HNDAF - Honda Adopts The 'iPhone SE Strategy' To Turn Around Sales

Summary

• Honda’s unit volume sales in the U.S. fell by 33% in 2022, but saw a 14% rebound in January 2023.
• Honda is now guiding for 20%-25% unit growth for the U.S. market in 2023. This will be driven by all the new product introductions from the second half of 2022.
• Given the wide applicability of compact crossovers, it appears that Honda now has a new winner in the all-new HR-V, which launched in 2022.
• The Honda HR-V holds a similar place in the product portfolio as the iPhone SE does for Apple. It is maximum utility for a disproportionately lower price.
• As with the Apple iPhone SE, the Honda HR-V meets the needs of a large share of the buying public, but without the extras that drive up the price to nosebleed levels.

On January 25, 2023, a non-US-based automaker did something unusual, which these types of entities usually don’t do anywhere near this way: Honda USA (HMC) issued a comprehensive outlook for its U.S. business for the year that just started, 2023. This meant specific sales guidance as well as a description of the product introductions that are expected for the North American market in 2023:

American Honda Offers Outlook on 2023 U.S. Automobile Business

The key takeaway here is that Honda USA is guiding for 20%-25% unit growth in the U.S. for 2023 compared to 2022. This includes the blended total inclusive of its premium brand Acura, which would constitute approximately 12% of the total units sold in 2023. Honda does not need any significant new product in order to achieve these numbers, given the extraordinary number of important model lines that were introduced during the second half of 2022 and into January of 2023 -- more on that below.

Honda took this rare step of outlining this yearly outlook because of a combination of two factors:

1. US unit automotive sales in 2022 had been exceptionally bad: Down 33% from 2021. That’s a horrible result by almost any measure.

2. 2023 is looking better, however: One week later, Honda reported a 14% increase in January month sales. Not yet at the 20%-25% annual growth guidance, but a major step in the right direction.

One of the reasons that Honda did so poorly in the US market in 2022 was that it was in the middle of replacing most of its best-selling nameplates during the second half of 2022, with some not fully stocked until early 2023. That meant that there were fewer units to “sell out” during 2022 as it wound down those preceding generations with manufacturing switchovers happening earlier in the year.

Honda’s compressed second-half 2022 launch schedule

Usually, automakers spread their portfolio rejuvenations evenly over a 4-5 year cycle so that they don’t all happen at the same time. In this case, Honda had somehow painted itself into the unusual corner of launching many of them almost at the same time, only a few months apart -- instead of being evenly spread over a 4-5 year period. This included the best-selling CR-V, the Pilot, the HR-V and the Accord. What Honda USA would normally have done over approximately three years now happened in six months.

Honda’s budget “catch-all” model, the HR-V

In a hyper-competitive market, how does an automaker innovate and provide a product that fits a large segment of the population, without adding cost? This is about adding shareholder value by being smarter, defining a product in a way that gives the consumer what he needs, without paying for the things that aren’t needed.

The analogy with the $429 Apple iPhone SE

The right analogy here is the iPhone recommendation conversation. Those of us who have followed tech for decades have all gotten the question from some family and friends: “Which iPhone should I buy?” Most people who only read headlines and implicitly assume unlimited budgets will suggest the latest flagship, such as the current iPhone 14 ( AAPL ). The latest version of Apple’s flagship phone series (12, 13, 14 etc.) now starts at an already whopping $999 but can cost significantly more depending on configuration, when it is initially launched every Fall.

On the other hand, my standard answer to any regular person who isn’t a professional photographer or has some other advanced or special need, is the iPhone SE. It starts at $429 plus tax and for what I estimate to be around 90% of users, is more than good enough for their actual needs -- as opposed to their status “wants.” The iPhone SE does everything a regular user could reasonably want, without having to pay two or three times as much for questionable additions.

It turns out that Honda wanted to make the automotive equivalent of the iPhone SE, because in the Summer of 2022, it launched an all-new vehicle that offers a value proposition similar to Apple’s budget phone: Everything that the normal consumer really needs, but none of the stuff that drives up the cost for questionable reasons. This car is the Honda HR-V.

The previous generation HR-V: Ugly at any speed

The HR-V nameplate had been used before, having been introduced into the US market in 2015, but it was a different product that had a narrower appeal, at least in principle. Its main party trick was a rear seat that folded up from the front of the seat cushion so that you could easily transport a tall object that had to stand straight up on the rear seat floor, such as a potted plant that you had bought at a nursery, or perhaps a small bicycle standing up.

The problem with the old HR-V was that this neat party trick was also its sole significant appeal. The previous generation HR-V was -- and there is no way to say this nicely -- just plain ugly. It had an inadequate powertrain and didn’t drive as well as most competitors. Unless you were very “anti” good-looking and good-driving cars or absolutely needed the rear seat cargo party trick, you would avoid the old Honda HR-V.

That said, the Honda HR-V sold respectable quantities since its first-generation introduction to the US market in 2015:

Data Source: Honda USA monthly sales reports

Annualized sales were relatively stable through 2020 at 82,000 to 99,000 per year. In 2021, during the last year of the old generation HR-V’s life, sales suddenly skyrocketed approximately 50% from its run-rate during the previous half-decade. It is unclear why this happened, but in the aftermath of 2020, 2021 and 2022 were both years of unusual supply chain shortages that were in some cases filled with rare occurrences of glut where double-ordering had occurred. That may explain the sudden ability to produce more of these particular HR-V units: Anything that got produced, got sold easily.

The new generation HR-V: Completely new from the ground up

Honda has a small iconic vehicle that most automotive journalists agree sets the standard for affordable car refinement all around: The Civic. We have known it for half a century and have almost come to take it for granted. In its most recent iteration, which was ready for the 2022 model year, it is better than ever.

The only problem with the Honda Civic is that it is not a crossover-SUV -- and Americans now want almost nothing else. Sedans and small hatchbacks are out of fashion, at least when they are described as such. This is where Honda saw its new opportunity: How about we make the new HR-V into simply the crossover version of the Civic?

This subcompact crossover space is now defined into such thin segment slices that it becomes hard to keep up who is really a direct competitor. Each vehicle “near” this segment has a slight variation on market positioning.

In the case of the Honda HR-V, one might narrow down its defining segment characteristics with these points:

• It’s a low-slung crossover that is closer to a regular hatchback or station wagon, than something taller and more upright. That’s unlike, say, the VW Taos and Nissan Rogue Sport (Qashqai outside North America) which are taller vehicles.

• It is offered in both front-wheel drive ((FWD)) and all-wheel drive (AWD), unlike the Nissan Kicks (which is FWD only) or the Subaru Crosstrek (which is AWD only).

• There is no powered rear liftgate -- just like the Kia Seltos.

As a result, almost any comparison will show that the Honda HR-V is ever-so-slightly different than many ostensible “almost, but” competitors. Yet, that alone doesn’t make it the iPhone SE of automobiles.

What makes the iPhone SE such a good recommendation for most Apple phone buyers, is that it retains all the relevant strengths of (much) more expensive models. In the Honda HR-V you will find the same qualities, in principle.

HR-V: No ugly duckling anymore

Before we get to the inner qualities, we start with the outer ones. Forget the ugly duckling HR-V-labeled vehicle of yore. This new generation HR-V is a handsome creature that will not bring aesthetic shame to any driveway. As with the iPhone SE, it gives the user all the essential look and feel of portfolio stablemates that cost twice or thrice as much.

Interior perfection

What you really use as a driver starts with the interior. In the 2022 HR-V, Honda found perfection. While many vehicles attempt to reinvent user interface concepts, the HR-V managed to blend tried-and-true knobs and buttons with an upmarket look and feel to shapes and textures. Easy to use and pleasing to the eyes and fingers -- what more could you want?

An engine made out of silk

Engines -- ranging from lawnmowers to motorcycles -- have typically been Honda’s strong suit, although the previous generation HR-V from a couple of years ago was a relative exception. In the new generation HR-V, Honda is back in the silky-smooth engine game. Often enough, the entry-level nameplates may be fuel-efficient, but you take no pleasure in applying full throttle because of vibration and noise.

Not so with the all-new HR-V. The sound and silky-smooth vibration characteristics make it a joy to spin to the max. Combine all that with the perfect seat, seating position, steering wheel and overall driving dynamics, and you will want to drive the modestly powered HR-V like a premium sports car, even if it lacks the actual power of a muscle car.

That is another way of saying that despite its sub-$30,000 price, you will get as much pleasure and utility from the Honda HR-V as you would get from comparing an Apple iPhone SE to its more expensive numbered brothers. Few people “not in the business” would know that you might have paid $28,000 instead of $65,000, without looking at the badge and consulting a search engine.

Honda needed something better below the CR-V

Honda’s best-selling vehicle in the U.S. market for the last few years has been the CR-V, which has also generally been the second-best-selling non-pickup truck in the U.S. market -- after the Toyota ( TM ) RAV4. The CR-V, however, is a larger and more capable vehicle. It comes with an optional powered rear liftgate, and it can be had with a hybrid powertrain.

The smaller HR-V has less power and fewer options than the CR-V. As with the Apple iPhone SE, it is meant for maximum value in a slightly smaller package. Yet, it has most things that most people want. As such, expect its sales to cannibalize the CR-V. Hey, it’s better that Honda cannibalizes its own product than that someone else does it.

Flaws: Yes, one

From what I have written until this point, you might think that the HR-V is flawless. It is not, because I found one downside that is not natural to this segment: Fuel economy. I drove it for a week and managed “only” 27 MPG. That happy-revving engine comes at a price!

27 MPG may have been a great number a couple of decades ago. However, this is 2023 and there are vastly larger and/or more capable products that yield better. I will give you just two examples of cars I drove recently that bracketed the expectations:

• The base Kia Seltos, which is as close of a direct competitor to the Honda HR-V as it gets, is rated at 31 MPG -- but I have achieved 40 MPG in real life.

• Ford’s hybrid vehicles -- Escape crossover and its pickup truck sister, the Maverick -- are rated around 40 MPG but I achieved a whopping 47 MPG in real life.

Yes, the Honda HR-V isn’t a hybrid -- but it is smaller and lighter. And the Kia Seltos isn’t a hybrid either. Yet, those vehicles deliver dramatically better MPG than the Honda. Go figure.

Yet another analogy with the Apple iPhone SE

The Apple iPhone SE has a similar kind of drawback to the Honda HR-V: Price. One might argue that it is the phone equivalent to MPG in a car.

You see, while $429 is the clear value leader among iPhones, it is still expensive when you compare against relative budget Android phones. $429 is also for a 64 gig version, with a more realistic 128 gig being $50 more, or $479. A healthy 256 gig is $579.

In contrast, you can find decent Android phones for under $300. Who cares about $130-$280, you may ask? Well, that’s anywhere from a 43% to a 93% markup. Many people care about that, because unlike many readers of this column, there are over 100 million Americans who live on a somewhat meaningful budget. Paying 43% to 93% more makes many people hesitate -- and for good reason.

For this reason, the HR-V’s paltry 27 MPG is a curious flaw in an otherwise flawless package. One may suspect that Honda has a future hybrid engine variant in mind. Even if it would cost an extra couple of thousand dollars, such a hybrid would-be version of this vehicle ought to realistically yield over 45 MPG, preferably closer to 55 MPG.

Price and value

The Honda HR-V comes in a few equipment grades, all with a choice of FWD and AWD, ranging mostly from $24,000 to around $30,000. It wasn’t more than a few single-digit years ago when a “basic car” was obtainable for $14,000 and this Honda HR-V would have started at $17,000. Oh how times have changed! Government regulations and inflation have done their “job.”

Yet, you get a lot of things for around $27,000 today that you did not get for $17,000 5-10 years ago:

• An upscale and beautiful interior with ergonomic perfection.

• A great-looking crossover exterior.

• A silky-smooth powertrain that makes you want to drive it like a sports car.

A smart move for Honda’s shareholders

Market demand for larger crossover-SUVs has been firmly established over the last quarter-century. This demand has even caused the minivan segment to shrink dramatically, at least in the U.S.

The new market trend over the last half-decade has been firmly to push this crossover-SUV craze into smaller and smaller sizes. With the old HR-V, Honda had a nominal entry that was not aspirational in any way, and was increasingly destined to lose market share as soon as industry supply bottlenecks normalized. Honda’s overall 33% unit decline in the U.S. market was a gut-punch to Honda’s shareholders.

With this all-new HR-V, Honda is again at the top of its game. It has an interior second to none, an attractive exterior, and despite its low nominal power it is fun to drive. Its only blemish is the abysmal fuel economy, which may be rectified with a future hybrid version.

As such, just like the Apple iPhone SE, it is an easy “standard recommendation” to almost any consumer, unless this person has a special requirement. Obviously the Honda HR-V is not the vehicle of choice if you have four kids, off-road on weekends or are looking to tow a horse trailer. It is however a natural choice for a single person or a small family without special or exotic vehicle needs.

As with the $429 iPhone, it shows that you don’t need to spend $40,000 to $65,000 to enjoy a sophisticated crossover vehicle experience. You can spend under $30,000 and probably be just as happy. And for this, Honda’s shareholders are now on track to reap the benefits already in 2024.

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