Interview with Curt Allen
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio interview between Andrew Zezas, host of CFO Studio and financial executive, Curt Allen, Vice President of Finance and Accounting and Corporate Controller of Subaru of America.
Visit www.CFOstudio.com to read about this interview and to watch the entire on-camera interview.
Selling Cars in the United States from the Perspective of Subaru’s Finance Executive
Zezas: This is CFO Studio and I’m your host Andrew Zezas. Joining us in our studio today is Mr. Curt Allen, Vice President of Finance and Accounting and Corporate Controller of Subaru of America, Inc. In 1975, Mr. Allen obtained his BA in Business from Rutgers, The State University in New Brunswick, New Jersey. In 2000, he obtained an MS in Organizational Development from the University of Pennsylvania. Mr. Allen has been a CPA in New Jersey since 1977 and prior to joining Subaru of America, Mr. Allen spent 5 years with Deloitte Haskins & Sells in the audit department.
Subaru of America was founded in 1968 and as the US sales and marketing subsidiaries of Fuji Heavy Industries Limited. Subaru of America is responsible for the distribution, marketing, sales and service of Subaru vehicles and replacement parts and accessories in the United States. Today Mr. Allen is here to talk to us about selling cars in the United States from the perspective of Subaru’s Finance Executive. Curt, it’s nice to have you here on CFO Studio.
Allen: Andrew thanks for having me..
Zezas: So Curt, Subaru is a very dynamic company. Tell me about the company’s origins because I find that story fascinating when you share it with me once before.
Allen: We are all little unique but most foreign car companies they decide they want to sell cars in United States. They set up the subsidiaries, set up an organization and then forward. We’re a little bit different. Two individuals, Harvey Lamm and Malcolm Bricklin decided that they wanted to set up a company in the United States and they wanted to sell a product that was sold in Japan a little scooter.
Zezas: A scooter.
Allen: A scooter, little mini motorcycle. Probably had an engine of a size of your lawn dollars right now. So they went to Japan, talked to the executive of Fuji Heavy Industries and saw that they produced a car called the Subaru of 360. It’s just little bit smaller but look like a mini Volkswagen Beetle and through long negotiations they finally got the exclusive distribution rights to sell the product in the United States.
Zezas: Wow, so they went over for one product, came back with another product. Was this a private equity backed concern? Was there a major investment?
Allen: Well, interesting enough you probably won’t believe it but Harvey Lamm and Malcolm Bricklin started the corporate organization with 12,000 dollars.
Zezas: 12,000 dollars.
Allen: 12,000 dollars. That was it.
Zezas: Subaru of America Corporation that mammoth corporation you work for today started with a 12,000-dollar investment in United States.
Allen: That was the beginning to set up a corporation. Obviously, it took a little bit more than that. They get the company rolling. So what they did was they took United States and separated into 13 districts. And what they did they kept the southern California district for themselves but the other 12 regions they found businessman, bankers to set up the organization for that region and responsibility for them was to pay for the cars as soon as they came across the ocean and went through customs.
Zezas: How does that work in terms of when you pay for the cars?
Allen: Well what happened is as soon as the cars from Tokyo got on the boat, we officially own the cars. So we had to have the corporate bank in the Elsie’s to deal with our promise payment to Fuji Heavy Industries. However in the East Coast, it’s about 28-day trip. To get to the West Coast, it’s about 14-day trip. And as soon as they clear customs in United States, that’s when we drafted on the cars to independent distributors.
So we got our money quickly. We actually got our money before we had to pay Fuji Heavy Industries and then the distributors have these cars. They had to sell it, set up an organization, dealer network across the country. It is Harvey Lamm and Malcolm Bricklin. They had no expertise in the car business. None at all. They knew they wanted to sell this product but to them they were a distributor, just buy and sell the product. So the distributor’s responsibility to set up a dealer organization and just wipe from there.
Zezas: Great start. What a great start. How long have you been in Subaru and how did you get your start?
Allen: I’ve been in Subaru for 33 years now.
Zezas: 33 years, in a world where Finance Executives are going from one company to another in less than 2 years on a continual basis. That’s tremendous. That says a lot.
Allen: I guess it talks about the way the company is and the way I am.
Zezas: Okay, so you’ve been there for 33 years. How did you get your start?
Allen: Interested, I was with the Lloyd Haskins in sales in the audit department. Finally made a decision that I didn’t want to be in auditing anymore. I wanted to go in the industry. So I went to a head hunter and just let them do the job and then all the sudden I get a phone call and said I had an interview for Subaru of America and said hi. So went on the interview, talked a little bit, walked out the door and then didn’t talk money or anything but doesn’t walk out the door and the controller of the company says, “By the way, the car comes with the job.” And I’m sitting there thinking in two days from now I am going to buy brand new car.
Zezas: You had already contracted it.
Allen: I’m already contracted it. I picked it up and I paid for it but I have all the financing ready and I’m single. I already had a car but it was nice to get a new car and I certainly didn’t need a third car. So I went to the dealership two days later and said, “Hey look, I will be honest with you. I really like your car but I have a job possible opportunity and it looks interesting. I already gone on one interview.
Hope to get a second interview but I don’t want to buy this car and find out I’m going to get a car in two weeks from now.” And the dealership at that time, the car was selling very well. The dealer was very livid. He was thinking he just sold a car and the salesperson was losing his commission and he told me and said, “I will only hold the car for you for a week and if you come back to me after that time and the car is still there, I won’t even guarantee you the price.” So that was interesting.
Zezas: And I guess you went back and got the job and the car.
Allen: Well subsequently I went on a second interview and everything went well in the second interview, walked out the door and they said they’ll get back to me and still haven’t talked about money. The next day I get a call and says, “Curt, come in Monday morning and let’s talk about the job and what we want to pay you and we want to hire you.” And here I am, I’m an audit senior and the partner on my job is coming out that Monday morning to finalize the audit. I’m thinking what am I going to do, probably being stupid.
I drive to the office Friday night, talked to the partner in charge to the whole office and told them I’m quitting before I even knew what the salary was I was going to make. I was so confident that this was the job I wanted and the partner was very nice. He said, Hey look, if it turns out you don’t get the salary you want. You’re welcome to stay with us.” And I said, “Well thank you but I’m thinking this is going to be interesting enough.” I’ve been there for 33 years. I married my wife who worked for Subaru. I’ve been married for 32 years.
Zezas: No kidding.
Allen: And I guess I’m just a loyal guy that loves my wife, loves my company and it’s been a great partnership for my wife and me and the company since.
Zezas: So it sounds like Subaru don’t really well for credal on Vice President.
Allen: Hopefully, it’s been a win-win situation for both.
Zezas: Let’s turn to finance. Tell me about those elements of Subaru that are unique to the finance department to management or to the company itself.
Allen: We are a very small organization. We have 10 billion dollars worth of sales to share but we only have 800 employees. And when I was hired, I think we had two other CPAs that were working for the company that time but all of a sudden, we’re in a growth mode in the late 70s and in the early 80s. We were growing so we made a decision that we wanted to hire a lot of CPAs, all from big aid accounting firms.
Zezas: A lot of CPAs.
Allen: A lot of CPAs.
Zezas: Not just in finance.
Allen: Not just. Well they all started. They were mainly hired in finance internal audit, various departments within the company but as the company grows, obviously you’re only going to have one controller and where is everyone else go. So the other individuals started in the operating departments and learn the business at that department and now we actually have more than half of our corporate officers are CPAs.
Zezas: Not just in finance.
Allen: Not just in finance.
Zezas: Corporate Officers across the board?
Allen: The encounters as you may say are running Subaru of America. The president is a CPA. The head of market development is a CPA. The head of HR is a CPA. The head of distribution, the head of parts and service. In past years, we had a head of IT and head sales for CPA’s.
Zezas: In some people, they might find that peculiar but there’s a lot of logic in that because you got continuity in direction. Everyone understands finance and accounting. No matter what department in there must make certain elements of running the company much smoother than another organization.
Allen: Well the CPAs that we hired they were all part of audit departments. So, most of them have 4 to 5 years’ experience. They were already in various companies so they really got great experience on how businesses run and now they’re running their own little business within their little department.
Zezas: Within the company. Curt, in the recent economic down term, the automobile industry took a major, major hit and went from selling 16 to 17 million cars annually to +/-10. How did Subaru survived that major hit in the industry?
Allen: We were very growing company. We actually had 75 to 86. We had 44 successive quarters of increase sales growth and earnings. We were the darling of Wall street. We were traded over the counter on NASDAQ and as taken and really did very well. Then in the late 80s when the exchange rates took a significant change, our products became more expensive. And from 87 to around 92, we really fell on hard times and then we make our growth again.
The outback that came out around 1994 really turned the company around and we started growing, got back to where we were before. And then you come in the early 2000’s, we sort of got a little bit full of ourselves. We said we just don’t want to be successful all right. We want to be the Japanese Bmw or the Japanese Mercedes. We want to be a high price luxury car but that really wasn’t our DNA. So we sort of got out of sink in the early 2000’s.
Then around 2005 to 2006, we said, “We got to remake the company. We got to be of value company.” So we re-did our whole pricing for the cars, made a value composition and something that people would want to buy and get great value from us. So we sort of set our self-up for that situation.
And then in 2008, all of a sudden the financial crisis hits. 2007, the US car market at 8 straight years are selling over 16 million units. 2008, they go down to 13 million. 2009, they go down to 10 million. Yeah. Everybody’s you know for Chrysler is going bankrupt. GM is going bankrupt. They don’t even know if they’re going to be around. Everything looks formal. Quite inertially in 2008, everybody is tanking in the auto industry.
We’re the only company that increase sales from 2007 to 2008. And since 2009, we had 4 straight years of record sales and we’re going to have record sales this year. The actions we took in 2005 and 2006 to really be value while we’re in the company. Not only you value your company, we look at safety. We wanted to be the safest car in the industry. Every one of our cars are IIA3, 5-star crash test value, Kelly-bluebook in ALG which reckon us top in resale values.
Zezas: Yeah, yeah.
Allen: Before we get greatly good guest knowledge so the whole value, quality, resale value, good guest knowledge, safety, it’s really what the US economy wants. When everybody sort of worrying about retrenching and it was not a matter of now. Cars were something a motor transportation that you wanted to feel safe and you want to feel like a good value. It was less important about showing I’ve made it and I got the real expensive car in my driveway.
Zezas: Right, right. And you know there’s some people who said that Subaru got lucky but it sure sounds like this was anything but luck. It sounds like it was well-planned in positioning of the company and its products.
Allen: Luck is generally. Luck generally happens because you put yourself in position to be lucky and the actions that we took was the right actions. Even if the financial crisis didn’t happen, we did the right actions that were necessary to make the company grow.
Zezas: Curt, talk to me about finance specifically and how it’s taken back to influence that success at Subaru.
Allen: In my department, obviously I’m part of the accounting department and finance department, your normal general ledger, financial statement operations but it sort of goes beyond that. Taxes is normal situation. My roles extended that we have a wholesale for floor plan operations. We did the wholesale for 31 dealers right now so we had a wholesale operation going on.
We had an extended more business that’s in finance department. We also do all the vehicle pricing that’s handled with us. We also do customs in all importations of parts from vehicles and all the custom program operation. We’re extensively tied in the marketing department. We keep good controls and tied in every marketing that’s going on. In the other big area, obviously the car companies, is the retail incentives.
Every part of the retail incentive operations were a part of. So we are really strongly involved in all operations in the business and interesting on this set of side is back in 1987, we started to spiff dealer personnel. It’s something we call telecash. The dealer personnel is salesperson. They sell car. They call up Subaru. They get a check so we call it telecash. That operation lasted for 20 years and all of a sudden we’re here in the mid 2000’s.
We’re saying, “This is getting a little stale. We need to do something different.” We weren’t growing. The car market was strong but we got up to around 180,000 units. We were about 1% in the industry but we stayed that way for many years, for 6 or 7, 8 years. And we said, “How can we increase sales?” Here we are selling 15,000 cars a month but we want to get to 18,000 and then we want to get to 20,000. How do you get into that next level?
And we started thinking we’ve got 5,000 sales people out of the dealerships. What if there’s half of those sales persons sold one more car every month? That would be significant to us. So we sort of morphed this telecash operations and at the same time we developed this we call it foundations. This was a long range plan. It was to train our sales personnel.
We wanted to make sure that our sales person knew everything. It was about that car. You come in to buy our car. We want that salesperson deals everything that’s going on. So if you want to get the spiff from us, you have to be properly trained.
Zezas: And the casualty that the salesperson got from you was in addition to the competition you got from the deal.
Allen: Yes, it was in addition. And on top of that here we are we’re sending checks. Worse process in 50,000 checks a year. Talk about a lot of people involved, a lot of time involved, reconciling bank account.
Zezas: A lot of checks.
Allen: A lot of checks. So at the same time foundations, we tied into a training session. We went from checks to a prepaid debit card. Instantly, 50,000 checks go away. The prepaid debit card gets updated every week. The money gets in there. And also instead of just paying a hundred dollars a car, we came up to a stair stuff method. So maybe you get 75 dollars for the first 3 cars you buy and it goes up to a 100 dollars and then it goes up to a 125 dollars.
Zezas: That’s great.
Allen: Up to a 150 dollars and it was retroactive that each level was retroactive to car 1. So if you’re selling 10 cars, you get 100 dollars a car. At 11th car could be worth not only 150 dollars but you’re getting 50 dollars for every other first ten cars control.
Zezas: What a tremendous…
Allen: So all of a sudden you’re getting 600 dollars for that next cars so you think that salesperson going to try one more car and that was the philosophy. So one more car per salesperson per month.
Zezas: How did that affix it?
Allen: Well this is right at the time at 2007 when we started this operation, we had 4 years of record sales. Just as past month and May was our best month ever, June was our second best month ever. We went back then 15,000 sales a month was a normal money. We had 2 straight months where we’ve been over 39,000. 40,000 is just on our horizon.
Zezas: That’s fantastic. Talk to me about retail operations. Does Subaru finance its retail operations differently than other motor companies?
Allen: Most companies have their own finance arm. You’re probably familiar with Ford Motor Credit, GMAC. Toyota has their own credit operations but it takes a lot of money. You have to have retail loans. You paint the cars are being paid for probably on the 16th month basis. So you got to cover your sales for 5 years. Leases are generally from 36 to 39 months.
It takes a lot of money. It takes a lot of expertise. You have that customer service people. You have that credit people and you have to have a lot of systems.
Zezas: It’s a whole business.
Allen: It’s a whole business of itself and we didn’t have that expertise for money or the operational staff to do that.
Zezas: Did you partner?
Allen: We partnered this out. In 2001 we did a new partnership with JP Boarding Chase. Obviously they have strong support and they were very good to us. Even though in financial crisis they kept the financing going on and it’s been a win-win situation for both of us.
Zezas: Wonderful, wonderful. Excuse me Curt if you will hire for us. You know like most companies, Subaru has been accounting in the United States through US cam. How will IFRS if it all effective company going forward?
Allen: Our parent came to us in 2009 and said, “IFRS is coming. Be ready.”
Zezas: In 2009, that’s where everybody got.
Allen: Right, get ready for it. So we started. We had big meaning talk about it. We obviously worked with our auditors and they help us along the way to find out. Wasting was a big thing. Componentization of fixed assets was a big thing so we had to get ready but to us it looked like a simple operation.
The plan was fiscal year 15 we were going to move. We’re a March year-end so that means you got to have compare the statements for fiscal year 14 and to do that you have to have the beginning balance. 2010, you think on 5 years out but we had really be ready by March of 13. So we’re getting ready and all of a sudden a year ago around January of 2012, the Japanese Finance Minister comes out. He doesn’t make a proclamation.
He does for the make statement and he says, “You know I think Japanese company needs another 5 to 7 years to get ready for this.” We’re not ready now and this is going to take a while. Obviously some companies had started early but when I came out it’s really like the rest of the Japanese company said, “Alright, I’m just going to wash my hands over for right now.” When he said 5 to7 years, it’s probably more like 7. So I’m thinking probably 2019 is when we’re going to move.
Zezas: Yeah, and you’re probably right about that. You know it’s interesting the whole IFRS issue is based on convergence and I attended a presentation by the general accounting office recently where the presenter said that currently there are 117 different versions of IFRS in use around the world. And I asked the question I thought this was about convergence and I got kind of an innocuous answer. Can we have time for one more question? Given what you just described to us, would you qualify or characterize Subaru’s accounting methods has being very complicated?
Allen: Reality, the car business what we deal in is simple business.
Zezas: Is it?
Allen: We buy and sell our product. We’re not buying and selling paper clips. We’re buying and selling cars for 20, 30, 40,000 dollars. It’s a high price product but you’re buying and selling product and it’s a simple business. One, you want to have a good product. You want to have a quality product and most importantly you want to have to take care of your customers.
If you don’t take care of your customers, you’re not going to have a customer down the road. It’s interesting we did a little analysis on what is the value of one customer. Well one customer over the life of that customer, he or she may buy 5 or 7 cars. Then they get married, have kids. How many kids buy the same car as their parents bought?
Next thing you know they’re getting ready to drive so you’re going to buy used car. If you like your product, you’re going to buy some used car. Do the kids like the car? It’s value of one customer. It’s significant so you have to take care of that.
Zezas: Well it’s apparent that Subaru gets that because I have known people who drive Subaru and they love them and they’re loyal and they’re quality cars. Curt, this has been a great interview. I want to thank you for appearing with us on CFO Studio. I hope you come back and see us again sometime.
Allen: Well, thank you very much and my pleasure.
Zezas: This is Andrew Zezas, your host at CFO Studio with Curt Allen, Vice President of Finance and Accounting and Corporate Controller at Subaru of America. Thank you very much for watching. We’ll see you again.