TOKYO – Just like the little engine that could, Subaru-maker Fuji Heavy Industries Ltd. keeps chugging away.

Defying most industry prognosticators, Japan’s smallest car maker weathered the past year’s financial storm relatively intact and, if the Japanese fiscal year had begun in July rather than April, it would be on track to sell a near record 600,000 vehicles in fiscal 2009.

As it is, with sales in the U.S. expected to top a record 200,000 units, Fuji is projecting a worldwide total of 545,000 cars and cross/utility vehicles.

And the Tokyo-based car maker is profitable again.

Management is projecting second-half earnings of ¥12.4 billion ($138 million), which if it meets target would give it a full-year ¥1 billion ($11 million) operating profit. Back in May, the auto maker forecast a nearly ¥35 billion ($40 million) loss.

In a wide-ranging interview with Ward’s Subaru’s 62-year-old president, Ikuo Mori, talks about his company’s quick turnaround and prospects for the future, including new projects, if any, with largest stakeholder Toyota Motor Corp.

Toyota currently controls 16.5% of Subaru, having doubled its initial 8.7% holding acquired in April 2008. The companies currently are working on several projects, including a jointly developed sports coupe, which was displayed as the Toyota FT-86 concept at this year’s Tokyo auto show.

Excerpts from the interview follow:

Ward’s: What is the current state of Fuji’s business 15 months after the “Lehman Shock”?

Mori: It’s been a struggle, like for everyone. But we’ve held our own for the most part, particularly in the U.S. and Canadian markets, where we were fortunate to have the right product during the downturn.

Early in 2007, we launched the Impreza. The following January we introduced a new Forester. Then last May our new Legacy came onto the market. Largely on the strength of these models our sales in North America held fairly steady.

And when I say, “right product,” note that our Outback was named Motor Trend magazine’s SUV of the year in October. This followed the Forester receiving the award the previous year.

Meanwhile, our new Legacy, which we launched just before the “Cash for Clunkers” program in July, had an especially positive impact on second-quarter earnings, helping boost sales 34% and 51% in July and August.

Ward’s: Have you sustained that level of growth since Aug. 31, when the Clunker program ended?

Mori: No. But sales were up 1% in September, year-on-year, and would have been higher had we not oversold our forecast for August and run short of supplies. Then, in October and November, we registered 30% and 20% growth. Granted, comparisons are with the first two months after the Lehman Shock.

Ward’s: And the total from January through October?

Mori: We’re up 12.7% and on track to exceed 200,000 units for the year (in the U.S.). Our peak was 200,703 in 2006.

Ward’s: What about other markets – specifically, China and Russia?

Mori: In China, our sales continue to grow rapidly, and between January and October were up 84%. Russia is another matter. The market completely collapsed and, like other car makers, we are struggling at 41% of the previous year’s level.

Ward’s: On a global basis, what capacity level can you now operate profitably?

Mori: I would say around 550,000 units, down about 10% from fiscal 2007 production levels.

Ward’s: So, annualizing second-quarter results, July through September, Subaru sales will grow to more than 570,000 units – which means you are profitable. Is that correct?

Mori: Yes. But there are limits as we move forward, especially if the yen strengthens further against the dollar. In particular, there are limits to further cuts in fixed costs centering on capital expenditures. So our major focus moving forward will be on increasing unit sales and trying to maintain our current market share.

Ward’s: And now you’re referring mainly to the U.S. market?

Mori: Yes. Note that during the past two years we raised our share from 1.2% to 2%. With demand currently around 10 million units, that comes to 200,000. If we can hold on to our 2% share, we should see substantial volume growth when demand recovers, say, to 15 million units.

Ward’s: And you also presume that the dollar will remain at its current level?

Mori: Yes.

Ward’s: Are you worried Fuji might not have sufficient financial resources as you move forward to support future projects including, for instance, possible production in China? After all, you still carry a substantial net debt of nearly ¥259 billion ($2.9 billion).

Mori: We’ve always found ways to tighten our operation and generate money when there’s a need. Our alliance with Toyota is an example.

Ward’s: Speaking of which, does Toyota’s 16.5% equity stake in Subaru represent a real commitment by either company? And where do you see the partnership heading? For instance, can Subaru find a special niche or become a center of excellence in the Toyota group? Or might Subaru take the lead in development of a mainstream platform based on, for example, the Legacy?

Mori: First, the alliance is doing precisely what we expected. Our basic principle remains the same from when we entered into the partnership in 2005, then expanded in 2008 – that Subaru will be an independent brand. Thus we are not looking for any substantial involvement in our management or operations by Toyota.

Ward’s: Do you have any concerns about the possibility of a takeover by, for instance, a cash-rich Indian or Chinese auto maker? Several industry analysts think that Subaru, Mitsubishi (Motors Corp.) and Mazda (Motor Corp.) are the three most likely targets for possible takeover.

Mori: In that eventuality, we are confident we can avoid being taken over. We are also aware of the potential risk, which is one reason for Toyota’s 16.5% equity holding.

Ward’s: Which brings us back to the nature of the relationship. Subaru gives Toyota a niche product, the FT-86 sporty car. Toyota gives Subaru minicars through Daihatsu (Motor Co. Ltd.), plus financial support. Is there any mainstream product or center of excellence Toyota gets from Subaru? Or would you agree that this is just a very limited arrangement?

Mori: In that sense it’s limited. But for Subaru it is fundamental, and the biggest thing we want at this time.

Ward’s: When do you expect to get back to your fiscal 2006 or 2007 earnings levels of about ¥47 billion ($522 million), one year, two years?

Mori: It depends on currency rates. In fact, if you just look at the number of units, both production and sales, we are already there. We have already exceeded our targets. But we’re making less money per unit.

But to answer your question, sometime within the next five years, hopefully closer to the middle.

Ward’s: So, if demand increases to 12 million or 13 million units, Subaru sales should grow to 240,000?

Mori: We hope so.

Ward’s: And globally, can you reach 600,000 units in three years?

Mori: Maybe sooner.

Ward’s: And of course the shift in North America to midsize and smaller vehicles from fullsize SUVs and pickups will provide a boost?

Mori: We believe so.

Ward’s: With the dollar at its current ¥90 equivalent, do you have any plans to boost U.S. production?

Mori: We’re monitoring the situation, but no decision has been made.

(In late November, Mori reportedly told Reuters Fuji had no plans to expand production in the U.S., where it currently operates an assembly plant in Lafayette, IN, that builds Legacy, Tribeca and Toyota Camry models. However, he indicated the auto maker was exploring producing cars in China, where sales are up more than 80% from year-ago.)

Ward’s: Can Fuji export profitably at ¥90:$1?

Mori: Yes, but margins of course are very small. But returning to your previous question, it doesn’t make business sense to shift production outside Japan regardless of the exchange rate if we can’t achieve a certain volume of sales.

Ward’s: Switching to the Japanese market, what is the current situation since demand has fallen by 20% over the past five years?

Mori: Market conditions are difficult and will remain so for the foreseeable future. Thus, we are putting more emphasis on standard cars and SUVs as opposed to (0.66L) minis. We also have consolidated our domestic dealer network, shrinking it from 43 sales companies to 23.

Ward’s: At the Tokyo Motor Show, Subaru displayed a new hybrid concept, the Subaru Hybrid Tourer, along with your Stella electric vehicle, which went on sale in late July. Japan’s new government wants car makers to cut carbon-dioxide emissions 25% by 2020. Can Subaru meet this target? Will government incentives be enough for a small company like yours?

Mori: We really don’t have much choice but to try to meet the targets. But no doubt they will be difficult. Still, from next year, we plan to make changes in our engine design, and eventually we must think about switching to electric cars.

As you saw from our Tokyo Motor Show exhibit, we are already involved in hybrid development, and this is one area where we envision synergies from our alliance with Toyota. We also presented the Stella EV, which went on sale in late July. We have products, and now we must find a way to sell them.