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Screaming Hot Subaru

Japanese niche maker’s stock jumps 500% in barely 18 months.

by on Aug.12, 2013

Subaru has caught the eye of investors as its stock price has risen 500% in 18 months.

Little Subaru has turned into a big deal as far as investors are concerned.

After squeaking out an increase in sales during even the worst years of the Great Recession, the stock market seems convinced the automotive arm of Fuji Heavy Industries has even bigger opportunities ahead, with Fuji shares increasing fivefold since the beginning of 2012.

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But while the maker’s President Yasuyuki Yoshinaga says Subaru is “at a major turning point,” he is also sounding a note of caution for those who think the maker might now shift its focus from niche products like the Forester crossover and WRX hot hatch to become a true mainstream manufacturer.

“We’re not a carmaker that can grow as big as Toyota,” Yoshinaga told reporters. “And even if we could, reaching that sort of scale would mean we’d stop being Subaru.”

Subaru's BRZ is one of the many products that have created a loyal following.

The 59-year-old executive revealed that there is an internal debate underway within Subaru, some in top management questioning the company’s traditional niche approach. But others caution that is precisely why Subaru has done so well and they clearly have history to look back at for examples of what might go wrong when a second-tier player tries to go mainstream.

In the late 1980s, at the height of the Japanese automotive boom, it seemed as if every one of that country’s manufacturers thought they could emulate Toyota. No one was more aggressive at that goal than Mazda. The Hiroshima-based firm unleashed a flood of new offerings – at one point more than doubling its range with seven new models hitting market in barely a year.

But designing and bringing new products to market turned out to be only half the challenge. In the critical U.S. market, it turned out Mazda didn’t have the financial resources to promote its expanded lineup and had to resort to a launch-and-leave strategy. In other words, it could come up with enough cash to market each new model for about three months before shifting to the next introduction.

The result, Mazda officials recalled, was that most of the new products were lost in the noise of a hotly competitive market. Few lasted for long and the Japanese maker went nearly bankrupt trying to clear things up, abandoning most of the new offerings and being forced to cede control to U.S. partner Ford Motor Co. for the better part of two decades.

Of course, with Ford as its big brother, Mazda found it could cut development costs on models like the Tribute SUV – essentially a rebadged version of the Ford Escape.

And Subaru could follow a similar strategy. It already has financial ties to Toyota – which snapped up Fuji shares after the smaller maker walked away from a brief and unsuccessful alliance with pre-bankruptcy General Motors.

Subaru was initially planning to work with GM on the development of the U.S. maker’s Pontiac Solstice roadster, a joint effort that never came to fruition. But the little Japanese maker has scored a big hit on an alliance with Toyota that led to the development of the new Scion FR-S – which is also sold as the Subaru BRZ and, in some global markets, as the Toyota GT86.

Other joint ventures with Toyota are reportedly also in the works. Indeed, Subaru has been producing cars for the Japanese giant at its plant in Lafayette, Indiana for several years. Subaru originally opened that factory as part of another failed alliance with Isuzu, which has since walked away from the U.S. market and abandoned passenger car production.

Once expected to cut-and-run itself, Subaru is now investing another $400 million in the Indiana facility, a move that will boost capacity there by 100,000 by the end of 2016.

(Subaru Forester leads crossover pack in crash testing. For more, Click Here.)

That should help Subaru meet a mid-term goal of reaching the 850,000 mark by the end of its fiscal year in March 2016. Longer-term, Yoshinaga sees 1 million as an “appropriate level.”

The maker’s hopes of building cars in China were dashed when it got caught up in geo-politics, Japan and China bitterly arguing over ownership of a chain of uninhabited islands in the East China Sea. Fuji might again apply for permission when the feud is resolved but for the near-term, if not longer, the U.S. market will likely remain key for Subaru.

Another risk is that the suddenly weakened yen could touch off new trade issues with the U.S. American makers are already trying to block Japan’s entry into a proposed U.S.-Asian trade alliance claiming the country is unfairly manipulating its currency.

(Click Here to read about Subaru adding 900 employees.)

While Japanese makers dispute that, the weak yen contributed the lion’s share of the surge in profits for Toyota and Nissan during the most recent quarter, both makers acknowledged.

For its part, Fuji saw profits triple to a record 48.5 billion yen, or $500 million, during the Japanese first fiscal quarter. And its margins hit 12.7%, one of the best numbers in the global auto industry.

But despite the temptation, many observers warn Subaru to stay small.

“Subaru is a niche product,” Takaki Nakanishi, founder of Nakanishi Research Institute Co., told the Bloomberg news service. “They have a strong partner in Toyota, which is complementing Subaru’s product development so that they can focus their strategy on being a niche player.”

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