Aaron Hussain

Abstract

Honda Motor Company (HMC) is one of the world’s leading car companies. In

this paper the financial and economic analysis of the company will be discussed

and compared to one of its main competitors, Nissan. This discussion includes

an analysis of the company’s demand function and revenue function obtained by

using company information; regression analysis; discussion of the cost structure,

total cost, average cost, and marginal cost functions; economic profit, output, and

product prices; and the market structure of the company.

Introduction

Honda states that their company is “built on dreams.” Its founder Socichior

Honda bases his philosophy on moving forward and being a visionary company

that is dedicated to “human mobility and benefit [to] society. The corporate

website reads:

Our success in the global marketplace is the result of our continued investment in

America's future. We thank our customers for the support and trust they've

shown us. We look forward to challenging ourselves to create new products and

services that bring value to our customers and society during the next 50 years.

One of Honda’s main competitors is Nissan, another Japanese car company.

We will compare the demand between the two company’s family sedan sales in

the US.

Demand Analysis

The demand of one Honda’s most popular vehicles, its family sedan, the Honda

Accord is given below according to US sales volume.

YearHonda Accord

U.S. SalesBase MSRP

2002 398,980 $15,500

2003 397,750 $15,800

2004 386,770 $15,900

2005 369,293 $16,295

2006 354,441 $18,225

2007 392,231 $18,625

2008 372,789 $20,360

2009 287,492 $20,905

2010 282,530 $21,055

2011 235,625 $21,380

In graph form, we see the downward-sloping curve of the Honda Accord’s

demand according to price in the past decade.

200,000 250,000 300,000 350,000 400,000$0

$5,000

$10,000

$15,000

$20,000

$25,000

f(x) = − 4.9481747537E-13 x³ + 2.69244251247E-07 x² − 0.050178541030016 x + 24778.2605286374R² = 0.701882667033808

Series2Polynomial (Series2)

We can the compare the data with Nissan Altima sales volumes in the past ten

years as well.

YearNissan Altima

U.S. SalesBase MSRP

2002 201,822 $16,649

2003 201,240 $16,749

2004 235,889 $16,850

2005 255,371 $17,450

2006 232,457 $17,750

2007 284,762 $17,950

2008 269,668 $18,620

2009 203,568 $19,900

2010 229,263 $19,900

2011 268,981 $20,270

Nissan Altima demand in relation to base MSRP given in graph form:

200,000 220,000 240,000 260,000 280,000 300,000$0

$5,000

$10,000

$15,000

$20,000

$25,000

f(x) = − 2.89364452833E-12 x³ + 1.959666848328E-06 x² − 0.425494335850096 x + 47576.6117420273R² = 0.0661388057411204

Series2Polynomial (Series2)

Price Elasticity

Given the formula for calculating price elasticity,

ED=

we can calculate the price elasticity for each year starting from the second year

of the data, 2003. Let us start off by looking at Honda.

Honda Accord 2003

[(397,750-398,980)*($15,800+$15,500)] / [($15,800-

$15,500)*(397,750+398,980)] = -.1584

Inelastic

Honda Accord 2004

[(386,770-397,750)*( $15,900+$15,800)] / [( $15,900-

$15,800)*( 386,770+397,750) = -4.4366

Elastic

Honda Accord 2005

[(369,293-386,770)*( $16,295+$15,900)] / [( $16,295-

$15,900)*( 369,293+386,770)] = -.0231

Inelastic

Honda Accord 2006

[(354,441-369,293)*( $18,225+$16,295)] / [( 354,441-369,293)*( $18,225+

$16,295)] = 1

Unitary elastic

Honda Accord 2007

[(Q2-Q1) × (P2+P1)][(P2-P1) × (Q2 + Q1)]

[(392,231-354,441)*( $18,625+$18,225)] / [( $18,625-$18,225)*( 392,231

+354,441)] = 4.6626

Elastic

Honda Accord 2008

[(372,789-392,231)*( $20,360+$18,625)] / [( $20,360-$18,625)*( 372,789

+392,231) = -.5710

Inelastic

Honda Accord 2009

[(287,492-372,789)*( $20,905+ $20,360)] / [( $20,905-$20,360)*( 287,492+

372,789)= -9.7812

Inelastic

Honda Accord 2010

[(282,530-287,492)*( $21,055+$20,905)] / [( $21,055-$20,905)*( 282,530+

287,492)]= -2.4350

Elastic

Honda Accord 2011

[(235,625-282,530)*( $21,380 + $21,055)] / [($21,380-

$21,055)*( 235,625+282,530) = -11.8195

Elastic

Let us compare the elasticity of the Accord to Nissan’s family sedan, using sales

figures for the past decade.

Nissan Altima 2003

[(201,240-201,822)*( $16,749+$16,649)] / [( $16,749-

$16,649)*( 201,240+201,822)] = -.4822

Inelastic

Nissan Altima 2004

[(235,889-201,240)*( $16,850+$16,749)] / [($16,850-$16,749)*( 235,889+

201,240) = 26.3685

Elastic

Nissan Altima 2005

[(255,371-235,889)*( $17,450+$16,850)] / [($17,450-$16,850)*( 255,371 +

235,889)] = 2.2670

Elastic

Nissan Altima 2006

[(232,457-255,371)*( $17,750 +$17,450)] / [($17,750-

$17,450)*( 232,457+255,371)] = -5.5113

Elastic

Nissan Altima 2007

[(284,762-232,457)*( $17,950+$17,750)] / [($17,950-

$17,750)*( 284,762+232,457)] = 18.0512

Elastic

Nissan Altima 2008

[(269,668-284,762)*( $18,620+$17,950)] / [($18,620-

$17,950)*( 269,668+284,762)] = -1.4860

Elastic

Nissan Altima 2009

[(203,568-269,668)*( $19,900+$18,620)] / [($19,900-

$18,620)*( 203,568+269,668)] = -4.2033

Elastic

Nissan Altima 2010

[(229,263-203,568)*( $19,900+$19,900)] / [($19,900-

$19,900)*( 229,263+203,568)] = undefined

Nissan Altima 2011

[(268,981-229,263)*( $20,270+ $19,900)] / [($20,270-

$19,900)*( 268,981+229,263)] = 8.6545

Elastic

Cross Elasticity

We will calculate the cross price elasticity of the Honda Accord to the Nissan

Altima by using the following formula:

Percentage change in quantity demanded of product-x divided by percentage

change in price of product-y

Year Change in Demand of

Accord

Change in Price of

Altima

Cross-Price

Elasticity

2003 -0.31% 0.60% -0.51

2004 -2.76% 0.60% -4.58

2005 -4.52% 3.56% -1.27

2006 -4.02% 1.72% -2.34

2007 10.66% 1.13% 9.46

2008 -4.96% 3.73% -1.33

2009 -22.88% 6.87% -3.33

2010 -1.73% 0.00% undefined

2011 -16.60% 1.86% -8.93

Regression Analysis

Cost Analysis

Year Output VC FC TC AFC AVC ATC MC

2011

235,625 16,683,000 5,883,00022,566,00

024.97 70.80 95.77

2010

282,530 14,312,000 4,959,00019,271,00

017.55 50.66 68.21

-0.014235205

For simplification purposes, we will consider the Research and Development

Expenses of Honda as fixed costs and Selling General and Administrative

expenses as variable costs. These costs are related to all the products that the

company sells, not strictly the Honda Accord. For simplification purposes, and

for this case study, we will assume that the Accord only product that Honda sells,

in order to demonstrate the cost structure of the company.

Numbers in Thousands

Profit Analysis

Year Revenue Cost Economic Profit

2012 96,581,000 21,838,000 74,743,000

2011 107,829,000 22,566,000 85,263,000

2010 91,815,000 19,271,000 72,544,000

Numbers in Thousands

Profit rose in 2011 but has decreased this past year.

Conclusion

The structure of the auto industry is an oligopoly. Economics Online describes

an oligopoly as

An oligopoly is a market structure in which a few firms dominate. When a market

is shared between a few firms, it is said to be highly concentrated. Although only

a few firms dominate, it is possible that many small firms may also operate in the

market. For example, major airlines like British Airways (BA) and Air France

operate their routes with only a few close competitors, but there are also many

small airlines catering for the holidaymaker or offering specialist services.

Bibliography

"2011 Honda Accord Specs and Features." MSN Autos. N.p., n.d. Web. 06 Dec. 2012.

"2011 Nissan Altima Specs and Features." MSN Autos. N.p., n.d. Web. 06 Dec. 2012.

"^GSPC Historical Prices } S&P 500." Yahoo Finance. N.p., n.d. Web.

"HMC Historical Prices - Yahoo! Finance." Yahoo! Finance. N.p., n.d. Web. 06 Dec. 2012.

"HMC Income Statement." Yahoo Finance. N.p., n.d. Web.

"Honda Accord Sales Figures." Good Car Bad Car. N.p., n.d. Web.

"Nissan Altima Sales Figures." Good Car Bad Car. N.p., n.d. Web. 06 Dec. 2012.

"Oligopoly." Economics Online. N.p., n.d. Web. 06 Dec. 2012.

Attachments

Source: http://www.autoblog.com/2012/11/02/honda-marks-30-years-with-200-

million-upgrade-200-new-jobs-in/