FUJHY Subaru Corporation (PK)

By Sean McLain 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 6, 2018).

TOKYO -- Some of the shine is coming off Subaru Corp.

The Japanese car maker, which grew rapidly earlier this decade by feeding Americans' demand for sport-utility vehicles, said Monday it fell short of its U.S. shipment target and its profit margins narrowed. Subaru's net profit in the current fiscal year, which ends in March, is set to drop to less than half the peak.

The problems are partly temporary. Last week, Subaru recalled more than 400,000 Subarus and Subaru-made Toyotas for engine parts that were at risk of breaking, a move that wiped out nearly $500 million in operating profit.

The company said it missed opportunities in the U.S. because it didn't have enough vehicles available. "We are struggling with production a bit, " said Toshiaki Okada, Subaru's chief financial officer.

The company's plant in Indiana hasn't built enough of the new Ascent, a seven-seater SUV with 19 cup holders. Factory workers have struggled to build Ascents fast enough while maintaining quality, Mr. Okada said.

Subaru is likely to record its third straight fiscal year of declining profit. Usually comfortably in the double digits, the company's operating margin fell to 3.7% in the six months to September from around 13% last year.

Subaru projects it will sell 1.04 million vehicles in the year ending in March, down from the previous year's 1.07 million units.

A business plan adopted in July under new Chief Executive Tomomi Nakamura calls for Subaru to lift its U.S. market share to 5%, from just under 4% currently.

In Japan, Mr. Okada said Subaru was wrestling with problems on its inspection lines at a plant where the company has acknowledged workers were conducting vehicle tests improperly. He said efforts to ensure vehicles are inspected properly slowed down production. The company said Monday it would recall an additional 100,000 cars in Japan for newly discovered problems related to vehicle inspections.

Takaki Nakanishi, a Tokyo-based auto analyst, said the sales slowdown is "a supply-side issue, not a demand issue. The demand is strong, the products are selling well."

Even without recall-related costs, Subaru's operating profit in the six months to September would have declined by more than third.

One reason is the growing bill for financial incentives in the U.S. Subaru offers 0% financing on some of its best-selling vehicles, a common tactic by car makers to reduce inventory ahead of a model refresh. Subaru began selling an updated Forester sport-utility vehicle in September.

U.S. interest rates overall are rising, lifting the bill for the subsidies Subaru is offering customers.

Subaru said it spent an average of around $2,200 per vehicle on financial sweeteners for customers, compared with around $1,800 last year. The company said sales of new models like the Ascent and the Forester would rein in its spending on incentives. New vehicles are typically offered with fewer deals.

Mr. Nakamura, the Subaru chief executive, said he was most worried about Subaru's quality struggles, which he blamed on growing too quickly. Subaru's sales volume grew to more than one million last year from 825,000 in 2014.

"There have been a lot of recall-related issues lately. The cause could probably be attributed to stretching too much for growth," Mr. Nakamura said.

Write to Sean McLain at sean.mclain@wsj.com

(END) Dow Jones Newswires

November 06, 2018 02:47 ET (07:47 GMT)

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