Do you associate Subaru with rugged landscapes, with skiers happily taking off for the slopes? If so, you have gotten the message -- a message worked out by the company many years ago with its marketing focus on rural areas, its introduction of four-wheel drive to passenger cars, and its long-term association with the U.S. Olympic ski team. Do you also associate Subaru with Japan? If so, you have received only half of the message and the least interesting half at that.
Subaru of America Inc. is a most unusual automobile company, best defined perhaps by what it is not. It is not a Japanese company. It is not the sale-and-marketing division of a Japanese company. There is nothing, corporately speaking, Japanese about it. It is a publicly owned American marketing company -- founded, managed, and staffed by Americans -- and it is the exclusive importer of cars and trucks manufactured by Fuji Heavy Industries Ltd., in Japan.
It began in 1967 in good entrepreneurial fashion -- scratched out on a sheet of paper by two men who wanted to "do something together" that would be fun, challenging, and exciting. The two men were Philadelphians Harvey Lamm and Malcolm Bricklin. Bricklin has since gone on to found another company, Bricklin Industries, which imports the Yugo and the Proton Saga from Yugoslavia and Malaysia, respectively. The separation -- an amicable one, by all accounts -- left Lamm in charge of the new company's rugged road to success. Today, Lamm is president and chief operating officer of a company that does $1.8 billion in sales and enjoys a net worth of $275 million. In February, INC. senior editor Steven Pearlstein and senior writer Bruce G. Posner visited the company's new $25-million office in Cherry Hill, N.J., to find out how he did it.
INC.: Let's begin with you and Malcolm Bricklin -- how did the two of you get together?
LAMM: We were personal friends. Malcolm was from Philadelphia originally, like me, but had gone down to Florida when he was young. We met when he came back and took up residence in the same apartment building where I was living. I was a newlywed at the time, 31 years old, and we began spending almost all our free time together, playing golf or whatever it was, and soon we were saying to each other that we ought to go into business together.
LAMM: Any business. Malcolm is a promoter. He likes to take ideas and concepts and bring them to the marketplace, help build the financial support for a company, and get it started. That's what is exciting for Malcolm. Once he reaches the point where the thing is off the ground, his interests change. I'm different. I was working in my family's furniture business at the time, and it was financially very successful, but I was spending most of my time looking for ways to get out of the business. But even as Malcolm came up with these ideas, my focus was always on the long term. I like to get involved in something and then bring it to new levels of growth. That's what is exciting for me.
INC.: How did you hit on the idea of importing and marketing Japanese cars?
LAMM: Malcolm had just come back from Japan very excited about this company he'd visited -- Fuji Heavy Industries. He was thinking about importing its motor scooters. But he had this brochure with him, with pictures of all its products: airplanes, cars, buses, trains, everything that's a piece of transportation. It's 11:30 at night in my apartment in Philadelphia, in 1967, and I'm looking through this brochure. And as a way to get Malcolm off the subject of motor scooters, which I'm just not interested in, I say, "I'll tell you what. If you can get them to develop this car, we can talk about it." He said, "Are you really serious?" and I had to think about that for a minute, because I wasn't sure I was, but then I said, "Yes, I am really serious. I think it would be fun."
INC.: Did you know anything about the car business?
LAMM: Not a thing. But you had only to look around to see what Volkswagen was able to do, importing cars into the United States. We even promoted the first Subaru as "the Japanese Beetle." There was also a man named Max Hoffman -- probably the grandfather of the car-import industry in America -- who did the same thing, only 15 to 20 years earlier, with almost every European line that's in the marketplace today. He brought in the Porsche, the Mercedes-Benz, the BMW. But in those days, the late 1960s, nobody was bringing in Japanese cars except the Japanese. They were exporting their own cars and marketing them, but Japanese cars weren't all that visible yet, especially on the East Coast. Nissan (Datsun it was called then) wasn't selling many cars, about 50,000 nationally and Toyota was maybe selling less than 100,000.
INC.: The first Subaru, the car you pointed to in the brochure, what was it?
LAMM: The Subaru 360 was really little better than a motorcycle, the better part being that you didn't have to sit outside. It had 25 horsepower, later developed to 30, got 66 miles to the gallon, and cost $1,297 -- a cheap piece of transportation. The Volkswagen, to put it in perspective for you, sold for about $1,799 in those days, and a big motorcycle for $900 or $1,000. Actually, the size of the thing was what enabled us to get it past federal design requirements; they didn't apply to motorcycle engines.
INC.: There was a lot of trouble with that first car, wasn't there?
LAMM: Yes, but at the beginning we did fantastically. In California, in the first three months of sales, the dealers were selling almost 1,000 cars a month at retail. We had about 20 dealers in the East, 60 in California, and the California business was generating the cash flow for the whole company. But then we ran into Ralph Nader. He started with General Motor's Corvair, you remember, but the way General Motors went after him to shut him off, it gave him a lot of publicity. So then, after the Corvair, his big push was the Volkswagen Beetle. He said the Beetle was a death trap. They were smart enough to ignore him, but the damage was done. Next thing you know, Consumer Reports wrote an article on the 360 that said the vehicle was unsafe.
INC.: So you went back to Fuji with an order for a bigger, safer car, is that it?
LAMM: I wish it had been that simple. Fuji wasn't going to invest the money in changing the product until we'd demonstrated that we could build a presence in the marketplace and develop a dealer organization. So we had to find a way to continue doing business with the product we had, the 360. We brought in a minivan and a minitruck. We brought in a sports version of the 360, lots of color and show, to appeal to the kids.
And some of the dealers, believe it or not, were still selling 200 to 400 Subaru 360s a month. They were the guys who didn't decide they couldn't sell the car, who continued to do the advertising, the promotion, the things that are necessary to bring the traffic. If you don't bring the traffic, then the salespeople are going to lose their enthusiasm. But, yes, I'd say it was a bad time for us. We ended up with a negative net worth of $6 million. We had the problem of keeping the company alive, so some of the things we did were expedient. We burned a lot of bridges with dealers, banks. We did whatever it took.
INC.: Which meant dropping a lot of dealers.
LAMM: Which meant dropping some, adding some, arranging buy-sells between dealers who weren't making money and ones who wanted to go into the business. The dealer is the focal point of this industry. If the dealer isn't committed to the product, to the marketing concepts, you are never going to reach your penetration levels, no matter how good the product is. So you have to keep on developing your dealer organization, moving it up to a new plateau. We did the same thing in the years 1974 and '75. That was another bad time for us -- the energy crisis and the import surcharge, which was a trade-protectionist device. Business fell off about 50% in the whole auto-import industry for a couple of months. We had all this inventory, no sales. The market was dead. The banks were saying, "Positively no more letters of credit." But the thing is, you can use this kind of crisis to upgrade your dealer organization.
INC.: How's that?
LAMM: I mean, how can you measure the potential of a dealer organization when the market is good? How do you know, in a good market, whether the dealer is good or bad? They're all saying, "I can sell more cars than you're giving me," and it's probably true. A bad market situation puts them to the test, so you can tell where your dealer strengths and weaknesses are. Then you have to go out and clean up. It's a periodic thing. We're doing it again today because we went through the same kind of market test last year.
INC.: But surely, in a bad market situation, you've got to do more than winnow out the bad dealers? In the 1969 to '70 crisis, for example, you had to get that bigger, safer car. What did you do in the 1970s?
LAMM: Well, if I've learned anything in business, it is that when you have a problem in the marketplace, you don't drag it out. You attack it. The problem back then was inventory. Cars are not like whiskey -- the longer you keep them, the better they get. You have to move them off the lot, to make room for the new ones. So we offered a rebate. We were the first company to do it. Chrysler claims it was the first, but we announced it in May 1974 and Chrysler announced it in January 1975.
INC.: Who took the bath, you or the dealers?
LAMM: We did, on the rebates. We spent $9 million, maybe a little more than our net worth, to liquidate that inventory. By the way, we lost $50 million before tax, $25 million aftertax, doing the same thing in 1987, the only difference being that in 1987 we had a $325-million aftertax net worth and $285 million aftertax in cash. In '74 to '75, we were facing going out of business again, as we had in '69 to '70 with the Subaru 360.
INC.: What were your marketing strategies in those early days?
LAMM: After the California business with the 360, we began to maximize our market potential in rural areas, not metros, especially New England and the Northwest. One reason was advertising: we had no money for advertising. We had to build the business on customer referrals. This meant we had to have a product that was appealing, pricewise anyway, but it also meant we had to have dealers who would, and could, do all those things that make customer referrals possible.
INC.: Was four-wheel drive part of your rural marketing strategy?
LAMM: We did no formal market research on the thing. The market study was me: I was convinced that this was a niche that nobody else was in. What I didn't know was that the idea was going to drive the company. During the first year -- that was in 1975 -- we only brought in 7,000 of them. We sold every one, right to the walls, without national TV or magazine advertising. In Philadelphia I sold them myself, by example. On snowy days, people would be struggling to get up some hill, and I'd just go around them. It was magic, like having a space vehicle or something. Nobody knew what it was. Everyone would be looking at you, and you'd back up and ask them, "Can I give you a lift?" It was really fun. What has happened since then, of course, is that the four-wheel drive has become the key identification for the company, not only in the United States but all over the world. Even at the time, though, four-wheel drive was a terrific help to us. We were stuck, you might say, and that car helped pull us out.
INC.: Yes, but it was Fuji's car. The problem with Subaru, as some entrepreneurs would see it, is what looks like your total dependence on a huge industrial corporation, and a foreign one at that, for your product. And not only does it have complete control over the product, production schedule, shipping schedule, and so forth, but it also owns you. Forty-nine percent of the stock, that is effective control, isn't it?
LAMM: Ten percent is "effective control" in this company. Forty-nine percent is absolute control.
INC.: Because nobody else owns anywhere near that amount, is that it? Not even you?
LAMM: Right, nobody. This is a publicly owned company and has been since 1968, less than six months after we started. We needed the money. We had put together $100,000 or so, but we needed a capitalization of maybe $1 million. So we went to a local stock-brokerage firm in Philadelphia, on an over-the counter basis, and raised about $900,000. What we did was, we had the contract with Fuji, which we valued at somewhere around $3 million, and we said, "OK, we'll sell one-third of that to the public and keep two-thirds of it for ourselves.
INC.: Do you now regret having gone public?
LAMM: No. I have never found the public a problem, ever. We tell them the truth, we tell them that we don't run the business from quarter to quarter. We run it on a long-term basis, which means that if the car market is good, we'll maximize profits. If the market is bad, we're going to build market. So that's the way it goes; if you don't like it, go buy someone else's stock. That's the way we run the company.
INC.: This brings us to the autonomy issue. Fuji has an enormous investment riding on your performance, a financial investment in the company and the cars, and an investment of reputation as well. How can it afford to keep its hand off the management of your company? It seems incredible.
LAMM: Look, I want to be frank with you: if I were Fuji, I would have a hard time keeping the commitment to our autonomy that those people have made to us. They have never, ever sent a person over here to look at our books, to question a number -- ever, in 20 years. It made no difference how much money they had in the company: they have always been totally committed to maintaining an arm's length position with our people. When they initially bought in, they owned 20%, which was your "effective control" even then, but at that point, they formally announced to the financial community and to the automotive industry that they had committed to an absolutely mutually autonomous relationship. And they stuck by that commitment.
INC.: Still, there must be mutual influence as well, no?
LAMM: In some ways, I think we have more influence in Fuji than most marketing departments have within their own companies, domestic or foreign, especially after we persuaded them to build the four-wheel-drive vehicle. In the automobile business, the principal influence on top management comes from design development and manufacturing, while the marketing, merchandising, and salespeople are really slaves to the task of disposing of what is built. If they can't dispose of it, it's their fault, not the designer's or manufacturer's fault. Whereas with us there's a balanced kind of cooperation between the marketing and manufacturing sides. We try to tell them what the consumer wants, what needs the market has, where the opportunities are, and then they try to develop product and production capabilities to meet those needs. But as I see it, this is the fundamental side of the equation. The market should drive the business, not the business the market. And Fuji is very receptive to that. You talk about trust. Like I said, it's an unbelievable relationship and an exciting one. At least I find it that way.
INC.: How do they get their input from you?
LAMM: In years past, most of it was done through my visits, coordinating with their design and production people. The biggest part of our trip, the central focus, was the time we sent in the Gumma plant, talking with their people about the product. As time went on, of course, the scope of responsibility broadened and we developed other people in our company who coordinated with their people on what eventually became a day-to-day basis. Now, at Subaru Technical Center, in California, we have Suburu Research and Development, where their designers and engineers and our people work together.
Inc.: But before you institutionalized it -- in the early 1970s, for example, in the first big crisis in the relationship -- how did you persuade Fuji to build that bigger, safer car you needed to replace the 360?
LAMM: Well, part of it was that it had gotten to the point where we couldn't stay in business if we didn't have the bigger car, and if we didn't stay in business, they wouldn't have an export market in the United States. It wasn't a threat. No way. But they never thought they could do it themselves; they didn't have people trained to speak English and manage a foreign market. It was a decision, for them, of whether they wanted to walk away from the export market or stay in it. So for six or seven months after the Consumer Reports thing, I made many, many trips to Japan. Finally, we had a series of meetings with Fuji Heavy Industries president Ohara -- actually, we spent more time with the director of exporting, Mr Kikuchi -- and got his agreement to build the FF1. It took a lot of time and a lot of help within Fuji, the relationships we had with people within the organization. We had, in spite of all the difficulties that we were encountering, a true level of trust. The mutual cooperation was mind-boggling. They would do anything for us, and we would do anything for them. They knew that we were totally committed and dedicated, and we knew that they were, too.
INC.: Can you think of some metaphor or anecdote that would illustrate that trust?
LAMM: Well, you could read our telexes. On our side, of course, they were not in Japanese, but we tried to write them in the Japanese spirit. The Japanese language has a lot of ways of showing consideration for others, different shades of it depending on whether you're talking to your parents or your boss or your friend in the street. In English, you don't have that kind of thing, but there are ways of coming close to it, being honest and frank but at the same time showing concern and respect for the other person, even a certain humility. Of course, there are times when you get upset and angry, and when that happens here in this country, naturally there's an explosion. You can't do that with them. With them, you have to be considerate in how you say things. We really worked hard on that, trying to institutionalize this consideration by setting an example. That's the key, setting an example. For years, I would monitor telexes -- I still do, though not every day -- not so much for what is said but how it is said. And it paid off. The Japanese knew we were working hard; they knew that what we were doing was not typically American.
INC.: Would you be a little more specific?
LAMM: Blaming people for a mistake instead of identifying the problem and asking them to help us solve it. You blame people, they become defensive, and all kinds of bad things happen. So we set an example by never blaming each other. We don't talk about who's wrong and who's right. We talk about what we think, what we feel and why we feel that way, what we're trying to accomplish, and how what's happening is not helping us. Then, if they don't agree with our feelings and thoughts, or we don't agree with theirs, then there's some careful explanation so we can adjust to what they're thinking and feeling, or they can adjust.
INC.: Was there any one person who was the focus of your relationship?
LAMM: There was one person in the company who was our key contact, Mr. Kukuchi. He's at least 72 now and retired from direct operations of the company. I knew him first as the director of export, but for the last seven years of his career he was in one of the top 10 positions in the organization. He's a superdynamic individual and probably the most intelligent person I ever met in my life. He and I built a level of trust that I don't think . . . well, I don't think I've ever had another experience like that with anybody. I totally trusted this man. If I said the wrong thing in a conversation, he would interpret it the right way because he knew what I intended. And I, for my part, would do what he wanted to do, because I knew what he wanted to accomplish, and knew that his intentions were as good or better than mine.
INC.: That is amazing.
LAMM: In America, you don't even try to look for a relationship like that. One reason is we don't take the time to know people. In Japan, we talked for days, weeks, months -- talking about things that had nothing to do with business, just so they could get to understand us. You could talk to them for a year or two before they decided they wanted to do business with you, but once they decided, then you were really in business together. They didn't care about contracts, anything, if they trusted you. They would do whatever was in the best interest of both parties. And sometimes go the extra mile -- I mean, way beyond the extra mile. During the '74 and '75 crisis, for example, when we had to give away all our net worth in rebates and advertising, there were many people in the company who said, frankly, that I was crazy. But the Japanese didn't. They gave us one-third of the money for the rebates -- no contractual obligation, nothing. They volunteered to give it to us, and they gave it. They made a substantial financial contribution to do it, too. That's because our excessive inventories meant we could take only a limited supply of new models -- automatic transmission -- in order to salt-and-pepper the inventory. It just about shut their factories down.
INC.: Was this before or after they had an investment in your company?
LAMM: Before. We've always operated on the principle that we are in the same boat, whether they had an investment or not. I tell you, it's an unbelievable relationship.
INC.: Well, there sure are some U.S. technology companies that wouldn't believe it. You hear all these horror stories about working with the Japanese, people being taken advantage of, that kind of thing.
LAMM: The problem comes, I think, when you get into these highly competitive situations in which there is a lot of money involved on a very personal basis. It has to do with people, not companies or countries. It don't care if it's Japan or America or Europe, if you do business with people who are entrepreneurial, who are trying to maximize profits, who are very directed toward their own personal growth and independence, you can get into a lot of trouble. You check the background of those technology people who tell the horror stories, and you'll find that most of them are the sort of people who won't work for the bigger companies, who won't discipline themselves, who don't care about how the other person feels.
INC.: How long did it take you to convince Fuji to do the four-wheel drive, two years? Didn't you get angry and frustrated then?
LAMM: Within myself, yes, but not openly. And I never thought that the way to get what I wanted was through emotional reactions: threatening people or blaming them. Maybe if they had promised it to us and weren't delivering on their promise, I might act like that. Actually, I felt a little bit embarrassed that we weren't performing as well as we'd anticipated with the product they'd given us. At any rate, the point is that in Japan you have to get a consensus and it takes a long time. Once you get it, though, you're going to have the thing done overnight, because nobody's going to be out of sync.
INC.: The four-wheel drive, when it became the Subaru signature worldwide, they must have thanked you for that.
LAMM: No, no, it's not like that. We don't thank each other for anything. They never said, "Thanks for getting us to invest in your company. You guys put us into an investment for $5 million or $10 million, and now it's worth hundreds of millions." Nobody says, "Thanks a lot, that four-wheel-drive idea was really great!" But what am I supposed to do with thanks? These people thank you in other ways. They thank you by trusting you, in the way they work with you, the way they react to you, the way they treat you. Those are the important ways.
INC.: Where did you learn this, Harvey? You didn't learn how to deal with the Japanese in the family furniture business.
LAMM: Maybe I did, in the family anyway. It's just a matter of being sensitive to the way people think and feel, which has something to do with how you were raised. Do you care about the relationships you have with people? Do you care about the how being just as important as the whats and the whens? It sounds pretty silly, but I think being sensitive to those things has something to do with your background.