Honda Motor Company (HMC) Risk Factors

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 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.

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 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 manner at appropriate cost levels 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 supply of raw materials and parts and Honda's ability to compete with other users in obtaining the supplies. In case it becomes impossible to receive the supply of materials and parts from suppliers on a continuous basis or in case of losing any key supplier, this could lead to delays in or the suspension of Honda's manufacturing operations and a loss of Honda's competitiveness, which could adversely affect Honda's business and operating results. For example, a shortage in the procurement of semiconductors has become manifest for Honda, which has led to such effects as the suspension or decrease of production of automobiles at some of Honda's production bases in Japan and overseas. Moreover, purchasing and procurement risk could also significantly affect Honda's mid- and long-term initiatives, particularly regarding further electrification of the products, more widespread use and evolution of driver-assistive technologies, and further provision of mobility services.

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.

The suspension and delay in business activities such as production, development, purchasing and sales as a result of damage caused to Honda's operation sites and employees by earthquakes, floods, windstorms, infections and other natural disasters may adversely affect Honda's business and operating results. Also, if any of Honda's business partners suffer any such damage, or if there is any disruption of the infrastructure due to a natural disaster, this may adversely affect Honda's business and operating results.

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.

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. Meanwhile, the means of cyberattacks that take place have become more advanced and sophisticated, targeting organizations around the world. For example, on June 8, 2020, 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. Any additional cyber-attacks could have similar or more serious effects on our business, or substantially impact Honda's mid- and long-term initiatives, particularly regarding more widespread use and evolution of driver-assistive technologies and further provision of mobility services. There is a possibility that, in addition to external cyber-attacks, any equipment malfunction, any management deficiency or human error at Honda or within any of its subcontractors, or any natural disaster, infrastructure failure or any other unforeseen circumstances could also result in the suspension of important operations and services, leakage of confidential or personal information, inappropriate processing of documents and information, or the destruction or falsification of important data. 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 in or suspension of Honda's manufacturing operations, and a loss of Honda's competitiveness.

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.

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 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. This risk may be magnified by initiatives for other next-generation technologies such as provision of mobility services, which involve greater collection and management of personal information.

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.