Honda to tread warily in Latin America car market

TOKYO, Sept 6 (Reuters) Honda Motor Co will expand at a measured pace through its higher-end models in South America, steering clear of the rapidly expanding low-cost segment for now, the head of its regional operations said on Thursday.

Honda, Japan's second-biggest automaker and the world's top motorcycle maker, recently announced a 0 million investment in Argentina to build 30,000 compact cars a year starting in the latter half of 2009, after doubling its Brazilian car output capacity to 100,000 units this year from 2003 levels.

But Sho Minekawa, a Honda board member and chief operating officer for its Latin American operations, said the automaker is still a niche player selling a small number of ''premium'' cars with engines larger than 1 litre, and stressed that attacking the big-volume, cheaper segment is not feasible now.

''The 'Big Four' brands have the market for entry-level cars cornered,'' he told a small group reporters in an interview, referring to Italy's Fiat SpA, Volkswagen AG, General Motors Corp and Ford Motor Co, which account for the bulk of the Brazilian and other South American markets.

''It's a very difficult market for us. We're still at a stage where we're building a foundation, and we're going to do that in the premium segment,'' he said. Honda competes in that second-tier group with PSA Peugeot Citroen, Toyota Motor Corp, Renault SA and other brands.

Honda expects its sales in Latin America to come to roughly 100,000 cars this year, up from 91,000 in 2006 and a fraction of the nearly 4 million cars it expects to sell globally in 2007.

With the added capacity in Brazil, Honda hopes to expand sales in the region to about 120,000 units in 2008, Minekawa said, representing less than 4 percent of the total market.

COST CHALLENGE Minekawa, who took his post in April, acknowledged that the biggest volume growth in Brazil, which accounts for about 60 percent of the South American car market, would likely occur in the entry-level segment of small cars priced around 30,000 reais (,000).

But he stressed that bringing down production costs was difficult due to a dearth of competitively priced components.

That was keeping a cap on locally procured content and made it difficult for Honda to compete with more established players, he said.

Honda's two main models in South America -- the Brazil-built Fit subcompact and the Civic sedan -- sell for around 48,000-50,000 and 70,000-80,000 reais -- nowhere near Volkswagen's popular Gol car, which Minekawa said was based on a platform dating back decades.

Economies of scale are also difficult to achieve since most of the cars sold in Brazil are based on a ''flex-fuel'' powertrain that can run on any combination of ethanol and gasoline. The rest of South America mainly drives gasoline-engine cars.

The relatively high running costs notwithstanding, Minekawa said Honda's profit structure in Latin America was ''stabilising'', largely thanks to its big and growing motorcycle business.

Last month, Honda, which accounts for about three-quarters of South America's motorcycle market, reached cumulative motorcycle production of 10 million units in Brazil since its 1976 start.

''There's much more room for motorcycle demand to grow,'' Minekawa said.

REUTERS SR PM1740