Subaru Faces off in an Epic Battle for Success

Subaru, the automotive division of Fuji Heavy Industries (NASDAQOTH: FUJHY  ) , is on fire. As the Foresters, Outbacks, Imprezas, and the newly launched BRZs become a familiar sight on the U.S. roads (especially in the north), the company is gearing up to sell around half a million vehicles in the country within the next couple of years.  

Although Subaru's growth trends make this look easy, it is actually quite a tight-rope walk. The company has to get both the demand and the supply side strategies right. Investors' attention should be focused on Subaru's production plans and one of its biggest advantages which could turn its dreams into reality.

Stamping Section at Subaru's Lafayette plant: Courtesy of Subaru.

Aiming high
In 2011, Subaru had rolled out its midterm plan called "Motion V," which targeted 850,000 vehicle sales by the 2016 fiscal year. Out of these, 380,000 were to come from the U.S.  What management did not anticipate was that its cars would become so popular in the U.S. that 358,000 cars would be sold  in 2013 alone. This led management to revise its U.S. sales expectation to be about 385,000 in the 2014 fiscal year.

Now, even this looks conservative. Sales through August are up 29.3% to 281,652 vehicles compared to the first eight months of 2012 and are showing no signs of slowing. Subaru's chief marketing officer, Dean Evans, has said that the company will sell around 410,000-420,000 cars in 2013 and probably more if it can produce them. In 2015, Subaru will be looking at around 500,000 in U.S. sales.

If we take the 2015 figure to be an accurate estimate of the demand, the immediate question that comes up is whether or not Subaru will be able to produce that many cars given that management is still not considering building another plant . The company currently produces around 772,000 units annually. 

The road map
Subaru's plan is to add capacity for another 130,000 vehicles by end of the 2017 fiscal year.  With its U.S. focus, it is no surprise that the company is prioritizing the capacity increase at its Lafayette, Ind., plant, known as Subaru Indiana Automotive, or SIA.

It will invest $400 million and increase capacity by 100,000 units at this plant. The plan calls for hiring 900 new employees, the expansion of an existing line, and equipment upgrades. The remaining 30,000 units will come from Japanese facilities through efficiency enhancements. This will increase Subaru's overall production capacity to 902,000 vehicles and SIA's to 300,000 . The 100,000 Toyota Camrys that are produced by SIA under a contract with Toyota, which owns 16.5% of Fuji Heavy , is not included in these numbers.

The company is banking on the additional production from these expansions and upgrades to realize its objectives of 500,000 car sales in the U.S. by 2015. The expansion will also help it to come closer to its big target of achieving 1 million car sales annually for the company as a whole.

Source: Fuji Heavy's Annual Report.

Capacity increase is a critical factor that will shape Subaru's future prospects, and management has a good plan which calls for optimization of existing resources. The story doesn't end there, however. The company has an ace up its sleeve – it's efficient and productive workforce and its non-unionized SIA plant.

Trump card
Being free from union pressures, management can handle its workers without any external influence. The United Automobile Workers or UAW has made repeated attempts toward unionizing workers at the SIA plant but to no avail. A big reason for this is that the pay and perks for Subaru workers are nothing less than what Ford (NYSE: F  ) or General Motors (NYSE: GM  ) workers get under the UAW contract.

Subaru workers get $14-$25 per hour, which is comparable to the $16-$19 per hour pay that UAW has negotiated for its entry-level Ford and GM workers.

It's true that Subaru workers have to put in 47-hour weeks, but there are good rewards both from monetary and career advancement points of view. In a one-of-a-kind initiative , the company sends its engineers all the way to Japan to enable them to be a part of a new automobile development project right from its initial stages. This creates a feeling of ownership among them and gives them unmatched perspective of the car building process.

Moreover, Subaru has never laid off workers in its span of operations in the U.S., has given wage increases every year, paid bonuses, and also sponsors an on-site university degree from Purdue University .

In comparison, Ford and GM workers have to make do with zero increments in base wage, which was part of the four-year contract that the UAW negotiated for them in 2011 . On a positive note, however, now that the auto companies have started making profits, the profit-sharing checks of the workers have bigger numbers on them. This year, Ford workers received checks for $8,300 and GM workers $7,325.

The domestic auto giants are on a tremendous run, with the duo posting profits of $1.2 billion each in the second quarter, but union pressures remain a perennial risk that investors need to keep an eye on. This is where Subaru scores.

Last word
Subaru is all set to make a solid place for itself in the U.S. automotive market. Now that the company is successful in creating a demand for its vehicles, it is increasing its production capacity to cater to that demand.

A huge advantage is that Subaru's U.S. plant is not unionized, allowing it to avoid lengthy negotiations and coercive union practices. Instead, the Japanese automaker has a motivated workforce that is committed to taking the company to the next level and earning value for its stakeholders.

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