The European headquarters of a Japanese automotive company aren’t necessarily where you would expect to have a conversation about philosophical values. And this is especially true when those headquarters lie in the urban abyss of Slough, a bleak industrial corridor to the west of London. But as Honda’s philosophies of ‘respect for the individual’ and the ‘three joys’ (buying, selling and creating) are central to everything the company does, it is impossible to understand the world’s leading motorcycle manufacturer without appreciating just how much those values matter.
Graeme Middleton, Honda’s European group treasurer, says the values apply as much to treasury as any other function. “Everyone who comes into contact with our company should be respected and trusted as equal partners, sharing the ‘joys’,” he explains. “This includes all our banks, financial institutions and investors. We expect that our core bank relationships develop on a foundation of respect, transparency and trust, and with a view to a longer-term relationship. Personally, I want our banks to gain a greater understanding of our company and the core philosophy of Honda, to share in the joys of our business, and, wherever possible, become our customers.”
By his own admission, Middleton’s Japanese is “not very good”, but he says that’s not a barrier to him communicating with the Japanese FD for Honda’s European, Middle East and African region. “I’ve seen several finance directors come and go, and you learn how to speak to them in English that they understand,” he says.
Honda’s European region has a strategy of standardising and consolidating its back office functions, and treasury falls within this programme. The European treasury team is supported by a back office function in Kraków, Poland, that carries out pooling, sweeping and cash forecasting activities. This frees up the central treasury function to act as a centre of excellence with responsibility for managing financial risk, including bank relationships, hedging and financing strategies. The development and introduction of a new cash management system during 2008/9 enabled treasury to move funding away from the entities in each of the countries and consolidate it in the centre; it also meant that it could start to rationalise its banks. So when the financial crisis struck, Honda’s European treasury was already ahead of the game in terms of improving efficiency compared with some other functions. Meanwhile, the crisis gave Honda the leverage it needed to make changes right across the business.
This month, Honda is legally merging most of its European sales subsidiaries into its main European holding company, Honda Motor Europe, and the company will henceforth operate branches in the different European territories. Middleton says the merger is “fairly straightforward” from treasury’s point of view, although challenges lie in ensuring that all local overdraft facilities and guarantees, and numerous bank accounts, are transferred to Honda Motor Europe.
From Middleton’s perspective, Honda’s focus on consolidation presents an interesting opportunity for him to develop treasury as a strategic function, making more input into the decisions taken by the company. “That way we can help to mitigate risk before it is finally passed to us to manage,” he says, adding that he sees the ‘strategic treasurer’ as the route that the treasury profession in general will go down over the coming years. “But it does require some persistence on our part as treasurers for our voices to be heard and for this to be accepted as a key part of our future.”
Everyone who comes into contact with our company should be respected and trusted as equal partners, sharing the ‘joys’
Honda’s business model is about providing quality products at affordable prices (whether those are cars, motorcycles or power products) and excellent customer service. This ethos is therefore reflected in its treasury function. “All roads lead to treasury to a certain extent. We want to provide a treasury that works in an optimum way, at as low a cost as possible, while providing a great service,” says Middleton. “We used to call it ‘the best treasury in the community’ experience. It’s striving to be the best you can be.”
He acknowledges, however, that although a goal of excellence sounds great, “it’s not that easy to achieve”. It’s not just about key performance indicators, he says, “it’s also about benchmarking the service to the business. If someone wants to do something and they haven’t considered the impact of financial risk or FX risk, they can come straight to treasury so we can advise them on that.”
The European treasury team manages FX risk and interest rate risk, although it does not currently use interest rate derivatives. Global commodity risks – for example, precious metals for catalytic converters – are hedged within another division of the company in Japan. But Honda aims to limit exposures through netting and ‘natural hedges’ as much as possible. “Our first priority is to eliminate FX risk where we can by locating factories in regions and, where possible, purchasing parts in countries and currencies that match our sales currencies,” says Middleton. This fits with Honda’s production philosophy of producing where demand exists. The main European manufacturing facility in Swindon produces the majority of Honda products sold in Europe and sources parts from suppliers across the continent.
Honda has had first-hand experience of putting disaster planning into practice following the calamitous earthquake off Japan’s east coast in March 2011, which killed more than 15,000 people and left nearly 3,000 still missing. “2011 was a difficult year for Honda globally and we suffered sharply lower automobile production due to supply chain disruptions caused by the earthquake in Japan and floods in Thailand that damaged manufacturing facilities there,” says Middleton. But Honda continued manufacturing, with reduced output, while its treasury needed to quickly revise forecasts and make “appropriate adjustments to hedges and funding plans”.
Honda’s European region and its treasury follow a policy of ‘regional self-reliance’, which means sourcing finance locally and independently of the parent company. Honda Motor Europe enjoys strong relationships with its Japanese banks and they provide it with reasonably priced credit facilities that have minimum covenants. It also looks to its non-Japanese core relationship banks to provide “competitively priced funding lines”, which they must do if they hope to bid for the group’s ancillary business. Honda wants to diversify its funding sources, but this inevitably comes at a cost.
Middleton is looking into the London Stock Exchange’s retail bond market, which would be a suitable fundraising platform for Honda Motor Europe as it is an unrated entity and can’t access the wholesale markets (unlike the group, which has a solid ‘A+’ long-term credit rating from Standard & Poor’s). “I like the idea of it because it fits in with Honda as a brand and allows customers to follow us,” he says. “But it is a comparatively expensive tool for us to use to raise finance and there are additional disclosure requirements.” Where cash reserves exist, they are reinvested within the region as much as possible. “In Europe, we are net borrowers,” says Middleton. “So we use all the cash in our group companies to offset against our funding requirements, thus reducing our loan balance and eliminating the relevant spread costs.”
After more than 27 years in finance at Honda, Middleton is very loyal to the brand and its philosophies, saying the latter have remained intact over all that time. He recalls meeting group founder Soichiro Honda in 1987 when he was in the UK for the London to Brighton veteran car rally. Honda paid a visit to the company’s then office in Chiswick. “He made a point of shaking everyone’s hands,” says Middleton. “The values have always been the same and come from Soichiro Honda himself.”
2009-present
European group treasurer, Honda Motor Europe
2002-2009
Manager, treasury, Honda Motor Europe
1997-2002
Assistant manager, treasury/project manager, Honda euro implementation project, Honda Motor Europe
1991-1997
Treasury analyst, Honda Motor Europe
1985-1991
Assistant management accountant, Honda UK
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“Obviously, my favourite gadgets are my BlackBerry and my iPad. But from a more practical perspective, my Honda satellite navigation system – otherwise I would always be lost somewhere. I also have my eye on a Honda Miimo, our new robotic lawnmower, which is available this spring.”
“Honda’s global brand slogan is ‘The Power of Dreams’. I have worked extremely hard to achieve my goals, but without self-motivation and a continuous belief that I can realise my dreams, I would have achieved nothing. I also have an understanding wife and a loyal and supportive team alongside me.”
“What is the most difficult question that my FD is most likely to ask? Hmm, that’s tricky – perhaps something in Japanese?”
“The best way to wind down after a stressful day is playing the football game FIFA 13 on my iPad. I just can’t put it down – it drives my wife mad.”
Sally Percy is editor of The Treasurer
Photos by Charlie Best
