SUBARU Corporation (SUBARU)
Corporate History & Strategy

In the 1970s, major automakers such as Toyota and Nissan dominated the domestic passenger car market with overwhelming market share, making it difficult for mid-tier manufacturer Fuji Heavy Industries to compete head-on. The company therefore adopted a strategy of concentrating resources on the four-wheel drive (4WD) segment, which at the time accounted for only a few percent of the passenger car market. For major manufacturers, the small market size was a deterrent to entry, while for Fuji Heavy Industries, it represented a niche with limited competition.

On the technology front, the company focused on developing the horizontally-opposed (boxer) engine, which was rarely adopted in the automotive industry. The boxer engine's low center of gravity and symmetrical layout offered superior driving stability when combined with 4WD systems. In 1972, Fuji Heavy Industries developed Japan's first passenger-type 4WD vehicle, establishing itself as a technological pioneer in the 4WD field. The decision to continuously refine technology in a segment ignored by major competitors created the foundation for competitive advantage when the market eventually expanded.

In 1979, Fuji Heavy Industries launched the improved 4WD model 'Leone,' marking the full-scale deployment of its 4WD-centric vehicle lineup. The Leone combined passenger car comfort with four-wheel-drive capability, gaining strong support from customers in snow-heavy regions and mountainous areas. Through this model, Fuji Heavy Industries positioned the SUBARU brand as synonymous with 4WD, making its strategy of concentrating limited resources on a single domain unmistakably clear.

This concentration strategy translated directly into market share. In FY1980, Fuji Heavy Industries captured a 38.5% share of the domestic 4WD market by unit sales, surpassing Toyota (20.6%) and Suzuki (19.6%) to claim the top position. By continuing to invest ahead of competitors in a niche that major manufacturers had not committed to, a mid-tier manufacturer achieved a dominant position in a specific segment. The technology accumulation and brand recognition built in 4WD would later form the foundation for the Legacy and the North American SUV expansion.

Throughout the 1980s, Japan-U.S. trade friction intensified, and the Japanese government imposed restrictions on automobile exports to the United States. Additionally, the rapid yen appreciation triggered by the 1985 Plaza Accord severely eroded the profitability of exporting Japanese-made vehicles to North America. The dual constraints of export volume restrictions and currency headwinds effectively compelled Japanese automakers operating in the North American market to shift to local production.

Major automakers such as Toyota, Nissan, and Honda had already secured sales networks and volumes in North America, and could realistically achieve the annual production of 200,000 units considered the break-even threshold for local production on their own. However, for mid-tier manufacturer Fuji Heavy Industries, annual sales in North America fell far short of 200,000 units, making standalone local production economically unviable. The company faced a dilemma: without local production, survival in the North American market would become increasingly difficult, but going it alone risked losses that could not be justified by the investment.

Isuzu Motors faced the same challenge. Isuzu's North American sales volume was similarly limited, and it lacked the resources to independently build and operate a mass production plant. Fuji Heavy Industries' major shareholder was Nissan, and Isuzu's was GM, but neither parent company actively supported their respective affiliates' North American expansion — Nissan showed little enthusiasm for backing Fuji Heavy's entry, while GM was preoccupied with its own labor issues. The shared constraint of being unable to obtain support from their keiretsu parent companies became the catalyst for bringing together two companies from different corporate groups.

In 1986, Fuji Heavy Industries President Tajima and Isuzu Motors announced plans to jointly build a mass production plant in North America. Since neither company could independently secure the annual sales volume of 200,000 units, the intent was to aggregate production volumes through collaboration, achieving economies of scale that would make local production economically viable. Named the 'IF Alliance' after the initials of the two companies (Isuzu and Fuji), this collaboration between two lower-tier passenger car manufacturers crossing keiretsu boundaries attracted considerable attention as an unprecedented initiative.

The joint venture 'Subaru-Isuzu Automotive, Inc. (SIA)' was established with Fuji Heavy Industries holding 51% and Isuzu 49%. The plant was built in Lafayette, Indiana, with a combined capital investment plan of 80 billion yen. Production models included Fuji Heavy's 4WD Leone (60,000 units/year) and Isuzu's Faster and Bighorn (combined 60,000 units/year), starting with an initial capacity of 120,000 units annually with plans to expand to 240,000.

The plant was completed on schedule in November 1989, and North American local production commenced. With the break-even point estimated at 150,000 units annually, it was understood from the outset that the initial 120,000-unit capacity would not be profitable. For Fuji Heavy Industries, the strategic priority was securing a production base in North America itself rather than short-term profitability, with plans to gradually increase production volumes toward break-even.

The IF Alliance delivered the outcome of acquiring a North American production base that Fuji Heavy Industries could not have achieved on its own. The Indiana plant would later serve as the manufacturing foundation when SUBARU expanded its North American sales. For a mid-tier manufacturer lacking the capacity to independently build a large-scale plant, this was a decision that secured entry into North American local production through a collaborative scheme.

However, the IF Alliance did not proceed as initially planned. Immediately after the plant began operations, the U.S. economy cooled, and both Fuji Heavy Industries and Isuzu saw their North American sales slump. The 150,000-unit break-even threshold remained out of reach, and SIA's losses weighed on Fuji Heavy's consolidated results. Operating a single factory shared by two companies with different vehicle types and different sales networks also presented challenges in coordinating production schedules.

Ultimately, in December 2002, Fuji Heavy Industries and Isuzu dissolved their North American production collaboration. Over the 15 years since the alliance began, the two companies' North American strategies had diverged, and the rationale for continued joint production had diminished. However, the Indiana production facility that Fuji Heavy Industries acquired through this alliance continued to operate as SUBARU's standalone North American plant after the dissolution, becoming a core asset supporting the company's subsequent North American sales expansion.

In FY1990 (March), Fuji Heavy Industries recorded an operating loss of 29.6 billion yen on a non-consolidated basis — the company's first loss since listing. The primary cause was losses at SIA (Subaru-Isuzu Automotive), the North American production subsidiary that had begun operations in 1989. A U.S. economic downturn immediately after the plant started up caused sales through North American dealers to fall well below expectations. While orders slumped, the need to maintain factory utilization rates led to a buildup of inventory.

SIA's losses represented the materialization of risks inherent in a mid-tier manufacturer's entry into North American local production. Against a break-even point of 150,000 units annually, actual sales volumes fell far short. The local production that had been launched as a revenue source to replace exports from Japan ended up dragging down financial performance from its very first year of operation. Fuji Heavy Industries' management was forced to prioritize the turnaround of its North American business above all else.

Following the descent into losses, President Tajima Toshihiro stepped down, and a new president was dispatched from major shareholder Nissan Motor. The appointee was Kawai Isamu, who had a track record of leading management turnarounds as president of Nissan Diesel. The arrangement brought in a proven management professional from the parent company's group to lead Fuji Heavy Industries' reconstruction. President Kawai commenced the turnaround with two pillars: improving profitability of the North American business and restructuring the domestic cost base.

One of the key initiatives under President Kawai was the full acquisition of U.S. sales company SOA (Subaru of America). The company shifted from a model where sales functions had been delegated externally to one where manufacturing through sales were managed under unified control. This decision was based on the recognition that the fundamental cause of the North American sales slump was the weakness of the dealer network and insufficient control over sales operations. In parallel with SIA's plant operations, the company embarked on rebuilding the sales side, aiming for medium- to long-term profitability of the North American business.