Temple of VTEC Rumors and News - Summary of 2003 Year-end Address by Mr. Fukui

Summary of 2003 Year-end Address by Mr. Fukui
Tokyo, 17 December 2003

The enhancement of those characteristics that are distinctive of Honda has been one of my main focuses since assuming the role of CEO. In other words, to further strengthen our Technology, Quality, and the Motivation of Honda associates. Technology refers to the respective skills employed in each area of the company including R&D, production, engineering as well as sales & marketing. Our focus on quality includes not only to the quality of products, but also the quality with which individual jobs and operations are executed. Motivation means the pride and passion I want all Honda associates to have in the pursuit of their responsibilities.

Followings are our major achievements in the environmental arena this year.

Honda announced that its fuel cell stack is capable of cold-starts and operation at sub-zero temperatures. This had been one of the major hurdles facing fuel-cell vehicles. Honda?s FC Stack also represents a significant step forward in terms of mass production. Our FCX was selected as the support car for the Hakone-Ekiden relay race that will be held on January 2nd and 3rd in Japan.

Honda became the first motorcycle maker to develop a PGM-FI (Programmed Fuel Injection) system for 50cc scooter engines. This system cuts exhaust emissions in half.

All 19 models of our BF series outboard engines have already achieved the CARB emission standards in the U.S. that will take effect in the year 2008.

Honda has begun joint development and testing of a Home Energy Station with a US venture company that generates hydrogen from natural gas for use in fuel cell vehicles while supplying hot water and electricity to the home. This is a unique concept developed by Honda which seeks to address the challenge of realizing a hydrogen society in the future.

We made some remarkable achievements in the area of safety as well.

In the Inspire, we introduced the world?s first Collision Mitigation brake System(CMS) and E-Pretensioner.

A crash compatibility-enhanced body structure that minimizes damage from a collision between vehicles of different sizes was developed and introduced in the Life minicar.

This technology will be expanded to all models in conjunction with new platform introductions.

A new crash safety facility was constructed at our R&D facility in Ohio, in addition to the existing one in Japan.

In 2003, we achieved significant business results. In Japan, we completed the introduction of our New Manufacturing System. With this new highly flexible production system, new model equipment investment costs have been decreased by over 50%. We now have the ability to produce up to 8 models on a single line, and the lead time necessary to move production of a model from one plant to another has been shortened from 6 months to 3 months. We are also making progress in renovating our small to medium size manufacturing plants overseas, especially in ASEAN countries -- as expansion of production capacity is necessary to meet increasing demand. Annual production capacity at our auto plant in Thailand was increased to 120,000 units from 70,000 units the previous year, while new plants were opened in Taiwan, Malaysia and Indonesia. In China, Guangzhou Honda ? which had an annual capacity of 30,000 units when it began production in 1999 ? has expanded to 120,000 units this year. In addition, production of the Fit Saloon, Honda?s third locally produced model, began.

"Made by Global Honda"

Honda?s basic policy is "building products close to the customer" and we have increased our focus on regional autonomy. For example, in 1996, 80% of the Honda and Acura automobiles sold in the U.S. were already manufactured in North America .

In conjunction with this increased regional autonomy, the "Made by Global Honda" strategy also focuses on improving efficiency and strengthening the model lineup of each region. This allows us to take advantage of the unique capabilities of each region through a complementary global supply network for the supply of products and parts.

In our motorcycle business where the "Made by Global Honda" strategy was first implemented, we began importing the well-received Today model followed by the Spacy 100 and Dio 50cc models to Japan from the world?s largest motorcycle market ? China. The European-made sporty 599 model is now on sale in North America, while the XR125L made in Brazil, and the LEAD scooter from India were introduced to European markets. In the area of automobiles, the newly built automatic transmission factory in Indonesia and manual transmission factory in the Philippines have begun exporting their products to our plants in Europe and Asia. In addition, the North-American made sport utility vehicles, MDX and Element were introduced to the Japanese market. In the area of multi-purpose engines, the WB20XT water pump model manufactured in Thailand was introduced in Japan. We have a plan to expand the annual production capacity of GX multipurpose engines in Thailand from the current 1.3 million units to 1.6 million units in 2004.

With respect to Honda?s global auto production, the percent that is exported from Japan has decreased from 23% to 15% over the last 5 years, whereas overseas production increased from 47% to 61% during the same period. These changes clearly show that the "Made by Global Honda" strategy is being realized. This also means Honda has been developing greater financial toughness against exchange rate fluctuations.

Calendar Year 2004 Plans

Honda has created a global network of operations. To fully utilize this network, we will draw upon our origins or inherent strengths. We will bolster our fundamental abilities in various business areas such as R&D, manufacturing, sales and marketing. In so doing, Honda will be able to make further advances and secure our future in the new era ahead.

- Development

Last year, we established Honda Research Institute in Japan, the U.S. and Europe to focus on the study of next generation and advanced technologies such as artificial intelligence, genome research, and new materials. We are currently building a new research facility in Tochigi due to open next month that will specialize in the study of next generation powertrains such as advanced diesel engines, next generation hybrid systems, and more. Honda proactively pursues fundamental research and research of core areas that serve as the foundation of next-generation technologies.

- Products

The Honda Way of auto development centers around a common theme ? "Fun-to-Drive." We have identified two key components in this concept.

One is "Driving Pleasure" ? or the pleasure experienced when driving a Honda vehicle.

Next year we will introduce a vehicle that will be the embodiment of this concept ? our fully remodeled Legend, Honda?s flagship sedan. For motorcycle riders, the CBR1000RR, a bike which inherits the DNA of our World Grand Prix champion racer--RC211V, will be launched.

The other key component of "Fun-to-Drive" is "Packaging Innovation." In other words, all passengers in a Honda vehicle should enjoy mobility accompanied by comfort and utility or put simply, fun-to-use. To pursue this goal, Honda will introduce a new model next spring based on the ASM model which was exhibited at the Tokyo Motor Show this year. In addition, we are planning to launch a new innovative model in the summer, which will feature completely new packaging. Further, we decided to launch a two-wheel pick-up, PS250, to retail customers next year. The actual PS250 will be very similar to the prototype we introduced this year at the Tokyo Motor Show.

In the area of power products, we will introduce an upscale model of our "Salad" tiller expanding the fun to use concept to include home gardeners.

-Production

In the area of manufacturing, we have successfully established flexible and complementary production systems at our major plants worldwide under our "Made by Global Honda" strategy. Such innovation has now been extended to our small-size auto plants like those in ASEAN countries. Our next challenge is to focus more on the area of parts and materials to achieve high efficiency and flexibility in parts production, which we see as the basis of auto production.

We have decided to move production of the NSX, Insight, and S2000 from the Takanezawa Plant to the Suzuka Plant by the summer of 2004. This will increase the flexibility of niche model production by integrating the entire production process starting from the engine. We will continue our effort to introduce innovations to our production system and begin to look for even more advanced automation technologies.

- Japan Automobile Market

With respect to auto sales, Japan auto sales are estimated to reach 740, 000 units for 2003. Our sales goal for the year 2004 is 800,000 units. A decade ago, in 1993, the cumulative number of Honda automobile customers in Japan was a little over 5 million. Now, the number has increased to 8.5 million. We will make an utmost effort to gain the lifetime owner loyalty through providing satisfaction with every aspect of car ownership including the buying experience, maintenance, routine inspections, etc. ? so that our current customers continue to choose Honda in the future.

To maximize customer satisfaction, we developed a new dealer networking system called "e-Dealer" this year, which further improves customer service at our dealers. This new system will organically link each dealer to Honda?s domestic sales operations center, which will be relocated to our new second headquarters building in Wako, through a broadband high-speed network. An IT-based training system, called "e-campus," is being made available to sales staff at all Honda dealers. In addition, we have introduced a new communication tool with a touch-panel display, which help sales staff to communicate product information and technologies more effectively.

Honda is also linked directly to our customers through the Honda C Card, an IC-card, and through our free-of-charge membership service, InterNAVI, that provides various online interactive functions such as traffic forecasts.

In addition, we have increased the number of maintenance personnel by 1,000 in the past 2 years to 14,500 to improve the satisfaction of our customers. This also prepares us for the rapid increase in demand for routine inspections, which will arise for the Fit, Stream, and the second generation Step Wagon which were launched at the beginning of 2001.

- North America

In the North American market, we have established a solid footing in this market with passenger cars such as the Accord and Civic, which achieve annual sales of 400,000 and 300,000 units respectively. We also entered into the light truck market with the introduction of the first generation Odyssey in 1995 and CR-V in 1997. The introduction of the North American-made Odyssey, MDX, and Pilot have further contributed to strengthening our foundation in North America. As a result, we are the first Japanese manufacturer to realize cumulative auto sales of 20 million and local production of 10 million. Our highly competitive products which offer high levels of comfort, fuel-economy, and functionality beyond comparison with truck-based products, differentiates Honda from our competitors and has enabled us to avoid using high sales incentives. Over the next three years, we will introduce two new light truck products and further strengthen our position in the North American markets. One of those new models is Honda?s SUT model which will be exhibited at the Detroit Auto Show starting on January 4th.

- China

In China, the market size is around 11 million units for motorcycles and nearly 2 million for automobiles. Demand for automobiles is growing dramatically and we expect it to reach 7 million units by the year 2010. Guangzhou Honda began operations with an annual capacity of 30,000 units and now has a capacity of 120,000 units per year. This year, the Fit Saloon model was added to the production lineup joining the Accord and Odyssey.

In 2004, the capacity of the Guangzhou plant will double to 240,000 units, while a new plant with a capacity of 50,000 units will open to produce products exclusively for export. In addition, production of the CR-V will begin next year in a new joint venture with Dongfeng Motor Corporation in Wuhan, China. We are not only expanding production capacity in China, but the local content ratio as well. For the new Fit Saloon, local content reached 80%, a significant increase from the 40% level for locally produced models only a few years ago. In April, our motorcycle R&D facility in Shanghai started operations. The mission of this research facility is to research the needs of local customers and quickly incorporate them into our products. We are planning to introduce a new product model into the Chinese market based on the results of these R&D efforts in China. Our strategy is not the pursuit of volume, but to increase customer satisfaction by having our R&D, procurement, production, and sales operations establish deep roots in the Chinese market and by responding quickly to the needs of our customers.

Honda currently has 11 joint ventures and subsidiaries in China for our motorcycle, automobile and power product businesses. In order to manage and operate these businesses comprehensively, Honda has decided to establish a wholly-owned subsidiary early next year, in the form of a new limited investment holding company.

This company will function as the regional operations center and develop Honda?s overall business strategy for China as well as to represent Honda group companies in the area of public relations, corporate communications, and intellectual property management. Integration of these functions in this new company is scheduled to begin in February 2004.

I believe the establishment of this company as a nerve center to horizontally link all our operations ? with each operation pursuing its own strategies ? will enable us to effectively respond to the historically unprecedented growth of the auto industry there and to continue to provide the highest customer satisfaction in the industry.

- New Business Area

In March 2003, Honda began commercialization of energy co-generation systems for residential use through city gas companies. The level of interest we received was well beyond our expectations. The number of units sold will reach 3,500 this year, and we expect to sell 9,000 units in 2004. The overall utilization efficiency of this system is 85%, more than twice that of thermal power generation transmission methods, which is 39%. In other words, this system drastically cuts CO2 emissions, which are recognized as being a cause of global warming. We will soon introduce a co-generation system unit for LPG (liquefied petroleum gas).

Further, Honda Engineering has continued to develop a solar battery panel, which requires just 20% of the energy to manufacture compared to conventional types.

In preparation for commercialization, a new 2.8 megawatt-size production line was established within Honda Engineering?s operation in Tochigi in November of this year.

Development of solar battery products has been one of Honda?s key initiatives toward an energy recycling society. Honda wants to contribute to the realization of ultimate energy recycling ? a society where highly efficient solar batteries generate electricity; electricity generates hydrogen from water; and hydrogen is used for fuel-cell vehicles that emit only water.

- Sales Projection and Sales Plan

For 2003, our sales forecast are 9.09 million motorcycles, 2.91 million automobiles, and 4.98 million power equipment units. For 2004, our sales goals are 10.4 million motorcycles, a 14% increase, 3.2 million automobiles, a 10% increase, and 5.4 million power equipment units, an 8% increase.

- Motorsports

In the motorcycle WGP, we earned the constructor?s championship for the third year in a row. The Honda RC211V won 15 of 16 races this year ? even better results than last year?s 14 wins out of 16 races. In 2004, we will be competing against this year?s champion, Mr. Rossi, who rode for Honda the past three championship years. It will be very challenging, but we continue to further improve the performance of the RC211V. We should be able to announce a new and powerful line-up early next year.

In Formula 1, we have concentrated our efforts on one team ? Lucky Strike BAR Honda?and earned 5th place this past season. In 2004, Takuma Sato will race full-time for the team, and we are preparing to achieve better results next year. We started road tests for the 2004 engine in November in Spain. Our 2004 engine has been completely redesigned to comply with newly introduced regulations as well as to achieve more power while minimizing its weight and size. Test results show positive speed and reliability.

- HondaJet

As you probably heard today, the HondaJet has successfully completed its maiden flight in North Carolina. This aircraft is powered by Honda-developed HF118 turbo fan engines, and has a fuselage that was also developed by Honda. As some of you may know, today is the 100-year anniversary of the first motorized flight by mankind. 100 years ago today, the Wright brothers who owned a bicycle shop in Dayton, Ohio conducted their first flight in Kitty Hawk, North Carolina with their handmade aircraft. I am very happy to share the news of the successful first flight of the HondaJet on such a memorable day.

Beginning with motorcycles, Honda has always been a company which has actively pursued mobility. Today, we can easily communicate with each other via the internet and cell phones; however, we believe face-to-face meetings are still the starting point for communication between people. Mobility is a basic desire, right and joy for all people. Honda continues to pursue mobility from all dimensions. Mobility in the third dimension ? the sky ? was a dream we have had since shortly after our company was founded. Honda will continue our effort to attain the ultimate in advanced mobility in order to create joy and happiness for people.