Are Subarus the best cars money can buy?

(Photo: I Love Dust)By the usual measurements, Subaru should be no more than an afterthought in the U.S. car market. It sells just seven car and crossover models and accounts for a slim 2.3% of U.S. auto sales. By itself, the Toyota Camry outsells the entire Subaru lineup. For years Subaru has been essentially a regional brand -- strong in the Northeast and Northwest but unknown in the rest of the country. No overnight success, Subaru of America -- the U.S. arm of Japan's Fuji Heavy Industries -- began selling cars in the U.S. 44 years ago and still ranks only 12th in size. Hyundai and Kia, which arrived two decades later, have developed broader product lines and sell several times more vehicles.

Yet Subaru has racked up more endorsements by independent arbiters of automotive quality and safety than just about any other manufacturer. Consumer Reports rates Subaru above Mercedes-Benz, BMW, and every other manufacturer in performance, comfort, utility, and reliability, and says the company makes the best cars in America. ALG (formerly Automotive Lease Guide), the industry's arbiter of residual value and used-car prices, named Subaru the leader in retained value among mainstream brands. And after crash tests, the Insurance Institute for Highway Safety made Subaru a "top safety pick" across its entire product line, a distinction no other manufacturer can claim.

Fueled by this trifecta of achievements, just about everything Subaru sells is flying off dealers' lots this year. Despite a chronic shortage of inventory, the company has been breaking monthly sales records with regularity, and sales for the year are up 26% compared with last year's -- nearly double the 14% gain for the industry as a whole. Hurricane Sandy struck right in the heart of Subaru's customer base, yet the little car company saw sales jump 30% in October, vs. the industry's 7%.

What Subaru has done is to make itself into the first automaker that could be described as "artisanal" -- focused, individualistic, and really good at a very few things. With only limited resources, Subaru has made smart bets on features like all-wheel drive, developed memorable marketing and advertising that set it apart from the competition, and learned more about its customers than any other automaker. In appealing to them by geography, lifestyle, and, at times, sexual orientation, it has built the deepest loyalty in the car business. The company understands itself so well that for years its advertising tag line was the self-referential "It's what makes a Subaru, a Subaru."

So resilient is the appeal of its brand name that Subaru has managed the feat of stretching it over wildly different models. One of this year's fastest-selling cars has been Subaru's compact Impreza sedan and hatchback. Newly redesigned and with a base price under $18,000, it has young families and first-time buyers queuing up to take advantage of its improved fuel economy, updated styling, and roomier interior. Sales have doubled from a year ago, and dealers have less than a two-week supply. At the opposite end of the functionality spectrum is another red-hot seller, the Subaru BRZ. A modern interpretation of the classic sports car, the two-plus-two coupe features out-there styling and racetrack handling that appeal to men of a certain age. So many are going out the door at prices starting at $25,000 that the days' supply at the beginning of September had shrunk to 11.

It's unusual for any car company, let alone one as tiny as Subaru, to have two hit models at once.

Today Subaru finds itself in a market sweet spot that produces outsize profits because, like an NFL receiver, it has learned how to work the seams. In the overcrowded midsize segment, for instance, Subaru sidesteps heavyweights like Camry, Accord, and Altima by equipping the Legacy with all-wheel drive (AWD), which the others don't offer. It can dodge expensive incentives because its cars are in short supply and its relatively affluent buyers are less sensitive to promotions. In August, Subaru spent just $857 per car on incentives; only Porsche spent less. senior analyst Jessica Caldwell says Subaru customers are generally capable of affording a more expensive vehicle, don't buy strictly on price, and continue shopping even when the economy takes a dive.

Even so, life isn't easy for Subaru or its corporate parent, Japan's Fuji Heavy Industries. They are minnows in an industry where size counts. Don't look in Subaru's lineup for any minicars the size of the Honda Fit or for full-size ones like the Toyota Avalon either. All Subaru cars and crossovers are based on just two platforms (General Motors (GM) has 30!), and the vehicles range in size only from subcompact to midsize. Subaru needed to form a partnership with Toyota (TM) to make the BRZ economical. Subaru did most of the engineering and provided the engine, but Toyota created the design and markets an almost identical version called the Scion FR-S.

Small size hurts when a new model like the awkward seven-passenger Tribeca fails to gain a foothold. It's also hard for a small car maker to keep on top of new technology. Subaru's signature four-cylinder "boxer" design is two decades old, and the company's first hybrid car won't come out until next year, 15 years after Toyota's Prius went on sale. Subaru suffered a near catastrophe when the earthquake and tsunami in March 2011 closed factories in Japan for four weeks and interrupted the flow of parts to its sole U.S. plant, in Lafayette, Ind. Dealers were starved for cars. Used to operating with 32,000 cars on the ground, Subaru saw its inventories drop to 17,000, pummeling sales.

Subaru of America was started in 1968 by two entrepreneurs, Malcolm Bricklin and Harvey Lamm, who contracted with Fuji Heavy to import cars as the initial wave of Japanese imports was washing onto U.S. shores. Their first car was the 360, a minicar with a 25-horsepower engine that needed 37 seconds to get from zero to 50 miles per hour; Consumer Reports called it the "Most Unsafe Car in America." But by selling distributorships, SOA went on to become the only import car company that was publicly traded; it made small fortunes for its two founders. Bricklin went on to build his own eponymous safety car, imported Fiats and Yugos, and was last seen trying to make a deal to import China-built Cherys.

Despite its rocky start, Subaru clung to its tiny niche like a freestyle rock climber on El Capitan. It introduced an AWD system in 1972 and continually upgraded its boxer engine. Its marketing and advertising cleverly exploited the brand's offbeat appeal. After it won the endorsement of the U.S. ski team in 1976, the company broadcast a commercial showing a Subaru driving up a snow-covered ski jump. Subaru was also a pioneer in reaching out to gays and lesbians, recently advertising on television shows like The L Word.

Still, its existence remained precarious. Subaru nearly collapsed in the 1980s when it tried to challenge Toyota, Honda, and Nissan in the mainstream car market with a lineup of sedans and sports cars sold under the slogan "Inexpensive and built to stay that way." When the yen rose late in the decade, the price of made-in-Japan Subarus exploded, and its high-volume strategy collapsed. Its sales, which had peaked in 1986 at 183,242, fell all the way to 100,407 by 1995, and nobody would have been surprised if Subaru had left the U.S. market. (This year sales are expected to be 325,000.)

Subaru recovered but now faces fresh challenges. It needs to catch up with competitors by developing fuel-efficient powertrains across its lineup, opening more factories outside Japan to spread its currency risk, and expanding its U.S. sales footprint. And it has to keep looking over its shoulder. Fast-rising Volkswagen poached Subaru's top marketing executive a year ago, and according to industry reports, VW is considering a new crossover with ride height, bumpers, and wheel-arch cladding that takes dead aim at Subaru's most popular models.


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