UPDATE 2-Subaru marches on in US but more work ahead

• Sales continue strong run in main U.S. market* Need work improving profitability but strategy in place* Looking at feasibility of making cars in China* Anticipating synergies on R&D with Toyota (Updates throughout with comments, details)By Chang-Ran Kim, Asia autos correspondentTOKYO, Nov 27 (Reuters) - Subaru maker Fuji Heavy Industries continues to charge ahead in the key U.S. market with sales seen jumping by a fifth this month, but it faces a lot of work to boost its earnings power, its CEO said on Friday.Fuji Heavy, owned 16.5 percent by Toyota Motor Corp, has stolen the limelight with the only rise in U.S. sales this year apart from South Korean rivals Hyundai Motor Co and Kia Motors Corp, giving it the same market share as mass-volume brand Volkswagen AG.Chief Executive Ikuo Mori said he expected the trend to continue, with sales so far in November soaring by 20 percent before adjusting for two fewer selling days against the year before. Official figures are due out next week."We've identified the United States as the single-most important market under our medium-term strategy, and we're boosting our share there," Mori told Reuters in an interview."Our revenue and profits are still low, however, and conditions are very tough.

But my feeling is that things are gradually getting better," Mori said, noting the company's new guidance announced this month to return to an operating profit for the financial year to March 2010.Subaru's U.S. sales grew 13 percent in the first 10 months as demand for the Forester and Legacy models surpassed expectations, particularly under the cash-for-clunkers scheme this summer. The overall market dropped 26 percent in the same period.Mori stressed, however, that the dollar's plunge posed major difficulties for Fuji Heavy, which has the biggest exposure to the United States among Japanese automakers. The dollar sank to a 14-year low on Friday of 84.82 yen.Mori, a manufacturing expert with extensive marketing experience, said Fuji Heavy was making steady progress in lowering its notoriously high fixed costs in Japan by 10 percent. But he said there was little else it could do to offset the greenback's plunge because its small size made producing more cars overseas unrealistic."We're basically on track to lowering our costs. Now if currency rates were where they were last year, I'd be smiling more," the 62-year-old executive said.Fuji Heavy, the smallest of Japan's eight carmakers, has only one assembly plant overseas, in Lafayette, Indiana, which uses half of its capacity to build Toyota's Camry sedan.Mori said Fuji Heavy had no plans to expand production in the United States.

The most likely next move, he said, would be to consider the feasibility of producing cars in China, where prospects for sales expansion were massive."We're looking into possibilities for China," he said, adding that Fuji Heavy would likely need a partner to share the plant's capacity to get sufficient economies of scale. He declined to estimate when a decision would be made, while noting he had fielded a lot of requests for partnership from Chinese carmakers.Fuji Heavy expects its sales in China to jump 85 percent this year to 35,000 units. It expects global sales of 545,000 units in 2009/10.TOYOTA BACKINGLike the rest of the industry, Fuji Heavy's mid-term growth plan has been interrupted by a collapse in global auto sales and a sinking dollar.But Fuji Heavy's ability to earn money has been sub-par for some time due to its high cost structure and disappointing product launches. Its operating profit margins have stagnated well below 4 percent since 2003 -- low for a Japanese carmaker.While acknowledging Subaru's past misstep of trying to re-brand itself as an upscale carmaker, Mori said a revised strategy of lowering its cars' selling price while holding down incentives was helping to re-craft Subaru as a value-added brand in customers' eyes.

Mori also said he had high hopes for Fuji Heavy's four-year-old alliance with Toyota, which has already yielded a project to jointly develop a front-engine, real-wheel-drive sports car with Subaru's signature boxer engine that will be produced by Subaru and sold under both brands.Fuji Heavy has also started adopting many of Toyota's industry-leading lean production methods, while it expects to benefit in future from R&D help in next-generation technology including in the fields of hybrids and electric cars."Cooperating in advanced technologies with Toyota will be a big plus for us," Mori said. "I think we're going in the right direction."

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