Lexus Sputters at Home
Toyota rolled out the marque to fend off European competitors in Japan. But so far the results have been less than impressive

With net profits of $10 billion, double-digit growth in the U.S., and GM's (GM) spot as the world's biggest automaker in sight, Toyota Motor (TM) President Katsuaki Watanabe has had little to complain about since succeeding Fujio Cho as the head of the Japanese automaker last June. Yet for all the great strides being taken by Toyota, Watanabe must be at least a little disheartened by the performance of the upmarket Lexus brand in Japan. Advertisement

The reason? Since the Lexus marque first went on sale in Japan last August, sales have hardly set the world afire (see BW Online, 7/11/05, "Lexus to the Rescue"). Through Dec. 31, only 10,300 Lexus were sold in Japan -- considerably short of Toyota's target of 20,000. What's more, in 2006 the carmaker is only expecting to sell 40,000 Lexus -- still off the the 50,000-60,000 annual target Toyota had mentioned last year.

U.S. SUCCESS. "The start of Lexus in Japan was somewhat slower than we had expected," Takeshi Suzuki, senior managing director at Toyota, conceded at Toyota's third-quarter results announcement in Tokyo on Feb. 7. "You should evaluate the Lexus brand on a global basis rather than on how well it is doing in the Japanese market."

The slow start in Japan stands in contrast to the U.S., where Lexus has been the best-selling luxury car brand for the last six years. In 2005, Toyota sold 302,895 Lexus vehicles in the U.S. This is up 5.8% vs. a year earlier. Moreover, it's the first time a luxury brand had sold 300,000 units since Cadillac achieved that feat in the mid-1980s.

Yet at home in Japan, imports of German rivals Audi, BMW, and Mercedes-Benz continue to perform well. Together, the three German brands sold more than 106,000 cars in Japan in 2005, a 10% increase, while Japan's overall auto market contracted by 0.9%.

"PREPARED TO FIGHT." What explains Lexus' troubles at home? One big factor: savvy foreign brands beat Lexus into the market with new models. BMW, for example, launched its remodeled 3-series in Japan ahead of Lexus. Mercedes also came out with several new vehicles during 2005, including the SLK 280 luxury roadster and E280 sedan in August. Both automakers also spruced up their marketing efforts.

"Mercedes and BMW took advantage of the Lexus launch," says Koji Endo, an analyst at Credit Suisse First Boston (CTN.X) in Tokyo. "They knew Toyota was launching the Lexus and prepared to fight."

Perhaps less predictably, foreign automakers say the arrival of Lexus has also enabled them to attract a new class of car buyers in Japan -- those who might not have considered an imported luxury car in the past. "People who went to Toyota showrooms didn't visit BMW showrooms," says Yuichiro Suzuki, a BMW Japan spokesperson in Tokyo.

WRONG MODELS? But with a little help from Lexus, attitudes are changing. BMW estimates that the number of visitors to its showrooms is up 20% since the rival's launch, and as many Japanese consider foreign brands for the first time. Customers realize that if you spend $45,000 or more, "you can afford an imported car," Suzuki says.

Toyota's choice of models may also shed some light on the sticky start by Lexus. Analysts point out that just two Lexus models were launched in Japan last August -- the GS sedan and SC convertible -- with the IS sedan added a month later. CSFB's Endo says all three models are too sporty to be big sellers in Japan's luxury sector. A truer evaluation of the Lexus will be possible after the top-of-the-line LS sedan goes on sale later this year.

Three additional models, including two SUVs, are expected in 2007. "After seeing how the LS does, we'll have a better picture," Endo says.

"HIGHLY BRAND-CONSCIOUS." Inflated price tags also may have deterred buyers. While the Lexus brand is new to Japan, luxury Toyotas are not. The GS and SC, for example, were previously sold in Japan as the Toyota Aristo and Soarer, respectively. But whereas the old Aristo cost up to around $40,000, the cheapest version of the GS on sale today is about $10,000 extra.

Of course, much of that premium is explained by higher specs -- Toyota points out that the current GS engines are much larger and more sophisticated than those in the last-generation Aristo. But for that kind of money some buyers will prefer the extra cachet of a European brand.

"Japanese consumers are highly brand-conscious," says Tatsuo Yoshida, an analyst at Merrill Lynch (MER) in Tokyo. "If the goal [of Lexus in Japan] is to be a true luxury brand up against European premium brands, it won't be an easy task."

Nonetheless, Toyota executives don't seem unduly concerned. For one thing, missed targets after less than a half-ear are hardly cause for panic. For another, while Toyota agrees that early sales are disappointing, feedback from buyers has been very positive. And this point has been confirmed by Lexus owners' and auto Web sites.

NO PANIC YET. One popular price comparison ranks the IS as the sixth-best car in Japan. "We are [making efforts to lay] a solid foundation for the Lexus brand in Japan," Toyota's Suzuki says. "We're below our original [sales] target, but brand recognition, customer satisfaction, and various other indicators are very good for Lexus."

Clearly, Toyota is preaching patience. And with 15-plus years of Lexus success in the U.S., who would bet against the luxury lineup eventually making its mark at home?