Subaru: Japan's Hottest Car Company

Over the years, Subaru, the automotive unit of Japan's Fuji Heavy Industries, has carved out an image as a carmaker that goes its own way. While larger Japanese rivals have won plaudits for building reliable but sometimes dull cars, Subaru has specialized in making sporty all-wheel-drive cars and SUVs powered by turbocharged boxer engines. In 2009, Subaru is standing out from the crowd for another reason: Unlike most other automakers, it's enjoying hot sales. Through the end of October, Subaru sold 176,000 cars in the U.S., a rise of 13% on a year earlier. That's all the more impressive given the slump of the wider market, which is down 25%. What's more, among automakers that have sold more than 20,000 vehicles, only Korea's Hyundai and its subsidiaryKia—both benefiting from the weak Korean currency—have expanded sales at faster clips. "You might be surprised to see such drastic improvement in results," Ikuo Mori, Fuji Heavy's president said at press conference on Nov. 2. "We've got some good cars." For the timing being, expect Subaru's hot streak to continue. Mori has increased Subaru's annual sales forecast by 37,000, to 548,000 vehicles, and now expects to record sales of 204,000 in the U.S. Like all Japanese exporters, Subaru is still hampered by the strong yen, but the company at least expects a small operating profit for the six months through March 2010. It previously projected a $390 million loss. New Legacy and Outback modelsWhat explains Subaru's performance? It helps that it has replaced most of its lineup. It launched new versions of its Legacy sedan and Outback SUV this year; last year it launched a new version of its Forester SUV; and in 2007 it brought out the latest version of the Impreza compact. As a niche player with around 2% market share, Subaru may also be benefiting the practical appeal of its midsize Legacy and crossover SUVs, which inspire strong customers' loyalty. "Consumers are rushing to practical and useful cars. That's what Subaru is producing," says Mitsuru Kurokawa, senior market analyst at IHS Global Insight in Tokyo. Fuji Heavy executives, though, can claim some smart moves. Masatsugu Nagato, the executive in charge of overseas operations, points to factors that are spurring growth. Under Mori, he says, the company is making cars in tune with international customers and especially those in North America, which account for about 45% of unit sales. Until recently, analysts say, Subaru often developed with Japanese customers in mind or tended to produce cars that engineers thought would sell. "We have to make cars which customers want and, from our point of view, the U.S. remains the most promising market," says Nagato. These days the company is certainly listening. For instance, during the redesign of the new, fifth-generation Legacy sedan, Subaru conducted online surveys and interviewed customers and owners of other brand cars. The upshot? The company made a more luxurious model that's taller, longer, and wider; its extended wheelbase helps provide an extra four inches of rear-seat legroom. Reviews have been positive, with Consumer Reports rating the new Legacy "excellent." It is a similar tale with the recently introduced Forester and Outback models, which are larger than predecessors and, like the Legacy, winning plaudits. In 2008, Motor Trend magazine made the Forester its SUV of the year. This year, it gave the Outback the same award—the first time one automaker had bagged the prize two years running. Subaru LoveStill, it's not all about the cars. Savvy marketing is also helping. In the fall of 2007, Subaru handed its U.S. ad account to Minneapolis agencyCarmichael-Lynch. The agency created a campaign built around the strength of emotional ties between Subaru customers and their cars, including print and TV commercials and a "SubaruLove" Web site where Subaru owners write about their affections for their Forester or Impreza. As part of the launch of the new Legacy, one stunt even involved passersby in New York, Los Angeles, and Chicago being asked to run their hands along a car hooked up to an eight-foot-high "love-meter." That might sound corny, but there are signs the company has reached beyond its loyal core: While it made 17,000-plus sales under the cash-for-clunkers program, which ended in August, just 173 Subarus were scrapped. That suggests the large majority of people using cash-for-clunkers to buy a new Subaru had switched from a rival brand. Overseas chief Nagato adds that Subaru has also benefited from moves to bolster the finances of its U.S. arm earlier this year. At a time when even customers with good credit histories were struggling to get a car loan, Subaru arranged credit lines with J.P. Morgan (JPM) and the state-backed Japan Bank for International Cooperation. That meant "neither we nor our consumers experienced any confusion," says Nagato, a former banker with Mizuho, Japan's second-largest bank. He adds that in 2010 Fuji Heavy hopes Subaru will increase its U.S. dealer count by 25, to 625. For all that, there is plenty of work hard ahead. Fuji Heavy still expects to post a net loss for the full year. With 85% of its production at home—Subaru has just one plant, in Lafayette, Ind., outside Japan—the company is vulnerable to further strengthening of the yen. Fuji Heavy must also navigate a three-way tie-up with Toyota (TM), which doubled its stake in Fuji Heavy, to 17%, in April 2008, and its small car unit Daihatsu. As part of the deal, Fuji Heavy will stop making 660cc minicars and instead sell Daihatsu minicars badged as Subaru. From 2011, Fuji Heavy will also build a new rear-wheel drive sports car, currently known as the FT-86, for Toyota and make a Subaru version. Lacking a HybridIndustry watchers broadly welcome the changes, noting that Subaru is too small to do everything on its own, but warn that its brand could be watered down if customers perceive the cars as being engineered by Toyota. Some analysts also worry about Subaru's lack of hybrids and other environmentally friendly options. While on paper, the tie-up with Prius maker Toyota should help, combining Subaru's boxer engines with Toyota's hybrid system may be less straightforward in practice. "It's not an impossible thing to do, but it would probably be time-consuming and expensive," says Koji Endo, a managing director at Advanced Research Japan. "At the same time, Subaru has limited resources, and they cannot do everything themselves." Then there's the challenge of replicating recent success in North America in other markets. Nagato says he is keen to expand sales in China, which will overtake the U.S. as the world's biggest auto market this year. The signs are positive: Sales in the Middle Kingdom increased 81% through September, to 24,000 vehicles, and should reach a record 35,000 by the end of the year. But every Japanese-made Subaru car Fuji Heavy exports to China incurs a 25% import tax, making it far harder to compete with Toyota, Honda (HMC), and other rivals, which are producing locally with joint venture partners. Nagato admits the company may have to build cars but says it is difficult to justify a factory unless they can sell at least 60,000 to 80,000 cars a year. "My impression is that cars that appeal to American customers will be loved in China, too," he says. Rowley is a correspondent in BusinessWeek's Tokyo bureau

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