Currently reading: Insight: how Subaru reinvented itself
The car maker’s understated performance in Europe belies a canny business model that has replaced its reliance on motorsport heritage
News
7 mins read
12 June 2017

Conventional automotive business wisdom says a company such as Subaru is too small to prosper or even survive over the longer term. With sales of just over one million vehicles last year, the Japanese car maker should, according to conventional wisdom, be looking at a merger with another, rather bigger, car maker.

In the case of Subaru, however, conventional wisdom is wrong. The Japanese company may be ploughing an individual furrow using boxer engines and permanent all-wheel drive on all of its full-size models, but it is delivering remarkable profit margins that, on a good day for the dollar-to-yen exchange rate, have been higher than industry leaders such as Porsche and Jaguar Land Rover. On 1 April, what was Fuji Heavy Industries changed its name to Subaru Corporation. Toyota owns 16.4% of the company and Suzuki 1.75%, while the rest is owned by financial institutions. A significant 94% of Subaru Corporation’s income is from automotive; its aerospace division accounts for just 4.7%.

Like Saab, that other determinedly individual automotive company, Subaru also has its roots in the aircraft industry. Fuji Heavy Industries started out in 1917 as Nakajima Aircraft, which built a wide range of military aircraft during World War Two, including the wellrespected Nakajima Ki-84 fighter.

Nakajima was wound up at the end of WW2 and reborn as Fuji Sangyo which, by 1951, was making scooters at the rate of 2000 a month as Japan began its rapid industrialisation. Then in 1953, the company released a three-wheel light commercial truck and, in 1954, its first light car, the 45bhp P-1, for which the brand name Subaru was created.

Subaru became best known, domestically at least, for its smallengined mini vehicles, or kei cars, the first of which, the Subaru 360, was launched in 1958. The first all-wheeldrive Subaru was the 1971 Leone station wagon, which the company says went on to become the world’s best-selling AWD passenger car. But it was the launch of the Legacy saloon and estate in 1989 that was really the foundation of the modern Subaru.

There’s a strong argument that Subaru is still dominating one particular market niche in the way it managed with the Leone nearly 50 years ago. According to figures from Subaru UK, the Japanese company remains the world’s biggest producer of all-wheel-drive vehicles.

In the financial year of April 2015 to April 2016, Subaru sold 965,892 AWD vehicles, which represented some 15.3% of the entire global market. That was ahead of secondplaced Audi’s 720,510 units. JLR, interestingly, was the world number five, with 485,797 AWD units sold.

Subaru’s success is in large part thanks to a straightforward vehicle line-up. There’s a simple choice of four-pot boxer engines, one type of running gear and, now, one platform to cover everything from the new Impreza hatch to the upcoming seven-seat large SUV.

Back to top

Although the brand’s roots were in Japanese-market kei cars, sales of these tiny vehicles have dropped from 145,000 units in 2007 to just 34,000 in the year ending April 2017. And although Subaru still markets five kei cars, they are now badgeengineered models produced offshore by Daihatsu. To that end, the production of these inexpensive and low-margin models doesn’t weigh heavily on Subaru’s R&D budget. The only other slight outlier is the BRZ coupé, which is also sold as the GT86 for Toyota. It’s based on a modified version of the previous Impreza platform, adapted to run rear-wheel drive, and as of April 2016, some 223,000 had been built.

Otherwise, Subaru’s line-up is of eight closely related models, all using the same basic architecture. The new Impreza and XV/Crosstrek are already on the new platform, with the vast Ascent SUV due at the end of the year. The rest will adopt the new platform over the next three years.

Subaru says the new platform marks a step change in both safety and refinement. In fact, Subaru has already established a safety record that’s second to none in the US.

The Forester, for example, has received the top ‘Good’ rating in the rigorous IIHS lab crash tests every year since 1999. Even though the 2017 model is based on the outgoing platform, it also scored a ‘Good’ rating for the onerous ‘small overlap’ front-end impact test.

So Subaru has advantages in using a single platform and transmission for its future cars, but market analyst logic says the company must invest significantly in electrification and autonomous technology.

Subaru is already on the case, albeit in the most cost-efficient way. It has integrated a hybrid system into its 4x4 drivetrain, fitting the electric motor into the transmission and placing the battery pack the rear axle.

This is typical of the brand’s engineering approach in that it’s a simple and easily integrated set-up which can fitted into all of the brand’s future vehicles. It’s expected to be launched later this year, possibly in a variant of the new Ascent.

Back to top

Subaru also needs to produce an EV in order to meet Californian  regulations (which are also used by other US states). The word is that the company is likely to build an allwheel drive electric crossover, similar in size to the Forester, by 2021, but much of the existing platform will probably be able to be adapted.

In terms of autonomy, Subaru is taking the most cost-effective and, some would say, sensible approach. The company launched its stereo ‘EyeSight’ forward-facing cameras in 2008. The new third-generation version can ‘see’ colours and is coupled to all-round sensors that can detect people, cyclists, lane markers and other vehicles. It will be used not only for pedestrian avoidance but also to assist other autonomous features such as predictive braking, lane keeping assist and ‘pre-collision throttle management’.

In short, Subaru’s autonomy will mean improved safety rather than handsoff driving, which in turn means major savings on research and development and component costs. The stated aim is that by the time the whole range is on the new platform, Subaru will be the world’s “number one brand for overall safety”, with its “All-Around Safety system protecting all passengers and pedestrians”.

Under the ‘Prominence 2020’ plan – and showing a typically modest Japanese approach – the upshot is that Subaru says it will be building more than 1.2 million cars per year by the end of the decade. It wants to be “number one for customer trust” and have industryleading profitability.

Today, profitability is good, but there’s no doubt that a decade ago, at the point of the global credit crunch, Subaru was looking decidedly marginal. In 2006-2007, Subaru produced just 578,000 vehicles and was barely profitable, and the period from 2007 to 2012 was decidedly rocky, with the company barely breaking even in 2012.

The key issue is that in 2007 Subaru sold just over 601,000 vehicles, while in 2012 it sold 617,000, a level that seems to be about breakeven for the company. However, sales then took a remarkable upward turn, hitting 978,000 in the year ending April 2016. For the year ending April 2017, the total was 1.065 million.

Back to top

The company’s operating profit in the last three months of 2016 was just over £1bn, with a profit margin of a remarkable 18.4% – quite possibly the highest margin in the car business. But Subaru is tied to the strength of the yen against the dollar.

The fall of the dollar against Japan’s currency meant that in the final quarter of the financial year to April 2017, operating profits fell to £713m and the profit margin to 11.6%. That said, it’s a better margin than BMW and Audi can manage.

It’s Subaru’s runaway success in the US that has driven the recent upswing. During 2016, Subaru sales hit 615,000, well over half of all global sales. The company has a factory in Indiana, which will build 400,000 vehicles across 2017, a significant increase on previous years. By 2019, Subaru Indiana should be making 436,000 cars per year.

Europe may well be becoming as obsessed by crossovers as the US, but Subaru’s performance here is lamentable. Across the continent, sales are around 46,000 units per year, while in the UK annual sales are under 4000 units.

According to Prominence 2020, the US will remain Subaru’s “toppriority market”, followed by Japan and China. Clearly there’s no corporate will to try to break back into Europe, which, admittedly, is only attractive if you have premium pricing and bigger volumes.

What Subaru does next is what Subaru has done until now: advance slowly and cost-effectively. The single-platform, single-transmission family, simple hybrid tech and autonomy biased solely towards the safety of drivers and other road users is eminently sensible for a company of this size.

Subaru’s biggest issue is its vulnerability to swings in the dollarto-yen exchange rate, although building more cars in the US will reduce that vulnerability.

The recent rise of the yen, however, hammered the company’s income and pushed profit margins for 2016- 17 down from 17.5% the year before to a still-impressive 12.4%. But looked at as a small and more or less independent automotive company, Subaru can justly claim that its business model isn’t broken and doesn’t need fixing.

Back to top

Join the debate

Comments
12
Add a comment…
Will86 12 June 2017

Nearly there

To my eyes Subaru has a lot of potential. There is a market for properly well engineered and reliable cars which favour longevity and all round performance over the very latest technology and every extra mpg. However, Subaru's current range needs work. Drop the 1.6 turbo from the Levorg into the Impreza and XV, offer the Levorg in a lower spec with a manual gearbox, and offer an Outback version, then work on the styling and those profit margins would improve even further. With the loss of Saab and the distinctly average range offered by Honda, the future should be bright for Subaru.
leftfield lenny 12 June 2017

Subaru's Future, Nearly There

Absolutely spot on, Will86. I said so when the Levorg fist came out. Unfortunately Subaru has persevered with the N/A 2.0 FB engine. It's emissions are slightly lower than the 1.6 engine.
If they cared to look on YouTube regarding the forthcoming 2018 model Impreza and XV they would see that American and Canadian road testers praise the new models in all areas except one, and guess what that is? Yes... the lack of horsepower compared to the opposition. Virtually all the reviews I've seen have been for the CVT gearbox model, they like the way it functions (and I liked the CVT Outback courtesy car that I had off my local Subaru dealer a few years back) but according to them, 152 bhp is measly compared to say, the Honda and Mazda equivalent that's touting 165 - 180bhp. The 1.6 engine in the Levorg is a direct injection cylinder head like the 2.0, and with the new UK car tax rates, there's no financial penalty to the driver so just install the 1.6 engine Subaru.
That engine is only currently used in the Levorg for Europe, how many Levorgs are you shifting to justify it being exclusive to the one range? You know that's what some of your customers want, and it makes sense!
Symanski 12 June 2017

Subaru Vs BMW.

I had a great time with my WRX and the performance pack fitted. Very reliable. When it came time to change, Subaru UK claimed you couldn't get a saloon with rear wing and WR Blue colour, yet every other region in the world had them. It's the UK reps that are holding Subaru back!

I instead bought a BMW. When it was running, it was great, not quite as good at holding the road or as quick at the Subaru. Yet it suffered from many engine faults; something the Subaru never had any trouble with. In the UK BMW won't cover the engine as they do in the USA, so I had to sell the car as the next batch of engine faults were more then the car was worth - yet would have been covered if it was in the USA. BMW stuffs the UK customer because they can.

leftfield lenny 12 June 2017

Subaru's Future

I'm currently with a Honda after 12 years with Subaru. Yes, previously their cars were expensive to insure, tax and fuel. But with progress the current (and forthcoming) range is a lot more bearable.
I shall be eagerly looking forward to a new Subaru (either the XV or Impreza) in 2019 - if they're still being sold in the UK. As good as I and loyal owners think that Subaru cars are, they're not attracting enough new customers to justify the costs surely?
leftfield lenny 12 June 2017

Subaru's Future

I'm currently with a Honda after 12 years with Subaru. Yes, previously their cars were expensive to insure, tax and fuel. But with progress the current (and forthcoming) range is a lot more bearable.
I shall be eagerly looking forward to a new Subaru (either the XV or Impreza) in 2019 - if they're still being sold in the UK. As good as I and loyal owners think that Subaru cars are, they're not attracting enough new customers to justify the costs surely?