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Automotive Industry

Subaru's Future Strategy

Automotive Industries, June, 1999 by Marjorie Sorge

Why the big-name suitors are flocking to the tiny automaker that specializes in low-cost awd vehicles.

Just six years ago, Subaru couldn't even get a wink and a nod from another automaker. It was on the brink of financial disaster. Yet with savvy branding and a sharp focus on its core all-wheel-drive (awd) products, this tiny Japanese auto company pulled itself back into the black. Today, it is a strong, profitable company that several major automakers, including Ford and General Motors, appear to be eyeing as a potential partner.

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Subaru's dramatic turnaround could also be a primer for larger auto companies, as they follow the trend of becoming niche players in many segments. Subaru only sells 150,000 vehicles a year in the U.S., but the money is rolling in again because it defined its core products and stuck to them.

"The message from Subaru's turnaround is, set the brand and stick with it," says one analyst, who points out that Subaru's rise and fall shows "the power and the limitations of the brand."

In the mid-1980s Subaru of America was the darling of Wall Street. It branded itself an expert in affordable front-wheel drive and simple, inexpensive all-wheel-drive technology. Subaru cars were popular, particularly in Snow Belt states, and the company's stock was exploding. But then it lost its focus, adding products like the subcompact Justy, and the quirky XT coupe and SVX sports sedan. The changes only confused the brand and drove customers away. By 1992, Subaru, a subsidiary of Fuji Heavy Industries, had a 300-day supply of vehicles in the U.S. and posted a $250 million loss for the year.

That meant either change direction or die. Subaru chose the former -- and went back to its roots. First, it dumped the oddities from its U.S. range, and re-focused its product plans around awd drivelines and the solid, reliable Legacy and Impreza. Then, with canny vision, it jacked up the Legacy wagon with big tires, fitted brawny trim and created the Outback -- kind of an antidote to truck-based SUVs. It was an instant hit. Next came the roomier Forester, also based on the do-it-all awd Impreza platform. The niche was established. Now Subaru's arguably the world's foremost maker of inexpensive awd cars (see p. 59).

Today, its plants are bursting at the seams. Last year the automaker had revenues of $3.1 billion and, while Fuji no longer reports Subaru financials separately, the company says its net income surpassed the record $94 million set in 1986 when Subaru of America was a publicly held company.

Those successes, and the unique product focus, have some automakers sitting in Fuji's parlor asking for its hand in marriage. Fuji is attractive. Not only does it own Subaru and make its own minicars, Fuji is also in great financial shape. And its products have little conflict with other automakers' brands.

"We could fit nearly in somebody's else's portfolio, because we are different and we wouldn't cannibalize or overlap with their lineups ... we've got our own thing going," George Muller, president of Subaru of America, tells AI.

GM and Ford are the likely candidates, well-placed sources say. GM already has a 10% stake in Suzuki and a 49% share in Isuzu, so it's likely the automaker was looking to add Fuji to its plans to expand in Asia. Ford's plan is similar, plus it could use the awd brand, but .all talks came to a screeching halt when French automaker Renault bought struggling Nissan, which owns 4% of Fuji.

Normally, that wouldn't be enough to even blink at but the Industrial Bank of Japan, which helped negotiate the Renault-Nissan deal, is part of the Nissan keiretsu as is Fuji. The bank is beholden to Renault for bailing out Nissan, so it won't independently agree to help a Renault competitor acquire Fuji.

"It's a chess game," says one observer. "Renault wants to figure out what it got with Nissan before it lets anything get away. It is going to move slowly so it could take a long time for this to play out."

No matter what scenario develops, Muller says Subaru can push a lot more product through its 590 U.S. dealers than the 150,000 vehicles it sells in America today. One possibility is selling products for another maker in a kind of "virtual" operation

"The brand has the capacity to sell more product at higher prices, if it is fed with a product lineup," he notes. "If we pumped a minivan or SUV through here that some other companies have, we could go beyond 150,000."

Consider this scenario. Nissan has a pretty nice, lower-end SUV with the Xterra and is going to sever its minivan-making relationship with Ford by 2004 at the latest, in favor of creating that product with Renault. Perhaps those vehicles could be sold through Subaru channels.

No matter what, Muller says Fuji wants to maintain its identity and culture and grow globally and add more platforms. But with total revenues of $10 billion and worldwide sales of 500,000, it is one of the smallest, independent companies in the world and probably not large enough to launch a global offensive on its own. It doesn't have the cash to invest heavily in many new platforms, to create a worldwide distribution network, or to develop the necessary emissions and environmental technologies. That makes a link with a larger automaker attractive.

Automotive Industry

Subaru's Future Strategy

Automotive Industries, June, 1999 by Marjorie Sorge

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