The Facts Behind Subaru's Amazing Success in America

Subaru, the automotive division of Fuji Heavy Industries (NASDAQOTH: FUJHY  ) , is on a terrific growth trajectory. It's eyeing 1 million vehicles in annual sales in the not-too-distant future, and it's all happening in the U.S. In the last five years, the U.S. has become Subaru's largest hunting ground, and sales have exploded. Its cars are so spacious and inherently American that people joke that the new Outbacks will not fit in a Japanese parking garage.

The company's success in America has obviously not come from big cars alone. It is the foresight, business acumen, and near-perfect execution of Subaru's management that is enabling the company to scale new heights.

Source: Subaru. 2014 Forester.

The growth story
The last five years have been a period of heavy growth for Subaru as sales surged 30% to 724,466 in the 2013 fiscal year, up from 555,333 in 2009. Given that this period included the devastating earthquake and tsunami in Japan in 2011 as well the aftermath of the U.S. recession, those numbers are quite impressive. They remain impressive even when compared to Japanese auto majors like Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) .

Five-year sales growth in terms of units sold

Company

2009
(in thousands
of
 vehicles)

2013
(in thousands
of
 vehicles)

Growth

Toyota

7,567

8,871

17%

Honda

3,517

3,408

-3%

Subaru

555

724

30%

Source: Company Annual Reports.

The period between 2009 and 2013 was also when Subaru focused on developing its U.S. market. Being the second largest automotive market in the world, automakers from everywhere target the U.S. to establish their global footprints. The market is dominated by stalwarts like GM, Ford, Toyota, and other biggies, but this did not deter Subaru. It grew its sales by a whopping 88% in North America, again a feat unmatched by its Japanese rivals.

Given the political tension between China and Japan that holds back Japanese automakers in China and the economic downturn in Europe, the importance of the North American market cannot be emphasized enough.

 Five-year sales growth in North America terms of units sold

Company

2009
(in thousands of vehicles)

Proportion of North American Sales

2013
(in thousands of vehicles)

Proportion of North American Sales

Sales Growth

Toyota

2,212

29%

2,469

28%

12%

Honda

1,496

43%

1,731

51%

16%

Subaru

207

37%

390

54%

88%

Source: Company Annual Reports.

Striking where the iron is "hottest"
It has not been an easy task for Subaru to carve a niche for itself in the U.S. Management needed a solid strategy and a good opportunity. It was quick to spot its chance in a transition that is currently rocking the U.S. auto scene. American buyers are ditching their SUVs and minivans and increasingly opting for the new automotive wonder -- the crossovers.

Crossovers appeared about two decades ago. Since then, they have come to account for 25% of the total market volume. According to AutomotiveCompass, crossovers are expected to be the fastest-growing car segment in the world over the next five years.

Once it realized the market potential, Subaru management discontinued the production of mini vehicles in its Japanese facilities in February 2012. This allowed the company to pour all of its resources into its top-class crossover models. The recently refurbished Forester and Outback appeal to the tastes of American buyers like never before. The result: a 45% year-over-year sales increase to 41,061 cars in August.

Consolidating strengths
A big part of Subaru's U.S. plan has been to keep its prices competitive. This is a huge challenge given that it does not have the scale economies of its larger peers. The chart below shows the average price fetched for a Subaru Forester compared to other popular crossovers according to a U.S. News Best Car survey.

Crossover Models

Average Prices

2013 Honda CR-V

$22,843-$30,104

2013 Chevrolet Equinox

$24,727-$33,083

2013 Ford Escape

$22,545-$31,479

2013 Toyota RAV4

$23,242-$28,285

2014 Subaru Forester

$21,841-$32,200

Source: US News & World Report.

Subaru has managed to keep its vehicles affordable without resorting to heavy incentives or compromising on margins. Bloomberg Industries data shows that Subaru's monthly incentives have averaged just $557 in 2013. This is about 20% of the industry standard. The automotive website TrueCar.com estimates average industry incentives to have been around $2,477 in August. Meanwhile, Subaru's operating margin during the first quarter (April - June) was a majestic 12.7%. Anything above 10% in auto industry is considered excellent.

The yen depreciation has definitely played its part by lowering production costs in Japan, but what has really done the trick for the company is its impressive operating efficiency. Subaru's two main Japanese plants are running at full capacity, and resource utilization is optimal.

Going forward, instead of taking the capital-intensive route of building another plant, management intends to increase its production capacity by another 130,000 vehicles within the next three years through equipment and technology upgrades. This will make operations even more efficient, allowing Subaru to maintain its prices.

Source: Fuji Heavy Industries 2013 Annual Report.

Investment proposition
In the last five years, the prices of Subaru's parent Fuji Heavy's American Depositary Shares (ADS) have increased fourfold. Toyota and Honda have also earned good value for their investors, but their numbers pale in comparison to Fuji Heavy.

As Subaru continues to grow its business on the back of solid demand for its vehicles, investor optimism is going to increase further and bring in more gains to the stock price. Fuji Heavy has also been generating far better returns both on its assets as well as equity compared to its bigger peers, making it an attractive investment option.

Company

ROA (TTM)

ROE (TTM)

5-Year Capital Gains

Toyota

3.20%

11.11%

43.46%

Honda

2.61%

7.70%

23.72%

Fuji Heavy (Subaru)

7.21%

27.44%

396.63%

Source: Yahoo! Finance.

Parting thoughts
Subaru is the fastest-growing non-luxury car company in the U.S. Its fantastic growth rates have earned it celebrity status in the U.S. automotive circuits. And all of this has been possible on account of its smart strategies and efficient management. The decision to focus on crossovers in the U.S. has paid off big time and will continue to bear fruit in the future. Subaru's operating discipline is also noteworthy and is providing excellent support to its growth plans. The company has been making its investors happy, a trend that should continue into the foreseeable future.

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Read/Post Comments (15) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2013, at 10:07 PM, Whatisthedeal wrote:

    What this article fails to mention is that Toyota is now the majority shareholder of Subaru as is witness with the Subaru BRZ and Scion FRS. Subaru is benefiting from Toyota's involvement. Subaru was owned by General Motors before the bailout. If you look at the front bumper of the 2014 Forestor it is the same design as the 2014 4runner. So the real credit for Subaru's success goes to Toyota, give credit where credit is due.

  • Report this Comment On September 23, 2013, at 10:12 PM, ThePusherman wrote:

    A 1992 Subaru Legacy wagon was my first car and I will never forget it. I was in college at the time, and it was good on fuel, spacious, and could go anywhere. I could even sleep in it if necessary (and in college it was often the case). There's nothing like climbing up and parking on the top of a snowbank on a beer run, or not worrying about the road conditions in Boston because hay, I have good ground clearance and all wheel drive. No worries with that car. I hope they are still as good as they were.

  • Report this Comment On September 23, 2013, at 11:20 PM, lacardude wrote:

    In regards to whatisthedeal, yes, at one point GM owned 20% of Subaru prior to GM's bankruptcy. At that point Toyota acquired 8.7% stake in Subaru. So no, the credit to Subaru's success goes to Subaru. That is where the credit is due.

  • Report this Comment On September 23, 2013, at 11:49 PM, Jeffkory wrote:

    People must be as sick as me with toyoda- There is a Toyota or a mustang on every street corner= BLAND.

  • Report this Comment On September 23, 2013, at 11:50 PM, luvmilan wrote:

    As a part of my job, I drove cars from lots of different automakers. But there is something in Subarus. I feel like I fall in love with driving, every time I'm driving a Subaru.

  • Report this Comment On September 24, 2013, at 12:16 AM, sassyalaskalady wrote:

    I have owned 2 Subarus. My 2003 H-6 Outback sedan is the best car I have ever owned! 200,000 problem free miles and counting.

  • Report this Comment On September 24, 2013, at 12:18 AM, sassyalaskalady wrote:

    Also I give Subaru all the credit, they are manufacturing a fantastic product. Toyota And GM are sinking stones.

  • Report this Comment On September 24, 2013, at 7:28 AM, PudnRoy69 wrote:

    I have owned my 1st Subaru for over 2 years.

    No problems at all - goes in bad weather like

    a road grader. It is such a good car that I can

    not even think of ever owning anything else.

    I have the legacy sedan and if I ever do trade

    it would be for an Outback. Definitely the best

    gift I ever gave myself!

  • Report this Comment On September 24, 2013, at 8:01 AM, CrazyDocAl wrote:

    I just got rid of my 2010 Impreza. The AWD system was great but otherwise it was not a quality product. The plastic felt cheap, it had way too many rattles. The manual shifted terrible. The metal was as thin as a sheet of paper. The thought process that went into designing the layout must have been done in a half hour. Anyone who owns a Subaru knows that they will rust out in 7 to 10 years.

    Over all it's not a bad car but why settle when there are other brands on the market that offer much better value. Being small Subaru just doesn't have the resources that GM, Ford, or Toyota have and it shows. After 2 years the silver paint on the dash (that was suppose to look like aluminum) was flaking off.

  • Report this Comment On September 24, 2013, at 8:57 AM, AcuraT wrote:

    I love how people criticize GM involvement and dismiss Subaru's growth when they were involved. Even before the last five years Subaru was growing - just not at the rate of growth of today. GM provided electronics know-how to Subaru, while Subaru provided AWD know-how to GM. It was a fair exchange and both companies profited. For example, did you know the fuel injection system (which improved fuel economy for Subaru) comes from the defunct GM Saab division? That some of the AWD systems Buick is now using come from Subaru and are modified? Both companies benefited back then, just as Toyota and Subaru both benefit from their partnership. Not all partnerships have to have winners and losers. In the case of Subaru, it seem to be both partners have worked out pretty well in both cases.

  • Report this Comment On September 24, 2013, at 9:18 AM, donkeymix33 wrote:

    Don't sell Subaru's in Brevard County Florida. I have considered one during my past 3 vehicle purchases but with no dealer being in our county and the closest one being 54 miles away. Its a deal breaker. Emailed and called Subaru and they don't care.

  • Report this Comment On September 24, 2013, at 10:37 AM, cityperson wrote:

    Buy a vehicle that can be serviced without taking a vacation for travel to a dealer.

  • Report this Comment On September 24, 2013, at 11:39 AM, Olliedowngear wrote:

    Anyone who disses a Subaru probably never owned one even if they tell you so....I and my family (and many of my friends) have owned many models over the years and they are the most dependable, well-made and sturdy cars on the market today. I have a 1999 Subaru Forester with 240,000 miles so far and it still uses no oil. Original starter, alternator, exhaust system, and air cond. compressor. No major problems at all! The reason why Subaru is gaining market share? I just told you! Quality and dependability. Love, It's what makes a Subaru a Subaru! LOL

  • Report this Comment On September 24, 2013, at 11:43 AM, Olliedowngear wrote:

    OH! I forgot, Subaru's do not "rust out" not in Ohio and I haven't seen any rusted out ones anywhere else. Mine is a 1999 ran on salt covered winter roads and it has no rust whatsoever. Anyone that buys one and owns it through a bad winter will own at least one for the rest of their lives!

  • Report this Comment On October 06, 2013, at 12:50 PM, pinkfire53 wrote:

    To those with no dealer nearby, keep in mind that routine service on a new Subaru can be done locally, and genuine Subaru parts can be obtained online at a discount from many sources. Most models do not require the first oil change until 7500 miles, although Legacy calls for it at 3,750.

    As a new Subaru owner, I leased a '13 Impreza Limited and it required no adjustments after delivery: quality control is impressive, as is fit and finish. On a 3-year, 45,000 mile lease, the only maintenance required other than oil changes is replacement of the brake fluid and engine air filter at 30,000 miles.

    For Florida drivers, the AWD will give you good traction if you have to drive in heavy rain, while all drivers benefit from the smoothness of Subaru's boxer engine. The 2.0 liter Impreza gets 30mpg in normal everyday commuting, and up to 36 mpg at a steady 55mph.

    The boxer engine also has a lower center of gravity for better handling, and is much better balanced than a conventional 4-cylinder engine. This unique power train is the reason most Subaru owners are repeat buyers.

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