Vehicle Technology and Consumers

“Focus on the Future” Automotive Research ConferencesJohn German

American Honda Motor Co., Inc.November 10, 2008

Three powerful forces define Honda’s compliance strategy

1. Honda’s philosophy

2. The marketplace

3. Regulators – at both the federal and state level

Genuine concern for environmental and safety issuesHigh targets, ‘Challenging Spirit’Pursuit of new technologySolutions that also satisfy customer needs

Honda wants to be a company that society wants to exist

Wide FE Technology Application

2006 Model Year Data from the 2006 FE Trends Report, US EPA

*Pilot is larger and heavier than average mid-size SUV: 4750 ETW versus 4264 average

14

18

22

26

30

34

smallcar

mid-sizecar

largecar

smallSUV

mid-sizeSUV

largeSUV

mid-sizevans

largevans

smallpickup

mid-size

pickup

largepickup

MPG

(adj

uste

d co

mbi

ned) Industry Average

Accord

Civic

CR-V Odyssey

RidgelinePilot

Element

Hybrid TechnologyExpanded to our volume leader vehicle

Honda Hybrid Vehicle DevelopmentHonda Hybrid Vehicle Development

Mar. 2002Mar. 2002Mar. 2002

2nd2nd

Dec. 1999

1st1st

Enhanced Fuel Economyfor V6 engine

Enhanced Fuel Economyfor V6 engineDec. 2004 Dec. 2004

3rd3rd

Nov. 2005Nov. 2005

Higher power added to increase use

of hybrid vehicles

4th4th

4

Three powerful forces define Honda’s compliance strategy

1. Honda’s philosophy

2. The marketplace

3. Regulators – at both the federal and state level

Real Gasoline PriceReal Gasoline Prices

(2008 $ per gallon)

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

1950 1960 1970 1980 1990 2000Motor Gasoline Retail Prices, U.S. City Average, adjusted using CPI-U

Jun 08$4.07

Fleet Fuel EconomyReal Gasoline Prices and In-Use Fleet MPG

(2008 $ per gallon)

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

1950 1960 1970 1980 1990 20000

5

10

15

20

25

30

35

MPG

Car mpg

Car + Light Truck mpg

Real Gasoline Price

In-Use MPG from Transportation Energy Data Book: 2007

Gasoline Cost per MileReal Gasoline Cost for Cars - Cents per Mile

(2008 $ per gallon)

$0.00$0.02$0.04$0.06$0.08$0.10$0.12$0.14$0.16$0.18$0.20$0.22

1970 1975 1980 1985 1990 1995 2000 2005

Jun 08$4.07

Real Fuel Cost - % of Disposable IncomeReal Fuel Cost of Driving a Passenger Car 10,000 Miles

% of Per Capita Disposable Income

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

1970 1975 1980 1985 1990 1995 2000 2005

% o

f Per

Cap

ita D

ispo

sabl

e In

com

e

Jun 08$4.07

BEA, Table 2.1, Personal Income and It's Disposition

Turrentine & Kurani, 2004

• Out of 60 households (125 vehicle transactions) 9 stated that they compared the fuel economy of vehicles in making their choice.

• 4 households knew their annual fuel costs.

• None had made any kind of quantitative assessment of the value of fuel savings.

In-depth interviews of 60 California households’ vehicle acquisition histories found no evidence of economically

rational decision-making about fuel economy.

Has F/E Importance Changed?

30%

35%

40%

45%

50%

55%

60%

65%

70%

2001 2002 2003 2004 2005 2006 2007

Top

Box

Per

cent

Reliability

A Well Made Vehicle

Durability

Good Running Engine

Mfr's Reputation

Safety Features

Ease Of Handling

Price Or Deal Offered

Fun To Drive

Riding Comfort

Warranty Coverage

Value For The Money

Interior Roominess

Dealer's Service

Exterior Styling

Prev Exp w / Make

Fuel Economy

Exterior Color

Quietness

Vehicle's Image

Strategic Vision New Vehicle Owner Survey 2001 - 2007

The purchase importance of Fuel Economy did not change much from 2001 to 2007, despite 75% increase in fuel prices

FE

$1.76 $1.61 $1.85 $2.13 $2.51 $2.74 $2.88

F/E Importance by Segment

FE F/E Importance by Market Segment

0%

10%

20%

30%

40%

50%

60%

70%

Y 2002 Y 2003 Y 2004 Y 2005 Y 2006 Y 2007

% T

op B

ox

Entry/PremCompactEntry Midsize Car

Premium MidsizeCarFullsize Car

Entry Luxury Car

Mid Luxury Car

Prem/Lux SportCarPremium SportsCarSporty Car

Compact Pickup

Fullsize Pickup

Entry SUV

Strategic Vision New Vehicle Owner Survey 2002 - 2007

And only the Compact Car segments register a consistent, significant gain in the purchase importance of fuel economy.

Compact

Environmental Trends

Willing to Pay More for Environmentally Friendly Vehicle

0%

5%

10%

15%

20%

25%

30%

2005 2006 2007

Perc

ent A

gree

Stro

ngly

(Top

Box

)

$2.51 $2.74 $2.88

Consumers are, as a general rule, LOSS AVERSE

• Will decline a bet with even odds of winning $110 or losing $100.

• Gal (2006) shows that loss aversion can be derived from two simple postulates:– Consumers require a motive to act– Consumers have imprecise (fuzzy)

preferences

Uncertainty about several key elements of the net present value calculation makes an

expenditure on higher fuel economy a risky bet

• Sure, there’s a fuel economy label on every car but what MPG will I get?

• How long will my car last?• How much driving will I do?• What will gasoline cost?• What will I have to give up to get better

fuel economy? – and how much will it cost?

Innovator

EarlyAdopter

EarlyMajority Majority

Hanger-On

CustomerProfile

Insight-Prius-Civic

Hybrids: Who is the buyer?

Increasingly risk averse

Since 1987, technological advances have been used to improve attributes other than fuel economy

Car Data from EPA’s 2008 FE Trends Report

Fuel efficiency has increased by about 1.6% per year since 1987However, this has mostly been used to increase other attributes more highly valued

by the customer, such as performance, comfort, utility, and safety

9

12

15

18

21

24

27

30

33

36

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

900

1200

1500

1800

2100

2400

2700

3000

3300

3600weight

MPG

% manual

0-60 time

22

24

26

28

30

32

34

36

38

40

42

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

1981 wts, accel,& % manual

actual data

MPG

Customer Demand Summary

• Real fuel costs are low• Most customers value other attributes

higher than fuel economy• Most customers are Risk Averse

Three powerful forces define Honda’s compliance strategy

1. Honda’s philosophy

2. The marketplace

3. Regulators – at both the federal and state level

New Vehicle Regulations

• Congress has established new CAFE standards• Next Administration (and possibly Congress) will

address GHG at the federal level• California

– The Pavley standards are on hold for the moment• EPA denied waiver – new Administration could reverse• Preemption issue still in litigation

– Because of the direct relationship between CAFE and GHG reductions, California regulations would force even higher fuel economy than the new CAFE standards

–ZEV mandate will require PHEVs/EVs/FCVs

New CAFE law is a game changer• Honda supported new CAFE law, but it is very

challenging– 35 mpg by 2020 overall

• Annual improvement over twice historical rate • All must go to fuel economy, not other attributes

– “Maximum feasible” standards through 2030• NHTSA’s proposed 2011-15 standards very stringent

– Average 4.5% annual increase– Only 3.3% annual increase needed to reach 35 in 2020

• Attribute-based standards fundamentally alter the competitive landscape

– No advantage to making smaller vehicles – just results in a higher standard to meet

– Regulating technology, not fuel economy

i-VTEC

InsightＩＭＡ

CivicＩＭＡ

Cylinderdeactivation

GasolineDI

i-DSIＶ６

i-DSI

AccordＩＭＡ

High efficient gasoline engine

Clean diesel

HEV expansion

Base engine improvement

Diesel

CO2

redu

ctio

n

FCV development for futureＦＣＶ

Fleet test

Research for mass production

GasolineHCCI

Civic GXCNG

GlobalＩＭＡ

No single solution –

multi-pronged approach

Honda’s Powertrain Progress for CO2 reduction

BatteryBattery

InverterInverterEngineEngine

TransTransMotorMotor

2) Integrated Motor Assist2) Integrated Motor AssistBatteryBattery

EngineEngine

InverterInverter

GeneratorGenerator

Power SplitPower SplitDeviceDevice

MotorMotor

InverterInverter

3) Power3) Power--SplitSplit

Basic Hybrid System Designs

1) Belt1) Belt--Driven Alternator/StarterDriven Alternator/Starter

GM/BMW/Chrysler 2GM/BMW/Chrysler 2--mode mode is a poweris a power--split variationsplit variation

Hybrid System Attributes

ModerateExtendedModerateExtendedCrank to idle>100vPower-

split

LimitedModerateModerateExtendedCrank to idle>100v

ModerateModerateModerateCrank to idle<100vIMA

integrated motor assist

LimitedModerateModerateCrank to idle42v

LimitedLimitedYes12vBAS belt-driven alternator

starter

Electric drive

Launch/Power assist

Alternator support

Regen brake

Stop/start

Benefits, complexity, and cost increase together

Evolutionary Direction of Hybrid TechnologyEvolutionary Direction of Hybrid TechnologyCO

2re

duct

ion

rate

(%

)

10

20

30

40

0

Cost reduction and performance enhancementCost reduction and performance enhancement

* US Combine mode* US Combine mode

Gasoline--Diesel

Gasoline

VCMI-DSI I-VTEC

COSTCOST

Hybrid TechnologyHybrid Technology

expensiveexpensive

IMA: Integrated Motor Assist IMA System Overview

IMA battery Inverter

High-efficiency engineHigh-efficiency engineMainMain

Motor-assist mechanismMotor-assist mechanismAuxiliary powerAuxiliary power

Honda Hybrid System

• i-VTEC IMA: 3-stage VTEC + motor• Certified as an AT-PZEV• EPA city/highway rating of 40/45 mpg2008 Civic Hybrid & IMA System

Hybrid TechnologyExpanded to our volume leader vehicle

Honda Hybrid Vehicle DevelopmentHonda Hybrid Vehicle Development

Mar. 2002Mar. 2002Mar. 2002

2nd2nd

Dec. 1999

1st1st

Enhanced Fuel Economyfor V6 engine

Enhanced Fuel Economyfor V6 engineDec. 2004 Dec. 2004

3rd3rd

Nov. 2005Nov. 2005

Higher power added to increase use

of hybrid vehicles

4th4th

4

2009Insight

• All new• More affordable

5th5th 6th6th

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