Japanese Subaru recalls more cars and cuts forecasts as cheating problem grows

TOKYO (Reuters) – The Japanese company Subaru Corp (7270.T) stated that they would call back more vehicles sold in the domestic market as a result of new cases of fraud during the inspection and warned that the increase in recall costs would result in a loss of about a quarter of their annual profit forecasts.

Subaru shares, already shaken by a string of recalls for problems ranging from faulty components to inspections, dropped 5% Monday to their lowest level in four years, after the announcement of new recalls and bleak prospects .

The company, the smallest of the major Japanese automakers, said it would recall about 100,000 vehicles, including its popular Impreza sedan, after discovering that the latest tests for components, including the brakes, had not been properly driven. Vehicles sold abroad will not be affected.

"It is unforgivable that these problems related to inspections continue," said Tomomi Nakamura, CEO, during a briefing, adding that the last reminder would be the last reminder of the misconduct tests.

The automaker predicts costs of 6.5 billion yen ($ 57 million) related to the latest recall. This, along with other quality issues, is expected to bring Subaru's operating profit to 220 billion yen by March 2019. It had previously forecast a profit of 300 billion yen.

Subaru recorded a surprise operating loss of 25 billion yen for the quarter ended in September, a first in the red since a quarter since 2009 and an average forecast of a 68.46 billion yen profit of 10 analysts surveyed by Refinitiv.

Recall costs were the largest contributor to the loss, while global sales fell 6% from the quarter due to weak demand in the US – its largest market where aggregate demand was decreased since the sales record reached in 2016.

(Click here for an interactive table of Subaru operating results tmsnrt.rs/2Ru9Edl)

DOUBLE REMINDER RELATED TO THE ENGINE

Last month, Subaru nearly halved its operating profit in the first half, citing higher quality-related costs. It then announced a global recall of approximately 400,000 vehicles, including its Forester SUV and Impreza sedan, to correct a defective design of engine valve springs.

This follows another set of recalls stemming from revelations last year that uncertified workers had submitted final inspection reports for vehicles sold in Japan. This had also resulted in the recall of about 400,000 cars.

Recalls are common in the auto industry and builders regularly set aside funds to pay for them.

But Subaru expects to need more money to cover recall costs – especially for its separate, horizontally placed boxer engines, which have a loyal following among racing enthusiasts, as they involve replacements time consuming.

"I have already heard from overseas that this recall could strike our brand," Nakamura said.

AMERICAN FABRICS

Subaru's shares, which had so far failed to improve the compliance of its plants, have fallen nearly 20% this year, on track for a third consecutive annual decline – also under the prospect darker in the United States.

For years, the company has managed to increase sales in the United States with commercials featuring slogans such as love, inclusion and security, to help seduce consumers. But his sales in the United States have reached a plateau since last year, marking a series of five consecutive victories.

Subaru is also preparing for a possible rise in US tariffs on imports of Japanese cars, which would be detrimental to Japan if it imports from Japan half of the vehicles it sells in the United States.

($ 1 = 113,2700 yen)