Subaru: Japan's Hottest Car Company

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This year, it gave the Outback the same award—the first time one automaker had bagged the prize two years running.

Subaru Love

Still, it's not all about the cars. Savvy marketing is also helping. In the fall of 2007, Subaru handed its U.S. ad account to Minneapolis agencyCarmichael-Lynch. The agency created a campaign built around the strength of emotional ties between Subaru customers and their cars, including print and TV commercials and a "SubaruLove" Web site where Subaru owners write about their affections for their Forester or Impreza. As part of the launch of the new Legacy, one stunt even involved passersby in New York, Los Angeles, and Chicago being asked to run their hands along a car hooked up to an eight-foot-high "love-meter." That might sound corny, but there are signs the company has reached beyond its loyal core: While it made 17,000-plus sales under the cash-for-clunkers program, which ended in August, just 173 Subarus were scrapped. That suggests the large majority of people using cash-for-clunkers to buy a new Subaru had switched from a rival brand.

Overseas chief Nagato adds that Subaru has also benefited from moves to bolster the finances of its U.S. arm earlier this year. At a time when even customers with good credit histories were struggling to get a car loan, Subaru arranged credit lines with J.P. Morgan (JPM) and the state-backed Japan Bank for International Cooperation. That meant "neither we nor our consumers experienced any confusion," says Nagato, a former banker with Mizuho, Japan's second-largest bank. He adds that in 2010 Fuji Heavy hopes Subaru will increase its U.S. dealer count by 25, to 625.

For all that, there is plenty of work hard ahead. Fuji Heavy still expects to post a net loss for the full year. With 85% of its production at home—Subaru has just one plant, in Lafayette, Ind., outside Japan—the company is vulnerable to further strengthening of the yen. Fuji Heavy must also navigate a three-way tie-up with Toyota (TM), which doubled its stake in Fuji Heavy, to 17%, in April 2008, and its small car unit Daihatsu. As part of the deal, Fuji Heavy will stop making 660cc minicars and instead sell Daihatsu minicars badged as Subaru. From 2011, Fuji Heavy will also build a new rear-wheel drive sports car, currently known as the FT-86, for and make a Subaru version.

Lacking a Hybrid

Industry watchers broadly welcome the changes, noting that Subaru is too small to do everything on its own, but warn that its brand could be watered down if customers perceive the cars as being engineered by Toyota. Some analysts also worry about Subaru's lack of hybrids and other environmentally friendly options. While on paper, the tie-up with Prius maker Toyota should help, combining Subaru's boxer engines with Toyota's hybrid system may be less straightforward in practice. "It's not an impossible thing to do, but it would probably be time-consuming and expensive," says Koji Endo, a managing director at Advanced Research Japan. "At the same time, Subaru has limited resources, and they cannot do everything themselves."

Then there's the challenge of replicating recent success in North America in other markets. Nagato says he is keen to expand sales in China, which will overtake the U.S. as the world's biggest auto market this year. The signs are positive: Sales in the Middle Kingdom increased 81% through September, to 24,000 vehicles, and should reach a record 35,000 by the end of the year. But every Japanese-made Subaru car Fuji Heavy exports to China incurs a 25% import tax, making it far harder to compete with Toyota, Honda (HMC), and other rivals, which are producing locally with joint venture partners. Nagato admits the company may have to build cars but says it is difficult to justify a factory unless they can sell at least 60,000 to 80,000 cars a year. "My impression is that cars that appeal to American customers will be loved in China, too," he says.

Rowley is a correspondent in BusinessWeek's Tokyo bureau

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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