Subaru’s lack of China plant pays off

Fuji Heavy stock shines for now but firm knows foray inevitable

by Ma Jie and Yuki Hagiwara

Bloomberg

Fuji Heavy Industries Ltd. President Yasuyuki Yoshinaga has become a market darling for something he failed to do: build a factory in China.

The maker of Subaru cars, the only major Japanese auto brand without a plant in the world’s largest vehicle market, has jumped 83 percent in Tokyo trading this year for the biggest gain on the Nikkei 225 stock average.

Fuji Heavy’s smaller presence in China helped shield it from a consumer backlash triggered by the Senkaku territorial dispute as its sales in the U.S. and Japan have surged.

“Selling cars in China is difficult now,” Yoshinaga said at the unveiling of the new Forester sport utility vehicle last week in Tokyo. “Luckily we can cover the loss there by producing more cars for Japan and the U.S., since we don’t have a plant in China.”

While its Japanese peers idled factories in China last month as deliveries slumped, Fuji Heavy was able to ship more cars to the U.S. and Japan, where waiting times have stretched to six months for its $25,495 BRZ sports car and two months for the $17,895 Impreza hatchback. The demand helped the Tokyo-based carmaker boost its full-year profit forecast by 40 percent even as Honda and Nissan cut theirs by a fifth.

Last year, Yoshinaga said he felt his perseverance was being “tested” after failing to get approval for his company’s proposed joint venture with Chery Automobile Co.

Chinese authorities had balked because Toyota Motor Corp., which already has two joint ventures in China, is Fuji Heavy’s largest shareholder, with a 16.5 percent stake.

China didn’t share Yoshinaga’s view that Fuji Heavy is independently managed from Toyota. A third partnership in the country for Toyota would have exceeded regulatory limits, according to three sources.

Manufacturing locally is crucial because import taxes of 25 percent make cars built abroad uncompetitive. China is Subaru’s third-largest market, after the U.S. and Japan, but its growth in the country has slowed. The company sold 57,198 Subaru cars in China last year, versus 57,138 in 2010 and 35,348 in 2009. Nissan Motor Co., which has a joint venture with Dongfeng Motor Corp., delivered 1.25 million vehicles in the country last year.

The delay in getting approval for its venture with Chery prompted Fuji Heavy in May to cut its projection for China deliveries by 44 percent to 100,000 units for the year ending in March 2016. It also lowered its global sales target to 850,000 units, a drop of 50,000.

The China rejection was “disastrous for Subaru and we had a very negative view at the time,” said Masatoshi Nishimoto, an analyst with IHS Automotive in Tokyo. “Their misfortune turned into a stroke of good luck after the anti-Japan protests. But in the long term, Subaru can’t do without China.”

Fuji Heavy Chief Financial Officer Mitsuru Takahashi agrees.

“We just happened to be lucky,” Takahashi said in a Nov. 13 interview. “By chance we have been moving in an advantageous direction. We are not carried away, and we are not assuming the conditions will be favorable forever.”

Fuji Heavy shares have gained 28 percent since Sept. 14, when the anti-Japan protests broke out in China, outperforming Toyota, Nissan and Honda. Researchers at Toyota estimate Japanese automakers are unlikely to fully restore Chinese production before next July, according to a document obtained by Bloomberg News this month.

The decades-old territorial dispute was reignited in April when then-Tokyo Gov. Shintaro Ishihara, a longtime critic of China, proposed buying the three of the Senkaku islets. Although the anti-Japan protests have subsided in China, tensions continue to simmer.

Shinzo Abe, head of the Liberal Democratic Party, said last Thursday he will boost control of the islands should the LDP regain power in the Dec. 16 Lower House election. China filed a formal diplomatic protest after Abe met with the Dalai Lama Nov. 13 and called for democracy in Tibet. Polls show the LDP may win the national vote, returning Abe to the prime ministership.

Fuji Heavy may need to be more aggressive in expanding its manufacturing capacity in North America to capitalize on the growing demand for its vehicles, said Takeshi Miyao, an analyst at market researcher Carnorama Japan.

By 2014, the automaker plans to boost capacity at its plant in Lafayette, Indiana, by 11 percent to 300,000 cars annually and is considering further expansion in the U.S. Fuji Heavy may sell 400,000 vehicles in the U.S. in fiscal 2015, exceeding an earlier forecast for 380,000, Takeshi Tachimori, chief of Fuji Heavy’s U.S. unit, said in June.

In Japan, the company has said it will increase production at its main domestic plant in Gunma Prefecture by 20 percent to 180,000 vehicles by next summer. Government subsidies helped boost domestic sales by 30 percent to 47,528 vehicles for the six months that ended in September, led by the Legacy and Impreza, the company said.

Despite investors rewarding Fuji Heavy for its minnow status in China, Fuji Heavy chief Yoshinaga says the country’s potential is just too big to ignore.

“China is the largest vehicle market in the world and will continue to grow,” Yoshinaga said last month at a media briefing. “When we consider local production, besides the U.S., China is the place. This plan hasn’t changed.”