Yasuyuki Yoshinaga, CEO of Fuji Heavy Industries, Subaru's corporate parent. Image source: Subaru.
Subaru's sales are booming. But its CEO isn't going to let them grow a whole lot more.
Yasuyuki Yoshinaga is CEO of Fuji Heavy Industries (FUJHY 0.37%), Subaru's corporate parent. And unlike a lot of auto-company CEOs, he believes its possible for an automaker to grow too big -- and he's determined to make sure Subaru doesn't suffer that fate.
A tiny automaker that generates outstanding profits
Subaru has a fairly big presence in the United States, but by global standards, it's tiny. With sales of less than a million cars a year, it doesn't even make the top 15 global automakers by sales volume.
But despite Subaru's small size, Fuji Heavy consistently delivers strong operating profit margins -- much stronger than those of many of Subaru's larger rivals. In the most recent quarter, it generated 150.9 billion yen ($1.26 billion) of operating income on revenue of 836.2 billion yen ($6.98 billion) for an operating margin of 18%.
Even allowing for the substantial tailwind that Fuji Heavy got from favorable exchange-rate shifts, that's an absolutely massive profit margin by auto-industry standards. Much larger rival Toyota (TM 0.90%) got a similar tailwind and managed an operating margin of 11.6%. That's also very good, but it's not close to Fuji Heavy's. (That difference hasn't escaped Toyota's notice: It owns a stake in Fuji Heavy.)
What's the secret to Subaru's outstanding profitability?
Part of it is that Subaru's entire product line is sitting in a "sweet spot" of the market right now. Sales of car-based "crossover" SUVs are booming all over the world, particularly in the U.S. The U.S. accounts for 61% of Subaru's total global sales. And crossovers are profitable products: They don't cost much more to build than a comparable sedan, but they can be priced higher.
As anyone who has ever seen a Subaru Forester or Outback knows, crossovers are Subaru's specialty. The company practically invented the category, and its sturdy, reliable products have attracted many loyal fans. It's no wonder U.S. sales are up 14.8% this year.
But Subaru's dealers know that sales increases could be even bigger. The reason they aren't has to do with the real secret to Subaru's success.
Why Yoshinaga wants to limit Suburu's growth
Here's the real secret: Yoshinaga is very careful with spending. Subaru has just three assembly plants, and they're all running at close to full speed. There are two factories in Japan, and one in the United States, in Indiana.
Right now, Subaru is investing $140 million in a big expansion of the Indiana plant. But once that's done, that's it: Yoshinaga told Automotive News last week that the company has decided on a maximum production capacity of just 1.03 million vehicles. If the existing factories work overtime, that could be pushed to 1.1 million. There are no plans to build any more factories. Subaru sold about 911,000 vehicles last year.
Given that most automakers are happy to spend big on expanding capacity, Yoshinaga's approach sounds almost crazy. But it's typical Yoshnaga: From his perspective, it makes no sense to build factories that might have to be idled if the market shifts, or the U.S. dips into recession. Why increase fixed costs for a temporary return?
That kind of thinking can be seen in other aspects of the company. Subaru has a fairly extensive product line, but the different models share many parts under the skin. That keeps engineering and production costs down, and it means Subaru can put extra effort into ensuring any new products maintain its sterling reputation for quality and durability.
It also means that, even with that extra effort, Subaru is able to bring home strong profits quarter after quarter, despite its small size, along with an excellent return on equity.
For investors, Fuji Heavy is worth a closer look
From an investment perspective, Fuji Heavy's stock isn't particularly cheap right now. And even though Subaru is a household name here in the U.S., Fuji Heavy isn't on a lot of American investors' radar screens.
If you're a fan of carefully run companies with lots of happy customers and consistency strong profit margins, this one is worth a much closer look.
