Subaru maker Fuji goes against grain with local output hike

by Anna Mukai and Yuki Hagiwara

Bloomberg

Fuji Heavy Industries Ltd. is making a contrarian bet: The maker of Subaru cars is cranking up domestic manufacturing at a time when its domestic rivals are expanding overseas to escape the strong yen.

The carmaker said this month it plans to increase domestic production to account for 78 percent of output during the fiscal year ending next March, compared with 73 percent the previous year. Fuji Heavy said that expanding capacity in Japan — instead of the United States, its biggest market — is cheaper.

“A large-scale expansion in the U.S., where we build new factory buildings and such, will cost a lot,” Chief Financial Officer Mitsuru Takahashi said in a May 18 interview in Tokyo. “We’re not like Toyota, Honda or Nissan, so it’s not appropriate for us to make sudden, big investments.”

The decision makes Fuji Heavy the nation’s only carmaker to disclose plans to increase its proportion of Japanese output, raising its vulnerability to a currency that has risen 40 percent in the past four years and forced competitors to build factories overseas. While the slight weakening of the yen this year has helped Fuji Heavy shares rally more than other automakers, some investors say the company is taking on unnecessary risk.

“What matters most for carmakers is localizing production where demand is,” said Yuuki Sakurai, chief executive officer at Fukoku Capital Management Inc. in Tokyo. “I don’t expect the yen to weaken much anytime soon and their relatively low level of localization will have an impact on their shares sooner or later.”

Fuji Heavy, which already makes a bigger proportion of its vehicles at home than any other Japanese automaker, said it will increase domestic production 28 percent to 598,000 units in the year ending next March. In the U.S., the Tokyo-based automaker will cut output at its plant in Indiana by 1 percent to 169,000, according to the company.

Among Japan’s automakers, Toyota Motor Corp. plans to maintain production of 3 million vehicles in Japan and recently announced plans to increase production in Indonesia, Russia and the U.S.

Nissan Motor Co., whose chief executive officer, Carlos Ghosn, referred to the yen as a “1,000-lb. gorilla” that’s unpredictable, has said it plans to maintain domestic output of 1 million cars and expand in Mexico, Brazil and Southeast Asian countries. Honda Motor Co. plans to expand production in Southeast Asia and North America, its biggest market, the company has said.

While the yen has weakened 2 percent in the past six months against the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, it still remains about 40 percent higher than before the 2008 bankruptcy of Lehman Brothers Holdings Inc.

For Fuji Heavy, every ¥1 gain against the dollar reduces operating profit by ¥6.5 billion, and ¥400 million versus the euro, according to Fusao Watanabe, a company spokesman.

“I can fully understand their thinking to stay in Japan, risk the inevitable exchange-rate fluctuations — you can lose, but you can also win — and leverage the various advantages they can find to exploit around the Japanese base,” said John Shook, chairman and chief executive officer of Cambridge, Massachusetts-based Lean Enterprise Institute and a former Toyota engineer.

Building a new factory in the U.S. will cost at least $1 billion, according to Shook and Maryann Keller, principal of a self-named consulting company in Stamford, Connecticut.

Still, meeting an increase in overseas demand through exports will put pressure on operating profit margins that trail the industry’s average.

Fuji Heavy’s operating margin of 2.9 percent compares with the 3.8 percent industry average, according to data compiled by Bloomberg. Nissan, the automaker with the highest share of production overseas, had a margin of 5.8 percent.

Fuji Heavy on May 8 forecast a 25 percent jump in profit as it targets record sales of its four-wheel drive Subaru vehicles this year on rising demand in the U.S. and China.

Driving profit growth is demand in the U.S., where Subaru was named this year’s top automaker in Consumer Reports magazine’s annual rankings, earning its score of 75 out of 100 points for building “dependable, all-wheel-drive vehicles with simple interiors.”

Fuji Heavy had to adjust its production plans after failing to receive Beijing’s approval to build cars in China. It’s the only Japanese carmaker besides Daihatsu Motor Co. without a vehicle-making venture in the world’s largest auto market.

China isn’t approving Fuji Heavy’s proposal because it considers it to be part of Toyota, which owns a 16 percent stake and already has the maximum of two Chinese partners, three sources said last year.

A 25 percent import duty makes Subaru cars more expensive than locally built cars. Fuji Heavy will have to continue shipping cars and sport utility vehicles.