TALK FROM THE TOP: CEO steers Subaru into premium territory Takao Saito Automotive News / May 19, 2003 Since embarking on a strategy to become a niche brand in 1993, Subaru of America Inc. has turned around its slumping sales by positioning itself as a specialist in all-wheel-drive vehicles, including crossovers and cars. Subaru added a second leg to its product range last year - European rally-based performance vehicles - by launching the Impreza WRX. Subaru also is adding turbo power to every vehicle. CEO Takao Saito, 60, spoke with Staff Reporter Diana T. Kurylko at Subaru headquarters in Cherry Hill, N.J., this month. How do you expect Subaru of America to do this year? Last year, we sold 180,000 vehicles. We will try to sell more than 200,000 vehicles this year. It's a very challenging target, but perhaps we can top 187,000 in 2003. We have grown 10 percent each year except in 2001-02. Considering the market situation, it may be a hard target. March sales results show an increase of more than 20 percent, and we were up 3 percent in April. That's good compared with the market. Our midterm target is 250,000 units in 2006. Another big strategy is to become a premium brand. That is a key target for us. All of our activities are directly related to this. If your long-term strategy is to grow to 250,000, doesn't that require some new vehicles in your portfolio? Of course. An entirely new car, a seven-passenger vehicle, is being developed for 2005. Will it be similar to a minivan or an SUV? A crossover, more like an SUV. It will be some kind of a combination and it will be developed in Tokyo. All of your cars today are basically on the Legacy platform, correct? It's hard to distinguish. My understanding is that the seven-passenger car platform will be a little different from the Legacy platform. Will it be built at your factory in Indiana? I believe so. It hasn't been finally decided. What volume are you targeting for this crossover? The plan is to sell 3,000 a month. If you are trying to make Subaru a premium brand, why a crossover vehicle? Our definition of a premium brand is not limited to luxury sedans. Of course, products have the first priority and we are trying to have a top-quality car in each segment. We are very proud of the Forester. The Impreza WRX has a good reputation, and the Legacy has continued 20 years in a row as the top station wagon. Our customer satisfaction index isn't so good. We are trying to improve that. Is that because of your dealer scores? Yes. It's a combination of product quality and dealer issues. We have some initiatives in place like our Signature Facility program to upgrade dealerships to a certain standard. There is a great disparity in the types of facilities that we have. We also have a customer-training program. You are near the bottom in the J.D. Power scores. In five years, what is your goal - to be up by Honda or Toyota or where GM is? Our target is to be top class and to do it in five years. Our understanding of a premium brand is that we have to be No. 1 in each target. By becoming a premium player, do you want to be able to charge more than a volume U.S. domestic brand for your products? Our image is higher than many of the Big 3 and Mitsubishi, Suzuki and Nissan but a little behind Honda and Toyota. My target is to be better than Honda. And issues like long-term durability are very high as a priority. What is your breakeven point? In Subaru's case, each model reached its breakeven point. How much can Subaru expand and stay a niche player? What are your limitations? What we did after 1993 explains our strategy. We try to enhance and sell only all-wheel-drive cars. We used to say Subaru is very strong in the snow in our marketing. Recently, we say awd isn't just for the Snow Belt; we have traction control and active safety and drivability. All these features of awd are good. Many people recognize that point. If we attach incentives, shortly we could get good sales numbers. But over the long term, and history shows this, your image goes down. You've increased incentives haven't you? Yes. Two years ago, our total incentives were $500 per vehicle. Last year, we spent about $900. This year, perhaps we'll spend a bit more, $1,000. The Big 3 are spending more than $3,000, and the Japanese competition about $2,000, so we are spending half of what the Japanese spend and one-third of the total average. We never yet attached customer cash to any car. We didn't use 0 percent incentives last year. We started 0 percent financing in March but limited it to 24 months because many dealers wanted to use 0 percent in advertising. Have sales suffered because you haven't been as aggressive with incentives? Two years ago, we set a sales record, and last year our numbers were good. In 2003, sales are increasing. Couldn't you offer higher incentives and meet sales targets faster? It's a question of balance. We have an annual business plan, and we don't set big incentives. My job is to get good sales with low incentives. How do you get someone to buy a Subaru when even Honda offers $2,000? We have to educate our sales people to sell cars, not deals. Our cars have a strong sales point. How much can Subaru expand in America and still stay a niche player? My sales target is 250,000 in 2006, and our share will grow to about 1.5 percent from 1.1 percent last year. Next year, you'll have another 100,000 units of production capacity in North America because you have bought out your partner in the Indiana plant, Isuzu. What will you do with it? It isn't that simple. We can't use the Isuzu lines. We would have to install a new line, so it's related to our future planning. Does your long-term plan call for installing a second production line? Maybe. How is the 20 percent stake that GM purchased in Fuji Heavy, your parent, helping Subaru? From GM we have OnStar on the six-cylinder Outback models as standard equipment. In Indonesia, the Philippines and India, Subaru is using GM's sales network. Beginning at the end of 2001, Fuji began importing GM's Zafira (small minivan) for sale in Japan as the Subaru Traviq. Also, many discussions are going on about China. Everything we do should be a win-win. Can you use General Motors Acceptance Corp. in America? No. Last year, we used Primus, but their interest rates aren't so good. We studied GMAC because of the alliance. And at the same time, we also studied Chase Automotive because they have a very sophisticated system. In the end, we chose Chase and we changed our finance company. Chase does all of our financing - consumer and dealer. Chase gave you better rates than GMAC? Yes, and we have a Subaru affinity Master Card through Chase with Subaru bucks. It was launched last year as well. They earn bucks toward parts, accessories, service and an extended service contract. GM CEO Rick Wagoner said this year that a proposal to develop a joint crossover vehicle went nowhere because Subaru wanted to use the horizontally opposed engine, your signature feature. His comments were related to the seven-passenger car, which was called SGX. Frankly speaking, it's a difficult car to make, especially for the U.S. market. GM is more cost-oriented, and our direction is toward making a premium car. And there were different methods of developing cars costwise. I don't know the details. Fuji then said we would develop it by ourselves. We used parts of the original concept. Earlier this year, your dealers were upset about sharing the WRX with Saab. They believe it is one of your best image vehicles and that sharing would affect your business. Saab's scale is small ? their sales are less than one-third of ours. So the numbers won't make a big difference to our franchise. The WRX station wagon is less than one-third of total Impreza sales. Will the next vehicle shared by Saab and Subaru be developed jointly? At this point, I'm not sure. How is the move to exclusive dealerships working? We have made big efforts in the past years since we announced the Signature Facility program. We have five regions and two independent distributors. We have 587 dealers, and 32 percent are exclusive. What is the target for 2003? Long term, we also want separate showrooms and have exceeded our plans. Only three years ago, we had only 25 percent exclusive. We now have 32 percent exclusivity, and 26 percent have separate showrooms. The number is increasing. Our target for 2006 is to have 76 percent exclusive, including separate showrooms. Are you helping with the investment? Case by case. And, of course, we have independent distributors. In today's market, is it unusual for a company to have independent distributors? Will that change in the future? We don't see any change coming at this moment. We've had this situation for a long time. They are doing a very good job. In England, the Boston distributor has all exclusive dealers. You now have two streams of vehicles, rally-type cars and all-wheel drive. Is this enough segmentation to maintain long-term growth? And why rally cars? Recently, many competitors have followed us with awd, and premium makers also are coming in with crossovers. The crossover segment is increasing as our sales are. Our share of awd is decreasing. In the United States, we have established a good reputation. In Europe, Japan and Australia, Impreza is stronger because of the world driving championship, which we won three years in a row. Because of this, Subaru's image is more of a performance-driving car. The U.S. and Canada are the last countries where we are now launching our driving performance strategy. We started this two years ago with WRX, and the car has been a success. What else are you doing to boost the performance image? We just started selling the STi version of the WRX with 300 horsepower. At the Chicago Auto Show, we introduced the Forester turbo, and in New York, we introduced the Baja turbo. As a last stage, we will introduce the Legacy turbo next year, so all of our cars have turbos. Why did you go with performance cars rather than enter the luxury segment like Lexus and Infiniti? You went with muscular rally cars. We went with our strength. The success of the WRX in the U.S. gave executives at Fuji confidence to continue with this strategy. Some times performance vehicles such as the STi dip sharply in sales after an initial success. Is it a sound strategy to focus on these vehicles if demand falls faster than for mainstream vehicles? That's why we decided to sell only 300 to 400 STi models a month and why we're charging $30,995. Already we have more than 1,000 orders with cash - even though we didn't have a final price until late April. That car will raise our image and reputation. We sell 2,000 WRXs a month. (The price difference is $6,000). Are you making a profit in North America? Yes. We are the biggest market for Fuji. Are you considering a luxury sedan? Yes. I believe the platform of the seven-passenger car could give us a very good flagship car. The Legacy is a little bit too small. Dealers originally said the Baja pickup was too expensive. Have you adjusted pricing? We didn't adjust, but immediately introduced the Baja Sport with a price difference of $2,000. None of the press people at the launch said it was too expensive. It was developed using parts of the Legacy, and they know the cost and its functions. Our pricing is very reasonable. For the general public, one of the targets is young people; they simply compare it with the cheaper Big 3 trucks and call it too expensive. So dealers said the same thing. I believe the top model also will help us with Baja sales. As a niche marketer, we don't have to necessarily compete with the cheap trucks. Have your targets changed? We wanted to sell 2,000 trucks a month. We compare that with sales of our old Brat. We consistently sold 2,000 Brats a month. When we stopped selling Brat in 1987, it was also cheap. We started Baja sales in September, and we sold about 2,543 Bajas last year. In March we sold 1,200 and in April, a bit less. That's only selling the original Baja. We added the new sport version, and later this year we'll add the turbo. With the three combinations next year, I hope to reach the final target. You will need more than three car lines for growth as well as the seven-passenger. Will there be another car range by the end of the decade? Perhaps. But to reach 250,000, we have enough. It will depend on how our driving performance strategy works.