’s Honda Prologue and Acura ZDX BEVs, soon to arrive at dealers and become the company’s first volume electrics, are a collaboration with General Motors Company (GM). The models, built by GM, are similar in size to GM’s Blazer EV, which is built on the automaker’s new Ultium architecture.

Friendly divorce

In October, Honda announced it was withdrawing from the $5 billion tie-up with GM, deciding it could better pursue a subsequent generation of smaller, affordable BEVs for 2027 on its own. The reasons are unclear, though a likely factor is the collapse of BEV pricing and – possibly – Honda’s determination that profitability as GM’s partner was more difficult than proceeding on its own.

Honda’s new battery-powered models are arriving together with a slowdown in the growth of BEV sales in the U.S. as more consumers grow wary that the nation’s charging infrastructure is underdeveloped, along with other worries such as cost, range and resale value. In fact, the Biden administration is considering relaxation of the fuel efficiency regulations meant to stimulate BEV production.

Since 2021 Honda has been discussing publicly its goal of entirely eliminating emissions from its products, which would be quite a feat considering that the company is the No. 1 maker of internal combustion engines in the world – largely because it also is the biggest global manufacturer of motorcycles. In terms of revenue, Honda is the seventh largest in the world, ahead of Hyundai and behind BMW. In terms of operating margin, the automaker is a distant 19^th, with Ferrari leading the pack.

What many Western investors probably don’t realize is that Honda makes more money from its motorcycles than it does from cars.

Solid name

Honda has earning a reputation for engineering innovation and for pursuing its own distinctive business strategy, irrespective of what conventional industry wisdom suggests; the automaker also is known for the excellence of its engines – all of which it intends to scrap over the next 16 years while building its emission-free fleet.

To accomplish this, Honda is developing its own BEV platform; four to five models from this platform will debut in 2025. In 2026, Honda expects to introduce the first model of Afeela, a new BEV brand developed in partnership with Japan’s Sony Group Corp. (SONY). The tie-up will merge Sony’s graphic, entertainment, and software expertise to Honda’s automaking expertise.

A prototype was shown in Las Vegas in January. According to CNET, Afeela will use Sony’s:

“Epic Games’ Unreal Engine 5.3 to power the 3D graphics and visuals that fill its massive, ultrawide dashboard display. Drivers and passengers will be treated to detailed 3D maps, virtual spaces and augmented reality views of the world around the Afeela, which can have internet-sourced metadata overlaid. Media from Sony’s various TV, movie and gaming catalogs are also able to be tapped to keep passengers entertained on the road, and when parked and charging.

Hydrogen could play a big role in Honda’s future. The automaker and GM have a joint manufacturing venture in Brownstown, Mich., to produce fuel cells, which produce electricity and water from so-called “cold combustion.” As with gasoline, cars can be fueled quickly. Range ceases to be a worry. Skeptics point out that the fuel doesn’t occur naturally and would require years of infrastructure work before it was readily available to consumers.

Buried below

Honda is playing a long game. Various companies are investing in the production of hydrogen using solar energy, steam treatment of fossil fuels and, lately, exploration for naturally occurring hydrogen deep underground. Hydrogen fuel cells could work particularly well to provide emission-free propulsion for large trucks – which is another potential market for the fuel.

Honda has manufactured the Clarity hydrogen-powered car and leased it to consumers in small numbers. Clarity operates more or less as a demonstration project. Later this year the automaker will introduce its CR-V small SUV powered by a hydrogen fuel cell from Brownstown, also in small number. Whether and how soon fuel-cell electric vehicles (FCEV) enter the vehicle fleet in a bigger way depends on the development of a supply and distribution of a hydrogen infrastructure.

Can Honda reach its 2040 goal of completely emission-free mobility products? Its biggest challenge might be its HondaJet aircraft – but a plan already exists to see if a synthetic fuel can be developed, such as that soon to be tried in F1 car racing, so-called E fuels that neutralize carbon output.

Honda has accomplished a reputation for doing what experts say can’t be done, such as designing an engine that didn’t need a catalytic converter to meet clean air regulations. Or achieving a full model changeover in a final assembly plant without losing a day’s production of vehicles – when competitors were closing plants for weeks or months to change models.

Since the Global Financial Crisis, Honda shares have performed unspectacularly. Over past three years HMC has done better, tracking with the major indices. Honda’s dividend policy is to return 30% of profit to shareholders, though lately the company is moving toward bigger share buybacks. Earlier this month the company announced a $336 million share buyback amounting to less than 1% of its shares outstanding.

Honda has proven its mettle with notoriously fickle American carbuyers, establishing its brand as one of the tops in quality, safety and reliability in an exceptionally competitive market.

As it makes the transition from ICE to emission free, the chances are quite good that its strong, practical and thoughtful corporate culture will be up to the task – which should be good news for buyers of the stock at current prices.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.