Honda exec says margins to fall as cars advance

TOKYO -- A top executive at Honda Motor Co. said on Monday profit margins would inevitably fall as more advanced vehicles spread through the market, but he stressed that skimping on R&D costs would do greater harm in the long run.

Japan's third-biggest auto maker last month outlined plans to reduce its cars' carbon dioxide emissions by an average 10 percent by 2010 compared with 2000 levels, mainly by developing more efficient gasoline engines, clean diesel engines and improving its hybrid powertrain.

Diesel and hybrid-powered vehicles are said to cost as much as 50 percent more than conventional gasoline cars to produce, and generally yield smaller profits for auto makers.

"This is an issue," Senior Managing Director Michiyoshi Hagino, who oversees environmental and other matters, told a small group of reporters, noting that the growing popularity of small, cheaper cars would also contribute to that trend.

But he added that spending on R&D to improve the performance and environmental viability of vehicles was essential for auto makers to stay competitive, and that profit margins ultimately mattered little as long as absolute earnings were growing.

"This is my personal opinion, but if car makers don't spend the necessary funds on R&D choosing instead to retain a high margin, things will eventually catch up with them," Hagino said in a thinly veiled jab at rival Nissan Motor Co.

Asked whether Nissan, which has announced industry-leading profitability as one of its goals, fell under that characterisation, Hagino said: "Who knows what could happen, but in our view, things could get tricky there."

In the year ended March 31, Honda spent 510 billion yen ($4.47 billion) on R&D, or 5.2 percent of its revenue. It had an operating profit of 868.9 billion yen, giving a margin of 8.8 percent.

Nissan's outlays, meanwhile, totalled 447.6 billion yen, or 4.7 percent of sales. Its operating margin was 9.2 percent.

Honda is known in the industry for its generous spending on R&D -- including in non-automotive areas such as robots, renewable energy and aircraft -- and famously shuns cooperation on technology involving its core powertrains.

With annual revenue less than half that of hybrid king Toyota Motor Corp., Honda is the only mass-market maker of gasoline-electric cars developed in-house.

Hagino admitted that Honda lagged Toyota in the hybrid field, but repeated the company's goal of offering a better-performing hybrid that would be cheaper than its current gasoline-electric Civic by 2009.

"The motivation among our engineers is high because we're losing the battle now," he said.

Hagino said Honda also wanted to be the first to come up with a viable diesel vehicle that would meet the strict U.S. emissions regulations to be introduced from 2009. Honda has said it aims to introduce a cleaner four-cylinder diesel engine within three years, and eventually develop a similar V6 engine, mounting them on its bigger vehicles.

He warned, however, that the next-generation diesel engines would add hundreds of dollars to the premium over gasoline cars -- already around $1,900 to $2,500 -- and that lowering the cost would be a major challenge.

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