Honda 2009 Annual Report Download - page 39

1.Honda’s operations are subject to currency fluctuations
Honda has manufacturing operations throughout the world, including Ja-
pan, and exports products and components to various countries. Honda
purchases materials and sells its products in foreign currencies. Therefore,
currency fluctuations may affect Honda’s pricing of products sold and ma-
terials purchased. Accordingly, currency fluctuations have an effect on
Honda’s results of operations and financial condition, as well as Honda’s
competitiveness, which will over time affect its results. Since Honda ex-
ports many products and components from Japan and generates a sub-
stantial portion of its revenues in currencies other than the Japanese yen,
Honda’s results of operations would be adversely affected by an apprecia-
tion of the Japanese yen against other currencies, 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 sub-
stantial effects of currency fluctuations and interest rate exposure on our
cash flow and financial condition. These instruments include foreign cur-
rency forward contracts, currency swap agreements and currency option
contracts, as well as interest rate swap agreements. Honda has entered
into, and 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 utilizing such hedging instru-
ments, Honda potentially forgoes benefits that might result from other
fluctuations in currency exchange and interest rates. Honda is also ex-
posed to the risk that its counterparties to hedging contracts will default
on their obligations. Honda manages exposure to counterparty credit risk
by limiting the counterparties to major international banks and financial in-
stitutions meeting established credit guidelines. However, any default by
such counterparties might have an adverse effect on Honda.
1. Honda may be adversely affected by market conditions
Honda conducts its operations in Japan and throughout the world, includ-
ing North America, Europe and Asia. A sustained loss of consumer confi-
dence in these markets, which may be caused by continued economic
slowdown, recession, rising fuel prices, financial crisis or other factors
could trigger a decline in demand for automobiles, motorcycles and pow-
er 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 certain mar-
kets may experience sharp changes over short periods of time. This vola-
tility is caused by many factors, including fierce competition, which is
increasing, short-term fluctuations in demand from underlying economic
conditions, changes in tariffs, import regulations and other taxes, shortag-
es of certain supplies, high material prices and sales incentives by Honda
or other manufacturers 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 volatility. Overca-
pacity within the industry has increased and will likely continue to increase
if the economic downturn continues in Honda’s major markets or world-
wide, leading, potentially, to further increased price pressure. Price volatili-
ty in any or all of Honda’s markets could adversely affect Honda’s results
of operations in a particular period.
Relating to Honda’s Industry
Risks Relating Honda’s Business Generally
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 pollutants from pro-
duction 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.
2.Honda is reliant on the protection and preservation of its intellectual
property
Honda owns or otherwise has rights in a number of patents and trade-
marks relating to the products it manufactures, which have been obtained
over a period of years. These patents and trademarks have been of value
in the growth of Honda’s business and may continue to be of value in the
future. Honda does not regard any of its businesses as being dependent
upon any single patent or related group of patents. However, an inability
to protect this intellectual property generally, or the illegal breach of some
or a large group of Honda’s intellectual property rights, would have an ad-
verse effect on Honda’s operations.
3.Honda is subject to legal proceedings
Honda is subject to a number of suits, investigations and/or proceedings
under relevant laws and regulations of various jurisdictions. A negative out-
come in one or more of these pending legal proceedings could adversely
affect Honda’s business, financial condition or results of operations.
Legal and Regulatory RisksCurrency and Interest Rate Risks
Annual Report 2009 37
Risk Factors