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BUSINESS August 19, 2013, 3:41 p.m. ET

Subaru's Got a Big Problem: It's Selling Too Many

Cars
By YOSHIO TAKAHASHI and YOREE KOH
TOKYO—Subaru has a problem any auto maker would love to have. It's selling too many cars.

Subaru-brand sales in the U.S. are up 27% in the first seven months of 2013, more than three times
the market overall. The auto maker, owned by Fuji Heavy Industries Ltd., is on track for a sixth-
straight year of sales gains, a period that includes the 2009 financial crisis that bankrupted two of
Detroit's Big Three.

But the sales boom has taken Subaru by surprise, and the company faces shortages of its newest
models. That is forcing Japan's smallest car maker to ask some thorny questions about how much
risk it can stomach if it wants to expand.

Subaru plans to increase its Japanese production capacity

More
by 15% by the end of August compared with 2012. Subaru
Open All Night: America's Car
Factories also is investing about $400 million to increase output at
Hyundai Motor Braces for Strike its U.S. factory in Lafayette, Ind., by 76% to 300,000
vehicles by 2016.

The U.S. sales surge and a weaker yen helped make Fuji Heavy Japan's most profitable car
company between April and June with an operating profit margin of 12.7%, above Toyota Motor
Corp.'s 10.6%.

Subaru's two main Japanese plants are already running at full capacity, and manager Masahiro
Kasai said the company would likely add more capacity soon.

But Subaru's conservative approach is nearing its limit, said Mr. Kasai.

"It's like when the tube of toothpaste has run out and you try to squeeze out the last little bit from
the bottom again," he said. For instance, its Forester crossover's U.S. inventory stands at a 15-day
supply, compared with the U.S. industry average of around 60 days.

A Fuji Heavy executive said the company would finance a big expansion if it saw an opportunity for

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Subaru's Got a Big Problem: It's Selling Too Many Cars - WSJ.com

long-term growth.

Right now, Subaru's parent believes the strong demand for the redesigned Forester will run out at
some point.

"For Fuji Heavy, no matter how cautious it becomes, that doesn't mean that they are overcautious,"
because they are so small, says Koichi Sugimoto, an analyst at BNP Paribas.

Subaru also is preparing to sell its XV Crosstrek Hybrid, its first hybrid gasoline-electric vehicle in
the U.S. later this year, prompting debate over how much it is willing to spend to support the
technology. The auto maker is late to the hybrid market and still doesn't have a full-electric or plug-
in hybrid that meets California emissions rules that go into effect in 2016.

"We are a small company, so within our limited resources how much do we put toward [hybrids]?"
asks Subaru of America Chairman Takeshi Tachimori, a 59-year-old Fuji Heavy veteran.

Subaru for years has operated as a niche player. It found its calling in compact SUVs and Outback
wagons. Its all-wheel-drive cars earned the brand a loyal following among drivers in the northern
corners of the U.S. Subaru started a decisive U.S. push in the past half-decade to counter the
shrinking Japanese market.

Its vehicles are now wider and roomier, tailored to American tastes so much so that some Subaru
models like the latest Outback are too big for some Japanese parking garages.

Subaru expects 51% of its sales to come from the U.S. in the year to March compared with 33% a
decade earlier.

Rob Cori, a 23-year-old graphic designer, ordered a 2014 Forester in mid-July through a Subaru
dealer in Arlington, Va. At the time, there was only one new Forester left on the lot. It wasn't the
color he wanted and didn't have the transmission he preferred.

Mr. Cori says he considered Mazda CX-5 crossover and a

Ford Escape, but decided to order the Subaru from Japan,
and put up with the wait.

"If I had went with the Mazda and the Ford I could have
walked off the lot with one that day, but I preferred to
wait for a Forester," he said.

Subaru's dilemma over capacity is shared by bigger rivals,

Reuters
including Ford Motor Co. and South Korea's Hyundai
Subaru is stretched from building cars such as Motor Co. Subaru's size currently accounting for just 2.6%
the XV Crosstrek Hybrid. of the U.S. market forces it to be more careful.

Adding a factory that can build 200,000 vehicles a year,

the amount usually required to build a new assembly plant, represents 3.5% of Ford's global output
but more than a quarter of Subaru's.

The way that Subaru was blindsided by its own U.S. success has been a cause of embarrassment for
Mr. Tachimori. He said the company's sales projections were so conservative that he found himself
apologizing instead of complaining to production officials for the shortages.

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Subaru's Got a Big Problem: It's Selling Too Many Cars - WSJ.com

This missed opportunity has caused Mr. Tachimori, who previously led development the Subaru
Outback and Legacy, to push other executives to soften its play-it-safe approach.

"It is something we haven't really done much of before. We know how to study worst-case scenarios,
but we've never examined a best-case scenario," Mr. Tachimori said. "It will be more problematic if
we miss out on an important opportunity so we should examine these kinds of best-case scenarios
as well."

Write to Yoshio Takahashi at yoshio.takahashi@dowjones.com and Yoree Koh at

yoree.koh@wsj.com

A version of this article appeared August 21, 2013, on page B1 in the U.S. edition of The Wall
Street Journal, with the headline: Subaru's Got a Big Problem: It's Selling Too Many Cars.

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