Honda's Record Quarter Masks a Perfect Storm of EV Losses, China Slide, and Earthquake Disruption
Record Quarter, But Guidance Raises on FX Not Operating Magic
Honda Motor opened its fiscal first quarter with a record operating profit of ¥530.7 billion, a striking rebound from the noise of the prior year. Management raised full-year operating profit guidance by ¥150 billion to ¥650 billion, citing a weaker yen (now assumed at ¥155/USD) and favorable tariff effects. Yet the headline masks a cascade of fresh risks—an earthquake, escalating EV related losses, and a China market in freefall.
The profit engine remains motorcycles: global sales, especially in India and Brazil, drove an all-time high quarterly operating profit and margin. Automobiles also delivered ¥192.1 billion in operating profit, with North America volume up even as incentives rose. “Operating profit for the first quarter was a record high JPY 530.7 billion.” — Masao Kawaguchi, Executive Officer and CFO · 2026-08-05 But the first quarter is also when the company confirmed that the full-year EV loss burden will now be ¥520 billion—revised upward from ¥500 billion purely on FX. No losses were yet booked because negotiations with suppliers are still ongoing, leaving a sword of Damocles over the next quarters.
Yes, we have an all-time high. So JPY 530 billion, this is a very powerful number.
Management's guidance hike is almost entirely currency-driven: the FX assumption moved from ¥148 to ¥155 per dollar, adding ¥90.8 billion to Q1 operating profit alone. The material cost pressure remains, with soaring steel and rare earth offsets only partially recovered. The company is also now battling a fresh memory-cost headwind, as AI demand spikes DRAM and NAND prices. They have factored in an additional ¥20–30 billion, but the trend is clearly upward.
China: The Structural Slide
The most worrying theme on the call is China. The overall ICE and Hybrid market contracted roughly 40% year-on-year in Q1, and Honda—still heavily reliant on those powertrains—saw retail units plunge to just over 80,000, about half of last year's level. Management acknowledged the Chinese market requires a genuine reset: they are extending their joint venture with GAC beyond 2028, leveraging local suppliers for cost and component competitiveness, and moving to commonize EV platforms with partners. “In the first quarter, just looking at China's ICE and Hybrid, compared to last year, I think that the market has shrunk by about 40%.” — Unknown Executive, Executive · 2026-08-05 The company is also streamlining production capacity, cutting from 1.5 million ICE units to around 700,000, and pushing hard on a new model cycle, but they admit that a meaningful recovery is still a year away.
The prior quarter calls already flagged China as a structural problem. In February, management revised EV losses upward and acknowledged that the Chinese market would require a "complete review" of product lineup. The new extension of the JV is a change in tone—moving from retreat to engagement, but the fundamental issue of product value for money persists.
EV Losses and the Kumamoto Wrench
The EV loss story has been a recurring theme for Honda. In the latest call, the company confirmed that the total onetime losses related to the North America EV strategy reset could reach ¥2.5 trillion, with ¥1.3 trillion already recognized. This fiscal year's ¥520 billion will be booked as negotiations with suppliers progress, likely in installments. It is a stark contrast to the prior year, when the company took a ¥650 billion hit. As one executive noted, “We have maintained the JPY 500 billion that we have originally forecast... with the foreign exchange impact, it has been revised to JPY 520 billion.” — Unknown Executive, Executive · 2026-08-05 The magnitude of these losses is a clear overhang on the stock.
Add the Kumamoto earthquake to the list. Production at the motorcycle factory near the epicenter was halted for nine days, and automobile plants in Saitama and Suzuka are suspending operations due to parts shortages from affected suppliers, including a damper maker in the Astemo group. Management said they cannot yet quantify the unit-sales impact, but they are keeping close communication with suppliers. The earthquake also adds to an already fragile supply chain, which had just recovered from the semiconductor shortage episodes of 2025.
Looking at prior calls, the pattern is clear: Honda is navigating a perfect storm of external shocks—tariffs, semi shortages, earthquakes, and now memory inflation. In August 2025, management admitted they had been conservative with tariff assumptions; “We were conservative because... we told you about those tariff as on the assumption at that time.” — Eiji Fujimura, Director · 2025-08-08 The consistency of these reassessments suggests the company is still in a reactive mode, rather than having found a stable footing.
From the prior Feb 2026 call, the scale of the EV problem was already evident: “So, so far, we had a battery EV of negative JPY 650 billion... we have JPY 270 billion... plus JPY 400 billion for R&D.” — Eiji Fujimura, Director, Managing Executive Officer · 2026-02-10 The new forecast keeps the pain within that range, but the uncertainty around supplier compensation makes the final number anything but settled.
Still, the record Q1 demonstrates that Honda's core ICE and hybrid business can generate enormous cash flow. The challenge is whether that cash can be redeployed fast enough to offset the EV transition costs and the China decline. The stock remains a watch-item—not for the quarterly headline, but for the accumulating set of one-off charges and disruptions that could compress future earnings.
One additional memory note: the company is also incorporating a modest cost increase from memory prices, but they have long-term agreements for legacy memory and remain confident in procurement. That is a small silver lining compared to the bigger structural issues.