When Subaru, the automotive unit of Fuji Heavy Industries (NASDAQOTH:FUJHY), launched the hybrid version of its successful compact cross-utility vehicle XV Crosstrek last year, it was hoping to capitalize on the growing U.S. hybrid market. But recent research shows that the demand for hybrids has cooled in the U.S., with market share for the category going down slightly from 3.7% in 2013 to 3.6% through August 2014. 

Though the dip could be temporary, it has taken many by surprise, because green-car sales were estimated to continue to rise in the coming years on the back of new model launches and increased awareness. Does this spell disaster for Subaru's hybrid aspirations? Let's find out.

Images
Subaru XV Crosstrek. Source: Subaru.

Why hybrid?
The idea of a hybrid has been a major hit in the U.S., and global auto giant Toyota has monetized the opportunity to the fullest with its Prius series. Until now, Prius has been the best-selling hybrid in America. In 2013, hybrid sales (excluding plug-ins and electric vehicles) in the country were up 13%. And it was about time for Subaru to capitalize on the trend by entering the segment. According to Green Car Reports, "If any carmaker should already have had a hybrid in its lineup, it's Subaru."

The company could spot the absence of a good hybrid model in the compact SUV/CUV segment, and probably sensed an opportunity. Other hybrid SUVs are bigger (midsize) and costlier: Toyota's Lexus RX and Highlander, Volkswagen's Porsche Cayenne and Volkswagen Touareg, and Nissan's Pathfinder. A new model, the Lexus NX 300 hybrid from Toyota, could heat up the competition in the compact SUV space, but it will be a luxury offering. Also, apart from the XV, the only other hybrid that offers all-wheel drive is the Highlander, but at a price tag of $48,160. 

The XV Crosstrek Hybrid, with an all-wheel drive that can handle off-road and with a price tag of $29,995, is an excellent choice for those looking for a sporty and affordable green-car option. As with many of its other new ideas, Subaru did a ground test in Japan in early 2013, where the hybrid became an instant hit, and then rolled it out in North America at the end of last year.

"It can do everything a normal Subaru can do," Subaru of America's car-line manager Todd Hill said at the car's launch, emphasizing its off-road credentials. The model has more luggage space, a roomier rear seat, and a quieter drive than the non-hybrid version. The small electric motor powers the CUV at slower speeds, which is perfectly suited for city drives. When it picks up, the gasoline engine kicks in with support from the electric engine.

With this strategic offering, Subaru wanted to attract a new class of buyers to the brand, and remain true to its image of bettering its popular models.

A calculated risk?
Subaru did its homework well. It figured out that, aside from the minimal competition the XV Crosstrek Hybrid would encounter in its class, the vehicle would gain from the huge popularity of its non-hybrid sister model and the soaring demand in the crossover/utility segment as a whole.

Subaru introduced the mainstream XV Crosstrek in 2012's second half as a variant of its 22-year-old popular model Impreza. In 2013, the CUV showed such promise that its sales exceeded Subaru's expectations by double, and reached 53,741 units by the year's end. Sales have already reached 48,612 units in the first eight months of 2014.

In August, XV Crosstrek's sales grew 73.3% over the same month last year, which is far above the segment's growth of 21.4%. Subaru has a very loyal customer base that has boosted sales of its offerings many times during the past several years. With such popularity, Subaru stood a good chance of its hybrid getting accepted.

Industrywide sales trends show that Americans always had a soft spot for the CUV/SUV segment, and with new launches and fuel-efficient models, sales are picking up. In August, industry sales were at an 11-month high, thanks to higher truck and CUV sales.

What do the sales numbers say?
The XV Crosstrek Hybrid got a good start in America. When the hybrid was launched, management expected sales in the range of 10%-15% of total XV sales, a goal that has been met in the U.S. Though the ratio dropped to 9% in August, as shown in the table below, it was due to the excellent growth of the conventional model, which the hybrid couldn't keep pace with. There was no sales drop for the hybrid as such.

Images
Source: Hybridcars.com and goodcarbadcar.net.

Taking a wise path
The momentum in the U.S. hybrid market might have slowed, but Subaru has planned well. For its first hybrid offering, it has identified a segment that's not terribly crowded, has priced the car attractively, and is looking to capitalize on the popularity of crossovers in general and its own XV Crosstrek nameplate in particular. No wonder sales are holding up and the performance of the hybrid remains on track.

ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool recommends and owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.