Subaru: 42% operating profit decline forecasted for FY2018 due to sales decline and recall expenses
Subaru introduces its first PHV, the new HV (e-BOXER) in 2018, EVs to follow in 2021
This report focuses on the impact of Subaru’s recall issues, the finished vehicle inspection cheating scandal in Japan, the quality issues that spread to the U.S., and well as some of Subaru’s product and technology development trends.
|The three-seater SUV Subaru Ascent launched in the U.S. market in July 2018
(All images in this report from Subaru)
In the October to November 2017 timeframe, the inspection cheating scandal was exposed, indicating that final vehicle inspections were being improperly conducted by using unqualified technicians. Subsequent investigations revealed further new problems leading to recall of 530,000 vehicles including the Toyota 86. Subaru cars account for 500,000 units of the total number of vehicles recalled.
These quality issues also made their way to the U.S. market. In November 2018, Subaru recalled 410,000 vehicles globally due to a valve spring defect of which 140,000 vehicles were in the U.S. Parts replacement costs were estimated at 55 billion yen and accrued in the company’s July-September quarterly financial results.
Subaru’s sales in the U.S. had been steadily increasing for the past 10 years until 2018. In addition, with the rapid growth of its consolidated performance, in the fiscal year 2015 its operating profit was JPY 565 billion with a consolidated operating profit margin of 17.5%. It also maintained operating profit margins exceeding 10% in fiscal years 2016 and 2017. However, due to recalls, its sales volumes in the April-September quarter of 2018 dropped by 9.2% y/y, with sales revenue dropping by 7.5%, reporting JPY 77.1 billion for recall expenses (warranty claims) resulting to a dismal financial report showing a 74.1% drop in operating profit. Subaru has since made a significant downward revision for its FY2018 forecast with a net sales revenue of JPY 3.21 trillion (down by 0.7%), operating profit of JPY 220 billion (down by 42%), and an operating profit margin of 6.9%.
Subaru has made it a top priority to reform its corporate culture, securing JPY 150 billion in investment funding over 5 years that will be targeted at initiatives to regain customer trust and improve quality.
Japanese automakers: Future direction and plans based on recently announced financial results （June 2018）
JSAE Exposition 2018: Exhibits of 6 automakers （June 2018）
North American International Auto Show 2018: Asian OEMs （February 2018）
Tokyo Motor Show 2017: Mazda, Suzuki, Subaru, and Daihatsu's exhibitions （December 2018）
Subaru: Mid-term plan revised upward to exceed 1.2 million vehicles in FY 2020 （October 2016）
Massive recalls due to faulty vehicle inspections and defective valve springs extends to the U.S.
In the October to November 2017 timeframe, the company disclosed that it had been conducting finished vehicle inspections of new cars by using unqualified technicians. Afterwards, a number of new scandals surfaced after investigations such as falsifying fuel economy and emissions data, as well as compliance issues with the brake performance test methods being used, which led to a recall of a total of 530,000 vehicles including the Toyota 86 (500,000 units were Subaru models).
Some of the root causes or background behind these issues were identified as follows:
- Excessive workload imposed on inspectors regarding processing capacity related to the final inspection of new cars.
- Corporate culture putting too much emphasis on high skill levels and an occlusive culture within the inspection department
- Lack of training, insufficient knowledge, and inadequate company rules
- Lack of ability to question the rationality of rules.
- Insufficient understanding by the management team and their lack of engagement to improve the situation.
Furthermore, according to Mr. Yoshinaga, the former CEO (at that time), “the workload of the workplace increased due to the growth of sales volumes over the past several years. However, the working style and practices at Subaru remained the same, dating back to the Showa period (30 years ago). Rather than making unreasonable demands of our workers we allowed the defects to go undetected and failed to make daily improvements to resolve the situation”.
Recalls spread to the U.S. market
The recall in Japan due to the inspection cheating scandal did not affect vehicle exports, but in the latter half of 2018 recalls due to defective parts appeared, spreading its impact on the profitability of Subaru’s most important market, the U.S.
In November 2018, due to a defective valve spring, Subaru announced that it was recalling 411,000 vehicles globally. In the valvetrain mechanism, due to a design flaw, minute foreign substances in the spring material could cause overstress to the valve spring that could fracture. This defect could lead to abnormal engine noise, malfunction or, in the worst case there is the possibility that the engine could suddenly stall. The recall affected 140,249 Subaru vehicles sold in the U.S.
Subaru said fixing the valve spring at the dealership requires the engine to be removed from the car and the repair work would take 12~13 hours (2 days) per car. This recall only would end up costing the company USD 500 million (JPY 55 billion).
Subsequently, Subaru announced the recall of 228,648 2018 Legacy sedans and Outback wagons for defects in the instrument clusters that did not correctly display the remaining fuel level. The defect was due to a software error that may indicate fuel remaining even if the gas tank is empty that could lead to sudden stalling, thereby increasing the risk of a collision.
Subaru halts Japan domestic production over power steering defects
In January 2019, Subaru announced that it was stopping all Japan domestic production and shipments from the night of the 16th due to a defect found to cause a loss of power steering function. It plans to resume production and shipments from the 28th of January. It was reported that more than 20,000 vehicles could be affected.
Downwardly revised its financial forecast showing operating profit down by 42% for fiscal year 2018
With Subaru’s significant growth in the U.S. market over the past several years, its consolidated sales volumes significantly increased from 640,000 vehicles in 2011 to 1,067,000 vehicles in 2017 (up 67%). In the fiscal year of 2015, the company achieved a consolidated operating profit margin of 17.5%. Afterwards, as operating profit margins dropped in parallel with the declining growth rate in the U.S. market, Subaru still managed to maintain an operating profit margin exceeding 10% in the fiscal years of 2016 and 2017.
However, due to recalls and the finished vehicle inspection scandal, in the April to September period of fiscal year 2018, sales volumes dropped by 9.2%, net sales fell by 7.5%, resulting in a 74.1% plunge in operating profit with the cost of the recalls amounting to JPY 77.1 billion yen. Among the biggest factors causing the decrease in profitability are miscellaneous expenses of JPY 91.3 billion, including the JPY 77.1billion for recall expenses, and the sales volume & mixture, etc. of JPY 62.9 billion yen. In particular, for the 2nd quarter (July to September period) Subaru posted a quarterly operating loss for the first time in 10 years (JPY 2.536 billion) ending the period with an net loss (JPY 1.151 billion). For its end-year financial forecast for fiscal year 2018, Subaru announced a significant downward revision with net sales of JPY 3.21 trillion (down 0.7%), operating profit of JPY 220 billion (down 42%) and an operating profit margin of 6.9%.
|Summarized from Subaru’s financial reports|
|Analysis of Variance in Operating Income (Consolidated)|
Subaru's Consolidated Results
（in millions of yen）
|Announced in May||Announced in Nov.|
|Operating income margin||12.4%||11.1%||9.2%||6.9%||13.2%||3.7%||-71.9%|
Note: From fiscal year 2018, the company adopted the accounting policy to deduct sales incentives from net sales. The net sales for fiscal year 2017, calculated under the same conditions, amounted to JPY 3.2327 trillion. As a result, the 2018 fiscal year sales forecast of JPY 3.210 trillion fell by 0.7% compared to the previous fiscal year. This does not affect profitability at every stage.
FY2018 production and sales plans: the impact of inspection cheating and recalls
The recall issues are affecting Subaru’s sales and production plans. Due to the investigations of the final vehicle inspections and other issues that have occurred since, production volumes have been reduced to put priority on quality assurance, factors which resulted in the drop in global production volumes by 6.3% from 525,000 vehicles in the previous year to 492,000 vehicles in the April-September period of fiscal year 2018.
According to media reports in December 2018, Subaru plans to further reduce Japan domestic production volumes in fiscal year 2018 by 20,000 to 30,000 vehicles from the 656,000 vehicles shown in the table below. One of the main causes of the final vehicle inspection cheating is likely due to excessive strain on the organization as a result of rapid growth in recent years, for which Subaru is implementing thorough preventive measures by adjusting production schedules, increasing training for employees engaged in final vehicle inspections, and implementing repetitive checks to ensure that preventive countermeasures permeate the production system. Subaru’s Japan domestic production in the recent years had continued to exceed 100% of its production capacity.
For production in the U.S. as well, production volumes are being reduced to prioritize quality. Due to strong retail sales, Subaru’s U.S. inventory fell to 62,000 vehicles in October from 94,800 vehicles at the start of 2018.
Global production units
|announced in May||announced in Nov.|
Note: Production in Japan includes Toyota 86/FR-S.
The consolidated (wholesale) sales volumes in the April to September period in the priority markets of Japan and the U.S. were reduced as shown in the table below, by 9.2% (consolidated).
In Japan sales fell sharply by 21.0%. Subaru’s Japan domestic retail sales volume in calendar year 2018 was 148,453 vehicles, down 16.0% compared to the previous year. While the total domestic sales volumes were up by 0.7% to 5,272,067 vehicles, among the rest of the passenger car manufacturers, Toyota was the only automaker with a negative growth of only 4.9%, so that made Subaru’s poor performance stand out among the rest of the Japan OEMs.
With respect to the global sales of 1,067,000 vehicles in fiscal year 2017, Subaru is planning to sell 1,041,000 vehicles for the full fiscal year 2018.
Consolidated units sales (wholesale)
|announced in May||announced in Nov.|
Subaru reforms management team, announces mid-term management vision
In March 2018, it was announced that 4 top executives would retire by the general shareholders meeting in June, due to the series of inspection cheating scandals that came to light. Only President Yoshinaga would remain to assume the position of Chairman and CEO to lead the reformation of Subaru’s corporate culture, which was the cause of the inspection issues. However, during an on-the-spot inspection conducted by the MLIT (Ministry of Land Infrastructure and Transport), a new issue relating to incompliant fuel economy and emissions measurement was discovered, and although Mr. Yoshinaga had assumed the post of chairman, he was stripped of the CEO position and the right to represent the company. The new President, Mr. Nakamura, will also hold the position of CEO.
New mid-term management vision STEP: Work to prioritize reformation of corporate culture
In July, Subaru announced its new mid-term management vision called STEP. It prioritizes making the reformation of its corporate culture as the most urgent task to be addressed now, to accelerate its efforts to become a “company that does the right thing in the right way”. It is putting in place an investment funding framework of JPY 150 billion over the next 5 years to enhance overall quality from product planning, plant production, and customer service.
One of Subaru’s visions by 2025 is to “Become a brand that is “different” by enhancing distinctiveness”. Subaru, just like BMW, says “that there is no other way left to survive other than to absorb the costs associated with raising the strength of its brand and having customers come to appreciate the added value of the Subaru brand”. In the U.S., Subaru is already recognized as a “Different brand”. Further, the automaker aims to achieve zero accidents by refining its driver-assist technologies.
In its revenue plan, Subaru is aiming to achieve JPY 10 trillion in net sales, operating profits of JPY 950 billion, and an operating profit margin of 9.5% over a total of 3 years during the fiscal year 2018 to 2020 timeframe. The company plans to achieve a global sales volume of 1.3 million units by 2025 (the plan for fiscal year 2018 year is 1.04 million units). By region, it plans to achieve a 5% share of the U.S. market with 850,000 vehicles out of the total U.S. demand of 17 million units (in 2018, Subaru’s share was at 3.9% with 680,135 units), 920,000 units for the entire North American region, 230,000 units for other regions, and 150,000 units in the Japan domestic market.
<Subaru sets up a new inspection department, independent from the manufacturing division>
Starting from December 1st of 2018, Subaru set up a new vehicle inspection department. Originally, vehicle inspections were conducted by the manufacturing quality control department of the main manufacturing division, but the new inspection department will be under the newly established Quality Assurance Division, which is aimed at ensuring thorough inspections independent from the manufacturing organization.
U.S. Market: Subaru achieves 10 consecutive years of record retail sales, but profit worsens
In the U.S. market in 2018, sales of the Crosstek compact SUV were brisk and Subaru entered the mid-sized SUV segment with the launch of the Ascent 3-row family crossover SUV. Subaru’s retail sales volume in the U.S. increased by 5.0% (total light vehicle sales in the U.S. increased by 0.3%), which resulted in record retail sales for the 10th straight year in the U.S. market. In 2019, Subaru plans to sell an additional 20,000 vehicles to reach a total 700,000 units annually, aiming for its 11th straight year of increased sales.
However, competition and pricing is fierce in the Crossover segment which is Subaru’s key target segment, and operating profit by geographical segment for North America in the Aril to September 2018 period fell to JPY 23.9 billion from JPY 43.9 billion in the same period of the previous year.
According to an article from Automotive news dated November 12, 2018, during the January to September 2018 period, the per vehicle sales incentive increased by 40% from the previous year to USD 1,393 (which is still lower than the industry average of USD 3,752). Executives of Subaru of America still expect that the demand for Subaru cars will remain high and sales will again expand once the recall issues are resolved.
<Supporting the reinforcement of the service system at dealerships>
Subaru has been engaged in strengthening the service system at its dealerships in the U.S. following the growth in sales and the increase in ownership of Subaru brand vehicles. In addition to upgrading service equipment, providing comfortable waiting areas, it also viewed arrangements for loaner cars as important. Along with the increase in the ownership of Subaru cars, the need for maintenance services is also increasing. From 2014 to 2017, two-thirds of Subaru’s dealers participated in the Fixed Operations Expansion program that supported capital investment in the service system at its dealerships. However, the system is still considered inadequate, so Subaru is considering adding new service programs.
|The Subaru Ascent 3-row family crossover SUV launched in the US market in July 2018||Interior of the Subaru Ascent|
Unit sales in the US by model
Source: Automotive News
Electrification and driver-assist areas: Subaru launches a PHV and the new HV (e-BOXER) in 2018, to be followed by EVs in 2021
Subaru is planning to comply with fuel economy and CO2 emissions regulations for each region in the world by a combination of electrification and substantial improvements in the efficiency of its internal combustion engines. In 2019, it will launch a newly-designed downsized turbo model.
For electrification, Subaru’s first plug-in hybrid vehicle, the Crosstrek Hybrid, was launched in the U.S. in December 2018. Equipped with an 8.8kWh lithium-ion battery, it has an EV range of 17 miles and a total range of 480 miles. It was developed based on the Subaru Global Platform.
The Subaru Global Platform is adopted on all Subaru models, and will subsequently be adopted on its gasoline-powered cars, PHVs and EVs.
Subaru will sell the model mostly in California and 9 other states that adopted the Zero Emissions regulations. The sale of PHVs also requires the purchase of inspection and repair equipment as well as the training of technicians so that dealers can decide whether they will sell the models outside those states. The federal government provides a purchase subsidy (tax deduction) of USD 4,500 per vehicle and there are additional subsidies available depending on the region or state.
<Subaru cooperates with Toyota on PHV and EV development>
Subaru’s first PHV, the Crosstek Hybrid, is equipped with the THS (Toyota Hybrid System, or rather the Prius Prime PHV system, to be specific) according to Subaru press releases. However, Subaru has made structural adjustments for the differences that exist between Subaru’s horizontally-opposed cylinder longitudinal mounted engine (also known as the Boxer engine) and Toyota’s transverse mounted engine.
Furthermore, Subaru is planning to launch an EV in 2021. Most of the EV technologies are originating from the Toyota group of companies. In September 2017, Toyota established a joint venture with Mazda and Denso, the EV C.A. Spirit Co. (EV Common Architecture Spirit Company), to jointly develop technologies for the basic architecture of EVs. Later, Subaru, Daihatsu, Suzuki, and Hino took a stake in the joint venture. Subaru is participating in the joint development initiative by dispatching 5 engineers to the joint venture.
For a company of Subaru’s size, there is a limit to its R&D expenditures, and although it is focused on the improvement of the boxer engine and the development of the safety system “EyeSight”, it has not had the resources to develop PHVs and EVs.
|Crosstek plug-in hybrid vehicle (left) launched in the US in November 2018. The right picture shows the charging port||Subaru Global Platform|
The new e-BOXER hybrid system is equipped on the Forester launched in Japan
In July 2018 the new Forester was launched for sale in Japan followed by the Advance spec model launch in September with the new e-BOXER hybrid system.
The vehicle runs on the electric motor only at low RPM regions where engine efficiency is low, provides motor-assist drive for acceleration and medium-speed driving, and finally full engine drive for high speed driving. The fuel economy based on the JC08 Mode test cycle for the “2.0L DOHC direct injection + e-BOXER” is 18.6km/L compared to 14.6km/L on the 2.5L DOHC direct injection model. In addition to the fuel economy effect, the e-BOXER was designed with a focus on improving driving performance. Approximately 40% of the Japan domestic orders are equipped with the e-BOXER.
|New Forester (US spec)||The new Forester (Japan spec) with the new hybrid system e-BOXER||The evolution of EyeSight and the development of powertrains|
Autonomous driving and connected cars
For autonomous driving, Subaru enhanced its “EyeSight” crash-avoidance system, with plans to realize Level 2 autonomous driving capability including lane changing on highways in 2020, and autonomous driving above Level 2 on highways and automated valet parking by 2024. Beyond 2024, it plans to advance the deployment of high-level driver-assist technologies on public roads. To realize these technologies, Subaru is working on advanced development using AI computers from NVIDIA.
For connectivity, as part of the Mid-Term Management Vision, Subaru announced plans to enhance communications with its customers by utilizing connected technologies, reinforcing its brand power.
Subaru’s connected service “Starlink” is currently equipped only on vehicles in the U.S., and reached an 80% adoption rate on new cars in 2017. The DCM (Data Communication Module) is equipped as standard. The system will also be introduced in the future for the Japan and Canadian markets, with plans to sell 80% of connected vehicles in Japan and North America by 2022.
(References) Recalls in Japan
Recalls due to deficiencies in final inspections of new cars (Japan domestic)
|Date of notification||Affected models||Production period||Number of vehicles|
|2017||November 16||11 models such as the Levorg||February 24, 2010 ~ October 3, 2017||371,032|
|2018||February 8||8 models such as the Levorg||October 4, 2017 ~ December 15, 2017||25,979|
|October 11||8 models such as the Levorg||December 14, 2017 ~ December 29, 2017||5,879|
|November 11||8 models such as the Levorg||January 9, 2018 ~ October 26, 2018||97,001|
Recalls due to defects in instrument cluster and valve spring (Japan domestic)
|Date of notification||Defective part||Affected models||Production period||Number of vehicles|
|2018||November 1||Instrument cluster (Fuel level warning lamp)||Legacy||October 2, 2017 ~ August 2, 2018||8,645|
|November 1||Valve spring||3 models such as Impreza||January 17, 2012 ~ September 30, 2013||74,349|
Sales Forecast by LMC Automotive: Subaru’s light vehicle sales in 2022 will be 1,066,000 units
（LMC Automotive,Quarter 4 2018）
According to LMC Automotive’s sales forecast (Quarter 4 2018), Subaru’s light vehicle sales in 2019 will be 1,105k units, up by 2.7% from 2018. However, Subaru’s sales will be hovering around 1,070k units between 2017 and 2022.
Sales in the US, which account for over sixty percent of its global sales and achieved 10th year of record sales in 2018, will be 723k units in 2020, up by 6.1% from 2018. However, sales in the US will decrease to 688k units in 2022.
LMC Automotive comments; “Sales for Subaru in the US have grown every year since 2008 as the company gains appeal with mainstream buyers and the market continuously skews towards SUVs. The success of the Crosstrek Small SUV and the arrival of the Ascent Midsize SUV in July have propelled the group’s sales in 2018. However, the Ascent is the only new entry expected in the forecast horizon, which will limit the brand’s market share to around 4%”.
Sales in Japan in 2018 decreased to 152k units, down by 14.2% from 2017, mainly due to repeated announcements of faulty inspections and related recalls. Sales in Japan will gradually decrease to 133k units in 2022.
Sales in Canada in 2018, the third largest market for Subaru following the US, and Japan, increased to 58k units, up by 6.0% from 2017. The year was driven by well‐received sales of the Ascent Midsize SUV and the first complete annual sales of the Crosstrek Small SUV. There are no new entries expected for the group, so Subaru’s growth through the coming years is reliant solely on updating their current portfolio. Sales in Canada will be hovering around 60k units between 2019 and 2022.
Subaru's light vehicle sales in 2022 will be 1,066,000 units (LMC Automotive)
Source: LMC Automotive "Global Automotive Sales Forecast (Quarter 4, 2018)"
*The table above shows data for selected countries, so the total of the countries in the table do not match the Subaru Corporation Total.
(Note) 1. Data indicates figures of only small-size vehicles, including passenger cars and light commercial vehicles with a gross vehicle weight of less than 6 tons.
2. All rights reserved. Reproduction of any data will require permission of LMC Automotive.
For more detailed information or inquiries about forecast data, please contact LMC Automotive.
Subaru, Final inspection, Recall, Ascent, Crosstrek Hybrid, e-Boxer
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