Ongoing Market Expansion, but Increasingly Challenging Competition

Against the backdrop of overall robust economic performance, the size of the Indian market continued to expand since motorcycle makers launched a number of highly competitive models. Honda's unit sales* in fiscal 2007 rose 13.3%, to 3,930,000 units, from the previous fiscal year. This total represents the combined sales of Hero Honda Motors Limited (Hero Honda), an affiliate accounted for under the equity method, which saw an 11.4% increase in sales from the previous fiscal year, to 3,239,000 units, and Honda Motorcycle and Scooter India Private Limited (Honda Motorcycle and Scooter India), a consolidated subsidiary, which experienced a 23.0% rise in sales to 691,000 units. From the second half of fiscal 2007, sales benefited from the November 2006 launch of the new CBZ Extreme and the December introduction of full model change versions of CD Dawn and CD Deluxe , which are two of the core models, spurring a recovery in Honda's market share.
* Wholesale units sold locally

Monthly Sales and Market Share over the Past Year

Boosting Production Capacity to Meet Growing Demand in the Long Term

Demand in India continues to expand for motorcycles, which are an essential mode of transportation in this market. Consequently, by approximately 2010 total demand is expected to rise to the 12,000,000-unit level. To meet this growing demand, Hero Honda is adding to the annual production capacity of 3,900,000 units at its two existing plants by building a third plant with an annual production capacity of 500,000 units. In September 2006, Honda Motorcycle and Scooter India also raised its annual production capacity to 1,000,000 units.

Financial Policies in the First Half of Fiscal 2007 Lead to Sluggish Market

In Indonesia—the world's third largest motorcycle market, following China and India—overall demand in calendar 2006* came to approximately 4,630,000 units, down 13.8% from the previous year. In fall 2005, the Indonesian government raised interest rates in an effort to curb the climbing rate of inflation initiated by rising gasoline prices. This move, in turn, caused a credit crunch that dampened consumer purchasing power.

In this problematic market environment, P.T. Astra Honda Motors (Astra Honda), an affiliate accounted for under the equity method, endeavored to arouse demand by launching the Mega Pro and Tiger 2000 , as well as for the Vario , a newly introduced scooter equipped with an automatic transmission (AT) that automatically changes gears according to speed and engine revolutions. Nevertheless, unit sales declined 11.6% from the previous year, to 2,340,000 units.
* Wholesale units sold locally

Easing of Financial Policies Contributes to Recovery from Second Half of Fiscal 2007

Looking at the economic environment in Indonesia, in fall 2006 inflation and interest rate policy returned to single-digit levels. In calendar 2007, overall motorcycle demand is expected to return to 2005 levels. As in India, economic expansion in Indonesia is expected to continue prompting high rates of market expansion. Astra Honda continues to promote sales growth by launching new models and strengthening its sales promotion efforts. The company is also encouraging rider safety through an enhanced riding trainer at its dealerships to create an environment that promotes motorcycles.

In 2006, the size of the Brazilian market expanded 24.0% year-on-year, to approximately 1,270,000 units, with currency exchange and inflation rates stable in a robust economic climate. Honda's unit sales in fiscal 2007 increased 22.0% from the previous term, to 1,021,000 units, despite competition from expanding local production by a Chinese manufacturer.

The country's economic outlook remains stable for calendar 2007, and motorcycle demand is expected to continue expanding and rise more than 20%, to 1,550,000 units. To meet this increasing demand, in January 2007 we raised annual production capacity from 1,000,000 units to 1,350,000 units. By the end of calendar 2007, we intend to further increase annual capacity, to 1,500,000 units.

Sources of Honda's Strong Position in the Brazilian Market Since beginning local production in Brazil in 1976, we have raised local procurement rates and bolstered cost competitiveness, and in the process developed a solid operation with deep local roots. As a result of many years of effort, Honda currently holds approximately 80% share of the Brazilian market. The Manaus plant, which is scheduled to expand annual production to 1.5 million units by the end of calendar 2007 Manufacturing line of the CG150 TITAN , which is a principal model

The U.S. market is divided into motorcycles and ATVs. In calendar 2006, the U.S. motorcycle market for on-road models expanded, spurred by new model launches by various manufacturers, but off-road category demand for enduro models suffered a decline as soaring gasoline prices and concerns about the economy prompted customers to curtail recreational spending. Consequently, overall demand remained approximately on par with the previous year. At the same time, in calendar 2006 the U.S. ATV market was relatively strong in the sport category, in response to the introduction of new products by various manufacturers. Higher interest rates and concerns about an economic slowdown affected demand in the utility category, however, driving down overall ATV demand compared with the preceding fiscal year.

In fiscal 2007, Honda's unit sales in North America fell 18.2%, to 503,000 units. In the motorcycle category, sales of new sports and off-road models were strong, but enduro models experienced a sales decline as a result of the shifts in the market environment. In the ATV category, sales were strong for new models, such as the FourTrax Rancher series, launched in December 2006, following a full model change. However, shifts in the market environment caused overall sales to decline.

In fiscal 2007, demand in the Japanese motorcycle market for motorcycles under 50cc of engine displacement—the largest demand category—fell as aresult of the declining number of youth in the population, resulting in the declining number of licensed motorcycle drivers. Overall, demand declined approximately 2%, to 730,000 units.

Looking at recent trends in the Japanese motorcycle market, restrictions on motorcycles with passengers traveling on expressways have been lifted, automatic-only vehicle licenses have been introduced, and the ETC*1 system has been expanded to include motorcycles. Each of these changes has helped to improve the riding environment, a culmination of years of effort. As a result, demand stopped declining in certain categories during fiscal 2007.

Due to the decline in demand for inexpensively priced scooters under 50cc, in fiscal 2007 Honda's unit shipments decreased 7.0%, to 343,000 units. In fiscal 2008, we expect demand to shrink slightly to approximately 720,000 units.

To meet anticipated increases in the diverse recreational mobility needs of Japanese customers, we will work to meet customers' demand focusing on customers' satisfaction, developing "Dream Shops" in Japan which offer products and services of high value, centering on sport models.

The motorcycle market in Europe in calendar 2006 was characterized by growing demand in Southern Europe, including Italy, Spain and France, driving up demand 8.5%, to approximately 1,310,000 units*2. A licensing system revision in Spain in October 2004, raised from 50cc to 125cc the maximum size of motorcycles that could be ridden legally with a standard automobile license, prompting a surge in demand in this country. Demand in France and Germany also surged in advance of the January 2007 introduction of Euro3*3 emissions restrictions in 15 European countries.

Honda's unit sales in Europe in fiscal 2007 came to 297,000 units, down 6.6%. Sales of SH125i , SH150i and other scooters were robust, but sales of large super sport models and motorcycles in the 125cc class were lackluster.