Fuji Heavy Industries, which makes Subaru cars, on Friday said its annual operating profit had slumped 25% due to a brutal US price war and forecast another tough year hit by a weak dollar.

According to Reuters, Fuji Heavy - owned 20% by General Motors - has, under a five-year business plan dubbed "FDR-1", been trying to jump-start its core car making business, which had slowed due to insufficient investment.

But the niche maker of off-road vehicles, best known for its advanced all-wheel-drive technology, reportedly lowered its sales and profit forecasts for the final year of the plan to account for a weaker dollar and lower sales in China.

It said operating profit for the business year ending March 2007 would be 91 billion yen ($US795 million) instead of 110 billion yen, using a dollar rate assumption of 105 yen, instead of 115 yen, according to Reuters, which noted that the dollar was trading around 114 yen on Friday.

"We expect sales volume to be 6% weaker, too, but the revision is mostly due to the new dollar assumption," president Kyoji Takenaka reportedly told a news conference in Tokyo.

Reuters said Subaru is more vulnerable to a weak dollar than its bigger domestic rivals because it builds only half of its cars sold in the United States locally, compared with more than 70% for Honda Motor and Nissan Motor.

But Takenaka reportedly painted a positive picture for the medium-term outlook of its core operations, saying Subaru was taking concrete steps to expand sales volume and profit margins.

Among them are plans to build and sell in the next business year a high-margin crossover vehicle priced at around $40,000 as part of its strategy of offering value-added cars to cultivate a premium brand like BMW and Volvo, Reuters said, adding that Subaru estimated sales of around 34,000 units in the 2006/07 business year.

Subaru will also reportedly strengthen its sales network in the country, focusing on 13 major cities in the 'sun belt' region, where its growth has been slower than in areas [mainly in the US north-east] with heavy snowfall.

Takenaka said that, in Japan, Subaru plans to launch a new multi-purpose vehicle that it hopes will lessen its reliance on the flagship Legacy model, Reuters added, noting it will also aim to return its three non-core businesses, including aircraft, to profitability through increased cooperation with the Subaru division.

For the year that ended in March, operating profit was 50.32 billion yen ($439.4 million), short of a median estimate of 52.8 billion yen in a survey of 19 brokerages by Reuters Research.

Net profit reportedly grew 15% to 38.65 billion yen, lifted by sales of stock and a lower tax burden, while sales rose 4.9% to a record 1.439 trillion yen.

In addition to a weaker dollar, profits were hit by heavy spending on discounts and other sales incentives in the United States as its flagship Legacy reached the end of its model cycle, Reuters said.

The news agency said Subaru's US sales hit a record last year, but largely because of incentives, which averaged around $2,500 per car.

But with the launch of the restyled, award-winning Legacy next month in the United States, incentives should return to "normal" levels of around $700 this year, Takenaka reportedly said.

For this year -- the third year of the FDR-1 plan -- Fuji Heavy forecast a further drop in operating profit to 45 billion yen, projecting a big loss from a further drop in the dollar, Reuters added.