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Subaru quality problems extend to U.S.

Company suffers first red ink since '10

TOKYO — For the past year, Subaru has been dogged by increasing quality problems that have hurt sales, dented the brand's reputation and torpedoed profits — but all in Japan.

Now, after rising recall costs pushed Subaru to a rare quarterly loss, the lapses are bleeding into the all-important U.S., and global President Tomomi Nakamura isn't happy.

"I have already heard from our U.S. dealers that they are worried about brand image," Nakamura said last week during the company's quarterly financial briefing.

"It is true quality-related issues have been on the increase," Nakamura said, blaming them on Subaru's breakneck growth. "There is a sense of complacency in various areas of our company."

The newest setback will saddle U.S. dealers with time-consuming repair work. But just as those retailers want more product, Subaru is forced to slow production to better ensure quality on its factory floors.

Half-billion dollar hit

The company's latest black eye occurred late last week when Subaru of America issued a recall and stop-sale for all U.S. 2018 Outback crossovers and Legacy sedans — 228,648 vehicles —because of a software programming error that can cause the low-fuel warning light to fail to illuminate. The miles-to-empty display may erroneously indicate that more driving range is available than actually remains.

Just before that came a global recall of 411,000 vehicles to fix faulty valve springs that can cause engines to stall. But unlike the half-million vehicles previously recalled in Japan to address cheating on final vehicle inspections, the valve spring recall, initiated Nov. 1, reaches U.S. shores.

Nakamura: U.S. dealers worry about brand image.

Subaru says some 140,000 vehicles, including some Impreza small cars, Crosstreks and BRZ sporty coupes, in the U.S. will have to be called back for the valve springs. The dealer repair requires engines be removed from the vehicle, work that consumes at least 12 hours per car.

"Our retailers are more concerned about the long hours needed for fixing this problem," said Nakamura, who took the helm at global headquarters in June after a stint as CEO of the Japanese automaker's U.S. unit, Subaru of America. "To regain trust, Subaru of America is considering ways to support our dealers with their replacement work."

Subaru's quality czar, Senior Vice President Atsushi Osaki, said it will take about a year to finish all the U.S. repairs. Complaints about valve springs began in 2012, he said.

The whopping cost for fixing just all the valve springs worldwide: nearly $500 million.

Rising outlays for earlier recalls in Japan are already hammering Subaru's bottom line. Subaru Corp. tumbled to an operating loss of ¥2.5 billion ($22.0 million) in the fiscal second quarter ended Sept. 30. That erased an operating profit of $816.3 million in the same quarter a year earlier. Subaru also reported a net loss of $10.6 million.

Subaru, which long boasted some of the industry's fattest profit margins, hasn't booked a quarterly loss since early 2010, when it was still digging out of the global financial crisis.

Quality questions

Even as Subaru blamed recalls for the July-September red ink, Nakamura announced another round of recalls to tackle the final inspection problems Subaru has battled for a year in Japan.

Subaru earlier indicated that it had rooted out the problems. But on closer review, Nakamura said, the company discovered that some factory inspection discrepancies had continued until last month — a year after flagging the initial issues.

As a result, Subaru said it will recall an additional 100,000 vehicles for reinspection. That boosts the total number of vehicles called back for such issues in Japan to 530,000.

Under Nakamura's midterm business plan, he has pledged to prioritize regaining trust by changing the corporate culture to redouble its focus on quality. He reiterated that last week.

"I am very sorry that a series of these problems have ensued," Nakamura said, bowing deeply with other top brass in a sign of public contrition. "I feel very sorry for our customers and dealers."

Some Japanese customers are turned off by the string of problems, Nakamura conceded. He estimated that sales in Japan were down 5 percent because of Subaru's tarnished image.

"We worry that such impact could spread further, going forward," Nakamura said.

In the U.S., Subaru has a mixed record in some measures of quality. In the closely watched J.D. Power Initial Quality Study, for example, Subaru has finished below the industry average every year since 2008. It ranked fourth from the bottom in 2018.

To make sure it nails quality, the company has dialed back the hectic pace of output, Nakamura said. Plant inspectors have resorted to measures such as surveillance cameras along the production lines to enforce work rules.

That slowdown comes at an inconvenient time for dealers.

Subaru's U.S. sales increased 4.9 percent to 558,812 vehicles through October, in an overall market that was up only 0.5 percent. But executives say volume could be higher if they had more product.

Lower global sales forecast

Subaru started the year with U.S. inventory of 94,800 vehicles, but stock has since fallen to around 62,000.

"What's more, we will scale back our production a little bit," said Corporate Executive Vice President Toshiaki Okada. "So we think our U.S. supply will come up short. I believe the U.S. business will be impacted."

Subaru is considering how it might smooth supply and distribution, he added.

Globally, Subaru had planned to increase production 0.6 percent to 1.056 million vehicles in the fiscal year ending March 31, 2019. It now plans to cut output 1.3 percent instead.

Okada said the pullback also has complicated Subaru's ramp-up of U.S. output of the Ascent, a new three-row large crossover for which Subaru has high hopes.

"We were unable to boost production while trying to ascertain the quality," Okada said.

As a result of the slowdowns, Subaru lowered its global sales forecast. It originally forecast a 3.1 increase in wholesale deliveries to 1.1 million vehicles. It now says wholesale volume will drop 2.4 percent to 1.04 million vehicles.

Meanwhile, in the U.S., Subaru is being pressured by intensifying competition in its mainstay crossover segment as other brands bring out rival offerings.

Subaru's overall incentives climbed 40 percent through September, from the year before. Its average outlay per vehicle of $1,393 was still well below the industry average of $3,752, according to Autodata Corp. But the brand also resorted to 0 percent financing on such models as the Outback crossover — Subaru's best-seller in the U.S. — which is getting long in the tooth.

Longer term, Subaru executives believe the quality troubles are just a bump in the road. There is still robust demand for Subaru products, they say. And once the quality concerns are under control and supply has been ramped up, dealers should be able to tap that demand.

"Actual sales in the U.S. are very good," Okada said. "So, I believe we have potential."

Jack Walsworth contributed to this report.

You can reach Hans Greimel at hgreimel@crain.com

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