Mh

Subaru's U.S. chief Tom Doll and his boss, Fuji Heavy CEO Yasuyuki Yoshinaga, posed with an Outback last year in New York. Both are betting big that strong consumer demand for vehicles like the Outback will continue. Source: Subaru

Subaru announced on Monday that it will make a big investment to expand its factory in Indiana.

Between now and 2017, officials said, the Japanese automaker will spend $140 million on a factory expansion that will allow it to make an additional 100,000 vehicles a year. About 1,200 new jobs will be added.

For Subaru, this is a very big deal. Subaru has a big presence in the United States, but the truth is that it's a much smaller company than most of its rivals. Toyota (NYSE:TM) out-sold it by more than 10-to-1 last year. But Subaru does very well, largely because its corporate parent, Fuji Heavy Industries (NASDAQOTH:FUJHY), is typically very careful with spending.

That care has made Subaru very competitive, despite its small size. And it makes this new investment -- which by Subaru standards is a very big one -- a very interesting development.

A "good kind of problem" that is still a problem
Fuji Heavy CEO Yasuyuki Yoshinaga has steered Subaru to an enviable position, with strong sales, big profit margins, and a top-notch reputation for quality.

As sales of car-based "crossover" SUVs have boomed in recent years, Subaru's have skyrocketed. Crossover SUVs are Subaru's speciality, of course -- the original Subaru Outback was one of the pioneers of the segment.

That popularity has been great for Subaru, but it has put the company in something of a difficult position. While its overall U.S. sales are up a healthy 12.5% this year through August, sales of the Outback are actually down slightly in 2015.

Why? Because right now, Subaru can't make enough of them to meet demand.

Moving Toyota out of Subaru's factory, moving more Subarus in
Subaru has just three assembly plants -- and only one outside Japan. That factory, the one in Indiana, is running at full speed. Part of the problem is that the factory also makes Camrys for Toyota under a longtime agreement. That made sense when Subaru's sales weren't enough to run the factory at full capacity, but things have changed.

Toyota will move its Camry assembly line elsewhere after next year. That will give Subaru the physical space to add another assembly line of its own, one that can make a variety of products. An expansion of the factory is already under way, as it prepares to begin production of the compact Impreza model by the end of next year.

This additional investment will give the factory more capacity to produce an additional model. Yoshinaga said last week that Subaru will add a full-size seven-passenger SUV to its U.S. lineup. That SUV will be built in the expanded Indiana plant, starting sometime after 2017. 

It's a big investment, but it looks like a good one
Subaru is on track for its seventh consecutive year of record sales in the United States. Its product line is limited, but its focus on safe, fuel-efficient, reliable all-wheel-drive vehicles has created a loyal following -- and booming demand.

Yoshinaga has to hope that the surge in U.S. demand for crossovers will continue long enough for Fuji Heavy's substantial investments in its Indiana factory to pay off. But he and Subaru's U.S. chief, Tom Doll, have read the market pretty well so far. This looks like a good bet from here.

John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.