Honda Motor Co's earnings will hit bottom this year and improve
beyond that as demand in the United States returns in the second half,
the Japanese automaker's chief executive said on Friday.

The last (January-March) quarter was the nadir, and things will
gradually start to improve in the first two quarters (of this year),
Takeo Fukui told Reuters in an interview.

I'm definitely expecting the second half to turn up, and on an annual basis I think this year will be the floor.

Battered by a sales slump in the United States, its biggest market,
Japan's No.2 automaker lost a net 186 billion yen ($1.95 billion) in
the fourth quarter of 2008/09, a reversal from a profit of 25.4 billion
yen a year earlier. For the year to March 2010, Honda has forecast a 71
percent drop in net profit to 40 billion yen.

A key element in the earnings deterioration across the industry in
the past year has been a double-digit sales slide in the United States,
which lost its claim to being the world's biggest auto market to China
this year. But Fukui said he believed the U.S. market had also reached
a bottom, projecting a recovery in the latter half of 2009.

A 10 million-unit (a year) market is abnormal for the United
States, he said. I think there's latent demand for 13 to 14 million
units annually, and we'll get back to that level at some point.

One worry was the possible disruption if Chrysler, which filed for
bankruptcy protection last month, dumped its cars on to the market from
its inventory, Fukui said.

While Fukui said he hoped that Chrysler's bigger rival, General
Motors Corp, would avoid Chapter 11, he said Honda -- and probably the
rest of the industry -- was making necessary preparations for the
possibility.

You can't just assume that it won't happen and hope for the best, he said.

QUALITY-RELATED COSTS DOWN

Honda was the only top Japanese carmaker to stay in the black last
year as Toyota Motor Corp and Nissan Motor Co lost money, and
executives have cited its profitable and world-leading motorcycle
business as a major boost.

But Fukui said another factor that gets little mention was the vast
drop in warranty and other costs last year after a lengthy process of
fixing quality issues finally began to bear fruit.

The initiative started during my predecessor's tenure and it's been
a long and painstaking process. We finally saw the results of that last
year, said Fukui, who will step down as CEO next month after six years
at the helm.

The improvement will grow from here onwards.

WORKING ON NEXT HYBRID

Honda's more visible strength lies in its line-up heavy in smaller
and fuel-efficient cars -- the most recent addition being the Insight
hybrid.

Fukui said response to the Insight has been good so far in the
United States, while Honda was focusing on trying to meet
better-than-expected demand in Japan.

Honda is scheduled to roll out a family of low-cost hybrid cars over
the next few years including a gasoline-electric version of the Fit
subcompact, and expects about one-tenth of its global sales to be
hybrids by around 2015.

Honda's hybrid system has the benefit of being simple and cheap,
with a single electric motor that assists the engine, but has the
disadvantage of being underpowered when mounted on bigger cars, unlike
Toyota's hybrid technology.

To overcome that shortcoming, Fukui said Honda was developing
various types of hybrid technologies including a twin-motor system that
would be better than Toyota's that could eventually power bigger
models such as the Odyssey minivan or Pilot SUV.

We'll have more variations, Fukui said, adding that Honda was also
working on a dual-clutch transmission to possibly be matched up with a
future hybrid system.