TOKYO — North America, long the earnings engine for Subaru Corp., turned into a drag on profits amid spiraling incentives due to increased competition in the crossover segment.
Subaru is still on pace for its 10th straight year of record U.S. sales. But the company is spending more to move the metal. Those higher outlays hurt parent company profits, which declined for the second straight year, mostly on tumbling results in North America.
Subaru warned that incentive spending will only get worse.
Its per-vehicle spiffs averaged $2,000 in the fiscal year that ended March 31, up $550 over the previous year. That should climb to $2,200 in the current fiscal year, said Toshiaki Okada, corporate executive vice president. "We plan to raise the incentive on concerns that the U.S. interest rate will rise," he said.
Selling expenses should taper off in the second half of this year, he added, after Subaru introduces the Ascent large crossover and the fifth-generation Forester crossover. The Ascent, which just entered production in Indiana, takes Subaru into a segment where it currently doesn't compete.
CEO Yasuyuki Yoshinaga said competition is hotter than expected in the company's go-to segment of crossovers, a niche the all-wheel-drive specialist once helped pioneer.
"The market is moving in the direction we anticipated," he said. "But we didn't expect there to be so many models as now, so the competition is heating up. Looking ahead, the situation will become tougher."
Operating profit in the North American region plunged 35 percent to ¥69.4 billion ($653.4 million) in the fiscal year. The decline came even as Subaru sales grew 3.8 percent to 149,703 vehicles in the January-March quarter, as industrywide sales rose 2 percent.
Subaru also has been dialing back wholesale shipments, which are the basis of parent company profits. U.S. wholesale volume inched ahead just 0.5 percent to 670,900 vehicles in the latest fiscal year and fell 2.6 percent to 161,900 in the fiscal fourth quarter.
Subaru's operating profit margin was once the envy of the industry, cruising above 10 percent for four straight years and peaking at 18 percent three years ago. But in the January-March period, it slumped below 10 percent for the first time in at least 15 quarters. For the year, operating profit margin declined to 11 percent from 12 percent. Subaru forecast that it would continue to erode, to 9.2 percent, in the current year.
Operating profit fell 7.6 percent to $3.57 billion in the latest fiscal year. Net income dropped 22 percent to $2.07 billion. Revenue rose 2.4 percent to $32.1 billion, with worldwide sales flat at 1.1 million vehicles.
Results were further sapped by higher fixed costs, largely for expanding capacity in the U.S. and Japan, warranty outlays and charges to recall vehicles in Japan that underwent inappropriate final inspections.
Naoto Okamura contributed to this report.