Why Big Sales for Subaru Could Actually Cause Big Problems

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Source: Subaru

Subaru has a big problem. It’s the type of problem that most automakers would kill to have, but it’s a problem nonetheless. Since 2011, the company’s U.S. sales have skyrocketed 44.7%, jumping from 266,989 vehicles up to 513,693 in 2014, becoming the 10th best-selling brand in America, and outselling Volkswagen, Mercedes-Benz, and Chrysler. While this hardly seems like a bad thing, Subaru’s sudden high-profile status has put the small company dangerously near production capacity, and another record-setting sales year could mean that it’s about to hit a serious sales plateau.

Speaking with The Cheat Sheet via email, Subaru’s Director of Corporate Communications Michael McHale commented on Subaru’s unique position in the American market; “It’s a high quality problem,” he writes. Part of Subaru’s solution lies with reducing the time between production and delivery. As a result, it will reshuffle where some of its models are built. “We are bringing Impreza production to the U.S. in late 2016 to help meet demand,” says McHale. As real as Subaru’s production problem is, it offers insight into just how quickly things have changed in the automotive industry.

In the years following the global financial crisis, a number of smaller players have stepped to the forefront and shaken up the automotive status quo. Hyundai and Kia have matured to the point where they offer legitimate contenders in nearly every segment, and Mazda’s beautiful and well-built cars have turned it into a darling of the automotive press. But none of this compares to Subaru, which in a few short years has gone from a cult car on the coasts to the second-fastest growing car company in America.

Source: Subaru

Source: Subaru

But unlike these other automakers, Subaru just isn’t equipped to handle the massive growth it’s experiencing. So now, as the company experiences unparalleled sales success, it’s faced with some tough decisions: Does it partner with a larger automaker, sink millions into expansion, or stay the course at the risk of sacrificing future sales? Reporting for Bloomberg Business, Kyle Stock explored the options, and found that each scenario has some very real drawbacks for America’s newest automotive infatuation.

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YOSHIKAZU TSUNO/AFP/Getty Images

For starters, Subaru is a very small automaker. Putting this into perspective, Stock writes:

“Almost any car company one can name is far bigger than little Fuji Heavy Industries, Subaru’s parent. BMW? More than twice the size in terms of unit sales. Kia? Almost three Subarus. Even Mazda sells 50 percent more cars.”

Success on this level can be especially dangerous for small manufacturers. Even in these good times, some analysts felt that even Mazda was too small and weak, and felt it was at risk of financial collapse if another recession hit. Recently, it entered a partnership with Toyota to give it some financial stability, but this probably isn’t the route the smaller Subaru is likely to take.

Toyota already has a 16.5% stake in Subaru (the two jointly developed the criminally-underselling Scion FR-S/Subaru BR-Z sports cars), and the company is freeing up space by ending production of the Toyota Camry at its American plant in Lafayette, Indiana. This move should help alleviate some pressure, but it isn’t nearly enough to affect production capacity in a big way .

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Source: Subaru

There is very physical room for growth at Subaru, especially at the Lafayette plant. But as Stock points out, this probably won’t happen anytime soon:

…about 600 largely undeveloped acres where the plant could, conceivably, expand. Of course, that requires money and no small dose of optimism… In early 2012, the company poured $75 million into the plant to boost capacity by 15 percent. Just a few months later, it committed to an additional $400 million in expansion costs, including a new paint shop, an assembly line, and a machine the size of a small apartment building to stamp metal sheets into doors and body panels.

Unlike companies like Volkswagen, Honda, and Nissan that have plants operating around the world, Subaru production is hamstrung by only having factories in Japan and America. The company plans on selling an ambitious 920,000 cars worldwide in 2015 – which puts it just near production capacity, though as Stock points out, research shows that the company could probably sell an additional 300,000 cars in the U.S. alone, if it only had the means to build them.

But this scarcity does come with advantages. At 9%, Subaru has the highest profit margins of any major automaker, and its cars hold their value better than almost anything else on the market. Despite a limited lineup and sometimes limited availability, demand is high. As a result, dealers are more likely to sell a new Subaru at or close to suggested cost than nearly any other type of car.

Part of Subaru’s appeal is due to the fact that it has filled the void left by Volvo, Volkswagen, and the dearly-departed Saab. While these two remaining automakers have moved decidedly upmarket, Subaru’s outside-the-box styling, standard all-wheel drive system, and family-focused ad campaigns have begun to make the cars attractive to buyers all over the country. Speaking with Bloomberg, auto analyst Jeff Schuster sums up the Subaru phenomenon as: “… the this-isn’t-a-Toyota appeal. And it’s a balancing act.” According to the company it’s something more than that. Its heart-warming ads declare “Love. It’s what makes a Subaru a Subaru.” Love and business rarely mix, but Subaru is doing something right, and hopes to keep its delicate balancing act going as long as it can.

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