TOKYO, March 13 (Reuters) - Honda's ( HMC ) $15.7 billion writedown of its electric vehicle business is not just a painful reversal of its strategy for the U.S.; it also highlights more challenges to come from China, where it faces a widening technological gap.

On Thursday, Japan's second-largest automaker said it would restructure its EV business - primarily in the U.S. - and write down the value of some Chinese operations, a move that could amount to an estimated 2.5 trillion yen ($15.7 billion). It will also report its first annual loss in its nearly 70 years as a listed company, it said.

It said it would cancel three planned battery-powered models in the U.S., where demand for electric cars cratered after President Donald Trump ended related subsidies.

Battery-powered cars accounted for just 2.5% of Honda's ( HMC ) 3.4 million global sales last year, or about 84,000 vehicles. The scale of the writedown reflects the automaker's massive investment in research and development and production capacity as it sought to sell greater volumes of EVs, said Christopher Richter, an autos analyst at CLSA.

The automaker should have been quicker to pump the brakes on that investment once Trump returned to power, he said.

"They took too long contemplating this," he said. "They were cancelling these projects virtually on the eve of releasing them."

Honda ( HMC ) first unveiled two concept models for its "Honda ( HMC ) 0 Series," including the Saloon sedan, at the CES trade show in Las Vegas in January 2024 and it had expected to roll out the series' first vehicles this year, starting in North America. 

Those plans have now been scrapped, with the company cancelling the three models that were due to be built in the U.S.: The Saloon, the Honda ( HMC ) 0 SUV and the Acura RSX.

As part of the financial hit, the company is expected to experience cash outflows of up to 1.7 trillion yen, largely due to the cost of compensating suppliers.

"We were shocked by the sheer scale" of the writedown, said Seiji Sugiura, a senior analyst at Tokai Tokyo Intelligence Laboratory, the research arm of Tokai Tokyo Securities, in a note to clients.

"This decision was taken at an extremely delicate stage, just before mass production, after substantial budgets had already been committed - suggesting that it was a very tough call."

Honda ( HMC ) will now pivot to hybrids in the U.S. and will look to strengthen its line-up and cost competitiveness in India, where it believes it can expand, it said.

CHINA PERFORMANCE SIGNALLED DEEPER EV TROUBLES

While Honda ( HMC ) appears to be clearing the decks and putting the worst behind it, fixing its China business may prove a more daunting challenge. 

The automaker warned of its inability to keep up with newer companies in China, particularly because of their shorter development cycles and strengths in software-driven vehicles, including advanced driver-assistance systems.

"In such a difficult competitive environment, Honda ( HMC ) was unable to deliver products that offer value for money better than that of newer EV manufacturers, resulting in a decline in competitiveness," it said in a statement.

Vincent Sun, a senior analyst at Morningstar, said there was uncertainty about Honda's ( HMC ) longer-term ability to meet the technological challenge.

"The move raises my concern on Honda's ( HMC ) technological competitiveness in the long run," he said.

In China, the world's largest auto market, Honda ( HMC ) has launched several battery-powered models, but it sold only 17,000 last year, accounting for just 2.5% of its sales of around 677,000 vehicles in the country and just a fifth of its global EV tally.

Analysts also said Honda ( HMC ) could face an additional risk from its EV joint venture with Sony Group ( SONY ), Sony Honda Mobility, which is developing the Afeela sedan.

On Thursday, Honda ( HMC ) said the direction of the joint venture was being discussed, but nothing had been decided.

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