Can Honda Make All the Cars it Can Sell (or Sell All the Cars it Can Make)?

Honda factory ads that were airing in early April ended with a booming two-word announcement: "Big Inventories."

The fact that the OEM is heralding large stocks with such gusto in the middle of a sales upturn –March daily sales were higher than in any month since May 2008 - illustrates the extent of the company's year-long struggle to bring supply in line with demand.

Honda’s inventory plummeted over the summer in the wake of production disruptions caused by Japan’s March earthquake and tsunami, and the company pushed back a number of new model introductions.

But while the auto makers’ production facilities have been able to produce at capacity for months, Honda claims its year-over-year sales slip in March (against industry growth of 8.7%) was due to a total inventory and trim-level mix problem.

In Christie Schweinsberg’s story last week (Honda Blames Inventory Woes for March Sales Slump), American Honda executive vice president John Mendel says Honda “had not counted on the industry (being) as strong as it is” when it made 2012 projections in January, leaving the company with too little product in March.

In other words, decimated by misfortune in 2011, Honda wasn’t ready to bet on a brighter future – or at least a better share of the future. Toyota, meanwhile, put its plants into overdrive, and has seen sales increase steadily throughout the first quarter.

In the same story, Mendel asserts that Honda is getting a handle on its supply problems and should see better results in April. But when asked whether Honda could meet a short-term fuel-price related spike in small car demand akin to the one that occurred in 2008, he jokes: “I think we could, and we would end up in the same place we did in May of 2008: with no Honda Civics.”

Of course, Honda’s lack of product during the summer of $4/gallon gas, was no laughing matter. The company revered for high-quality small cars was left with a dearth of those vehicles just when consumers were most desperate for them. A repeat of that scenario would hardly help the company regain market position.

Honda’s prolonged supply problems may owe something to the company’s longstanding preference for lower-than-average inventories. And if Honda’s recent sales dip is basically an inventory problem, the solution is straight forward: build more cars.

But a year of low inventories, mix issues and delayed product launches may have left Honda’s competitors with a tighter grip on the company’s former market share than it would like to believe.

If Honda has finally filled its lots with cars and trucks, its next challenge is to prove it can still sell them.