Autos

Two Ways to Fix Subaru's Supply Problem


Cars produced at the Subaru of Indiana Automotive Manufacturing Plant in Lafayette, Ind.

Photograph by Michael Conroy/AP Images

Cars produced at the Subaru of Indiana Automotive Manufacturing Plant in Lafayette, Ind.

Subaru is having an existential crisis. Everything is going its way. Customers are clamoring for its cars, the yen is relatively weak, and its factories are whirring away as fast as they can.

In the U.S., where Subaru now sells about half of its vehicles, sales were up 27 percent in the first seven months of the year. Based on last month’s rate of sales, it could sell all the vehicles in its U.S. inventory in just 27 days—less than half the auto industry average. Subaru is taking measured steps to expand its production capacity, but today it is worried about running out of cars.

At the same time, it is facing a bigger question about what kind of company it wants to be. Subaru executives just aren’t sure how long the good times will last. Rising interest rates or another recession could cool the new-car market quickly. Plus, Subarus have always been kind of quirky, kind of niche. Investing a bunch of money to be something bigger or mainstream just doesn’t feel quite right. “We know how to study worst-case scenarios, but we’ve never examined a best-case scenario,” Subaru of America Chairman Takeshi Tachimori told the Wall Street Journal recently.

Here’s the problem: It doesn’t make much financial sense to build a new car factory unless it can crank out at least 200,000 cars a year. For Subaru, that would represent almost one-third more vehicles than it made last year. It needs a middle ground, and fast. Here are two options:

Raise prices. If Subaru isn’t comfortable changing the supply side of its business, it could dial back demand a bit. Pushing prices up would improve its profit margins and build up a safer cushion on the inventory side. It might even burnish the brand a bit. It should be noted that Subaru has hardly tinkered with prices in its recent flurry of business. Its average monthly vehicle incentive—though still relatively small—actually increased slightly this year to $557, according to Bloomberg Industries data.

Get a jump from Toyota. Toyota (TM) still owns 16.5 percent of Subaru’s parent company, Fuji Heavy Industries (FUJHY)—an arrangement that isn’t talked about much anymore. Subaru’s Indiana plant even cranks out tens of thousands of Toyota Camrys every year in a contractual arrangement that dates to 2007. Although Subaru has already committed to spend $400 million to expand that factory, wiggling out of the Camry deal or at least pulling back some of that production capacity would be an easy way to make a few more Outbacks and Foresters.

Um, no, said Toyota spokesman Steven Curtis. “While Toyota has announced 10 manufacturing expansions in North America in the past 20 months, resulting in $2 billion in additional investments and more than 4,000 new jobs, we are not working with Subaru on any expansions.”

It might want to reconsider. In terms of production, Toyota is almost 12 times the size of Subaru; it stamped out 7.4 million cars last year, including 1.3 million in North America. Surely it can spare some slack in some of its assembly lines. Toyota’s U.S. sales were only up 17 percent from January through July and Camry sales only gained 16 percent in that time. Not bad, but Subaru is blowing those results away.

Kyle-stock-190
Stock is an associate editor for Businessweek.com. Twitter: @kylestock

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Companies Mentioned

  • TM
    (Toyota Motor Corp)
    • $117.53 USD
    • 0.01
    • 0.01%
  • FUJHY
    (Fuji Heavy Industries Ltd)
    • $66.04 USD
    • 0.83
    • 1.26%
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