Honda - 20-F annual report 2020

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

OR

For the fiscal year ended March 31, 2020

OR

For the transition period from                to                

OR

Date of event requiring this shell company report            

Commission file number 1-7628

HONDA GIKEN KOGYO KABUSHIKI KAISHA

(Exact name of Registrant as specified in its charter)

HONDA MOTOR CO., LTD.

(Translation of Registrant’s name into English)

JAPAN

(Jurisdiction of incorporation or organization)

No. 1-1, Minami-Aoyama 2-chome, Minato-ku, Tokyo 107-8556, Japan

(Address of principal executive offices)

Rikako Suzuki

prj_h_ir2@hm.honda.co.jp, +81-3-5412-1134, No. 1-1, Minami-Aoyama 2-chome, Minato-ku, Tokyo 107-8556, Japan

(Name, E-mail and/or Facsimile number, Telephone and Address of Company Contact Person)

Securities registered pursuant to Section 12(b) of the Act.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act,    Yes  ☒    No  ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such file).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  ☐    International Financial Reporting Standards as issued by the International Accounting Standards Board  ☒    Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

PART I

Unless the context otherwise requires, the terms “we”, “us”, “our”, “Registrant”, “Company” and “Honda” as used in this Annual Report each refer to Honda Motor Co., Ltd. and its consolidated subsidiaries.

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected Financial Data

The selected consolidated financial data set out below for each of the five fiscal years ended March 31, 2020 have been derived from our consolidated financial statements that were prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

You should read the IFRS selected consolidated financial data set out below together with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements contained in this Annual Report.

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B. Capitalization and Indebtedness

Not applicable.

C. Reason for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

You should carefully consider the risks described below before making an investment decision. If any of the risks described below actually occurs, Honda’s business, financial condition or operating results could be adversely affected. In that event, the trading prices of Honda’s common shares and American Depositary Shares could decline, and you may lose all or part of your investment. Additional risks not currently known to Honda or that Honda now deems immaterial may also harm Honda and affect your investment.

Risks relating to the spread of coronavirus disease 2019 (COVID-19)

The World Health Organization (WHO) declared COVID-19 a Public Health Emergency of International Concern in January 2020 and, subsequently, a pandemic in March 2020. Thereafter, COVID-19 continued to spread worldwide, due to various responses resulted from the spread of COVID-19 including outing and travel restrictions in various countries, there has been stagnation of consumers’ consumptions and corporate economic activities, and resulted in decreased sales units of automobiles and other products.

The spread of COVID-19 has adversely affected Honda’s business and operating results in its Motorcycle business, Automobile business, Financial services business, and Life creation and other businesses. Resulting from travel restriction measures by government, Honda’s production bases in Japan and overseas are also affected by suspended or reduced production mainly due to restrictions on employees’ commute to the workplaces and delays in the supply of parts within the supply chain. Dongfeng Honda Automobile Co., Ltd. located in Wuhan City, China, stopped production at February 3, 2020, and subsequently, resumed production sequentially after March 11, 2020. Automobile factories located in the United States, stopped production at March 23, 2020, and subsequently, resumed production sequentially after May 11, 2020. Some dealers in Japan and overseas were obliged to suspend business, shorten business hours, or reduce services such as inspections and repairs. Customer credit risk and other factors are affected by changes in forecast, including an increase in unemployment rate and decline in used vehicle prices due to the downturn of economy. Furthermore, financing costs in the Financial services business are affected by the volatility in the financial market resulted from the spread of COVID-19. Honda’s cash and cash equivalents as of March 31, 2020 corresponds to approximately 2.1 months of sales revenue, and Honda believes it has sufficient liquidity for its business operations.

In January 2020, Honda established the Global Emergency Headquarters. Honda’s first priority is the safety of our stakeholders, including customers, suppliers and employees, Honda has taken countermeasures to minimize the adverse impacts on Honda’s business and operating results, from the perspective of business continuity. Beginning with thorough infection prevention countermeasures based on guidelines from the WHO and governments worldwide, Honda is taking various measures, such as disallowing travel to countries with a high risk of infection in line with travel restrictions in each country, expanding remote work by introducing restrictions on physical commuting, and canceling or scaling down events in which Honda’s stakeholders gather

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in large numbers. Honda has been gradually resuming its business activities in some countries based on developments on local regulations and the supply of parts, upon taking measures such as checking employees’ temperatures, maintaining hygiene in work areas, and ensuring social distancing.

As mentioned above, some business activities are resuming. However, the duration of the spread of COVID-19, market trends, and economic trends remain uncertain. Unpredictable future trends may adversely affect Honda’s business and operating results, such as through factory downtime and business suspensions or shortening of business hours at dealers and decrease in sales units, in addition to increased costs to maintain prolonged infection prevention countermeasures. Increase of customer credit risk and other factors, which are affected by changes in forecast including an increase in unemployment rate and decline in used vehicle prices, may adversely affect Honda’s operating results including increase of credit losses and losses on lease residual values. Prolonged spread of COVID-19 may affect Honda’s liquidity and financing activities.

The spread of COVID-19 may have an impact on the following risks.

Regional Risk

Honda conducts business operations in countries worldwide and is exposed to risks including changes in local laws and regulations, agreements, institutions and business practices, such as tariffs, import and export regulations, and taxes, wars, terrorism, political uncertainty, worsening security situation, change in political regime and labor strikes in those countries or neighboring regions. If such unforeseeable events occur, and operations are delayed or suspended, Honda’s business and operating results could be adversely affected.

Particularly among them, Honda recognizes the following as the main risks, which could significantly affect the mid- and long-term initiatives of the Honda regarding further electrification of the products and provision of mobility services, so countermeasures are gaining importance.

For the scale of business in each region that may be affected by such changes in local laws and regulations and systems in the future, see “(d) Supplemental Geographical Information” of note “(4) Segment Information” to the accompanying consolidated financial statements.

1. Status of Trade Agreements

Going forward, trends in the negotiations regarding trade agreements, particularly those related to the United States, could have adverse effects on Honda’s business and operating results. Honda will continue to monitor the status of negotiations and take action in consideration of the impact on Honda.

Especially noteworthy is the fact that the United States-Mexico-Canada Agreement (USMCA) is expected to enter into force in July 2020. The revision of various rules such as the rules of country of origin for automobiles sold within the regions covered in USMCA may adversely affect Honda’s business in North America.

2. Status of Environmental Regulations

Fuel efficiency and emissions regulations are being revised or are scheduled to be revised in countries around the world. Depending on the trend of revisions of the regulations, countermeasure expenses of regulations may be incurred regarding development and the procurement of parts, thereby potentially adversely affecting Honda’s businesses in North America, Europe, Asia, and other regions.

3. Status of Personal Information Protection Rules

In recent years, personal information protection rules have been rapidly developed in countries around the world, as exemplified by the California Consumer Privacy Act that took effect in January 2020. As such, fines

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may be imposed if violations of rules occur, including the leakage of personal information, in accordance with the rules of each country, and this could have an adverse effect on Honda’s business and operating results. In initiatives for other next-generation technologies such as provision of mobility services, measures to protect personal information are also gaining importance.

Information Security Risk

Honda uses a wide range of information systems and networks relating to information services and driving support in its business activities and its products, including in areas managed by subcontractors. Especially, in recent years, IoT and other information technologies, which have evolved rapidly, have become indispensable for control of vehicles. Amid this situation, cyber-attacks could substantially impact Honda’s mid- and long-term initiatives toward more widespread use and evolution of driver-assistive technologies and further provision of mobility services, so countermeasures are gaining importance, and this trend is expected to continue to accelerate in the future.

These may be the result of external cyber-attacks, in addition to equipment malfunction, or management deficiencies and human error, as well as natural disasters, infrastructure failures, or other unforeseen events within Honda or at its subcontractors. When such event occurs, Honda’s business and operating results could be adversely affected in terms of damage to its brand image or social reputation, liability to customers or parties affected, payment of financial penalties, delays to or suspension of manufacturing operations, and a loss of Honda’s competitiveness.

Recent Incident

On June 8, Honda experienced a cyber-attack, which widely affected personal computers when they accessed Honda’s internal system. As a result, Honda’s business operation suspended temporarily at several locations including Honda’s production bases.

In addition to restoring affected personal computers, Honda is continuing to investigate, including the identity of the attackers and the method by which they accessed Honda’s internal system. As of the date of this report, no damages to customers or other third parties, such as leaks of information, have been confirmed. While Honda has taken countermeasures to minimize the impacts of the attack and prevent similar or additional attacks, because the investigation has not been completed yet, there may be undetected impacts of the attack, and Honda’s countermeasures may not be sufficient to prevent similar or additional attacks.

If any such undetected impact of this attack is revealed or there is a similar or additional attack, Honda’s business and operating results could be adversely affected in terms of damage to its brand image or social reputation, liability to customers or parties affected, payment of financial penalties, delays to or suspension of manufacturing operations, and a loss of Honda’s competitiveness.

Business Alliances and Joint Ventures Risk

Honda engages in business operations through alliances and joint ventures with other companies in expectation of synergy effects and increased efficiency, or to meet the requirements of the countries in which business development is being undertaken.

As Honda advances its mid- and long-term initiatives toward further electrification, more widespread use and evolution of driver-assistive technologies, and further provision of mobility services, the utilization of alliances and other forms of partnership are gaining importance.

If disagreements in business, profit or technology leakage, delays in decision-making or poor operating results at business partners occur among the parties to an alliance or joint venture, or if conditions to an alliance or joint venture is changed or cancelled, it may have an adverse effect on Honda’s business and operating results.

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Intellectual Property Risk

Honda owns or otherwise has rights in a number of patents and trademarks relating to the products it manufactures, which have been obtained over a period of years. These patents and trademarks include those that could significantly affect Honda’s mid- and long-term initiatives toward more widespread use and evolution of driver-assistive technologies and further provision of mobility services, among other areas, so countermeasures are gaining importance.

The inability to protect this intellectual property generally, the illegal infringement of some or a large group of Honda’s intellectual property rights, or the suspension of manufacturing and/or sales activities and the payment of large amounts of damages as a result of lawsuits on infringement of patent rights and license fees, could have an adverse effect on Honda’s business and operating results.

Natural Disasters Risk

The suspension and delay in business activities such as production, development, purchasing and sales as a result of damage caused to Honda’s operational sites and employees by earthquakes, floods, windstorms, infections and other natural disasters may adversely affect Honda’s business and operating results.

Financial & Economic Risk

1. Economic Trends and Economic Fluctuations Risks

Honda conducts business operations in the countries throughout the world. Honda has manufacturing operations and sells products in various regions and countries. These business activities may be affected by economic slowdown, currency fluctuation or other factors, which could result in decreased sales due to market contraction, increases in component procurement prices and product sales prices, higher credit risk for Honda’s business, and higher financing interest rates, among others. Accordingly, these changes may have an adverse effect on Honda’s business and operating results.

2. Currency Fluctuations Risk

Honda has manufacturing operations throughout the world, including Japan, and exports products and components to various countries. Honda purchases materials and components and sells its products and components in foreign currencies. Therefore, currency fluctuations could affect Honda’s pricing of materials purchased and products sold. Accordingly, currency fluctuations may have an adverse effect on Honda’s business and operating results.

Relating to Industry Market Risk

Honda conducts its operations in Japan and countries throughout the world, including North America, Europe and Asia. A sustained loss of consumer confidence in these markets, which may be caused by an extended economic slowdown, recession, changes in consumer preferences and needs, rising fuel prices, financial crisis, increases in product prices due to increases in material costs or decreases in supply volume, intensifying competition with other companies or other factors could trigger a decline in demand for Honda’s products that may adversely affect Honda’s business and operating results.

Honda’s Financial services business conducts business under highly competitive conditions in an industry with inherent risks

Honda’s Financial services business offers various financing plans to its customers designed to increase the opportunity for sales of its products. However, customers can also obtain financing for the lease or purchase of Honda’s products through a variety of other sources that compete with our financing services, including commercial banks and finance and leasing companies. The financial services offered by Honda involve credit

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risk as well as risks relating to lease residual values, cost of capital and access to funding. Competition for customers and/or these risks may adversely affect Honda’s business and operating results.

Purchasing and Procurement Risk

Honda aims to sustain the procurement of good products at reasonable prices in a timely manner, purchases raw materials and parts from numerous external suppliers, and relies on certain suppliers for some of the raw materials and parts which it uses to manufacture its products. Honda’s ability to continue to obtain these supplies in an efficient and cost-effective manner is subject to a number of factors, some of which are outside of Honda’s control. These factors include the ability of its suppliers to provide a continued source of raw materials and parts and Honda’s ability to compete with other users in obtaining the supplies. In particular, the loss of a key supplier could adversely affect Honda’s business and operating results, including affecting its production.

Legal Risk

Honda could be subject to lawsuits, various investigations and legal proceedings under relevant laws and regulations of various jurisdictions. A negative outcome in any such current or future legal proceedings brought against Honda could adversely affect Honda’s business and operating results.

Honda is subject to risks relating to its obligations to provide post-employment benefits

Honda has various pension plans and provides other post-employment benefits, in which the amount of benefits is basically determined based on the level of salary, service years, and other factors. Contributions are also regularly reviewed and adjusted as necessary to the extent permitted by laws and regulations. Defined benefit obligations and defined benefit costs are based on assumptions of a variety of factors, including the discount rate and the rate of salary increase. Changes in assumptions could affect Honda’s defined benefit costs and obligations, including Honda’s cash requirements to fund such obligations in the future, which could adversely affect Honda’s operating results.

Honda’s success depends in part on the value of its brand image, which could be diminished by product defect

One of the important factors behind corporate sustainability is trust and support for the Honda brand from our customers, society and the communities in which Honda conducts business operations. In order to support this brand image, Honda endeavors to gain the trust of society in all types of corporate activities, including ensuring product quality and compliance with laws and regulations, conducting risk management, and enhancing internal controls related to corporate governance. However, if for some unforeseeable reason the Honda brand image is damaged or Honda is unable to communicate information in a timely manner and deal with such information appropriately, this could adversely affect Honda’s business and operating results.

Risks Relating to Honda’s ADSs

A holder of ADSs will have fewer rights than a shareholder has and such holder will have to act through the depositary to exercise those rights

The rights of shareholders under Japanese law to take various actions, including exercising voting rights inherent in their shares, receiving dividends and distributions, bringing derivative actions, examining a company’s accounting books and records, and exercising appraisal rights, are available only to holders of record. Because the depositary, through its custodian agents, is the record holder of the Shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited Shares. The depositary will make efforts to exercise votes regarding the Shares underlying the ADSs as instructed by the holders and will pay to the holders the dividends and distributions collected from the Company. However, in the capacity as an ADS holder, such holder will not be able to bring a derivative action, examine our accounting books or records or exercise appraisal rights through the depositary.

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Rights of shareholders under Japanese law may be more limited than under the laws of other jurisdictions

The Company’s Articles of Incorporation, Regulations of the Board of Directors, Regulations of the Audit and Supervisory Committee and the Company Law of Japan (the “Company Law”) govern corporate affairs of the Company. Legal principles relating to such matters as the validity of corporate procedures, directors’ and officers’ fiduciary duties, and shareholders’ rights may be different from those that would apply if the Company were a U.S. company. Shareholders’ rights under Japanese law may not be as extensive as shareholders’ rights under the laws of the United States. An ADS holder may have more difficulty in asserting his/her rights as a shareholder than such an ADS holder would as a shareholder of a U.S. corporation. In addition, Japanese courts may not be willing to enforce liabilities against the Company in actions brought in Japan that are based upon the securities laws of the United States or any U.S. state.

Because of daily price range limitations under Japanese stock exchange rules, a holder of ADSs may not be able to sell his/her shares of the Company’s Common Stock at a particular price on any particular trading day, or at all

Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price fluctuation limits for each stock, based on the previous day’s closing price. Although transactions may continue at the upward or downward limit price if the limit price is reached on a particular trading day, no transactions may take place outside these limits. Consequently, an investor wishing to sell at a price above or below the relevant daily limit may not be able to sell his or her shares at such price on a particular trading day, or at all.

U.S. investors may have difficulty in serving process or enforcing a judgment against the Company, its directors or executive officers

The Company is a limited liability, joint stock corporation incorporated under the laws of Japan. Most of its directors and executive officers reside in Japan. All or substantially all of the Company’s assets and the assets of these persons are located in Japan and elsewhere outside the United States. It may not be possible, therefore, for U.S. investors to effect service of process within the United States upon the Company or these persons or to enforce against the Company or these persons judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Japan, in original actions or in actions for enforcement of judgment of U.S. courts, of liabilities predicated solely upon the federal securities laws of the United States.

The Company’s shareholders of record on a record date may not receive the dividend they anticipate

The customary dividend payout practice and relevant regulatory regime of publicly listed companies in Japan may differ from that followed in foreign markets. The Company’s dividend payout practice is no exception. While the Company may announce forecasts of year-end and quarterly dividends prior to the record date, these forecasts are not legally binding. The actual payment of year-end dividends requires a resolution of the Company’s Board of Directors. If the Board of Directors adopt such a resolution, the year-end dividend payment is made to shareholders as of the applicable record date, which is currently specified as March 31 by the Company’s Articles of Incorporation. However, such a resolution of the Board of Directors is usually made at a meeting of the Board of Directors held in April. The payment of quarterly dividends also requires a resolution of the Company’s Board of Directors. If the board adopts such a resolution, the dividend payment is made to shareholders as of the applicable record dates, which are currently specified as June 30, September 30 and December 31 by the Articles of Incorporation. However, the board usually does not adopt a resolution with respect to a quarterly dividend until after the respective record dates.

Shareholders of record as of an applicable record date may sell shares after the record date in anticipation of receiving a certain dividend payment based on the previously announced forecasts. However, since these forecasts are not legally binding and resolutions to pay dividends are usually not adopted until after the record

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date, our shareholders of record on record dates for year-end and quarterly dividends may not receive the dividend they anticipate.

Cautionary Statement with Respect to Forward-Looking Statements in This Annual Report

This Annual Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements included in this Annual Report are based on the current assumptions and beliefs of Honda in light of the information currently available to it, and involve known and unknown risks, uncertainties, and other factors. Such risks, uncertainties and other factors may cause Honda’s actual results, performance, achievements or financial position to be materially different from any future results, performance, achievements or financial position expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors are generally set forth in Item 3.D “Risk Factors” and include, without limitation:

Honda undertakes no obligation and has no intention to publicly update any forward-looking statement after the date of this Annual Report. Investors are advised to consult any further disclosures by Honda in its subsequent filings pursuant to the Securities Exchange Act of 1934.

Item 4. Information on the Company

A. History and Development of the Company

Honda Motor Co., Ltd. is a limited liability, joint stock corporation incorporated on September 24, 1948 under the Commercial Code of Japan as Honda Giken Kogyo Kabushiki Kaisha. It was formed as a successor to the unincorporated enterprise established in 1946 by the late Soichiro Honda to manufacture motors for motorized bicycles.

Since its establishment, Honda has remained on the leading edge by creating new value and providing products of the highest quality at a reasonable price for worldwide customer satisfaction. Honda develops, manufactures and markets motorcycles, automobiles and power products globally.

Honda’s principal executive office is located at 1-1, Minami-Aoyama 2-chome, Minato-ku, Tokyo, 107-8556, Japan. Its telephone number is+81-3-3423-1111. We maintain a website at https://global.honda/investors/ that contains information about our Company.

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The United States Securities and Exchange Commission (the “SEC”) maintains a website at https://www.sec.gov/ which contains in electronic form each of the reports and other information that we have filed electronically with the SEC.

Principal Capital Investments

In the fiscal years ended March 31, 2018, 2019 and 2020, Honda’s capital expenditures were ¥2,394.6 billion, ¥2,657.2 billion and ¥2,858.3 billion, respectively, on an accrual basis. Also, capital expenditures excluding those with respect to equipment on operating leases were ¥595.4 billion, ¥618.5 billion and ¥613.4 billion, respectively, on an accrual basis. For further details of Honda’s capital expenditures during fiscal 2020, see Item 4.D “Property, Plants and Equipment” of this Annual Report.

B. Business Overview

General

Honda’s business segments are the Motorcycle business operations, Automobile business operations, Financial services business operations, and Life creation and other businesses operations.

The following tables show the breakdown of Honda’s revenue from external customers by category of business and by geographical markets based on the location of the customer for the fiscal years ended March 31, 2018, 2019 and 2020:

Motorcycle Business

In 1949, Honda began mass production of motorcycles with the Dream D-Type, followed by other models such as the Benly and the Cub F-Type. By 1957, Honda became the top Japanese manufacturer in terms of motorcycle production volume. Honda expanded its business overseas by establishing American Honda Motor Co., Inc. in the United States in 1959. Honda first started overseas production in Belgium in 1963.

Honda produces a wide range of motorcycles, with engine displacement ranging from the 50cc class to the 1800cc class. Honda’s motorcycle lineup uses internal combustion engine of air- or water-cooled, and in single, two, four or six-cylinder configurations. Honda also has electric vehicles in its lineup. Honda’s motorcycle lineup consists of sports, business and commuter models. Honda also produces a range of off-road vehicles, including all-terrain vehicles (ATVs) and side-by-sides (SxS).

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The following table sets out unit sales for Honda’s Motorcycle business, including motorcycles, all-terrain vehicles (ATVs) and side-by-sides (SxS) and revenue from Motorcycle business, and the breakdown by geographical markets based on the location of the customer for the fiscal years ended March 31, 2018, 2019 and 2020:

See Item 4. D. “Property, Plants and Equipment” for information regarding principal manufacturing facilities.

For further information on recent operations and a financial review of the Motorcycle business, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”.

Automobile Business

Honda started Automobile business operations in 1963 with the T360 mini truck and the S500 small sports car models. Honda subsequently launched a series of mass-production models including the Civic in 1972 and the Accord in 1976, which established a base for its Automobile business. In 1969, production of the mini vehicles N600 and TN600 began in Taiwan using component parts sets. In 1982, Honda became the first Japanese automaker to begin local automobile production in the United States (with the Accord model) and later conducted local development and expanded production activities to include light truck models. In 1986, the Acura Brand was established and an exclusive sales network was launched in the United States.

Honda’s vehicles use gasoline engines of three, four orsix-cylinder configurations, diesel engines, gasoline-electric hybrid systems and gasoline-electric plug-in hybrid systems. Honda also offers other alternative fuel-powered vehicles such as battery electric vehicles, fuel cell vehicles, and flexible fuel vehicles.

Honda’s principal automobile products include the following vehicle models: (in alphabetical order)

Passenger cars:

Accord, Brio, City, Civic, Crider, Fit/Jazz

Light trucks:

CR-V, Freed, Odyssey, Pilot, Vezel/HR-V, XR-V

Mini vehicles:

N-BOX

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The following table sets out Honda’s unit sales of automobiles and revenue from Automobile business and the breakdown by geographical markets based on the location of the customer for the fiscal years ended March 31, 2018, 2019 and 2020:

See Item 4. D. “Property, Plants and Equipment” for information regarding principal manufacturing facilities.

For further information on recent operations and a financial review of the Automobile business, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”.

Financial Services Business

We offer a variety of financial services to our customers and dealers through finance subsidiaries in countries including Japan, the United States, Canada, the United Kingdom, Germany, Brazil and Thailand, with the aim of providing sales support for our products. The services of these subsidiaries include retail lending, leasing to customers and other financial services, such as wholesale financing to dealers.

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The following table sets out Honda’s revenue from Financial services business and the breakdown by geographical markets based on the location of the customer for the fiscal years ended March 31, 2018, 2019 and 2020:

For further information on recent operations and a financial review of the Financial services business, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”.

Life Creation and Other Businesses

Honda’s Power product business began in 1953 with the introduction of the model H, its first general purpose engine. Since then, Honda has manufactured a variety of power products including general purpose engines, generators, water pumps, lawn mowers, riding mowers, robotic mowers, brush cutters, tillers, snow blowers, outboard marine engines, walking assist devices and portable battery inverter power sources. In 2019, Honda had renamed Power product business to Life creation business. This renaming represents Honda’s intention to evolve Power product business as a function to create new value for “mobility” and “daily lives”, which includes existing power products business as well as new businesses for the future, including energy business. Energy business consists of portable and swappable battery rechargeable with renewable energy and energy management service for EV owners to charge their car with the renewables.

In Other businesses, Honda began deliveries of the HondaJet aircraft in December 2015.

The following table sets out Honda’s revenue from Life creation and other businesses and the breakdown by geographical markets based on the location of the customer for the fiscal years ended March 31, 2018, 2019 and 2020:

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For further information on recent operations and a financial review of the Life creation and other businesses, see “Operating Results” in “Item 5. Operating and Financial Review and Prospects”.

Marketing and Distribution

Most of Honda’s products are distributed under the Honda trademarks in Japan and/or in overseas markets.

In fiscal 2020, approximately 89% of Honda’s motorcycle units on a group basis were sold in Asia. Approximately 41% of Honda’s automobile units (including sales under the Acura Brand) on a group basis were sold in Asia followed by 38% in North America and 14% in Japan. Approximately 50% of Honda’s power products units on a group basis were sold in North America followed by 24% in Asia and 15% in Europe.

Sales and Service

In Japan, Honda produces and sells motorcycles, automobiles, and power products through its domestic sales subsidiaries and independent retail dealers. In overseas markets, Honda also provides motorcycles, automobiles, and power products through its principal foreign sales subsidiaries, which distribute Honda’s products to local wholesalers and retail dealers.

In fiscal 2020, approximately 97% of Honda’s overseas sales were made through its principal foreign sales subsidiaries, which distribute Honda’s products to local wholesalers and retail dealers.

Honda sells spare parts and provides after-sales services through retail dealers directly or via its overseas operations, independent distributors and licensees.

Components and Parts, Raw Materials and Sources of Supply

Honda manufactures the major components and parts used in its products, including engines, frames and transmissions. Other components and parts, such as shock absorbers, electrical equipment and tires, are purchased from numerous suppliers. The principal raw materials used by Honda are steel plate, aluminum, special steels, steel tubes, paints, plastics and zinc, which are purchased from several suppliers. The most important raw material purchased is steel plate, accounting for approximately 38% of Honda’s total purchases of raw materials.

No single supplier accounted for more than 5% of the Company’s purchases of major components and parts and principal raw materials during the fiscal year ended March 31, 2020.

Ordinarily, Honda does not have and does not anticipate having any difficulty in obtaining its required materials from suppliers and considers its contracts and business relations with the suppliers to be satisfactory. The Company does not believe any of its Japanese domestic suppliers are substantially more dependent on foreign suppliers than Japanese suppliers generally. However, it should be noted that Japanese industry in general is heavily dependent on foreign suppliers for substantially all of its raw materials.

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Seasonality

Honda’s motorcycles and power products have historically experienced some seasonality. However, this seasonality has not generally been material to our financial results.

Environmental and Safety Regulation

Honda is subject to various government regulations, including environmental and safety regulations for automobiles, motorcycles and power products. Such regulations relate to items such as emissions, fuel economy, recycling and safety and have had, and are expected to continue to have, material effects on Honda’s business. Honda has incurred significant compliance and other costs in connection with such regulations and will incur future compliance and other costs for new and upcoming regulations. Relevant environmental and safety regulations are described below.

Outline of Environmental and Safety Regulation for Automobiles

1. Emissions

Japan

In 2010, the Central Environmental Council in the Ministry of Environment reviewed the JC08 mode for emission testing and began to consider the introduction of the Worldwide harmonized Light vehicle Test Procedure (WLTP). In 2015, the Central Environmental Council in the Ministry of Environment decided to introduce WLTP. From October 2018, emission test based on WLTP has been obligatory instead of JC08 mode.

In December 2017, the Central Environmental Council in the Ministry of Environment started to consider introduction of regulations of particle number (PN) from diesel/gasoline direct injection engine vehicles.

In March 2018, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) introduced the Real Driving Emissions (RDE) examination for diesel vehicles. It will be applicable to new models of vehicles beginning in October 2022 and to existing models of vehicles beginning in October 2024.

In February 2019, the MLIT adopted the Global Technical Regulation No.19 (Evaporative emission test procedure for WLTP) for domestic regulation.

The United States

Increasingly stringent emission regulations under the Clean Air Act have been enacted since the 1990s by the U.S. federal government.

Under the Clean Air Act, the State of California is permitted to establish its own emission control standards to the extent they are more stringent than federal standards. Pursuant to this authority, the California Air Resources Board (CARB) adopted the California Low Emission Vehicle Program in 1990, aiming to establish the strictest emission regulations in the world.

In August 2012, the CARB issued the Advanced Clean Car package of regulations, which included amendments to the California Low Emission Vehicle Program III (LEV III) and Zero Emission Vehicle (ZEV) regulations. The LEV III regulation, which applies to 2015 and subsequent model years, tightened limits on emissions and evaporative emissions. The ZEV regulation was revised so that requirements could be satisfied by TZEV (Transitional ZEV) and ZEV alone for 2018 and subsequent model years. Also, for 2018 and subsequent model years, the credit value eligible for each ZEV category was decreased drastically, which consequently increases the required sales volume dramatically. The BEVx category, which includes battery electric vehicles with auxiliary power units, was also added as a ZEV category. Currently, many states have adopted California LEV III and ZEV regulations.

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In March 2014, the Environmental Protection Agency (EPA) finalized Tier 3 regulation, the federal emission and fuel standards. Tier 3 requires gasoline fuels at a pump to have an average sulfur content of 10 parts-per-million, which is already implemented in Europe and Japan. It also sets exhaust and evaporative emission standards equivalent to California LEV III. In other words, it enables auto manufacturers to sell some of the same vehicles they sell in California in states that have not adopted LEV III.

In October 2015, the CARB issued the Final Statement Of Reasons for rulemaking (FSOR), to amend the current LEV III regulation in order to align its standards further with the finalized federal Tier 3 regulation.

Canada

On July 16, 2015, the Environment Canada (current Environment and Climate Change Canada) issued the final regulation of amendment to emission regulation whose requirements refer to Tier 3 regulations in the United States.

Europe

In 2005, the European Union created new emission standards (the Euro 5 and Euro 6 regulations) and comprehensive requirements for gasoline vehicles and diesel vehicles.

The Euro 5 regulation required limits on particle number emissions from diesel vehicles, and implemented new test measurements for PM mass emissions from gasoline vehicles with direct injection engines and diesel vehicles in and after September 2011.

The Euro 6 regulation was implemented in September 2014. Emission limits for diesel vehicles were lowered even more than the Euro 5 levels for NOx and THC plus NOx. Additionally, Euro 6 requires limits on particle numbers from gasoline vehicles with direct injection engines.

The required ethanol density of test fuel was also increased, starting from September 2016.

The testing cycle to measure emissions has gradually been transitioning from New European Driving Cycle (NEDC) to Worldwide harmonized Light duty driving Test Cycle (WLTC) beginning from September 2017.

The European Commission implemented regulations regarding the Real Driving Emissions (RDE) using Portable Emissions Measurement System (PEMS). The monitoring phase started from April 2016 and RDE testing with emission limits started from September 2017 for NO_X and PN (particulate number).

The new Evaporative Emissions Test started from September 2019. The testing cycle was updated from NEDC to WLTP in conformity with the United Nations Economic Commission for Europe (UNECE) GTR No. 19.

China

China adopted Step 5 emission regulation for light-duty vehicles in 2017. This regulation is similar to European regulations (such as Euro 5 regulation). In addition, China has promulgated rules to implement Step 6 emission regulations in July 2020, based on Euro 6 regulation. Step 6a regulations will be implemented in July 2020 and Step 6b regulations will be implemented in July 2023. From July 2019, some regional environmental protection departments have already introduced Step 6 regulations in advance of national schedule.

In order to reduce dependence on foreign sources of crude oil and reduce air pollution, which are viewed as serious problems, the Chinese government has implemented various infrastructure projects and subsidy policies

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and has been preparing the relevant national standards and a certification system in order to encourage broad use of new energy vehicles such as electric vehicles,plug-in hybrid electric vehicles, and fuel-cell electric vehicles.

India

India implemented Bharat Stage VI (BS VI) regulations from April 2020, skipping the implementation of BS V regulations. The BS VI regulations feature two phases. The second phase is expected to apply from April 2023 with more stringent particle number and on-board diagnostic requirements and compliance for RDE.

Thailand

Thailand is scheduled to implement Euro 5 regulation by 2022 and Euro 6 regulation by 2023.

Malaysia

Malaysia is scheduled to implement Euro 4 regulation from July 2020 for new vehicles and January 2022 for all gasoline vehicles.

Indonesia

Indonesia introduced Euro 4 regulation from April 2017 for new models of vehicles and October 2018 for existing models of vehicles.

Other Regions

Brazil is scheduled to implement PROCONVE L7 from 2022 and L8 from 2025. This regulation is a unique Brazilian regulation based on U.S. regulations, which is much stricter than current regulations. Brazilian authorities and manufacturers are currently discussing the test methods and the OBD requirements.

2. Fuel Economy / CO₂

Japan

In June 2010, MLIT and the Ministry of Economy, Trade and Industry (METI) jointly established a committee and commenced a study to formulate new fuel economy standards for passenger motor vehicles for 2020. The new standards were announced in March 2013. The next term fuel economy standards improve the 2015 standards by 19.6% and adopt the Corporate Average Fuel Economy (CAFE) calculation method.

Fuel specifications for E10 fuel, which is gasoline blended with 10% ethanol, were revised and included in the April 2012 announcement setting forth the details of safety standards under the Road Transport Vehicle Law. Ethanol blended fuel is a “biomass fuel”. Biomass fuel is regarded as an effective countermeasure for CO₂ reduction. CO₂ emissions after burning ethanol fuel produced with biomass resources (such as plants or wood) are not counted as CO₂ emissions under the Kyoto Protocol.

In 2015, MLIT and METI examined the new fuel economy standards for small commercial vehicles.

In autumn 2016, WLTC mode was introduced into fuel economy standards, in addition to JC08 mode.

In March 2018, MLIT and METI jointly established a committee and commenced a study to formulate new fuel economy standards for passenger motor vehicles for 2030. The new standards, announced in January 2020, require an improvement in fuel efficiency of 32.4% over the 2016 standards and adopted the Corporate Average Fuel Economy (CAFE) calculation method.

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The United States

On May 21, 2010, then-President Obama ordered the National Highway Traffic Safety Administration (NHTSA) and the EPA to extend the National Program for cars and light-duty trucks to the 2017 model year and beyond with the support of the CARB. On October 1, 2010, the NHTSA, the EPA, and the CARB gave the notice of their intent to conduct joint rulemaking to establish 2017 and later model year fuel economy and greenhouse gas standards. The NHTSA and EPA issued a regulation in August 2012 regarding greenhouse gas / CAFE regulations from the 2017 through 2025 model years. The standard for the 2025 model year is 163 g-CO₂/mile or a 54.5 mpg industry average. The CARB also issued a regulation that was nearly equivalent to the EPA’s greenhouse gas regulations in August 2012. In December 2012, the CARB amended its greenhouse gas regulation so that a manufacturer is also deemed to comply with the CARB greenhouse gas regulations if it complies with EPA-GHG from the 2017 through 2025 model years.

When greenhouse gas / CAFE regulation was legislated in 2012, the EPA and the NHTSA announced that they, in coordination with the CARB, would perform a mid-term evaluation re-examining the appropriateness of limit values for 2022-2025 model years by April 2018. Accordingly, the EPA, the NHTSA and the CARB jointly issued a joint technical assessment report in July 2016 (a technical report, and not a decision document). The CARB decided in March 2017, before the new EPA decision planned for April 2018 was announced, not to change the greenhouse gas regulations applicable for the 2022-2025 model years.

On March 2017, President Trump issued executive order “Promoting Energy Independence and Economic Growth” which includes rescinding the “Climate Action Plan” announced by former president Obama. Therefore, U.S. environmental regulation may be drastically reconsidered in the future.

On April 2, 2018, the EPA announced that the GHG requirement for 2022-2025 model years needs reconsideration.

On September 27, 2019, the EPA and the NHTSA jointly issued Part 1 of the “Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule Part 1: One National Program” replacing the current GHG / CAFE regulations.

The SAFE Vehicles Rule Part 1 clarified that federal law supersedes state law and withdrew a preemption waiver (Federal Priority) previously granted to allow the state of California to set its own GHG emission standards different from the federal standards set by EPA.

In March 2020, the EPA and the NHTSA jointly published the SAFE Vehicles Rule Part 2. Under the new SAFE rule, both GHG and CAFE requirements will increase in stringency by 1.5% per year during 2021-2026 model years. The CO₂ standard for the 2026 model year is industry average of 199 g-CO₂/mile.

Canada

The government of Quebec in Canada finalized the standard to mandate each automaker to sell a certain minimum number of ZEVs starting from the 2018 model year.

In May 2019, the government of British Columbia also adopted a bill to mandate ZEV sales from 2025.

In June 2019, the Environment and Climate Change Canada signed an agreement with the California Air Resources Board in the United States to promote cooperation in reducing GHG emissions.

Europe

In 2014, a new regulation was issued, requiring EU fleet-wide target of 95 g CO₂/km for 2020 based on NEDC testing procedure.

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The current European type-approval procedure for fuel consumption and CO₂ emissions of cars based on NEDC has been gradually replaced with WLTP beginning from September 2017. During the transitional years, WLTP-measured CO₂ values are calculated to NEDC CO₂ values to check compliance to the NEDC based CO₂ target. A new WLTP based target for each manufacturer will be set from 2021.

On November 8, 2017, the European Commission proposed a new CO₂ standard beyond 2025. The European Parliament and Council reached a provisional inter institutional agreement on the European Commission proposal during the fifth trilogue meeting on December 17, 2018.

The agreed target beyond 2025 is negative 15%. The agreed target beyond 2030 is negative 37.5% for new passenger cars and negative 31% for light commercial vehicles, respectively, compared to the 2021 average of all manufacturers’ EU fleet-wide target.

The agreement also provide that, for zero- and low-emission vehicles, a benchmark equal to 15% share of the respective fleets of newly registered passenger cars and light commercial vehicles shall apply from January 1, 2025, and a benchmark equal to 35% share of the fleet of newly registered passenger cars and a benchmark equal to 30% share of the fleet of newly registered light commercial vehicles shall apply from January 1, 2030.

China

China adopted a fuel consumption regulation for passenger vehicles in 2004. Step 1 of this regulation was implemented in 2005, Step 2 of this regulation was implemented in 2008 and Step 3 of this regulation was implemented in 2012. In addition, China implemented Step 4 of this regulation in 2016. Based on the latest draft of the regulation, Step 5 will be implemented in 2021.

India

India has promulgated rules to introduce fuel economy / CO₂ regulations in 2017 and 2022 in a phased manner.

Other Regions

Brazil is scheduled to implement new fuel economy / CO₂ regulations from 2022.

3. Recycling / End-of-Life Vehicles (ELV) / Chemicals and hazardous substances

Japan

Japan enacted the Automobile Recycling Law in July 2002, which required manufacturers to take back air bags, fluorocarbon and shredder residue derived from end-of-life vehicles (ELV), which became effective on January 1, 2005. ELV processing costs are collected from owners of cars currently in use and purchasers of new cars.

Europe

On December 30, 2006, the European Union adopted the Regulation concerning the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), which became effective on June 1, 2007. From June 1, 2008, any manufacturer or importer of chemical substances is required to submit a registration to the European Chemicals Agency, based on annual production or import quantity levels. Submitting a pre-registration between June 1 and December 1, 2008 will allow the manufacturer or importer to extend the deadline for submitting the registration for existing chemical substances. The list of Substances of Very High Concern (SVHC) is amended periodically to include new substances. Upon a request by a consumer, a supplier of a product containing SVHC must provide the consumer with sufficient information, including at least the name of the substance, within 45 days.

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On February 18, 2011, the first set of substances which require authorization for use after specified dates were announced. Manufacturers using these substances in Europe must either be authorized for use after submitting an application or use substitute substances. Substances which require authorization will be added periodically.

China

On June 23, 2017, China implemented automobile recycling laws partially following the regulations established by the European Union.

India

India has a plan to implement automobile recycling laws in the near future.

4. Safety

Japan

Japan Automobile Standards Internationalization Center (JASIC), which is organized by the MLIT and Japan Automobile Manufacturers Association (JAMA), among others, has started to review a proposal for the unification of Safety/Environment Standards, vehicle categories and certification in order to promote further internationalization of standards and certifications. JASIC made the proposal to other contracting parties of the 58 / 98 Agreement in 2009 and reached an agreement among the contracting parties by 2017.

In October 2016, the MLIT adopted UN R138, which regulates the reduced audibility of “quiet road transport vehicles”, including electric vehicles.

In February 2017, the MLIT adopted UN R139, which regulates Brake Assist Systems.

In February 2017, the MLIT adopted UN R140, which regulates Electronic Stability Control (ESC) Systems.

In February 2017, the MLIT adopted UN R141, which regulates Tyre Pressure Monitoring Systems (TPMS).

In February 2017, the MLIT adopted UN R142, which regulates Tyres installation.

To achieve the highest level of traffic safety in Japan, MLIT developed a strategy to introduce fully automated driving in the latter half of the 2020s. To develop harmonized regulations for automated driving, MLIT is joining ITS / AD Informal Working Group under WP29 of the United Nations. MLIT is co-chairman of Informal Working Group together with the United Kingdom.

In 2019, the Cabinet decided on a bill to develop a system to secure the safety of automated driving.

MLIT is considering introducing a regulation regarding “Accident Emergency Call Systems (AECS)”.

In 2019, the MLIT adopted UN R152, which regulates “Advanced Emergency Braking System (AEBS)”.

The United States

In January 2011, the NHTSA issued a final rule to prevent the ejection of occupants in rollover accidents. The rule requires “ejection mitigation countermeasure” (e.g. advanced glazing or head protection side airbag) equipment which meets with performance requirements. Manufacturers have had to comply with the new

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requirements for 25% of all vehicles produced by 2013, 50% by 2014 and 75% by 2015. Further, 100% had to comply (with carryover credit) by 2016, and all vehicles by 2017.

In March 2014, the NHTSA issued a final rule for FMVSS No. 111, which requires that rear visibility technology be installed in all new vehicles weighing under 10,000 pounds. The purpose is to reduce death and injury resulting from incidents when the driver is backing up. Manufacturers had to comply with the new requirements for 10% of all vehicles produced from May 2016 to April 2017. From May 2017 to April 2018, 40% must comply and all vehicles by May 2018.

In September 2016, the NHTSA issued the Federal Automated Vehicles Policy for safety testing and deployment of automated vehicles. This policy comprises four sections: vehicle performance guidance for automated vehicles, model state policy, current regulatory tools, and modern regulatory tools. The vehicle performance guidance section outlines a 15 point “safety assessment” for the safe design, development, testing and deployment of automated vehicles.

In December 2016, the NHTSA issued a final rule to newly establish FMVSS141, a standard for minimum sound requirements for hybrid and electric vehicles. The purpose of FMVSS141 is to reduce the number of injuries that result from electric and hybrid vehicle crashes with pedestrians by providing a sound level and sound characteristics necessary for these vehicles to be detected and recognized by pedestrians. Manufacturers must comply with the new requirements for 50% of all hybrid and electric vehicles produced from September 2018, and all hybrid and electric vehicles in or after September 2019.

In January 2017, the NHTSA issued a proposed regulation to establish a new FMVSS150 (vehicle-to-vehicle (V2V) communications) standard. FMVSS150 specifies performance requirements for V2V communications capability and the mandatory equipment requirements of V2V function. FMVSS150 applies to new passenger cars, multi-purpose vehicles, trucks, and buses with a gross vehicle weight rating of 10,000 pounds (4,536 kg) or less. FMVSS150 has a provision for a scheduled phase-in.

In September 2017, the NHTSA issued a voluntary guidance “A Vision for Safety” to update the Federal Automated Vehicle Policy issued in 2016. Manufacturers may demonstrate how they address the safety elements contained in this guidance by publishing a Voluntary Safety Assessment for automated driving system (SAE Level 3 through 5).

In September 2017, the NHTSA issued a final rule for FMVSS No. 305, electrolyte spillage and electrical shock protection. This update adopts various electrical safety requirements found in Global Technical Regulation (GTR) No.13, “Hydrogen and fuel cell vehicles” and other sources.

In February 2018, the NHTSA issued a final rule for FMVSS141, a standard for minimum sound requirement for hybrid and electric vehicle. The purpose of this amendment is to clarify the details of technical requirement and reschedule phase-in schedule (1 year delay).

In February 2020, the NHTSA issued a proposed rule for FMVSS 200 series to establish a new “Occupant Protection for Automated Driving Systems”. This proposed rule seeks to adopt safety requirements for vehicles with Automated Driving Systems (ADS) that lack traditional manual controls by revising the requirements and test procedures to account for the removal of manually operated driving controls.

Europe

Legislation regarding a new system called “eCall” was finalized in 2017. The EU eCall for new vehicle types became effective on March 31, 2018.

In August 2018, the EU commission issued a regulation to significantly revise the legal framework for the EU type-approval. This regulation introduces a market surveillance system for managing the conformity of motor

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vehicles available on the market and adds a requirement of an expiration date for vehicle type approval. This EU type-approval will be entered into force on September 1, 2020.

In March 2019, the Committee of the Permanent Representatives of the Governments of the Member States to the European Union approved amendments to the “General safety regulation”. Road traffic safety in the EU has improved during the last decade, but recently the decrease in the number of road fatalities has stagnated.

To address this issue, the revised General Safety Regulations came into force in January 2020 and will be applied to vehicles from July 2022, which is 30 months after the enforcement. The revised General Safety Regulations include mandatory equipment such as driver assistance systems like ADAS.

In January 10, 2019, the EU Commission issued a regulation complementing Union type-approval legislation with regard to the withdrawal of the United Kingdom from the EU (i.e. Brexit).

China

Vehicle safety regulations in China were drafted with reference to the UNECE standards and cover almost the same matters as the UNECE standards. However, these regulations also include unique provisions which take into account the distinctive characteristics of the Chinese market environment and the rules differ from the latest UNECE standards. Future safety regulations are described as follows:

Newly published GB standards (Chinese national standards issued by the Standardization Administration of China) in 2019 include:

Newly established GB standards (not yet published) include:

India

In India, the government had amended AIS-145, a new standard for additional safety features, which became mandatory from July 2019. Specific safety features pursuant to this standard include a speed alert system, driver seat belt reminder, manual override for the central locking system, driver air bags and vehicle reverse parking alerts.

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United Nations

Following a long discussion, Revision 3 of the 1958 Agreement was adopted at the 169th WP29 and the official document (UN Agreement) was published in October 2017. This Revision 3 was entered into force on September 14, 2017. The 1958 Agreement, an intergovernmental agreement of United Nations Economic Commission for Europe (UN/ECE) signed in 1958, aims at establishing a unified standard for the structure, safety and environment performance of wheeled vehicles, equipment and parts and promoting reciprocal recognition of approvals for such wheeled vehicles, equipment and parts. The major changes of Revision 3 are:

IWVTA is a system that develops mutual recognition of automobile certification from “unit of equipment” to “vehicle unit”. This system was introduced via Japan’s proposal, and Japan has served as the chairman and led the discussion since then. This system was adopted at the 173rd WP29, as UN R No.0 and entered into force on July 19, 2018.

Outline of Environmental and Safety Regulation for Motorcycles

1. Emissions

Japan

Japan published the next phase (Euro 5) level emission regulation to be implemented from December 2020.

The United States

The state of California started to consider introducing the Euro 5 level emission regulation.

Europe

Euro 5 requirements other than catalyst monitoring of OBD (Onboard Diagnostics Regulation) started to apply to new vehicle models from January 2020 and will apply to all vehicles registered from January 2021. Catalyst monitoring will apply to new vehicle models from January 2024 and will apply to all vehicles registered from January 2025.

India

Ministry of Road Transport & Highways, the Government of India implemented an emission regulation called BS IV, which applied to new motorcycles from April 2016 and to all motorcycles registered from April 2017. India also published a BS VI regulation (Euro 5 level exhaust emission regulation), which started to apply from April 2020, except OBD stage 2, which will apply from 2023.

China

China started to consider introducing the Euro 5 level emission regulation.

Other Asian Countries

Indonesia, Vietnam and Thailand have implemented emissions regulations based on European regulations.

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Other Regions

Brazil published a new emission regulation called PROMOT 5 (Euro 5 level exhaust emission regulation), which will apply to new motorcycles from January 2023 and to all motorcycles registered from January 2025. The OBD stage 2 requirement will apply to new models of motorcycles from January 2025 and will apply to all motorcycles registered from January 2027.

2. Recycling / Chemicals and hazardous substances

Europe

The same REACH compliance required for motor vehicles is required for motorcycles.

India

India has announced a plan to implement motorcycle recycling laws in the near future.

Vietnam

Vietnam implemented motorcycle recycling laws on January 1, 2018.

3. Safety

Japan

Japan has introduced safety regulations based on UNECE regulations as described below.

Japan issued new standards for advanced brake system (ABS: Anti-lock Brake System/ CBS: Combined Brake System) which applied to new type motorcycles from October 2018, and will apply to all motorcycles from October 2021.

Japan adopted electric safety requirements for battery motorcycles (UN R136), and the requirements applied to new type motorcycles from January 2018, and applied to all motorcycles from January 2020.

Japan newly adopted “Hydrogen and Fuel Cell Vehicles of category L” (UN R146), which became applicable to all motorcycles from January 2, 2019.

Japan plans to adopt the Installation of lighting and light-signaling devices (UN R53), which will be applied to new motorcycle models from 2023.

The United States

There is no new regulation information for motorcycle safety.

Europe

On January 10, 2019, the EU Commission issued a regulation complementing Union type-approval legislation with regard to Brexit.

India

In India, the Auto Headlight On (AHO) function, which automatically turns on the head lamps when the engine is running, shall be installed on all two-wheelers manufactured on and after April 1, 2017 and also on new

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vehicle models manufactured on and after April 1, 2018. All vehicles manufactured on and after April 1, 2019 shall be equipped with an advanced brake system. Two-wheeled vehicles with engine capacity of not more than 125cc, continuous rated or net power not more than 11kW and power/weight ratio not more than 0.1 kW/kg shall be equipped with ABS or CBS. All other categories of two-wheeled vehicles shall be equipped with ABS. Furthermore, the Automotive Industry Standard Committee (AISC) published AIS 146, 147 and 148. These are the standards for stand, external projection and footrest strength. These standards became closer to those required by the European regulations.

In addition, AIS-156 for electric safety requirements for electric motorcycles are currently being prepared based on UNR136.

China

China introduced a requirement for an advanced braking system, which shall be installed on new vehicle models manufactured on and after July 1, 2019, and also on all motorcycles manufactured on and after July 1, 2020. Motorcycles with engine capacity of more than 150cc and not exceeding 250cc shall be equipped with ABS or CBS. Motorcycles with engine capacity of more than 250cc shall be equipped with ABS.

The noise regulations will be revised in 2020.

Other Asian Countries

Indonesia, Vietnam and Thailand have been introducing various regulations regarding lighting and braking based on UN Regulations.

Other Regions

The Brazil transport authority (CONTRAN) issued a standard concerning motorcycle braking based on the UNECE Brake regulation (R78.03) as well as a new regulation mandating ABS/CBS installation. The Brazilian standardization authority (INMETRO) currently mandates parts certification for tires and batteries, but added drive/driven sprocket, drive chain and muffler to the scope of application from March 24, 2019 at customs clearance. Brazilian government issued lighting regulation based on previous UNECE regulations; these regulations were implemented from January 1, 2019. On January 31, 2020, CONTRAN implemented new requirements for license plates based on the Mercosur standards. In addition, the requirements for holes for sealing of license plates have been repealed, since QR codes are printed on the plates instead.

Outline of Environmental and Safety Regulation for Power Products

1. Emissions

The United States

In November 2015, CARB presented a policy to develop a regulation to replace 25% of spark-ignition engine products circulating in the market with zero-emission products by 2030. Currently, rulemaking activities regarding research are led by CARB.

In April 2016, CARB has published an evaporative emission regulation applicable to outboard engines implementing from the 2018 model year and later.

In November 2017, CARB has published a final regulation to amend California’s evaporative emission regulation for small off-road spark-ignition equipment.

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Europe

The European Committee has finalized strengthened exhaust emission regulation for non-road small spark-ignition engines (commonly known as Stage 5 regulation). Its limit values of exhaust emission follow the U.S. EPA phase 3 and the effective date is January 2018 for new certifications and January 1, 2019 for the engines newly placed in the market.

India

The Ministry of Environment is studying the next stage of exhaust emission regulations.

China

An exhaust emission standard was introduced in China on March 1, 2011. Its requirements are based on the European exhaust emission regulations and are applicable to small spark-ignition engines for non-road mobile machinery with 19 kW or less. The phase 2 regulation with durability requirement started from January 1, 2014. The phase 3 regulation is under development.

In 2019, Chinese authorities strengthened monitoring of emissions in the market, and emission control regulations were enacted in each province and city.

Thailand

In 2019, the Thai Ministry of Industry issued a draft standard for environmental performance of smallair-cooled gasoline engines.

2. Recycling / Chemicals and hazardous substances

Europe

The same REACH compliance required for motor vehicles is required for power products. In June 2011, the European Union Directive on the restriction of the use of certain hazardous substances in electrical and electronic equipment (RoHS) had been wholly revised and most power products were within its scope after 2019.

China

On July 1, 2016, a regulation similar to European RoHS has entered into force. The first list of target products was published on March 12, 2018.

3. Safety

Japan

The METI amended the technical requirements of the Electrical Appliances and Materials Safety Act and added requirements regarding the retention force of receptacle outlets and the flame resistance of circuit boards. These amended and additional requirements have been implemented from July 2016.

The voluntary safety scheme for snow blowers newly included a requirement on dozers, which was implemented in April 2015.

Agricultural Technology Innovation Engineering Research Center of National Agriculture and Food Research Organization has decided to conduct safety inspection of agricultural machinery that has replaced agricultural machinery safety appraisal from July 31, 2018.

In 2020, the METI began considering introduction of a warning label regarding safety of snow blowers.

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The United States

In November 2016, the U.S. Consumer Product Safety Commission promulgated a notice of proposed rule-making in the Federal Register, which proposes to restrict the carbon monoxide emission from portable generator rated 19kW and below. This regulation was proposed to address the carbon monoxide poisoning injuries occurring from portable generators.

In April 2018, an American National Standard Institute (ANSI) Standard for portable generators were amended.

Europe

The Low Voltage Directive (LVD) and the Electromagnetic Compatibility Directive (EMCD) have been amended and they became applicable from April 2016. Recreational Craft Directive (RCD) Stage 2 also became effective. The Gas Appliance Regulation has been published and accordingly, the Gas Appliance Directive expired in April 2018.

On January 10, 2018, the European Commission issued a notice with regard to Brexit and EU rules in the field of industrial products.

In the United Kingdom, on September 13, 2018, the Department for Business, Energy and Industrial Strategy (BEIS) issued a guidance in the form of a technical notice to explain the future arrangement on the regulations for most products subject to the new EU rules.

The EU Commission plans to enhance existing noise regulation applicable to equipment intended to be used outdoors. This is a comprehensive rulemaking including expansion of the scope of regulation, enhanced noise limits, change to the conformity assessment system, among other things.

In 2019, the EU Commission began discussions for a revision of the Machinery Directive.

China

The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) has issued final regulations for spark-ignition engines which include a wide variety of requirements such as machinery safety, thermal protection, electrical safety, and others. It became effective in 2015.

In 2019, a recommended standard for lawn mower safety requirements was issued by the State Administration for Market Regulation (SAMR).

Preparing for the Future

Management Challenges

The business environment surrounding Honda has come to a major turning point. Values are diversifying, the population is aging, urbanization is accelerating, climate change is worsening, and the industrial structure is changing due to progress in technologies such as the use of electric-powered motors, autonomous driving and IoT, all on a global basis. It is vital to ensure “strong products, strong Mono-zukuri (the art of making things) and strong businesses” which are essential for future growth.

Looking at the market environment of Motorcycle business operations, competition with not only existing manufacturers but also emerging manufacturers is intensifying. The operating environment continues to change more rapidly than ever as seen by the need to make efforts to deal with tighter environmental regulations in each country and expansion of new markets.

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In Automobile business operations, Honda will create products that can immediately respond to changes in the environment and satisfy customer needs with strong Mono-zukuri, and will develop a strong business operation structure that can deliver products to the world in a timely manner.

The Life creation and other businesses will evolve into a function to create new value for “mobility” and “daily lives,” with the addition of “new businesses for the future,” including the energy business, to the existing “provision of power products.” Honda will broaden the domain and promote businesses under the concept of “Life creation business.”

Challenges to be Addressed Preferentially

Considering the business environment, Honda will work on the following new challenges directed at the next generation to provide value unique to Honda with a view to contributing to solving various social issues while continuing to achieve sustainable growth.

1. Prepare for future growth

Next-generation technologies

In the automobile industry in the future, the ability to respond to electrification, driver-assistive technologies, connected technologies and other technological innovations will likely determine the competitiveness of a company. Honda will work to develop products and services equipped with such next-generation technologies in the Motorcycle, Automobile and Life creation businesses, and ensure business feasibility as early as possible.

As for electrification, Honda will further expand the lineup of hybrid vehicles based on electric-powered motor technology it has been developing, and proactively introduce zero-emission vehicles.

Regarding driver-assistive technologies, Honda will work to promote and evolve “Honda SENSING,” a safety and driver-assistive system, for the purpose of preventing accidents.

By continuing to push ahead with efforts for joint development and commercialization in preparation for future society while utilizing partnerships with other companies, Honda will aim to realize a clean and safe / secure society.

New businesses

In “Honda eMaaS,” Honda’s energy technology is expected to contribute to the effective utilization of electric power for society as a whole. For example, Honda’s electrified mobility and energy equipment function as temporary electric power storage/discharge devices, contributing to stabilization of electric power. To this end, in the mobility service, efforts need to be made in the areas of mobility and goods transport services using electric vehicles. In the energy service, efforts need to be made in the area of mobile power supply, by not only “using” energy equipment as a power source for mobility but also enabling them to “create” electric power and “connect” with the power supplies for the household so that electricity can be used efficiently whenever and wherever needed.

Honda intends to serve people worldwide with the “joy of expanding their life’s potential” by proposing solutions in these areas.

2. Solidify existing businesses

Honda will enhance the business strategy formulation function by steadily proceeding with the next initiatives, and build a highly competitive Mono-zukuri foundation to realize strong businesses.

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Build a structure to realize strategies

In order to build strong businesses that can immediately respond to changes in the environment and can provide products that satisfy customer needs in a timely manner, Honda has established a unified operational structure which integrates S-E-D-B (Sales, Engineering, Development and Buying) areas.

This enables the formulation of business strategies based on abig-picture view of product planning, development, buying/purchasing, engineering/production and sales, and the swift implementation of such strategies. At the same time, Honda will realize Mono-zukuri reform and stable production with high-precision development of new models through frontloading and operation which integrates the entire process from development through mass-production.

Mono-zukuri reform

In the Automobile business, Honda has strengthened its global models and regional models according to the needs of each region, with the aim of manufacturing challenging products unique to Honda. Efficient Mono-zukuri, in addition to product appeal, is indispensable for further enhancing the competitiveness of such models. To this end, Honda is working to strengthen the structure in each area. Introducing the Honda Architecture, which is a company-wide initiative that increases the efficiency of development and expands parts-sharing for mass-production models, Honda will sequentially apply it, starting with the global models, and expand its application. By doing so, Honda will enhance the efficiency of existing businesses and repurpose those man-hours to conduct research and development in advanced areas, thereby accelerating development for the future.

Steady progress is being made in optimizing the production capacity in all regions, and Honda will improve its global capacity utilization rate.

Further improve quality

To achieve a new level of outstanding quality of products, Honda has continued activities to further improve quality at every stage: design, development, production, sales and service including suppliers. Going forward, Honda will team up with other companies, including those from other industries, to challenge new forms of mobility that incorporate electrification, driver-assistive technologies and IoT in creating new value through open innovation. To that end, Honda will evolve its activities to realize a new level of outstanding quality, by pursuing the utmost quality not only in products and services provided to customers but also in every area of business at all points of customer contact, alongside evolution in “mobility” and “daily lives.”

Also, in the Automobile business, in April 2020 the quality innovation departments for all operations were integrated, and Quality Innovation Operations was newly established and commenced activities.

Continue to enhance Honda’s social reputation and communication with the community

In addition to continuing to provide products incorporating Honda’s advanced safety and environmental technologies, Honda will continue striving to enhance its social reputation by, among other things, strengthening its corporate governance, compliance, and risk management, as well as participating in community activities and making philanthropic contributions.

Through these company-wide activities, Honda aims to be a company that society, which includes our shareholders, our investors and our customers, wants to exist.

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C. Organizational Structure

As of March 31, 2020, the Company had 85 Japanese subsidiaries and 272 overseas subsidiaries. The following table sets out for each of the Company’s principal subsidiaries, the country of incorporation, function and percentage ownership and voting interest held by Honda.

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D. Property, Plants and Equipment

The following table sets out information, as of March 31, 2020, with respect to Honda’s principal manufacturing facilities, all of which are owned by Honda:

In addition to its manufacturing facilities, the Company’s properties in Japan include sales offices and other sales facilities in major cities, repair service facilities, and R&D facilities.

As of March 31, 2020, the Company’s property, with a net book value of approximately ¥1.4 billion, was subject to specific mortgages securing indebtedness.

Capital Expenditures

Capital expenditures in the fiscal year ended March 31, 2020 were applied to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of sales and R&D facilities.

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Total capital expenditures for the year amounted to ¥2,620.5 billion, increased by ¥155.2 billion from the previous year. Also, total capital expenditures, excluding equipment on operating leases, for the year amounted to ¥375.6 billion, decreased by ¥50.8 billion from the previous year. Spending by business segment is shown below.

Intangible assets are not included in the table above.

In Motorcycle business, we made capital expenditures of ¥67,827 million in the fiscal year ended March 31, 2020. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of sales and R&D facilities.

In Automobile business, we made capital expenditures of ¥293,771 million in the fiscal year ended March 31, 2020. Funds were allocated to the introduction of new models, as well as the improvement, streamlining and modernization of production facilities, and improvement of sales and R&D facilities.

In Financial services business, capital expenditures excluding equipment on operating leases amounted to ¥180 million in the fiscal year ended March 31, 2020, while capital expenditures for equipment on operating leases were ¥2,244,893 million.

In Life creation and other businesses, capital expenditures of ¥13,865 million in the fiscal year ended March 31, 2020, were deployed to upgrade, streamline, and modernize manufacturing facilities, and to improve R&D facilities.

Plans after fiscal year 2020

Our management mainly considers economic trends of each region, demand trends, situation of competitors and our business strategy such as introduction plans of new models in determining the future of projects.

However, Honda has not determined the plans for significant capital expenditures for the fiscal year ending March 31, 2021 since Honda is unable to reasonably calculate the impacts relating to the spread of COVID-19.

Item 4A. Unresolved Staff Comments

We do not have any unresolved written comments provided by the staff of the SEC regarding our periodic reports under the Securities Exchange Act of 1934.

Item 5. Operating and Financial Review and Prospects

You should read the following discussion of our critical accounting policies and our financial positions and operating results together with our consolidated financial statements included in this Annual Report.

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A. Operating Results

Overview

Business Environment

Looking at the economic environment surrounding Honda, its consolidated subsidiaries and its affiliates accounted for under the equity method in the fiscal year ended March 31, 2020, until the fiscal third quarter, the United States economy continued to recover, mainly due to improvement in employment conditions and gradually growing personal consumption. Europe saw a weak economic recovery, mainly due to deterioration of employment conditions and a gradual decline in personal consumption. In the Asian economies, India, Thailand and Indonesia showed weakness while China’s economy experienced a moderate slowdown. The Japanese economy saw a gradual recovery, mainly due to improvement in employment conditions and an upturn in personal consumption, in addition to moderate growth in capital investment. The spread of COVID-19in the fiscal fourth quarter led to a global economic slowdown. For the time being, a further downturn in the economy is expected.

The trends, uncertainties, demands, commitments and events identified below may continue or recur, impacting the Company’s future financial results.

Impacts relating to the spread of COVID-19 on Honda’s consolidated financial results

The spread of COVID-19 has caused the global economic slowdown and also have affected Honda’s consolidated financial results for the fiscal fourth quarter.

Resulting from travel restriction measures by government, Honda’s production bases in Japan and overseas were also affected by suspended or reduced production mainly due to restrictions on employees’ commute to the workplaces and delays in the supply of parts within the supply chain. Some dealers in Japan and overseas were obliged to suspend business, shorten business hours, or reduce services such as inspections and repairs. Customer credit risk and other factors were affected by changes in forecast, including an increase in unemployment rate and decline in used vehicle prices due to the downturn of economy.

In the Automobile business, decreased unit sales of automobiles mainly in North America was a component of factors of a decrease in operating profit. Share of profit of investments accounted for using the equity method also decreased due to a decrease in unit sales of automobiles in China. In the Financial services business, selling, general and administrative expenses increased due to an increase in allowance for credit losses mainly in North America.

In addition, see “Risks relating to the spread of coronavirus disease 2019 (COVID-19)” in Item 3.D. “Risk Factors”.

Overview of Fiscal Year 2020 Operating Performance

Honda’s consolidated sales revenue for the fiscal year ended March 31, 2020, decreased from the fiscal year ended March 31, 2019, due mainly to decreased sales revenue in the Automobile business as well as negative foreign currency translation effects, which was partially offset by increased sales revenue in the Financial services business. Operating profit decreased from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales revenue and model mix as well as negative foreign currency effects, which was partially offset by continuing cost reduction as well as decreased selling, general and administrative expenses.

Honda has been conducting market-based measures in relation to airbag inflators mainly in North America and Japan. This is related to the problem where the internal pressure of the inflators rise abnormally at the time of airbag deployment on the driver’s side and passenger’s side, causing damage to the container and spraying metal fragments within the cars. We are continuing to focus on the satisfaction and safety of our customers and making every effort through market-based measures to replace those airbag inflators as quickly as possible.

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Motorcycle Business

Honda’s consolidated unit sales of motorcycles, all-terrain vehicles (ATVs) and side-by-sides (SxS) in fiscal year 2020 totaled 12,426 thousand units, a decrease of 6.0% from the previous fiscal year, due mainly to decreases primarily in India and Thailand, which offset increases in sales in Brazil.

Automobile Business

Honda’s consolidated unit sales of automobiles in fiscal year 2020 totaled 3,318 thousand units, a decrease of 11.5% from the previous fiscal year, due mainly to decreases in sales units primarily in Asia and North America.

Life Creation and Other Businesses

Honda’s consolidated unit sales of power products in fiscal year 2020 totaled 5,701 thousand units, a decrease of 9.5% from the previous fiscal year, due mainly to decreases in sales units primarily in North America and Asia.

Fiscal Year 2020 Compared with Fiscal Year 2019

Sales Revenue

Honda’s consolidated sales revenue for the fiscal year ended March 31, 2020, decreased by ¥957.6 billion, or 6.0%, to ¥14,931.0 billion from the fiscal year ended March 31, 2019, due mainly to decreased sales revenue in the Automobile business as well as negative foreign currency translation effects, which was partially offset by increased sales revenue in the Financial services business. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have decreased by approximately ¥599.2 billion, or 3.8%, compared to the decrease as reported of ¥957.6 billion, which includes negative foreign currency translation effects.

Operating Costs and Expenses

Operating costs and expenses decreased by ¥864.8 billion, or 5.7%, to ¥14,297.3 billion from the previous fiscal year. Cost of sales decreased by ¥729.2 billion, or 5.8%, to ¥11,851.6 billion from the previous fiscal year, due mainly to a decrease in costs attributable to decreased consolidated sales revenue in the Automobile business. Selling, general and administrative expenses decreased by ¥132.8 billion, or 7.5%, to ¥1,641.5 billion from the previous fiscal year. Research and development expenses totaled to ¥804.1 billion basically unchanged from the previous fiscal year.

Operating Profit

Operating profit decreased by ¥92.7 billion, or 12.8%, to ¥633.6 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales revenue and model mix as well as negative foreign currency effects, which was partially offset by continuing cost reduction as well as decreased selling, general and administrative expenses. Honda estimates that by excluding negative foreign currency effects of approximately ¥105.8 billion, operating profit would have increased by approximately ¥13.1 billion.

With respect to the discussion above of the changes, management identified factors and used what it believes to be a reasonable method to analyze the respective changes in such factors. Management analyzed changes in these factors at the levels of the Company and its material consolidated subsidiaries. “Foreign currency effects” consist of “translation adjustments”, which come from the translation of the currency of foreign subsidiaries’ financial statements into Japanese yen, and “foreign currency adjustments”, which result from

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foreign-currency-denominated transaction. With respect to “foreign currency adjustments”, management analyzed foreign currency adjustments primarily related to the following currencies: U.S. dollar, Japanese yen and others at the level of the Company and its material consolidated subsidiaries. The estimates excluding the foreign currency effects are not on the same base as Honda’s consolidated financial statements, and do not conform to IFRS. Furthermore, Honda does not believe that these measures are substitute for the disclosure required by IFRS. However, Honda believes that such estimates excluding the foreign currency effects provide financial statements users with additional useful information for understanding Honda’s results.

Profit before Income Taxes

Profit before income taxes decreased by ¥189.4 billion, or 19.3%, to ¥789.9 billion. The main factors behind this decrease, except factors relating to operating profit, are as follows:

Share of profit of investments accounted for using the equity method had a negative impact of ¥64.6 billion, due mainly to a decrease in profit attributable to decreased sales revenue at affiliates and joint ventures in Asia.

Finance income and finance costs had a negative impact of ¥32.1 billion, due mainly to effect from gains or losses on foreign exchange. For further details, see note “(22) Finance Income and Finance Costs” to the accompanying consolidated financial statements.

Income Tax Expense

Income tax expense decreased by ¥23.1 billion, or 7.6%, to ¥279.9 billion from the previous fiscal year. The average effective tax rate increased by 4.5 percentage points to 35.4% from the previous fiscal year. For further details, see “(a) Income Tax Expense” of note “(23) Income Taxes” to the accompanying consolidated financial statements.

Profit for the Year

Profit for the year decreased by ¥166.3 billion, or 24.6%, to ¥509.9 billion from the previous fiscal year.

Profit for the Year Attributable to Owners of the Parent

Profit for the year attributable to owners of the parent decreased by ¥154.5 billion, or 25.3%, to ¥455.7 billion from the previous fiscal year.

Profit for the Year Attributable to Non-controlling Interests

Profit for the year attributable to non-controlling interests decreased by ¥11.7 billion, or 17.9%, to ¥54.1 billion from the previous fiscal year.

Business Segments

Motorcycle Business

Honda’s consolidated unit sales of motorcycles, all-terrain vehicles (ATVs) and side-by-sides (SxS) totaled 12,426 thousand units, decreased by 6.0% from the previous fiscal year, due mainly to a decrease in consolidated unit sales in Asia.

Sales revenue from external customers decreased by ¥40.8 billion, or 1.9%, to ¥2,059.3 billion from the previous fiscal year, due mainly to decreased consolidated unit sales as well as negative foreign currency translation effects. The impact of price changes was immaterial on sales revenue. Honda estimates that by

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applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥24.8 billion, or 1.2%, compared to the decrease as reported of ¥40.8 billion, which includes negative foreign currency translation effects.

Operating costs and expenses decreased by ¥34.8 billion, or 1.9%, to ¥1,773.6 billion from the previous fiscal year. Cost of sales decreased by ¥11.6 billion, or 0.8%, to ¥1,494.6 billion, due mainly to a decrease in costs attributable to decreased consolidated unit sales as well as negative foreign currency effects. Selling, general and administrative expenses decreased by ¥16.0 billion, or 7.4%, to ¥199.6 billion. Research and development expenses decreased by ¥7.1 billion, or 8.3%, to ¥79.3 billion.

Operating profit decreased by ¥5.9 billion, or 2.0%, to ¥285.6 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales volume and model mix as well as negative foreign currency effects, which was partially offset by continuing cost reduction.

Japan

Total industry demand for motorcycles in Japan* was approximately 360 thousand units in fiscal year 2020, a decrease of approximately 3% from the previous fiscal year.

Honda’s consolidated unit sales in Japan decreased 1.0% to 205 thousand units in fiscal year 2020, a decline from the previous fiscal year, mainly due to decreases primarily in sales of the Super Cub 110, which offset the increases primarily in sales of the Tact.

North America

Total demand for motorcycles and all-terrain vehicles (ATVs) in the United States*, the principal market within North America, increased around 1% from the previous year to approximately 660 thousand units in calendar year 2019.

Honda’s consolidated unit sales in North America increased 9.6% from the previous fiscal year to 330 thousand units in fiscal year 2020. This was mainly due to an increase in sales of side-by-sides (SxS), led by the Talon 1000R primarily in the United States.

Europe

Total demand for motorcycles in Europe* increased around 4% from the previous year to approximately 960 thousand units in calendar year 2019.

Honda’s consolidated unit sales in Europe decreased 4.0% from the previous fiscal year to 239 thousand units in fiscal year 2020, mainly due to decreases primarily in sales of the SH300i, which offset increases primarily in sales of the CB650R.

Asia

Total demand for motorcycles in Asia* decreased around 7% from the previous year to approximately 41,090 thousand units in calendar year 2019.

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Looking at market conditions by country, in calendar year 2019, demand in India decreased around 13% from the previous year to approximately 18,790 thousand units. Demand in Indonesia increased around 3% from the previous year to approximately 6,500 thousand units. Demand in China decreased around 6% from the previous year to approximately 6,500 thousand units. Demand in Vietnam decreased around 4% from the previous year to approximately 3,250 thousand units. Demand in Pakistan decreased around 3% from the previous year to approximately 2,050 thousand units. Demand in Thailand decreased around 3% from the previous year to approximately 1,740 thousand units.

Honda’s consolidated unit sales in Asia were 10,348 thousand units in fiscal year 2020, a decrease by 7.6% from the previous fiscal year, mainly due to decreases primarily in sales of the Activa model in India, which offset increases primarily in sales of such commuter models as the RS150R in Malaysia.

Honda’s consolidated unit sales do not include sales by P.T. Astra Honda Motor in Indonesia, which is accounted for using the equity method. P.T. Astra Honda Motor’s unit sales for fiscal year 2020 decreased around 2.3% from the previous fiscal year to approximately 4,850 thousand units, mainly due to decreases primarily in sales of the BeAT model, which offset increases primarily in sales of the new Genio model.

Other Regions

Total demand for motorcycles in Brazil*, the principal market within Other Regions, increased around 13% from the previous year to approximately 1,080 thousand units in calendar year 2019.

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales increased 3.7% from the previous fiscal year to 1,304 thousand units in fiscal year 2020 due mainly to an increase in sales of the Elite 125 in Brazil.

Automobile Business

Honda’s consolidated unit sales of automobiles totaled 3,318 thousand units, decreased by 11.5% from the previous fiscal year, due mainly to a decrease in consolidated unit sales in all regions.

Sales revenue from external customers decreased by ¥1,113.0 billion, or 10.1%, to ¥9,959.0 billion from the previous fiscal year, due mainly to decreased consolidated unit sales. The impact of price changes was immaterial on sales revenue. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have decreased by approximately ¥872.9 billion, or 7.9%, compared to the decrease as reported of ¥1,113.0 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales decreased by ¥1,093.1 billion, or 9.7%, to ¥10,194.6 billion from the previous fiscal year.

Operating costs and expenses decreased by ¥1,036.7 billion, or 9.4%, to ¥10,041.3 billion from the previous fiscal year. Cost of sales decreased by ¥878.6 billion, or 9.8%, to ¥8,124.9 billion, due mainly to a decrease in costs attributable to decreased consolidated unit sales. Selling, general and administrative expenses decreased by ¥163.1 billion, or 11.8%, to ¥1,221.4 billion. Research and development expenses increased by ¥5.1 billion, or 0.7%, to ¥694.9 billion.

Operating profit decreased by ¥56.3 billion, or 26.9%, to ¥153.3 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales volume and model mix as well as negative foreign currency effects, which was partially offset by decreased selling, general and administrative expenses as well as continuing cost reduction.

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Proportion of retail unit sales by vehicle category and principal automobile products:

Although there are various factors that affect the profitability of each vehicle category, sales price is an important factor in determining profitability. In general, the weighted average sales price in the light trucks category is higher relative to the total average sales price, while the weighted average sales price in the mini vehicles category, which is unique to the Japanese market, is relatively lower, although sales price varies from model to model.

In general, the contribution margin of the light trucks category tends to be higher relative to the total weighted average contribution margin because the sales price is higher, while the contribution margin of the mini vehicles category tends to be relatively lower because the sales price is lower, although the level of contribution margin varies from model to model. For example, in Japan and the United States, which are the main sales markets for our automobiles, the contribution margin of our light trucks category was approximately 30% higher, our passenger cars category was approximately 20% lower and our mini vehicles category was approximately 45% lower than total weighted average contribution margin for the fiscal year ended March 31, 2020. It should be noted that we define contribution margin as an amount per unit of net sales minus material cost, which is thought to increase in almost direct proportion to net sales volume.

Japan

Total demand for automobiles in Japan^*1 decreased around 4% from the previous fiscal year to approximately 5,030 thousand units in fiscal year 2020.

Honda’s consolidated unit sales in Japan decreased 8.4% from the previous fiscal year to 589 thousand units^*2 in fiscal year 2020. This was mainly because of the impact of restrictions on the supply of parts for the new N-WGN, which offset increases primarily in sales of the Freed.

Honda’s unit production of automobiles in Japan decreased 11.4% from the previous fiscal year to 808 thousand units in fiscal year 2020. This was mainly because of decreases due to effects of restrictions on the supply of parts for the new N-WGN.

North America

Total industry demand for automobiles in the United States*, the principal market within North America, decreased around 1% from the previous year to approximately 17,040 thousand units in calendar year 2019. This result reflected decreased demand for passenger cars, despite a continued increase for light trucks.

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Honda’s consolidated unit sales in North America decreased 6.6% from the previous fiscal year to 1,825 thousand units in fiscal year 2020. This decrease was mainly attributable to the effect of a decrease in sales of the Civic model, despite increases primarily in sales of the Passport model.

Honda manufactured 1,736 thousand units in fiscal year 2020, a decrease of 3.7% from the previous fiscal year, mainly due to decreases in demand for passenger cars.

Europe

Total demand for automobiles in Europe* decreased around 1% from the previous year to approximately 15,800 thousand units in calendar year 2019, mainly due to the slowdown in the diesel market.

Honda’s consolidated unit sales in Europe decreased 21.3% from the previous fiscal year to 133 thousand units in fiscal year 2020, mainly due to decreases primarily in sales of the Civic model.

Unit production at Honda’s U.K. plant in fiscal year 2020 decreased 36.8% from the previous fiscal year to 95 thousand units, mainly attributable to the effect of a decrease in sales of the Civic model.

Asia

Total demand for automobiles in China, the largest market within Asia, decreased around 8% from the previous year to approximately 25,760 thousand units^*1 in calendar year 2019. Total demand for automobiles in other countries in Asia decreased around 9% from the previous calendar year to approximately 7,810 thousand units^*2. This was mainly due to decreases in demand in India and Indonesia.

Honda’s consolidated unit sales in Asia decreased 23.3% from the previous fiscal year to 563 thousand units in fiscal year 2020. The decrease was mainly attributable to the decrease in sales of the Amaze in India, and the City in Malaysia.

Honda’s consolidated unit sales do not include unit sales of Dongfeng Honda Automobile Co., Ltd. and GAC Honda Automobile Co., Ltd., both of which are joint ventures accounted for using the equity method in China. Unit sales in China decreased 7.3% from the previous fiscal year to 1,389 thousand units in fiscal year 2020. The decrease was mainly attributable to a decrease in sales of the Fit model, despite the effect of launching the new Envix model and the Inspire.

Honda’s unit production by consolidated subsidiaries in Asia decreased 24.4% from the previous fiscal year to 606 thousand units^*3 in fiscal year 2020.

Meanwhile, unit production by Chinese joint ventures Dongfeng Honda Automobile Co., Ltd. and GAC Honda Automobile Co., Ltd. decreased 8.1% from the previous fiscal year to 1,370 thousand units in fiscal year 2020.

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Other Regions

Total industry demand for automobiles in Brazil, the principal market within Other Regions, increased around 8% from the previous year to approximately 2,660 thousand units* in calendar year 2019.

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales decreased 16.1% from the previous fiscal year to 208 thousand units in fiscal year 2020, mainly due to decreases primarily in sales of the City and Fit models in Brazil.

Unit production at Honda’s plant in Brazil decreased 10.9% from the previous fiscal year to 124 thousand units in fiscal year 2020.

Financial Services Business

To support the sale of its products, Honda provides retail lending and leasing to customers and wholesale financing to dealers through its finance subsidiaries in Japan, the United States, Canada, the United Kingdom, Germany, Brazil and Thailand.

Total amount of receivables from financial services and equipment on operating leases of finance subsidiaries on March 31, 2020, decreased by ¥66.8 billion, or 0.7%, to ¥9,787.2 billion from March 31, 2019. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, total amount of receivables from financial services and equipment on operating leases of finance subsidiaries as of March 31, 2020 would have increased by approximately ¥123.3 billion, or 1.3%, compared to the previous fiscal year.

Sales revenue from external customers increased by ¥221.6 billion, or 9.4%, to ¥2,586.9 billion from the previous fiscal year, due mainly to increased revenues on disposition of lease vehicles and operating lease revenues. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥266.1 billion, or 11.2%, compared to the increase as reported of ¥221.6 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales increased by ¥220.8 billion, or 9.3%, to ¥2,600.9 billion from the previous fiscal year.

Operating costs and expenses increased by ¥237.1 billion, or 11.1%, to ¥2,381.2 billion from the previous fiscal year. Cost of sales increased by ¥187.5 billion, or 9.3%, to ¥2,214.0 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased revenues on disposition of lease vehicles and operating lease revenues. Selling, general and administrative expenses increased by ¥49.6 billion, or 42.2%, to ¥167.2 billion from the previous fiscal year, due mainly to an increase in allowance for credit losses.

Operating profit decreased by ¥16.2 billion, or 6.9%, to ¥219.7 billion from the previous fiscal year, due mainly to increased selling, general and administrative expenses, which was partially offset by an increase in profit attributable to increased sales revenue.

Life Creation and Other Businesses

Honda’s consolidated unit sales of power products totaled 5,701 thousand units, decreased by 9.5% from the previous fiscal year, due mainly to a decrease in consolidated unit sales in all regions.

Sales revenue from external customers decreased by ¥25.3 billion, or 7.2%, to ¥325.6 billion from the previous fiscal year, due mainly to decreased consolidated unit sales in Life creation business. Honda estimates

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that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have decreased by approximately ¥17.2 billion, or 4.9%, compared to the decrease as reported of ¥25.3 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales decreased by ¥26.6 billion, or 7.1%, to ¥350.6 billion from the previous fiscal year.

Operating costs and expenses decreased by ¥12.4 billion, or 3.2%, to ¥375.7 billion from the previous fiscal year. Cost of sales decreased by ¥8.4 billion, or 2.8%, to ¥292.6 billion, due mainly to a decrease in costs attributable to decreased consolidated unit sales in Life creation business. Selling, general and administrative expenses decreased by ¥3.2 billion, or 5.7%, to ¥53.3 billion. Research and development expenses decreased by ¥0.7 billion, or 2.4%, to ¥29.7 billion from the previous fiscal year.

Operating loss was ¥25.0 billion, an increase of ¥14.1 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales volume and model mix. In addition, operating loss of aircraft and aircraft engines included in the Life creation and other businesses was ¥42.2 billion, an increase of ¥2.0 billion from the previous fiscal year.

Japan

Honda’s consolidated unit sales in Japan decreased 7.1% from the previous fiscal year to 312 thousand units in fiscal year 2020, mainly due to a decrease in sales of OEM engines* and other factors, which offset the increase primarily in the sales of generators.

North America

Honda’s consolidated unit sales in North America decreased 6.6% from the previous fiscal year to 2,848 thousand units in fiscal year 2020, mainly due to a decrease in the sales of OEM engines, which offset an increase primarily in the sales of lawnmowers.

Europe

Honda’s consolidated unit sales in Europe decreased 14.1% from the previous fiscal year to 845 thousand units in fiscal year 2020, mainly due to a decrease in sales of OEM engines and lawnmowers.

Asia

Honda’s consolidated unit sales in Asia decreased 11.8% from the previous fiscal year to 1,375 thousand units in fiscal year 2020. This was mainly due to a decrease in sales of OEM engines and brush cutters.

Other Regions

Honda’s consolidated unit sales in Other Regions (including South America, the Middle East, Africa, Oceania and other areas) decreased 13.9% from the previous fiscal year to 321 thousand units in fiscal year 2020, mainly due to decreases in the sales of OEM engines and water pumps.

Geographical Information

Japan

In Japan, sales revenue from domestic and export sales decreased by ¥425.3 billion, or 8.8%, to ¥4,422.9 billion from the previous fiscal year, due mainly to decreased sales revenue in the Automobile business.

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Operating loss was ¥28.1 billion, a decrease of ¥28.1 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales revenue and model mix as well as negative foreign currency effects, which was partially offset by decreased selling, general and administrative expenses.

North America

In North America, where the United States is the principal market, sales revenue decreased by ¥467.1 billion, or 5.2%, to ¥8,556.8 billion from the previous fiscal year, due mainly to decreased sales revenue in the Automobile business as well as negative foreign currency translation effects, which was partially offset by increased sales revenue in the Financial services business. Operating profit increased by ¥5.5 billion, or 1.9%, to ¥305.3 billion from the previous fiscal year, due mainly to continuing cost reduction as well as decreased selling, general and administrative expenses, which was partially offset by a decrease in profit attributable to decreased sales revenue and model mix.

Europe

In Europe, sales revenue decreased by ¥154.8 billion, or 16.7%, to ¥772.5 billion from the previous fiscal year, due mainly to decreased sales revenue in the Automobile business. Operating profit was ¥14.9 billion, an increase of ¥21.6 billion from the previous fiscal year, due mainly to continuing cost reduction as well as an increase in profit attributable to increased sales revenue and model mix.

Asia

In Asia, sales revenue decreased by ¥412.5 billion, or 9.7%, to ¥3,859.7 billion from the previous fiscal year, due mainly to decreased sales revenue in the Automobile business. Operating profit decreased by ¥84.6 billion, or 20.9%, to ¥319.5 billion from the previous fiscal year, due mainly to a decrease in profit attributable to decreased sales revenue and model mix, which was partially offset by continuing cost reduction.

Other Regions

In Other Regions, sales revenue decreased by ¥70.8 billion, or 9.3%, to ¥693.6 billion from the previous fiscal year, due mainly to decreased sales revenue in the Automobile business as well as negative foreign currency translation effects. Operating profit increased by ¥14.6 billion, or 64.9%, to ¥37.2 billion from the previous fiscal year, due mainly to decreased selling, general and administrative expenses as well as continuing cost reduction, which was partially offset by negative foreign currency effects.

Fiscal Year 2019 Compared with Fiscal Year 2018

Sales Revenue

Honda’s consolidated sales revenue for the fiscal year ended March 31, 2019, increased by ¥527.4 billion, or 3.4%, to ¥15,888.6 billion from the fiscal year ended March 31, 2018, due mainly to increased sales revenue in all business operations. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥787.0 billion, or 5.1%, compared to the increase as reported of ¥527.4 billion, which includes negative foreign currency translation effects.

Operating Costs and Expenses

Operating costs and expenses increased by ¥634.6 billion, or 4.4%, to ¥15,162.2 billion from the previous fiscal year. Cost of sales increased by ¥580.3 billion, or 4.8%, to ¥12,580.9 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased consolidated sales revenue in all business operations,

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the impact to Europe related to changes of the global automobile production network and capability. Selling, general and administrative expenses totaled to ¥1,774.3 billion basically unchanged from the previous fiscal year, due mainly to the impact to Europe related to changes of the global automobile production network and capability, which was partially offset by the loss related to the settlement of multidistrict class action litigation in the previous fiscal year. Research and development expenses increased by ¥55.0 billion, or 7.3%, to ¥806.9 billion from the previous fiscal year.

Operating Profit

Operating profit decreased by ¥107.1 billion, or 12.9%, to ¥726.3 billion from the previous fiscal year, due mainly to the impact to Europe related to changes of the global automobile production network and capability as well as negative foreign currency effects, which was partially offset by continuing cost reduction and the loss related to the settlement of multidistrict class action litigation in the previous fiscal year. Honda estimates that by excluding negative foreign currency effects of approximately ¥160.3 billion, operating profit would have increased by approximately ¥53.1 billion.

With respect to the discussion above of the changes, management identified factors and used what it believes to be a reasonable method to analyze the respective changes in such factors. Management analyzed changes in these factors at the levels of the Company and its material consolidated subsidiaries. “Foreign currency effects” consist of “translation adjustments”, which come from the translation of the currency of foreign subsidiaries’ financial statements into Japanese yen, and “foreign currency adjustments”, which result from foreign-currency-denominated transaction. With respect to “foreign currency adjustments”, management analyzed foreign currency adjustments primarily related to the following currencies: U.S. dollar, Japanese yen and others at the level of the Company and its material consolidated subsidiaries. The estimates excluding the foreign currency effects are not on the same base as Honda’s consolidated financial statements, and do not conform to IFRS. Furthermore, Honda does not believe that these measures are substitute for the disclosure required by IFRS. However, Honda believes that such estimates excluding the foreign currency effects provide financial statements users with additional useful information for understanding Honda’s results.

Profit before Income Taxes

Profit before income taxes decreased by ¥135.5 billion, or 12.2%, to ¥979.3 billion. The main factors behind this decrease, except factors relating to operating profit, are as follows:

Share of profit of investments accounted for using the equity method had a negative impact of ¥18.8 billion, due mainly to a decrease in profit at affiliates and joint ventures in Asia.

Finance income and finance costs had a negative impact of ¥9.5 billion, due mainly to effect from gains or losses on derivatives. For further details, see note “(22) Finance Income and Finance Costs” to the accompanying consolidated financial statements.

Income Tax Expense

Income tax expense increased by ¥316.7 billion to ¥303.0 billion from the previous fiscal year, due mainly to the impacts of the enactment of the Tax Cuts and Jobs Act in the United States in the previous fiscal year. The average effective tax rate increased by 32.1 percentage points to 30.9% from the previous fiscal year. For further details, see “(a) Income Tax Expense” of note “(23) Income Taxes” to the accompanying consolidated financial statements.

Profit for the Year

Profit for the year decreased by ¥452.3 billion, or 40.1%, to ¥676.2 billion from the previous fiscal year, due mainly to the impacts of the enactment of the Tax Cuts and Jobs Act in the United States in the previous fiscal year.

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Profit for the Year Attributable to Owners of the Parent

Profit for the year attributable to owners of the parent decreased by ¥449.0 billion, or 42.4%, to ¥610.3 billion from the previous fiscal year.

Profit for the Year Attributable to Non-controlling Interests

Profit for the year attributable to non-controlling interests decreased by ¥3.3 billion, or 4.8%, to ¥65.9 billion from the previous fiscal year.

Business Segments

Motorcycle Business

Honda’s consolidated unit sales of motorcycles, all-terrain vehicles (ATVs) and side-by-sides (SxS) totaled 13,215 thousand units, increased by 2.0% from the previous fiscal year, due mainly to an increase in consolidated unit sales in Asia and Other regions.

Sales revenue from external customers increased by ¥61.4 billion, or 3.0%, to ¥2,100.1 billion from the previous fiscal year, due mainly to increased consolidated unit sales. The impact of price changes was immaterial on sales revenue. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥160.1 billion, or 7.9%, compared to the increase as reported of ¥61.4 billion, which includes negative foreign currency translation effects.

Operating costs and expenses increased by ¥36.8 billion, or 2.1%, to ¥1,808.5 billion from the previous fiscal year. Cost of sales increased by ¥39.5 billion, or 2.7%, to ¥1,506.3 billion, due mainly to an increase in costs attributable to increased consolidated unit sales. Selling, general and administrative expenses decreased by ¥3.8 billion, or 1.7%, to ¥215.6 billion. Research and development expenses increased by ¥1.1 billion, or 1.3%, to ¥86.5 billion.

Operating profit increased by ¥24.6 billion, or 9.2%, to ¥291.6 billion from the previous fiscal year, due mainly to an increase in profit attributable to increased sales volume and model mix.

Japan

Total industry demand for motorcycles in Japan* was approximately 370 thousand units in fiscal year 2019, a decrease of approximately 1% from the previous fiscal year.

Honda’s consolidated unit sales in Japan increased 24.0% to 207 thousand units in fiscal year 2019, a substantial increase from the previous fiscal year, mainly due to increases in sales of the PCX and Cross Cub 110.

North America

Total demand for motorcycles and all-terrain vehicles (ATVs) in the United States*, the principal market within North America, decreased around 3% from the previous year to approximately 660 thousand units in calendar year 2018.

Honda’s consolidated unit sales in North America decreased 3.8% from the previous fiscal year to 301 thousand units in fiscal year 2019. This was mainly due to a decrease in sales of ATVs, despite the effect of launching new models such as the Monkey, primarily in the United States.

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Europe

Total demand for motorcycles in Europe^* increased around 1% from the previous year to approximately 920 thousand units in calendar year 2018.

Honda’s consolidated unit sales in Europe increased 6.4% from the previous fiscal year to 249 thousand units in fiscal year 2019, mainly reflecting the effect of launching the new model Monkey and a full model change of the Forza.

Asia

Total demand for motorcycles in Asia* increased around 6% from the previous year to approximately 44,270 thousand units in calendar year 2018.

Looking at market conditions by country, in calendar year 2018, demand in India increased about 13% from the previous year to approximately 21,620 thousand units. Demand in China decreased around 11% from the previous year to approximately 7,040 thousand units. Demand in Indonesia increased around 7% from the previous year to approximately 6,300 thousand units. Demand in Vietnam increased around 2% from the previous year to approximately 3,340 thousand units. Demand in Pakistan increased around 7% from the previous year to approximately 2,100 thousand units. Demand in Thailand decreased around 1% from the previous year to approximately 1,790 thousand units.

Honda’s consolidated unit sales in Asia increased 0.7% from the previous fiscal year to 11,201 thousand units in fiscal year 2019. This was mainly due to an increase in sales of scooter models such as the Vision in Vietnam, among other factors, despite a decrease in India due to the impact of revisions to the mandatory vehicle liability insurance requirement.

Honda’s consolidated unit sales do not include sales by P.T. Astra Honda Motor in Indonesia, which is accounted for using the equity method. P.T. Astra Honda Motor’s unit sales for fiscal year 2019 increased around 13.3% from the previous fiscal year to approximately 4,970 thousand units due mainly to increases in sales of the PCX and Scoopy models.

Other Regions

Total demand for motorcycles in Brazil*, the principal market within Other Regions, increased about 18% from the previous year to approximately 950 thousand units in calendar year 2018.

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales increased 12.2% from the previous fiscal year to 1,257 thousand units in fiscal year 2019 due mainly to an increase in sales of the CG160 in Brazil.

Automobile Business

Honda’s consolidated unit sales of automobiles totaled 3,748 thousand units, increased by 1.6% from the previous fiscal year, due mainly to an increase in consolidated unit sales in North America.

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Sales revenue from external customers increased by ¥219.9 billion, or 2.0%, to ¥11,072.1 billion from the previous fiscal year, due mainly to increased consolidated unit sales. The impact of price changes was immaterial on sales revenue. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥373.3 billion, or 3.4%, compared to the increase as reported of ¥219.9 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales increased by ¥242.5 billion, or 2.2%, to ¥11,287.7 billion from the previous fiscal year.

Operating costs and expenses increased by ¥406.7 billion, or 3.8%, to ¥11,078.0 billion from the previous fiscal year. Cost of sales increased by ¥352.2 billion, or 4.1%, to ¥9,003.6 billion, due mainly to an increase in costs attributable to increased consolidated unit sales. Selling, general and administrative expenses totaled to ¥1,384.6 billion basically unchanged from the previous fiscal year. Research and development expenses increased by ¥49.3 billion, or 7.7%, to ¥689.8 billion.

Operating profit decreased by ¥164.1 billion, or 43.9%, to ¥209.6 billion from the previous fiscal year, due mainly to the impact to Europe related to changes of the global automobile production network and capability, which was partially offset by continuing cost reduction and the loss related to the settlement of multidistrict class action litigation in the previous fiscal year.

Proportion of retail unit sales by vehicle category and principal automobile products:

Although there are various factors that affect the profitability of each vehicle category, sales price is an important factor in determining profitability. In general, the weighted average sales price in the light trucks category is higher relative to the total average sales price, while the weighted average sales price in the mini vehicles category, which is unique to the Japanese market, is relatively lower, although sales price varies from model to model.

In general, the contribution margin of the light trucks category tends to be higher relative to the total weighted average contribution margin because the sales price is higher, while the contribution margin of the mini vehicles category tends to be relatively lower because the sales price is lower, although the level of contribution margin varies from model to model. For example, in Japan and the United States, which are the main sales markets for our automobiles, the contribution margin of our light trucks category was approximately 35% higher, our passenger cars category was approximately 20% lower and our mini vehicles category was approximately 50% lower than total weighted average contribution margin for the fiscal year ended March 31, 2019. It should be noted that we define contribution margin as an amount per unit of net sales minus material cost, which is thought to increase in almost direct proportion to net sales volume.

Japan

Total demand for automobiles in Japan^*1 increased around 1% from the previous fiscal year to approximately 5,260 thousand units in fiscal year 2019.

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Honda’s consolidated unit sales in Japan increased 2.6% from the previous fiscal year to 643 thousand units^*2 in fiscal year 2019. This was mainly due to the effect of launching the new model N-VAN and an increase in sales of theN-BOX.

Honda’s unit production of automobiles in Japan increased 10.0% from the previous fiscal year to 912 thousand units in fiscal year 2019. This was mainly due to increases in export volume and domestic sales volume.

North America

Total industry demand for automobiles in the United States*, the principal market within North America, remained basically unchanged from the previous year at approximately 17,270 thousand units in calendar year 2018. This result reflected a continued increase for light trucks, which offset decreased demand for passenger cars.

Honda’s consolidated unit sales in North America increased 2.7% from the previous fiscal year to 1,954 thousand units in fiscal year 2019. This increase was mainly attributable to the effect of a full model change of the Insight model and an increase in sales of the CR-V model, despite the restrictions on supply caused by the impact of flooding in Mexico.

Honda manufactured 1,802 thousand units in fiscal year 2019, a decrease of 3.4% from the previous fiscal year, mainly reflecting the impact of flooding in Mexico.

Europe

Total demand for automobiles in Europe* remained basically unchanged from the previous year at approximately 15,620 thousand units in calendar year 2018, mainly due to the slowdown in the diesel market, despite growth in the SUV market and other factors.

Honda’s consolidated unit sales in Europe decreased 7.7% from the previous fiscal year to 169 thousand units in fiscal year 2019. This was mainly due to decreased sales of diesel vehicles.

Unit production at Honda’s U.K. plant in fiscal year 2019 decreased 8.1% from the previous fiscal year to 151 thousand units, mainly due to the termination of production of the CR-V model.

Asia

Total demand for automobiles in China, the largest market within Asia, decreased around 3% from the previous year to approximately 28,030 thousand units^*1 in calendar year 2018. Total demand for automobiles in other countries in Asia increased about 8% from the previous calendar year to approximately 8,560 thousand units^*2. This was mainly due to increases in demand in India and Thailand.

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Honda’s consolidated unit sales in Asia increased 1.2% from the previous fiscal year to 734 thousand units in fiscal year 2019. This increase was mainly attributable to the effect of a full model change of the Amaze model in India and an increase in sales of the Jazz model in Thailand, despite a decline in sales in Indonesia among other factors.

Honda’s consolidated unit sales do not include unit sales of Dongfeng Honda Automobile Co., Ltd. and GAC Honda Automobile Co., Ltd., both of which are joint ventures accounted for using the equity method in China. Unit sales in China increased 3.9% from the previous fiscal year to 1,499 thousand units in fiscal year 2019. The increase was mainly attributable to an increase in sales of the Civic model and the effect of a full model change of the Crider model.

Honda’s unit production by consolidated subsidiaries in Asia increased 0.5% from the previous fiscal year to 802 thousand units^*3 in fiscal year 2019.

Meanwhile, unit production by Chinese joint ventures Dongfeng Honda Automobile Co., Ltd. and GAC Honda Automobile Co., Ltd. increased 2.8% from the previous fiscal year to 1,491 thousand units in fiscal year 2019.

Other Regions

Total industry demand for automobiles in Brazil, the principal market within Other Regions, increased around 14% from the previous year to approximately 2,470 thousand units* in calendar year 2018. The increase was supported by the gradual economic recovery among other factors.

In Other Regions (including South America, the Middle East, Africa, Oceania and other areas), Honda’s consolidated unit sales decreased 1.6% from the previous fiscal year to 248 thousand units in fiscal year 2019 mainly due to a decrease in sales of the WR-V model, despite an increase in sales of the Civic model in Brazil.

Unit production at Honda’s plant in Brazil increased 1.1% from the previous fiscal year to 139 thousand units in fiscal year 2019.

Financial Services Business

To support the sale of its products, Honda provides retail lending and leasing to customers and wholesale financing to dealers through its finance subsidiaries in Japan, the United States, Canada, the United Kingdom, Germany, Brazil and Thailand.

Total amount of receivables from financial services and equipment on operating leases of finance subsidiaries on March 31, 2019, increased by ¥807.9 billion, or 8.9%, to ¥9,854.0 billion from March 31, 2018. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, total amount of receivables from financial services and equipment on operating leases of finance subsidiaries as of March 31, 2019 would have increased by approximately ¥513.7 billion, or 5.7%, compared to the previous fiscal year.

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Sales revenue from external customers increased by ¥242.1 billion, or 11.4%, to ¥2,365.3 billion from the previous fiscal year, due mainly to increased revenues on disposition of lease vehicles and operating lease revenues. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥245.6 billion, or 11.6%, compared to the increase as reported of ¥242.1 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales increased by ¥242.7 billion, or 11.4%, to ¥2,380.0 billion from the previous fiscal year.

Operating costs and expenses increased by ¥202.8 billion, or 10.5%, to ¥2,144.0 billion from the previous fiscal year. Cost of sales increased by ¥200.1 billion, or 11.0%, to ¥2,026.5 billion from the previous fiscal year, due mainly to an increase in costs attributable to increased revenues on disposition of lease vehicles and operating lease revenues. Selling, general and administrative expenses increased by ¥2.7 billion, or 2.4%, to ¥117.5 billion.

Operating profit increased by ¥39.8 billion, or 20.3%, to ¥235.9 billion from the previous fiscal year, due mainly to an increase in profit attributable to increased sales revenue.

Life Creation and Other Businesses

Honda’s consolidated unit sales of power products totaled 6,301 thousand units, increased by 0.6 % from the previous fiscal year, due mainly to increased consolidated unit sales in Asia.

Sales revenue from external customers increased by ¥3.9 billion, or 1.1%, to ¥350.9 billion from the previous fiscal year, due mainly to increased consolidated unit sales in power products. Honda estimates that by applying Japanese yen exchange rates of the previous fiscal year to the current fiscal year, sales revenue for the year would have increased by approximately ¥7.8 billion, or 2.3%, compared to the increase as reported of ¥3.9 billion, which includes negative foreign currency translation effects. Sales revenue including intersegment sales increased by ¥6.0 billion, or 1.6%, to ¥377.2 billion from the previous fiscal year.

Operating costs and expenses increased by ¥13.6 billion, or 3.6%, to ¥388.1 billion from the previous fiscal year. Cost of sales increased by ¥13.8 billion, or 4.8%, to ¥301.1 billion, due mainly to an increase in costs attributable to increased consolidated unit sales in Life creation business. Selling, general and administrative expenses decreased by ¥4.8 billion, or 7.8%, to ¥56.5 billion. Research and development expenses increased by ¥4.6 billion, or 17.8%, to ¥30.5 billion from the previous fiscal year.

Operating loss was ¥10.9 billion, an increase of ¥7.5 billion from the previous fiscal year, due mainly to an increase in research and development expenses as well as negative foreign currency effects. In addition, operating loss of aircraft and aircraft engines included in the Power product and other businesses segment was ¥40.2 billion, an improvement of ¥1.6 billion from the previous fiscal year.

Japan

Honda’s consolidated unit sales in Life creation business operations in Japan increased 12.0 % from the previous fiscal year to 336 thousand units in fiscal year 2019 mainly due to an increase in sales of OEM engines* and other factors.

North America

Honda’s consolidated unit sales in North America increased 1.2% from the previous fiscal year to 3,049 thousand units in fiscal year 2019 mainly attributable to an increase in sales of OEM engines, despite a decline in sales of generators.

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Europe

Honda’s consolidated unit sales in Europe decreased 3.7% from the previous fiscal year to 984 thousand units in fiscal year 2019 mainly due to decreases in sales of lawnmowers and trimmers.

Asia

Honda’s consolidated unit sales in Asia increased 3.1% from the previous fiscal year to 1,559 thousand units in fiscal year 2019. This was mainly due to an increase in sales of OEM engines.

Other Regions

Honda’s consolidated unit sales in Other Regions (including South America, the Middle East, Africa, Oceania and other areas) decreased 10.3% from the previous fiscal year to 373 thousand units in fiscal year 2019 mainly due to a decline in sales of lawnmowers.

Geographical Information

Japan

In Japan, sales revenue from domestic and export sales increased by ¥367.6 billion, or 8.2%, to ¥4,848.3 billion from the previous fiscal year, due mainly to increased sales revenue in all business operations. Operating profit decreased ¥86.9 billion, or 100.0%, from the previous fiscal year, due mainly to the impact to Europe related to changes of the global automobile production network and capability as well as an increase in research and development expenses, which was partially offset by decreased selling, general and administrative expenses.

North America

In North America, where the United States is the principal market, sales revenue increased by ¥439.3 billion, or 5.1%, to ¥9,023.9 billion from the previous fiscal year, due mainly to increased sales revenue in the Automobile business and Financial services business. Operating profit increased by ¥21.2 billion, or 7.6%, to ¥299.7 billion from the previous fiscal year, due mainly to the loss related to the settlement of multidistrict class action litigation in the previous fiscal year and continuing cost reduction, which was partially offset by increased selling, general and administrative expenses.

Europe

In Europe, sales revenue increased by ¥10.2 billion, or 1.1%, to ¥927.4 billion from the previous fiscal year, due mainly to increased sales revenue in the Motorcycle business. Operating loss was ¥6.6 billion, a decrease of 22.4 billion from the previous fiscal year, due mainly to the impact to Europe related to changes of the global automobile production network and capability, which was partially offset by continuing cost reduction.

Asia

In Asia, sales revenue increased by ¥51.2 billion, or 1.2%, to ¥4,272.2 billion from the previous fiscal year, due mainly to increased sales revenue in Motorcycle business, which was partially offset by negative foreign currency effects. Operating profit totaled to ¥404.2 billion basically unchanged from the previous fiscal year, due mainly to continuing cost reduction as well as an increase in profit attributable to increased sales revenue and model mix, which was partially offset by increased selling, general and administrative expenses.

Other Regions

In Other Regions, sales revenue decreased by ¥73.0 billion, or 8.7%, to ¥764.4 billion from the previous fiscal year, due mainly to negative foreign currency effects, which was partially offset by increased sales revenue

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in the Motorcycle business and Automobile business. Operating profit decreased by ¥21.2 billion, or 48.4%, to ¥22.6 billion from the previous fiscal year, due mainly to negative foreign currency effects, which was partially offset by continuing cost reduction.

Application of Critical Accounting Policies

Critical accounting policies are those which require us to apply the most difficult, subjective or complex judgments, often requiring us to make estimates about the effect of matters that are inherently uncertain and which may change in subsequent periods, or for which the use of different estimates that could have reasonably been used in the current period would have had a material impact on the presentation of our financial position and results of operations. Further changes in the economic environment surrounding us, effects by market conditions, effects of currency fluctuations or other factors have combined to increase the uncertainty inherent in such estimates and assumptions.

As of the date of this report, although it is difficult to reasonably predict the severity and duration of the spread of COVID-19, we accounted for estimates using assumptions where corporate economic activities restart and market gradually recovers as the spread of COVID-19 slows down, based upon the information available. As uncertainties in market trend and economic conditions may remain persistent considering duration of the spread ofCOVID-19 and countermeasures taken by each country and region, actual results in any future periods could differ materially from the estimates.

The following is not intended to be a comprehensive list of all our accounting policies. Our significant accounting policies are described in note “(3) Significant Accounting Policies” to the accompanying consolidated financial statements.

We have identified the following critical accounting policies with respect to our financial presentation.

Product Warranty

We warrant our products for specific periods of time. We also provide specific warranty programs, including product recalls, as needed. Product warranties vary depending upon the nature of the product, the geographic location of their sales and other factors.

We recognize costs for general warranties on products we sell and for specific warranty programs, including product recalls. We recognize general estimated warranty costs at the time products are sold to customers. We also recognize specific estimated warranty program costs when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Estimated warranty costs are provided based on historical warranty claim experience with consideration given to the expected level of future warranty costs, including current sales trends, the expected number of units to be affected and the estimated average repair cost per unit for warranty claims. Our products contain certain parts manufactured by third party suppliers that typically warrant these parts.

We believe our provision for product warranties is a “critical accounting estimate” because changes in the calculation can materially affect profit for the year attributable to owners of the parent, and require us to estimate the frequency and amounts of future claims, which are inherently uncertain.

Our policy is to continuously monitor warranty cost accruals to determine the adequacy of the accrual. Therefore, warranty expense accruals are maintained at an amount we deem adequate to cover estimated warranty expenses.

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Actual claims incurred in the future may differ from the original estimates, which may result in material revisions to the warranty expense accruals.

The changes in the provision for those product warranties and sales revenue for the years ended March 31, 2018, 2019 and 2020 are as follows:

Credit Losses

Our finance subsidiaries provide retail lending and leasing to customers and wholesale financing to dealers primarily to support sales of our products. Honda includes retail and finance lease receivables (“consumer finance receivables”) derived from those services in receivables from financial services, and operating leases are classified as equipment on operating leases. Honda also includes wholesale receivables in receivables from financial services.

Credit losses are an expected cost of extending credit. The majority of the credit risk is with consumer financing. Credit risk on consumer finance receivables can be affected by general economic conditions. Adverse changes such as a rise in unemployment can increase the likelihood of defaults. Declines in used vehicle prices can reduce the amount of recoveries on repossessed collateral. Exposure to credit risk on consumer finance receivables is managed by monitoring and adjusting underwriting standards, which affect the level of credit risk that is assumed, pricing contracts for expected losses, and focusing collection efforts to minimize losses.

Our finance subsidiaries are also exposed to credit risk on equipment on operating leases. A portion of our finance subsidiaries’ operating leases are expected to terminate prior to their scheduled maturities when lessees default on their contractual obligations. Losses are generally realized upon the disposition of the repossessed operating lease vehicles. The factors affecting credit risk on operating leases and management of the risk are similar to that of consumer finance receivables.

Credit risk on dealer finance receivables is affected primarily by the financial strength of the dealers within the portfolio, the value of collateral securing the financings, and economic factors that could affect the creditworthiness of dealers. Exposure to credit risk in dealer financing is managed by performing comprehensive reviews of dealers prior to establishing financing arrangements and monitoring the payment performance and creditworthiness of dealers with existing financing arrangements on an ongoing basis.

The allowance for credit losses is management’s estimate of expected credit loss on receivables from financial services. Our finance subsidiaries evaluate these estimates, at minimum, on a quarterly basis.

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The allowance for credit losses is measured at amounts according to the three-stage expected credit loss (ECL) model:

Lifetime ECL represents ECL that results from all possible default events over the expected life of a financial asset. 12-month ECL is the portion of lifetime ECL that results from default events that are possible within 12 months after the reporting date. ECL is a probability-weighted estimate of the difference between the contractual cash flows and the cash flows that the entity expects to receive, discounted at the original effective interest rates.

To determine whether credit risk has increased significantly, consumer finance receivables are assessed both individually and collectively. Individual assessments are based on delinquencies. Consumer finance receivables 30 days or greater past due have historically experienced increased default rates and therefore are considered to have a significant increase in credit risk. Collective assessments are performed for groups of consumer finance receivables with shared risk characteristics such as the period of initial recognition, collateral type, original term, and credit score considering relative changes in expected default rates since initial recognition. Dealer finance receivables are assessed at the individual dealership level to determine whether credit risk has increased significantly considering payment performance and other factors such as changes in the financial condition of the dealership and compliance with debt covenants.

Our definition of default on receivables from financial services varies depending on internal risk management practices of each of our finance subsidiaries. Our most significant finance subsidiary located in the United States considers delinquencies of 60 days past due to be in default. Collection efforts on consumer finance receivables are escalated after becoming 60 days past due including repossession of the underlying vehicles if it has been determined that the borrower is unable to perform on their obligations. Defaulted consumer finance receivables are considered to be credit-impaired. Dealer finance receivables are considered to be credit-impaired when there is evidence we will be unable to collect all amounts due in accordance with the original contractual terms including significant financial difficulty of the dealership, a breach of contract, such as a default or delinquency, or bankruptcy.

At the finance subsidiary in the United States, the estimated uncollectible portion of consumer finance receivables are written-off at 120 days past due or upon repossession of the underlying vehicle. Although various statutory regulations limit the length of time and circumstances when enforcement activities can be taken, in general, the outstanding contractual balances continue to be subject to enforcement activities for several years after write-offs. The portion of outstanding contractual balances that is estimated to be uncollectible reflects our expectations of collections from enforcement activities. Dealer finance receivables are written-off when there is no reasonable expectation of recovery.

At the finance subsidiary in the United States, ECL of consumer finance receivables is measured for groups of financial assets with shared risk characteristics by reflecting historical results, current conditions, and forward-looking factors such as unemployment rates, used vehicles prices, and consumer debt service burdens. Estimated losses on operating leases due to early terminations are also measured collectively, using estimation techniques similar to those applied for consumer finance receivables.

We believe our allowance for credit losses and impairment losses on operating leases is a “critical accounting estimate” because it requires significant judgment about inherently uncertain items. Our finance

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subsidiaries regularly review the adequacy of the allowance for credit losses and impairment losses on operating leases. The estimates are based on information available at the end of each reporting period. However, actual losses may differ from the original estimates as a result of actual results varying from those assumed in our estimates.

As an example of the sensitivity of the allowance calculation, the following scenario demonstrates the impact that a deviation in one of the primary factors estimated as part of our allowance calculation would have on the remeasurement and allowance for credit losses. If we had experienced a 10% increase in write-offs during fiscal year 2020, the remeasurement for fiscal year 2020 and the allowance balance at the end of fiscal year 2020 would have increased by approximately ¥9.6 billion and ¥6.3 billion, respectively. Note that this sensitivity analysis may be asymmetric and is specific to the base conditions in fiscal year 2020.

Additional Narrative of the Change in Credit Loss

The following tables summarize our allowance for credit losses on receivables from financial services:

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Honda has adopted IFRS 9 issued in July 2014 with a date of initial application of April 1, 2018. Comparative amounts for the year ended March 31, 2018 represent the allowance for credit losses under previous accounting policies. Details of previous accounting policies are described in “(j) Impairment” of note “(3) Significant Accounting Policies” to the accompanying consolidated financial statements.

The following table provides information related to losses on operating leases due to customer defaults:

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Fiscal Year 2020 Compared with Fiscal Year 2019

The remeasurement for credit losses on receivables from financial services for the fiscal year ended March 31, 2020 increased by ¥22.1 billion, or 63.8%, from the fiscal year ended March 31, 2019. Write-offs of receivables from financial services for the fiscal year ended March 31, 2020 increased by ¥2.3 billion, or 7.7%, from the fiscal year ended March 31, 2019.

Impairment losses on operating leases due to early termination for the fiscal year ended March 31, 2020 increased by ¥24.8 billion, or 221.3%, from the fiscal year ended March 31, 2019.

The increase in the remeasurement for credit losses and impairment losses on operating leases due to early termination is primarily due to an increase in credit risk by estimated impact of the spread of COVID-19 in our North American finance subsidiaries. As a result of the spread of COVID-19, the economy is experiencing a deterioration resulting in an adverse change in forward-looking factors such as unemployment rates and used vehicles prices. An adverse change in forward-looking factors has resulted in an increase in credit risk in our North American finance subsidiaries.

The increase in write-offs was primarily attributable to higher default frequencies of retail loans for consumers with higher credit risk and those loans of used vehicles in our North American finance subsidiaries.

Fiscal Year 2019 Compared with Fiscal Year 2018

The remeasurement for credit losses on receivables from financial services for the fiscal year ended March 31, 2019 decreased by ¥1.8 billion, or 5.1%, from the provision for fiscal year ended March 31, 2018. Net write-offs of receivables from financial services for the fiscal year ended March 31, 2019 decreased by ¥0.6 billion, or 2.1%, from the fiscal year ended March 31, 2018. The decrease in the remeasurement for credit losses and net write-offs was attributable to foreign currency translation effects in our finance subsidiary in Other Regions.

Although the actual impairment losses on operating leases due to early termination we realized during the fiscal year ended March 31, 2019 continued to increase compared to prior years, the rate of increase has slowed. As a result, impairment losses on operating leases due to early termination for the fiscal year ended March 31, 2019 decreased by ¥0.6 billion, or 5.8%, from the fiscal year ended March 31, 2018.

Losses on Lease Residual Values

Our finance subsidiaries in North America determine contractual residual values of lease vehicles at lease inception based on expectations of end of term used vehicle values, taking into consideration external industry data and our own historical experience. Lease customers have the option at the end of the lease term to return the vehicle to the dealer or to buy the vehicle for the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance). Returned lease vehicles can be purchased by the grounding dealer for the contractual residual value (or if purchased prior to lease maturity, for the outstanding contractual balance) or a market based price. Returned lease vehicles that are not purchased by the grounding dealers are sold through online and physical auctions. We are exposed to risk of loss on the disposition of returned lease vehicles when the proceeds from the sale of the vehicles are less than the contractual residual values at the end of the lease term.

We assess our estimates for end of term market values of lease vehicles, at minimum, on a quarterly basis. The primary factors affecting the estimates are the percentage of leased vehicles that we expect to be returned by the lessee at the end of lease term and expected loss severities. Factors considered in this evaluation include, among other factors, economic conditions, historical trends, and market information on new and used vehicles.

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For operating leases, adjustments to estimated residual values are made on a straight-line basis over the remaining term of the lease and are recognized as depreciation expense. For finance leases, if there is an objective evidence that recognition of losses on lease residual values is needed, downward adjustments for declines in estimated residual values are recognized as a loss on lease residual values in the period in which the estimate changed.

We also review our equipment on operating leases for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. If impairment conditions are met, impairment losses are measured by the amount carrying values exceed their recoverable amounts.

We believe that our estimated losses on lease residual values and impairment losses are a “critical accounting estimate” because it is highly susceptible to market volatility and requires us to make assumptions about future economic trends and lease residual values, which are inherently uncertain. We believe that the assumptions used are appropriate. However, actual losses incurred may differ from original estimates as a result of actual results varying from those assumed in our estimates.

If future auction values for all Honda and Acura vehicles in our North American operating lease portfolio as of March 31, 2020 were to decrease by approximately ¥10,000 per unit from our present estimates, holding all other assumptions constant, the total impact would be an increase in depreciation expense by approximately ¥7.5 billion, which would be recognized over the remaining lease terms. Similarly, if future return rates for our existing portfolio of all Honda and Acura vehicles were to increase by one percentage point from our present estimates, the total impact would be an increase in depreciation expense by approximately ¥1.4 billion, which would be recognized over the remaining lease terms. Note that this sensitivity analysis may be asymmetric and is specific to the base conditions in fiscal year 2020. Also, declines in auction values are likely to have a negative effect on return rates which could affect the sensitivities.

Post-employment Benefits

We have various pension plans covering substantially all of our employees in Japan and certain employees in foreign countries. Defined benefit obligations and defined benefit costs are based on assumptions of many factors, including the discount rate and the rate of salary increase. The discount rate is determined by reference to market yields at the end of the reporting period on high quality corporate bonds that is consistent with the currency and estimated term of the post-employment benefit obligations. The rate of salary increase reflects our actual experience as well as near-term outlook. Our assumed discount rate and rate of salary increase for Japanese plans as of March 31, 2020 were 0.6% and 1.6%, respectively. Our assumed discount rate and rate of salary increase for foreign plans as of March 31, 2020 were 2.5 - 3.8% and 2.0 - 2.8%, respectively.

We believe that the accounting estimates related to our pension plans are a “critical accounting estimate” because changes in these estimates can materially affect our financial position and results of operations.

We believe that the assumptions currently used are appropriate. However, changes in assumptions could affect our defined benefit costs and obligations, including our cash requirements to fund such obligations in the future. Actual results may differ from our assumptions, and the difference is recognized in other comprehensive income when it is incurred and reclassified immediately to retained earnings.

For information on the effect of change in the assumed discount rate on our defined benefit obligations, see “4) Sensitivity analysis” of note “(18) Employee Benefits” to the accompanying consolidated financial statements.

Deferred Tax Assets

We consider the probability that a portion of or all of the deductible temporary differences, carryforward of unused tax losses and carryforward of unused tax credit can be utilized against future taxable profits in the

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recognition of deferred tax assets. In assessing recoverability of deferred tax assets, we consider the scheduled reversal of deferred tax liabilities, projected future taxable profit and tax planning strategies.

We believe that our accounting for the deferred tax assets is a “critical accounting estimate” because it requires us to evaluate and assess the probability of future taxable profit and our business plan, which are inherently uncertain.

Based upon the level of historical taxable profit and projections for future taxable profit over the periods for which the deferred tax assets are deductible, we believe it is probable that we will utilize the benefits of these deferred tax assets as of March 31, 2019 and 2020. Uncertainty of estimates of future taxable profit could increase due to changes in the economic environment surrounding us, effects by market conditions, effects of currency fluctuations or other factors.

New Accounting Pronouncements Not Yet Adopted

For a description of new accounting pronouncements not yet adopted, see “(e) New Accounting Standards and Interpretations Not Yet Adopted” of note “(2) Basis of Preparation” to the accompanying consolidated financial statements.

B. Liquidity and Capital Resources

Overview of Capital Requirements, Sources and Uses

The policy of Honda is to support its business activities by maintaining sufficient capital resources, a sufficient level of liquidity and a sound balance sheet.

Honda’s main business is the manufacturing and sale of motorcycles, automobiles and power products. To support this business, Honda also funds financial programs for customers and dealers.

Honda requires working capital mainly to purchase parts and raw materials required for production, as well as to maintain inventory of finished products and cover receivables from dealers and for providing financial services. Honda also requires funds for capital expenditures, mainly to introduce new models, upgrade, rationalize and renew production facilities, as well as to expand and reinforce sales and R&D facilities.

Honda meets its working capital requirements primarily through cash generated by operations, bank loans, corporate bonds and commercial paper. Honda believes that its working capital is sufficient for the Company’s present requirements. The year-end balance of liabilities associated with the Company and its subsidiaries’ funding for non-Financial services businesses was ¥532.0 billion as of March 31, 2020. In addition, the Company’s finance subsidiaries fund financial programs for customers and dealers primarily from medium-term notes, bank loans, securitization of finance receivables and equipment on operating leases, commercial paper and corporate bonds. The year-end balance of liabilities associated with these finance subsidiaries’ funding for Financial services business was ¥ 7,002.4 billion as of March 31, 2020.

There are no material seasonal variations in Honda’s borrowing requirements.

Cash Flows

Fiscal Year 2020 Compared with Fiscal Year 2019

Consolidated cash and cash equivalents on March 31, 2020 increased by ¥178.2 billion from March 31, 2019, to ¥2,672.3 billion. The reasons for the increases or decreases for each cash flow activity, when compared with the previous fiscal year, are as follows:

Net cash provided by operating activities amounted to ¥979.4 billion of cash inflows. Cash inflows from operating activities increased by ¥203.4 billion compared with the previous fiscal year, due mainly to a decrease in receivables from financial services, despite increased payments for parts and raw materials.

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Net cash used in investing activities amounted to ¥619.4 billion of cash outflows. Cash outflows from investing activities increased by ¥41.9 billion compared with the previous fiscal year, due mainly to increased payments for additions to and internally developed intangible assets as well as decreased proceeds from sales and redemptions of other financial assets, which was partially offset by decreased payments for additions to property, plant and equipment.

Net cash used in financing activities amounted to ¥87.4 billion of cash outflows. Cash outflows from financing activities increased by ¥110.3 billion compared with the previous fiscal year, due mainly to increased repayments of financing liabilities as well as purchases of treasury stock.

Fiscal Year 2019 Compared with Fiscal Year 2018

Consolidated cash and cash equivalents on March 31, 2019 increased by ¥237.6 billion from March 31, 2018, to ¥2,494.1 billion. The reasons for the increases or decreases for each cash flow activity, when compared with the previous fiscal year, are as follows:

Net cash provided by operating activities amounted to ¥775.9 billion of cash inflows. Cash inflows from operating activities decreased by ¥211.6 billion compared with the previous fiscal year, due mainly to an increase in payments for parts and raw materials, which was partially offset by an increase in cash received from customers.

Net cash used in investing activities amounted to ¥577.5 billion of cash outflows. Cash outflows from investing activities decreased by ¥37.5 billion compared with the previous fiscal year, due mainly to an increase in proceeds from sales and redemptions of other financial assets.

Net cash provided by financing activities amounted to ¥22.9 billion of cash inflows. Cash inflows from financing activities increased by ¥197.2 billion compared with the previous fiscal year, due mainly to an increase in proceeds from financing liabilities, which was partially offset by an increase in repayments of financing liabilities.

Liquidity

The ¥2,672.3 billion in cash and cash equivalents as of March 31, 2020 is mainly denominated in U.S. dollars and in Japanese yen, with the remainder denominated in other currencies.

Honda’s cash and cash equivalents as of March 31, 2020 corresponds to approximately 2.1 months of sales revenue, and Honda believes it has sufficient liquidity for its business operations.

At the same time, Honda is aware of the possibility that various factors, such as recession-induced market contraction and financial and foreign exchange market volatility, may adversely affect liquidity. For this reason, finance subsidiaries that carry total short-term borrowings of ¥1,140.0 billion have committed lines of credit equivalent to ¥1,084.9 billion that serve as alternative liquidity for the commercial paper issued regularly to replace debt. Honda believes it currently has sufficient credit limits, extended by prominent international banks, as of the date of the filing of Honda’s Form 20-F.

Honda’s financing liabilities as of March 31, 2020 are mainly denominated in U.S. dollars, with the remainder denominated in Japanese yen and in other currencies. For further information regarding financing liabilities, see note “(15) Financing Liabilities” and “(25) Financial Risk Management” to the accompanying consolidated financial statements.

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Honda’s short- and long-term debt securities are rated by credit rating agencies, such as Moody’s Investors Service, Inc., Standard & Poor’s Rating Services, and Rating and Investment Information, Inc. The following table shows the ratings of Honda’s unsecured debt securities by Moody’s, Standard & Poor’s and Rating and Investment Information as of March 31, 2020.