Honda 2008 Annual Report Download - page 37

Risk Factors
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1. Honda may be adversely affected by market conditions
Honda conducts its operations in Japan and throughout the world,
including North America, Europe and Asia. A continued economic
slowdown, recession or sustained loss of consumer confidence in
these markets, which may be caused by rising fuel prices or other
factors, could trigger a decline in demand for automobiles, mo-
torcycles and power products that may adversely affect Honda’s
results of operations.
2. Prices for automobiles, motorcycles and power
products can be volatile
Prices for automobiles, motorcycles and power products in cer-
tain markets may experience sharp changes over short periods
of time. This volatility is caused by many factors, including fierce
1. Honda’s operations are subject to currency fluctuations
Honda has manufacturing operations throughout the world, in-
cluding Japan, and exports products and components to vari-
ous countries. Honda purchases materials and sells its products
in foreign currencies. Therefore, currency fluctuations may affect
Honda’s pricing of products sold and materials purchased. Ac-
cordingly, currency fluctuations have an effect on Honda’s results
of operations and financial condition, as well as Honda’s competi-
tiveness, which will over time affect its results. Since Honda ex-
ports many products and components from Japan and generates
a substantial portion of its revenues in currencies other than the
Japanese yen, Honda’s results of operations would be adversely
affected by an appreciation of the Japanese yen against other cur-
rencies, in particular the U.S. dollar.
2. Honda’s hedging of currency and interest rate risk exposes
Honda to other risks
Although it is impossible to hedge against all currency or interest
rate risk, Honda uses derivative financial instruments in order to
reduce the substantial effects of currency fluctuations and inter-
est rate exposure on our cash flow and financial condition. These
instruments include foreign currency forward contracts, cur-
rency swap agreements and currency option contracts, as well
as interest rate swap agreements. Honda has entered into, and
Relating to Honda’s Industry
Risks Relating Honda’s Business Generally
competition, which is increasing, short-term fluctuations in de-
mand from underlying economic conditions, changes in tariffs,
import regulations and other taxes, shortages of certain supplies,
high material prices and sales incentives by Honda or other manu-
facturers or dealers. There can be no assurance that such price
volatility will not continue or intensify or that price volatility will not
occur in markets that to date have not experienced such volatil-
ity. Overcapacity within the industry has increased and will likely
continue to increase if the economic downturn continues in Hon-
da’s major markets or worldwide, leading, potentially, to further
increased price pressure. Price volatility in any or all of Honda’s
markets could adversely affect Honda’s results of operations in a
particular period.
expects to continue to enter into, such hedging arrangements.
As with all hedging instruments, there are risks associated with
the use of such instruments. While limiting to some degree our
risk fluctuations in currency exchange and interest rates by utiliz-
ing such hedging instruments, Honda potentially forgoes benefits
that might result from other fluctuations in currency exchange and
interest rates. Honda is also exposed to the risk that its counter-
parties to hedging contracts will default on their obligations. Hon-
da manages exposure to counterparty credit risk by limiting the
counterparties to major international banks and financial institu-
tions meeting established credit guidelines. However, any default
by such counterparties might have an adverse effect on Honda.
1. The automobile, motorcycle and power product
industries are subject to extensive environmental
and other governmental regulation
Regulations regarding vehicle emission levels, fuel economy, noise
and safety and noxious substances, as well as levels of pollut-
ants from production plants, are extensive within the automobile,
motorcycle and power product industries. These regulations are
subject to change, and are often made more restrictive. The costs
to comply with these regulations can be significant to Honda’s
operations.
Currency and Interest Rate Risks
Legal and Regulatory Risks
Annual Report 2008 35