Subaru targets America's sun belt states despite rising costs, Trump

[TOKYO] Peaking demand, sky-high sales incentive costs, threats of a border tax - none of these are distracting Subaru from its marketing and growth ambitions in its biggest market.

"America is the pillar," Yasuyuki Yoshinaga, chief executive officer of Fuji Heavy Industries Ltd, which owns the Subaru brand, said in an interview Thursday.

"It's true we want to increase sales in other countries, but in terms of the place with the best chance to increase sales, it has to be America's sun belt" states in the south.

The company, which will change its name to Subaru Corp from April 1, already gets in excess of 60 per cent of its sales from the US, something Mr Yoshinaga readily admits is a "poor balance".

But he argues that Subaru must harness the brand power it has cultivated in the US, rather than divert its resources to cheaper, margin-eroding products for emerging markets. That's something that a small automaker like Subaru can ill afford, given the increasing investments required to develop clean-energy and autonomous-driving technologies.

To survive alone, "there's no other way for us than" to concentrate on the US, he said.

Subaru is connecting with US car buyers both with its product lineup and unorthodox marketing strategy. Sales growth is being powered by its Outback crossover and refreshed Impreza compact. The brand has also created buzz with witty, socially conscious ads that target outdoor enthusiasts and millennials.

Waning Demand

Mr Yoshinaga expects to sell 670,000-plus Subaru vehicles in the US this year, a 9 per cent increase from the 615,000 clocked in 2016, which was an eighth consecutive annual record. The 63-year-old says he's not worried about a decline in demand, even as many automakers beef up incentives in a market that IHS Markit, CLSA Ltd, and JD Power, among others, warn may have already peaked. IHS, for example, sees total light vehicle sales dropping to 17.4 million units this year in the US, from 2016's unprecedented 17.6 million.

The Subaru executive isn't sweating it.

"I don't get the sense demand is going to fall sharply," he said.

"And if it doesn't increase more than this, isn't that fine too? It's already at a record."

Shinkin Asset Management Co likes Subaru's strategy.

"The US economic outlook isn't going to be rosy forever, and the risk of not diversifying could emerge at some point, but for right now a bet on America seems like the right one," said Naoki Fujiwara, the firm's Tokyo-based chief fund manager, who doesn't own Fuji Heavy shares.

The stock was little changed as of 9:37am in Tokyo, compared to a 0.2 pecent decline in the Topix index.

What concerns Subaru more is the potential for a tax as high as 35 per cent on imported autos, as President Donald Trump tries to keep factory jobs in America. The automaker is among the most exposed, needing to ship about 40 per cent of vehicles from Japan to meet this year's sales target, even after booting top-shareholder Toyota Motor Corp out of its Indiana plant to manufacture more of its own Outback, Impreza and Legacy models.

Despite that, Mr Yoshinaga has no immediate plans to build more US factories, partly because it takes years to add a new production line, meaning Subaru would likely still need to import vehicles that would be subject to any border levy.

Indiana Plant

Instead, Mr Yoshinaga plans to wait until the Trump administration actually makes a decision - and after that, he says his first line of defence will be to emphasise how much they've already increased capacity at their only plant outside Japan.

The Indiana facility happens to be in the home state of Vice-President Mike Pence, who's been put in charge of trade issues with Japan.

Should that fail, Mr Yoshinaga says there's plenty of additional land at the Indiana site to expand if need be.

Mr Trump aside, the immediate challenge for Subaru in the US will be how to take an all-four-wheel-drive lineup that's done well in the snowy north, and promote it in the south. In 16 southern states that include Florida, Missouri and Kentucky, but not California, Subaru has just 1.8 per cent of the market, according to IHS data. In the rest of the country, the share is 4.7 per cent.

Mr Yoshinaga doesn't plan to add many more dealerships, as the 630 already in the country have plenty of room to sell more Subarus. Instead he'll rely on the brand image he's tried to cultivate over the years: safe vehicles that are fun to drive.

He also signalled he'll continue to avoid the rebates and cash incentives offered by some other automakers. Subaru only offers zero per cent loans for Outback, Legacy and Forester models.

Even so, the company projects those sweeteners could increase costs per vehicle to US$1,650 in the current quarter. Those costs would rise further as the Federal Reserve raises interest rates, and it will be extremely hard for Subaru to curb incentives unless other carmakers do the same, according to Mr Yoshinaga.

Subaru's average incentive of US$950 per vehicle in February was more than 70 per cent higher than a year earlier, although it was still the lowest in an industry that averaged US$3,594, according to Autodata Corp.

Modest spending on incentives helped Subaru post an industry-leading operating profit margin of 11.6 per cent in the quarter through December, according to data compiled by Bloomberg. Mr Yoshinaga aims to keep it above 10 per cent.

"We're building a valuable car, and beyond that it's a question of whether we can lift our brand image," he said.

"We want to be a company that delivers value to people's lives as drivers. It's not just about the vehicles."

BLOOMBERG