Feisty Subaru Boosting U.S. Production Capacity

TOKYO – It is one of 2012’s rousing success stories: Subaru.

Fuji Heavy Industries, former aircraft maker and owner of the Japanese brand, is on track to report record earnings of ¥82 billion ($1 billion) in the fiscal year ending March 31 on record sales of ¥1.8 trillion ($22.5 billion) and 714,000 units.

Since September 2008 and the global recession triggered by the Lehman Brothers bankruptcy, Fuji (Subaru) has had only one half-year period of red ink, this despite unfavorable exchange rates seeing the yen at or near record highs for 50 consecutive months.

Yasuyuki Yoshinaga, the auto maker’s 58-year-old president and CEO, recently met with WardsAuto here to discuss Subaru’s current market situation and future plans

Prior to being promoted to president in June 2011, Yoshinaga was instrumental in Subaru’s product and cycle planning during the first half of the last decade, which resulted in a series of popular models including the Impreza, Legacy, Outback, XV Crosstrek and BRZ.

Following are excerpts from the interview:

WardsAuto: Analysts continue to be impressed by Subaru’s ability to operate profitably at ¥80:$1 exchange rates. To this end, has Subaru modified its business plan to include, for instance, an expansion of production in the U.S., your major market?

Yoshinaga: First, let me say that the current ¥80:$1 rate is exceedingly difficult for us. Our U.S. earnings have increased because we improved our product mix. Generally, Subaru cars aren’t cheap, and (we) have been successful holding down incentives to around one-third the industry average, to between $800 and $900. As a result, residual value for our customers is higher than for many other brands.

WardsAuto: Then do you plan to increase production at Subaru of Indiana Automotive’s Lafayette, IN, plant?

Yoshinaga: We plan to raise production capacity at SIA to 200,000 units by summer 2014 from current levels of 170,000. Since we are currently operating at capacity, the increase will effectively be an increase in output.

WardsAuto: Will that be enough?

Yoshinaga: We think so.

WardsAuto: In Subaru’s midterm plan, which runs through fiscal 2015, what is your U.S. sales target?

Yoshinaga: 380,000 units including imports.

WardsAuto: And your global target?

Yoshinaga: 850,000 units.

WardsAuto: Do you count 0.6L minivehicles produced by Daihatsu?

Yoshinaga: Yes. In fact, we ended minivehicle production at our Gunma main plant in February and transferred all production to Daihatsu. Moving forward, Subaru will focus only on standard cars like the Legacy, Outback and Impreza.

WardsAuto: What do you produce on the former minivehicle line?

Yoshinaga: The BRZ and Impreza.

WardsAuto: Also, Toyota’s F86?

Yoshinaga: Yes.

WardsAuto: Many Japanese auto makers are building an exchange rate buffer with production in Southeast Asia and China. What is the status of Subaru’s plans to enter the Chinese market, which, according to news reports, involves Chery?

Yoshinaga: We had planned to begin production in China last year. China is really our focus, but we’re having complications getting the necessary approvals. So we haven’t been able to proceed. In fiscal 2011, we sold around 55,000 cars in China.

WardsAuto: And those were all produced in Japan?

Yoshinaga: Yes.

WardsAuto: If and when Subaru eventually opens its China plant, what annual volumes do you envision?

Yoshinaga: 150,000 units. That’s plant capacity. Our sales (target) is 180,000 units. This is our plan, of course, but at the moment everything is stalled.

WardsAuto: How long do you expect it will take to receive the necessary approvals and then to build the plant in the current politically charged environment?

Yoshinaga: First, we can’t sell cars (in China). And if we can’t sell cars, there is no basis for building the plant. Until September, we were selling around 4,600 units per month. That fell to 1,880 in September and 1,470 in October (because of China’s territorial dispute with Japan over the Senkaku Islands, when consumers began boycotting Japanese car brands).

WardsAuto: Would you consider another location, Southeast Asia, for instance?

Yoshinaga: We’re not large enough as a company, thus we must marshal our resources carefully. For the moment we’re only thinking of the U.S. and China. That said, we operate a small knockdown-kit plant in Malaysia but otherwise have no plans for Southeast Asia.

WardsAuto: Switching to another subject, Subaru introduced a limited-production electric car in summer 2009, the Stella Plug-In. What are your plans for electric vehicles and hybrids?

Yoshinaga: We plan to introduce our first hybrid next year in Japan.

WardsAuto: Will it be a plug-in type?

Yoshinaga: No.

WardsAuto: Exactly when do you intend to introduce the model and will it employ a lithium battery?

Yoshinaga: We still haven’t decided the launch date, and it won’t employ a lithium battery.

WardsAuto: How closely are you working with Toyota on this hybrid?

Yoshinaga: As you are aware, our hybrid will be based on (our) horizontally opposed engine, so we cannot utilize Toyota’s main (Prius) hybrid system. Thus, although we are exchanging information with Toyota (which holds a 16.5% equity stake in Subaru), we are not using their system.

WardsAuto: Do you intend to exhibit the car at the North American International Auto Show in Detroit in January?

Yoshinaga: No, and again we still haven’t set a launch date.

WardsAuto: Concerning Subaru’s all-wheel-drive technology, are you planning any changes?

Yoshinaga: No, nothing.

WardsAuto: And do you still believe AWD is one of the keys to your success, particularly in the U.S. market?

Yoshinaga: Without question.

WardsAuto: Just to clarify, Subaru’s strength is in the northeastern part of the country in states like Massachusetts and New York?

Yoshinaga: We’ve also begun to see growth in the Sunbelt, and we see the same trend in Japan where we rarely talk about AWD in our marketing activities. Customers are buying our cars because they’re Subarus.

WardsAuto: Related, are you planning any further refinements of your Boxer engine, and how is the diesel version selling in Europe?

Yoshinaga: As you are aware, we completed a full model change of our engine lineup in 2010. Among the changes, we incorporated direct-injection turbo technology (for the new FA series).

Concerning our diesel Boxer, we introduced it in 2008. The engine has been evaluated highly because of its horizontal layout, which enables it to handle a great deal of torque. That said, the European market is weak. No one is selling much of anything there, and we’re clearly not selling in the volumes we would like.

WardsAuto: Switching subjects, the BRZ/FR-S project with Toyota has been a rousing success with many positive reviews of both cars reflected by high sales high and low inventories. Does this collaboration portend future collaborations with Toyota and, if so, when?

Yoshinaga: We are not thinking of developing more models, but more variants are possible. We are currently selling about 1,000 BRZs per month divided roughly evenly between North America and Japan.

WardsAuto: Do you currently have any plans for introducing these variants?

Yoshinaga: Not at the moment.

WardsAuto: Also concerning product, are you considering offering a subcompact model in the U.S. and, if so, when? It seems that a B-segment car would be a perfect fit for the brand.

Yoshinaga: Again, no plans.

WardsAuto: Then are you considering any additional model types for your North American lineup? Another midsize CUV, for instance? And will the Tribeca be replaced?

Yoshinaga: We have no plans to introduce a new midsize CUV or to replace the Tribeca.

WardsAuto: Turning to the world’s two biggest auto markets, China and the U.S., what is your demand forecast for the next few years?

Yoshinaga: We expect the U.S. market to recover to 16 million units by 2015. We also believe that the Chinese market will hold steady at around 20 million units. That said, we expect ups and downs in China before the current political situation stabilizes.

WardsAuto: And Subaru’s sales outlook?

Yoshinaga: Our goal is 1% of the global market. Actually, our fiscal-2015 sales target is slightly below that level – 850,000 units out of an estimated 100 million. To achieve this level, we must highlight the major attributes of our products including engines and drivetrains, specifically our Boxer engines and AWD technology.

As for the future, we want to introduce electric-power products. Again, our first offering will be a hybrid next year.

WardsAuto: Lastly, it appears as if Subaru is more than breaking even on exchange rates. Is your yen-dollar breakeven point ¥77:$1?

Yoshinaga: ¥77 is difficult, but because we sell higher-valued cars and have been able to keep incentives down, we’re profitable.

Postscript: On Dec. 27, the dollar recovered to ¥86.0:$1, one of the highest levels in years, which, if it stays there, could lead to bigger profits when Subaru closes its books in March.