Subaru steps up quality control after stumbles

TOKYO -- Subaru is feeling the burn of its red-hot sales.

With the brand stung by a spate of U.S. recalls that undercut earnings this year and an embarrassing tumble in its cherished Consumer Reports reliability rating, its top global executive, Yasuyuki Yoshinaga, says he is stepping up safeguards as quality strains under explosive growth.

The first step began in April with the appointment of a new quality czar sent from Japan to directly manage the issue in the U.S., says Yoshinaga, CEO of Fuji Heavy Industries, the Japanese parent company of the popular all-wheel-drive specialist brand.

In a Nov. 7 interview with Automotive News, Yoshinaga said quality is Subaru's top priority and that it is taking pre-emptive actions to stave off problems as Subaru and its suppliers find their feet amid rampant sales and production expansion.

"We've always been focusing on quality, but we did have an increase in recalls," Yoshinaga said at the company's global headquarters here. "We've assigned a former FHI officer who was in charge of global quality assurance to oversee and enhance Subaru's quality in the U.S. market."

The heightened vigilance is a rare move for a company that could do no wrong in recent years. It also underscores a threat that has tripped up much bigger and richer companies, including Toyota Motor Corp., which blamed unrestrained growth for its infamous 2010 recall crisis.

Subaru has been unstoppable.

The brand is poised for an eighth-straight year of record U.S. sales, with a forecast to climb 5.5 percent to 615,000 vehicles this year. The company hasn't had a monthly sales decline since November 2011. And, Yoshinaga says, it will see a ninth-straight year of record sales.

U.S. sales should jump again in 2017, this time 8.9 percent to 670,000 vehicles, Yoshinaga told Automotive News, even as he conceded that overall U.S. market demand "has already peaked out."

By the fiscal year ending March 31, 2021, Subaru's U.S. sales will top 750,000, he predicts.

That unrelenting surge is driving a ramp-up in production for Subaru, one of Japan's smallest automakers. It plans to expand global production capacity by a full third to 1.1 million vehicles in the fiscal year ending March 31, 2019, from just 854,000 last spring.

In the U.S. alone, where Subaru has its only assembly plant outside Japan, the company plans to increase annual capacity at the Lafayette, Ind., factory to 436,000 units by 2019. It produced 308,647 vehicles last year, including assembly of the Toyota Camry.

Growing pains were the inevitable result of the sales boom, Yoshinaga said.

"The background of our current situation is Subaru's rapid sales growth that has caused strain to our U.S. production and to our suppliers," he said. "Having recalls like we've had this year, we realize the strong need to strengthen our effort to ensure high quality."

Subaru's sterling reputation lost a little luster this year. Recalls already were spiking because of the Takata airbag inflator callbacks, but that massive quality headache was bedeviling nearly every major automaker. Of greater concern are a series of Subaru-only glitches.

In February, Subaru recalled 77,000 Tribeca SUVs to fix a hood latch defect. In May, it entered fix-it mode again with 48,500 new Legacy sedans and Outback crossovers from the 2016-17 model years to inspect and, if necessary, replace possibly improperly built steering columns. In some cases, turning the wheel has no effect on the direction of the wheel.

Subaru added to the run of callbacks just last month by recalling 100,000 vehicles equipped with turbocharged engines that could fail, overheat, melt and possibly catch fire.

Adding insult to injury, Subaru dropped six places in Consumer Reports' benchmark annual Auto Reliability Survey, slumping from "more reliable" to a middling "reliable" ranking of 11, behind Asian mass-market rivals such as Kia, Hyundai, Mazda, Honda and Toyota.

Subaru had been in the top 10 every year since 2010.

Consumer Reports dinged the flagship Legacy and Outback as having only "average" reliability and dropped the WRX/STI sporty car from its closely watched list of recommended vehicles.

Subaru suffered mainly from glitchy electronics or advanced safety systems as it introduced the new technologies, said Jake Fisher, director of auto testing at Consumer Reports.

"They were a little slow to adopt the advanced electronics," Fisher said, noting that other makes, such as Ford, had similar stumbles years earlier when they deployed newer gadgetry. "They slipped from being excellent to quite good. I'm sure they can recover."

But the spiraling recall costs have become a drag on earnings.

Fuji Heavy reported a 29 percent drop in operating profit in the July-September quarter, partly because of rising quality costs. Fuji Heavy took a ¥15.3 billion ($151.1 million) charge to settle warranty claims, including Takata inflator outlays, in the quarter.

Speaking at this month's earnings announcement in Tokyo, CFO Mitsuru Takahashi said the airbags were only part of the problem and that those costs already had been largely factored in.

"But we have had other recalls already in the first half," Takahashi said. "So we are trying to rein in quality costs not related to Takata. We will try to manage costs at this level."

In April, Yoshinaga quietly dispatched Masashi Takahashi, a former corporate vice president for global quality assurance, to Fuji Heavy Industries U.S.A. in New Jersey. In announcing the shuffle, Fuji Heavy said Takahashi was retiring from the parent company and being reassigned as a technical adviser and chairman of the U.S. unit, without further explanation.

The position is a newly created one, Yoshinaga explained.

Takahashi's first task will be canvassing U.S. dealers to hear feedback on how recalls are handled and how quality issues are reported from the field. The goal is to speed the reporting of problems to Fuji Heavy in Japan so headquarters can respond faster.

"When a recall happened, FHI would do recall analysis from a technical point of view, but we lacked a view to see the actual trouble and inconvenience that our retailers and customers were experiencing," Yoshinaga said. "Subaru of America was doing a good job, but it was FHI, at a manufacturer's side, which was short on listening and grasping the voices of the market."

Yoshinaga said he saw a need to create the position partly because it took Fuji Heavy engineers in Japan sometimes twice as long to respond to such "technical reports" from the U.S. as they did from Japan. Seven months after dispatching Takahashi to troubleshoot, Yoshinaga said it is still too soon for concrete conclusions about how to improve performance.

But when measures kick in, Yoshinaga said he expects them to deliver not only more satisfied customers but better reviews from third parties such as J.D. Power and Consumer Reports.

Keeping an ear to the ground is a key lesson he learned during his formative years working in Fuji Heavy's domestic sales division selling Subarus across Japan, he said.

"I tell our sales team never to get detached from the market."