First loss in nearly 70 years since going public, Honda's electrification hits the brakes.

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On May 14, Honda Motor presented a financial report for the 2025 fiscal year (April 2025 to March 2026) that shook the global automotive industry.

Honda recorded a net loss of 423.9 billion yen (approximately 18.2 billion RMB) during this fiscal year, compared to a net profit of 835.8 billion yen in the same period last year. This is also Honda's first annual net loss since its IPO in 1957.

The direct culprit dragging this Japanese giant into the quagmire of losses was a massive impairment of 1.58 trillion yen. In the 2025 fiscal year, to stop further losses in time, Honda completely halted plans for three pure electric models slated for production in North America.

Honda's electrification transformation has simultaneously faced setbacks in both the Chinese and U.S. markets. In China, Honda continues to contract.

During the reporting period, Honda’s sales in China plunged 24% for the year, with total sales falling to 645,000 vehicles. This marks the fifth consecutive year of declining sales in China for Honda, and compared to its historical peak of over 1.6 million vehicles, its market share has sharply contracted.

Facing setbacks in both the Chinese and U.S. markets, Honda President Toshihiro Mibe made an extremely rare strategic concession at a press conference, acknowledging that the previously set target of fully phasing out gasoline cars by 2040 is no longer realistic under the current business environment.

At the same time, Honda announced a reversal, reallocating resources to focus on its traditional strength in hybrid powertrains, and gave a forecast to return to profitability with a net profit of 260 billion yen in the 2026 fiscal year.

This industry-shaking “historic first loss” and strategic adjustment, on the surface, appear as an expensive tuition for misjudging the pure electric strategy. Behind the financial data, it is a classic automotive giant undergoing an “extreme strategic shock therapy” in the era of smart cars, forced by the high cost of transformation, geopolitical trade frictions, and the multidimensional blows from Chinese carmakers.

Honda’s predicament is not unique. Before Honda’s financial report, Toyota also reported growing revenue but declining profits, while Nissan recorded a huge loss. Japanese automakers collectively are suffering from the pains of transformation.

01 Historic First Loss

Honda’s 2025 fiscal year financial data shows an extreme structural imbalance: “revenue growth without profit growth, two-wheel subsidizing four-wheel.”

According to the financial report, Honda’s sales revenue in 2025 increased slightly by 0.5% to 21.8 trillion yen. While revenue remained stable, operating profit plunged from 1.21 trillion yen in the previous year to an operating loss of 414.3 billion yen.

The direct cause of the profit decline was the significant asset impairment in the automotive segment. Honda’s massive impairment of 1.58 trillion yen was far more than a simple project overrun.

It is understood that this impairment covered Honda’s core investments in the early phase of large-scale electrification in the North American market. The three pure electric models halted included the planned 0 Series SUV, 0 Series sedan, and the Acura RSX EV. This not only means enormous sunk costs in R&D, but also compensation for supply chain breaches, liquidation of early joint ventures and alliances, and the write-off of assets during North American factories’ conversion from EV lines back to gasoline/hybrid lines.

This was a typical “financial clean-up,” with management attempting to shed the toxic assets from North American electrification failures through a one-time impairment, aiming for a lightweight balance sheet for the next fiscal year.

From the perspective of department profit contribution, Honda’s financial resilience now almost entirely relies on its motorcycle business.

The financial report showed that the motorcycle segment performed strongly in 2025, achieving departmental profits of 731.9 billion yen. By contrast, due to the massive EV-related impairments, the automotive segment recorded an operating loss of 1.41 trillion yen.

This means that the cash flow Honda accumulated from two-wheelers in emerging markets like Southeast Asia and India is now paying for its strategic mistakes in the North American and Chinese four-wheeler markets.

Despite the huge loss, Honda’s cash flow is not facing a break.

By the end of the fiscal year, net cash flow from operating activities still reached 1.13 trillion yen, with cash and equivalents rising to 5.12 trillion yen. This shows Honda’s losses are not from daily operations running dry, but from proactively restructuring its balance sheet.

However, amid continued weakness in the yen, the exchange rate gains that should have boosted profits for exporters were completely offset by changes in North American tariff policy and the heavy losses from EV projects. The disappearance of this exchange rate dividend is extremely rare in Japanese automakers’ financial reports and highlights Honda facing a severe profitability crisis in its core markets.

02 Double Pressure in China and US Markets

Honda’s current situation requiring extreme impairments is not sudden but the result of the underlying commercial logic being overturned in its two most important single markets, China and the US.

In China, Honda’s decline mirrors the collective retreat of Japanese joint venture automakers.

In the 2025 fiscal year, Honda’s sales in China stuck at 645,000 vehicles, a year-on-year plunge of 24% and the fifth consecutive annual decline. Since the peak of 1,627,000 vehicles in 2020, Honda has lost nearly one million vehicles in annual sales over five years, contracting over 60%. This steep decline is unmatched in any other market in Honda’s global landscape.

The basic gasoline car segment has continued to unravel. Civic monthly sales dropped from tens of thousands to just about 3,000 units; the Fit’s end-user sales in November 2025 went to zero, and the model has been discontinued.

Latest sales figures are equally bleak: According to Honda China, in April 2026, end-user sales were 22,595 vehicles. Both major joint venture manufacturers showed declines; according to Guangzhou Auto Group’s official report on May 6, 2026, GAC Honda’s April sales were just 5,100 units, down 72.42% year-on-year; Dongfeng Honda sold 17,495 units, also down significantly.

Clearly, the “reliability + large space” value Honda once relied on was quickly dismantled in the wave of consumer demand shifting toward smart cockpits and advanced driver-assistance systems.

Electrification performance was also poor. The e:N pure electric brand’s main model, e:NP1, sold only 787 units for the whole year. The “Ye” brand P7 saw sales drop to only a hundred units in its launch’s second month; S7 saw a forced price cut of 60,000 RMB within a month after launch. Neither model offered any notable intelligent features, while domestic brands intensified their focus on smart technology at the same time.

Bleak sales forced capacity cuts. Currently, Honda’s annual production capacity in China has fallen from 1.49 million units to 1.2 million units and will be further slashed to 720,000 units in 2026, less than half its peak.

Not until May 2026 did Honda announce a pivot to localized R&D and adoption of local suppliers such as Huawei. However, China’s NEV penetration rate is already close to 60%, local brand iteration cycles are only 18 months, while Honda’s R&D cycle is over 48 months. New models won't hit the market until 2027, which mismatches current NEV development rates.

The bleeding in the Chinese market has pressured Honda’s profit structure, and the traditional profit source in North America also saw problems in the same time frame. Previously, to respond to US policy guidance toward accelerated electrification, Honda set an aggressive electrification timeline.

However, since late 2024, as US regulations on fossil fuel emissions have relaxed, EV purchase subsidies adjusted, and charging infrastructure lagged, North America’s pure EV market growth slowed sharply. Consumers shifted back to hybrids, eliminating range anxiety.

Honda, with relatively weak pure EV technology reserves, tried to forcibly launch pure electric projects to seize market share, only to find its products could not compete with Tesla on cost and energy efficiency and also could not fend off traditional local automakers’ hybrid resurgence.

Meanwhile, changes in US tariff policy have increased export and local assembly costs for Honda’s gasoline and hybrid vehicles.

The threshold for scale effect has been significantly raised.

Facing the massive hundreds-of-billions-dollar capital drain from electrification and smartification, as a “midsize” automaker, Honda can no longer shoulder the costs of full-stack self-development alone.

This also explains why, after negotiations started in 2024, Honda and Nissan had to finalize a historic merger plan in 2025 and even invite Mitsubishi to join. The integrated super-group would become the world’s third-largest auto alliance after Toyota and Volkswagen.

However, only a month and a half later, negotiations broke off in February 2025. The two sides disagreed about governance structure: Honda wanted to make Nissan a subsidiary, while Nissan insisted on an “equal relationship.” They could not agree on shareholding and board seats.

A senior industry observer told Wallstreet Insights that the failure of the merger had far-reaching impacts on both companies’ strategies. For Honda, it lost an important option to share the cost of electrification through scale, which means it must shoulder technology and market investment alone in subsequent competition. For Nissan, the breakdown exacerbated its operating difficulties, forcing layoffs and global capacity cuts in 2025.

03 Reversal and Breakthrough

Toshihiro Mibe’s cancellation of the “100% electrification by 2040” target is, from a PR perspective, a humiliating retreat, but in real commercial terms, it is Honda’s realistic return to a strategic focus.

Facing an industry reshuffling over the next two to three years, Honda’s breakout path is clear: use hybrid technology to stabilize its cash flow basics.

Hybrids are being reestablished as Honda’s main profit engine for the next five years. Previously, Honda’s i-MMD hybrid system had global technology barriers in fuel economy and smoothness.

Honda management’s forecast of a 260 billion yen net profit in the 2026 fiscal year is based on increasing the proportion of high-margin hybrid models in North America and other markets where gasoline cars still dominate, offsetting stagnation in the pure EV business.

This strategy is similar to Toyota’s recent profit logic: Don't blindly invest in the pure EV hardware arms race until revolutionary battery technology—such as mass-produced solid-state batteries—is achieved, but instead harvest the last dividends from traditional technology frameworks.

However, retreating to hybrids does not mean Honda is abandoning its commitment to smart technology.

The pause in pure EV hardware is essentially to focus limited funds on reconstructing the core capabilities of smart cars.

Honda’s leadership is now clearly aware that the next generation of automobile competitiveness will be determined not by chassis and internal combustion engines, but by central computing platforms, operating systems, and massive data. In this area, the Afeela brand from the joint venture Sony Honda Mobility will play a critical role.

The Afeela project is not simply about selling units, but about Honda leveraging Sony’s advantages in semiconductors, sensors, and entertainment ecosystems to pilot whole-vehicle electronic/electrical architecture and cloud integration capabilities.

This long-term layout in intelligence will take time to materialize, but Honda faces far more urgent short-term pressure on profitability.

Honda expects to turn losses into profits in the 2026 fiscal year, with net earnings reaching 260 billion yen. This forecast is based on several assumptions, such as successful scaling of hybrid models in North America contributing significant margins, EV-related losses shrinking sharply from their 2025 peak, effective management of tariff impacts, and the decline in the Chinese market being contained.

The risk is that if any of these assumptions deviate, the profit target will be under pressure. The actual impact of US auto tariffs on import costs has yet to be fully apparent, competition in China shows no signs of cooling, and heavy short-term investment in the hybrid strategy will also increase R&D and capital expenditure.

For Honda, the “historic first loss” is not the end; it represents a comprehensive challenge at the turning point of industrial transformation faced by a traditional giant. Honda needs to make difficult rebalancing decisions between technology path choices, reevaluating regional markets, adjusting organization and governance, and speed versus scale.

Honda must also, through this fog, see its own coordinate clearly.

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