Subaru struggles to compete with McDonald's on wages as U.S. inflation bites

TOKYO – Subaru says U.S. inflation is so bad that the automaker has trouble competing on wages with the local McDonald’s outside its Indiana assembly plant.

Those soaring American labor costs, CEO Tomomi Nakamura said, are one reason his company is not thinking of new investments to build electric vehicles Stateside anytime soon.

Speaking at Subaru Corp.’s quarterly earnings announcement on Wednesday, Nakamura said Subaru will stick with its plans to assemble electric vehicles at a new dedicated plant to be built in Japan.

Complying with new U.S. guidelines to win full federal EV tax credits of $7,500 under the Inflation Reduction Act is too difficult right now, Nakamura said. Then there are the high wages.

“In Indiana, part-time workers at McDonald’s earn $20 to $25 per hour, which is in competition with what temporary workers make at our plant,” Nakamura said. “If we were to build a new plant, it would be very difficult to hire new people for that. Labor costs are rising now. It is quite challenging for us to secure workers for our Indiana plant, including those of suppliers.”

U.S. inflation stood at 8.2 percent through September, and rising prices worldwide have stoked the cost of everything from wages to raw materials and fanned concerns of recession.

Nakamura acknowledged the risk of a downturn but said demand for Subaru vehicles remains robust. The company has around 48,000 backorders in the U.S. and is dealing with a 10-day supply of inventory, he said.

Subaru sees U.S. sales climbing 25 percent to 631,000 units this fiscal year.

“Basically, we think there will be strong demand for our cars,” Nakamura said.  “But our U.S. retailers told me they feel there could be a recession, so we will be watching the situation closely.” 

Electric vehicle laggard Subaru said in May it will step up its pace in the battery-car race by adding a dedicated in-house EV assembly plant in Japan from about 2027. The EVs made there will be exported globally to markets including the U.S., Subaru said at the time.

At the earnings briefing, Nakamura said Subaru is studying how it can qualify for EV tax credits in the U.S. But he said Subaru cannot consider building an EV plant there unless wages come down.

“It is very difficult for us to respond to. There are a number of requirements,” Nakamura said of the Inflation Reduction Act, which was passed in August.

“We find it difficult to figure out how the IRA will help us bring benefits to our customers.”

The act requires EVs and their battery packs to be made in North America.

Nakamura’s assessment came as the parent company reported a tripling of operating profit in the latest quarter as the automaker recovered lost production, stabilized sales and rode a wave of favorable exchanges rates. Higher sticker prices also helped offset higher material costs.

“U.S. sales have kept very strong momentum,” Nakamura said. “This year, we raised sticker prices twice, and we are going to raise prices on some models at the change of the model year.” 

Subaru now predicts operating profit will triple for the full fiscal year, as it raised its earnings outlook on favorable foreign exchange rates that bolster the bottom line.

The new optimism comes despite cutbacks in the company’s production and sales forecasts, as pandemic and supply chain uncertainties linger. Subaru trimmed its production plan by 30,000 vehicles to 970,000 and dialed down its wholesale target by 20,000 to 920,000.

Nevertheless, Subaru expects a dramatic uptick in the next six months, with production returning to pre-pandemic levels of 540,000 units globally in the October-March fiscal second half.

Subaru sees worldwide wholesale volume zooming ahead 45 percent in the coming six months to 521,000 vehicles, driven by a 40 percent surge in the U.S. to 353,000 vehicles.

Subaru’s operating profit surged to 73.5 billion yen ($508.6 million) in the fiscal second quarter ended Sept. 30, from 24.9 billion yen ($172.3 million) the year before.

Net income nearly doubled to 50.6 billion yen ($350.2 million) in the three months.

Subaru’s performance was aided by slightly higher sales as the company gradually overcame crimped production from the COVID-19 pandemic and global semiconductor shortage.

Global output increased 39 percent to 220,000 vehicles in the July-September period, helping drive a 1.5 percent increase in worldwide sales to 203,000 vehicles. The rebound helped Subaru gain its footing after struggling to fill the product pipeline amid strong demand for its products.

Quarterly wholesale deliveries advanced 2.9 percent to 140,000 vehicles in the U.S. but fell 35 percent to 11,000 in Canada. They stayed flat at 4,000 in Europe.

Exchange rates turbocharged quarterly profits with a 58.3 billion yen ($403.4 million) windfall. The Japanese yen’s weakening against the U.S. dollar boosts the value of earnings repatriated to Japan. The currency has lost 28 percent of its value against the dollar since Jan. 1.

Subaru’s incentive spending in the U.S. shrank to $750 per vehicle in the quarter, from $900 the year earlier, helping deliver savings on that front, CFO Katsuyuki Mizuma said.

Looking ahead, an upbeat Subaru raised its profit outlooks, despite the cutbacks in its production and sales forecasts. The revision rides favorable tailwinds from the weak yen.

Subaru now expects operating profit to finish at 300.0 billion yen ($2.08 billion) in the current fiscal year ending March 31, 2023. That is up from an earlier forecast of 200.00 billion yen ($1.38 billion) and represents a tripling of operating profit from the previous fiscal year.

Net income is also seen rising threefold over the previous year. Subaru’s new goal is 210.00 billion yen ($1.45 billion), up from an earlier outlook of 70.00 billion yen ($484.4 million).