The Japan launch of Toyota Motor Corp.’s Lexus luxury brand next week is likely to mark the beginning of a period of intense competition in the premium car sector.
Toyota already sells de facto Lexus series vehicles in Japan, though it sells them under different names. Lexus brand models up to now had been marketed only overseas.
By introducing the Lexus brand here, Toyota hopes to rid itself of its “value-for-money” image and establish a new business model that relies more on profitable luxury models.
“We would like to make our Lexus brand a truly recognized global premium brand, and to that end, winning the hearts of customers in our home country is imperative,” remarked Toyota Executive Vice President Kyoji Sasazu.
But Toyota has invested serious money and effort in trying to counter perceptions that the Lexus launch here is just a giant relabeling exercise.
On Aug. 30, Toyota will introduce three remodeled vehicles under the Lexus brand — the GS, IS and SC. The GS is a remodeled Aristo sedan in Japan, the IS is currently sold as the Altezza and the SC is a remodeled Soarer sports coupe.
The flagship LS model, currently marketed as the Celsior, will debut next year.
The prices of the first three models will be set higher than those of the previous models, with the increases ranging from 300,000 yen to 1.5 million yen and the price tags thus ranging from 3.9 million yen to 6.8 million yen.
This price range matches those of BMW and Mercedes-Benz.
Lexus cars were first launched in the United States in 1989. Establishing a reputation as a luxury brand competing on a par with Mercedes Benz and BMW, Lexus vehicles became the best-selling premium cars in the U.S.
But Toyota is far from satisfied. The Lexus brand is not well recognized in Europe, despite being there for nearly 15 years.
And even in the U.S., the cars’ popularity is attributed primarily to price competitiveness, rather than to high-quality brand image, said Akihiro Nagaya, the general manager of Toyota’s Lexus brand planning department.
For example, the Lexus flagship model, the LS, is about 20 percent cheaper than the BMW 7 series and the Mercedes-Benz S class, he said.
Nagaya said this “value-for-money” image must be altered and customers worldwide should be persuaded to pay more for the label.
“Japanese manufacturers in general have been mass-producing reasonably priced, high-quality goods, but each product generates only small profits,” Nagaya said. “This is also true in the automobile industry and if we continue to stick to this process, the industry will be trapped in a narrow-margin business.”
Lying behind Toyota’s agenda is the change perceived in customer tastes in the domestic market.
“(With the introduction of the Lexus series), Toyota hopes to secure profits from the (high-margin) luxury automobile market,” said Noriyuki Matsushima, a credit analyst at Nikko Citigroup Ltd.
Industry watchers say the profit margin in selling a luxury car for about 6 million yen is comparable with that of selling five minivehicles.
“Automakers have to invest a lot of money in research and development in the area of environment, safety and information technology to stay competitive, and they are under pressure to earn a good profit” to secure the money for future investment, Matsushima said.
Annual domestic sales of cars — excluding minivehicles with engine displacements of up to 660cc — have leveled off to almost 3.5 million units over the past few years.
Data compiled by Nikko Citigroup show that customer demand is shifting toward cheaper models, priced under 1.5 million yen.
Sales of the latter accounted for nearly 44 percent of total sales in fiscal 2004, compared with 35.6 percent in fiscal 2000.
This trend has eaten into automakers’ profit margins, prompting Toyota to look to stimulate the luxury market, Matsushima said.
With the Lexus launch, Toyota officials hope to grab a bigger slice of the luxury auto market, which has hitherto been dominated by German automakers.
The domestic luxury car market shrank to 365,000 units in 2004, down 43 percent from the 637,000 units in annual sales marked in 1992, according to Nikko Citigroup.
Although there is no official definition for luxury cars, the securities firm selected certain brands — usually priced over 3 million yen — that it thought would be categorized as premium models.
Over the past 12 years, Toyota’s luxury car sales have declined 29 percent to 184,000 vehicles, while BMW sales have surged 36 percent to 38,700 units and Mercedes-Benz sales have jumped 50 percent to 44,400 vehicles, Nikko Citigroup said.
Analysts say the success of the Lexus depends on whether Toyota can lure away BMW and Benz customers.
“Since Toyota has spent an enormous amount of money to launch the Lexus and explore the new upper territory, you can’t call it a success,” unless it takes clients away from the German giants, said Yasuhiro Matsumoto, a credit analyst at BNP Paribas Securities (Japan) Ltd.
Toyota has reportedly spent some 200 billion yen to launch the Lexus series, though it did not disclose the exact amount.
The automaker even spent 1.2 billion yen to build Fuji Lexus College in Shizuoka Prefecture, a new training facility for Lexus staff.
At the training institute, which opened in March, Lexus staff learn about the products, share the brand identity and get a taste of luxury in order to improve their dealings with top-end customers.
Boasting a marble floor and white walls, the interior of the institute is fashioned in the image of a luxuriously furnished Lexus outlet.
The lounge at which trainees take their breaks is equipped with an audio system worth millions of, yen again allowing trainees to experience the sounds emitted by the Lexus car stereo system.
Despite this hefty investment by Toyota, BMW Japan Corp. and DaimerChrysler Japan Co. remain calm.
Expecting a degree of stimulation for the overall luxury car market, they even appear to welcome the Lexus launch.
BMW is confident Toyota won’t steal its customers.
“A luxury brand is shaped by tradition, quality and confidence that have been fostered over many years,” said BMW Japan spokesman Masanori Sugimoto, adding that, regardless of a product’s quality, building a luxury brand is not something that can be done overnight.
“Suppose a Japanese company, which has been marketing a bag for around 100,000 yen suddenly starts selling a bag at 300,000 yen to 500,000 yen under a newly introduced luxury brand, do you think Hermes and Louis Vuitton will lose their loyal customers?”
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