Lexus Recalls Risk Ceding Decade-Long U.S. Lead to Mercedes

After 10 years on top in the U.S., Toyota Motor Corp.’s Lexus risks relinquishing its best-seller status among luxury brands to Daimler AG’s Mercedes-Benz.

The Lexus brand, a benchmark for quality in the 1990s and 2000s, has been marred by record recalls this year for flaws across its lineup. Problems including fuel leaks, engines that may stall and vehicles at risk of rolling over during emergency driving maneuvers surfaced after Toyota had already recalled more than 8 million vehicles under its main brand for defects linked to unintended acceleration.

“It’s very likely Mercedes-Benz may take over the lead this year,” said Jesse Toprak, vice president of industry trends for researcher Truecar.com in Santa Monica, California. “The cumulative impact of all the recalls hasn’t really shown up yet. It’s more likely to be seen in the second half.”

In the first half of this year, U.S. deliveries of the Japanese brand grew 19 percent to 107,430, while Mercedes-Benz jumped 25 percent to 106,972. Lexus’s market share may dip to 1.98 percent this year from 2.1 percent in 2009, falling behind both Mercedes-Benz and Bayerische Motoren Werke AG, according to auto-industry researcher Edmunds.com.

“It will be a battle,” Jim Lentz, president of Toyota’s U.S. sales unit, said in an interview in Torrance, California. “The Lexus customer is really discerning about quality issues.”

Eiji Toyoda

Former Toyota President and Chairman Eiji Toyoda, a member of the automaker’s founding Toyoda family, spearheaded the development of the Lexus brand, which was set up in the U.S. in 1989 to take on German luxury carmakers. Lexus has been the top- selling luxury-car brand in the nation since 2000.

While BMW, the world’s top-selling luxury auto brand, trails Lexus in the U.S., it’s still a contender with 100,632 units sold this year through June. Mercedes-Benz is the second- biggest premium vehicle line globally.

“They’re really neck and neck” in the U.S., said Jessica Caldwell, a senior analyst at Santa Monica, California-based Edmunds.com. “There is a big opportunity there for the Germans.”

Toyota rose 1.7 percent to close at 3,085 yen in Tokyo. The shares have fallen 20 percent this year, compared with a 14 percent gain at Daimler and 32 percent surge at BMW.

Lexus’s U.S. sales growth dropped to 2.7 percent in June while Mercedes-Benz posted a 25 percent gain and BMW delivered 15 percent more cars.

Lexus Recalls

The decline followed setbacks for Lexus that began in April when Toyota recalled the GX 460 sport-utility vehicle after Consumer Reports magazine rated it a “safety risk,” saying the model was at risk of rolling over under certain conditions. The magazine removed the designation on May 7.

In May, Toyota recalled and halted U.S. sales of model 2009 and early 2010 Lexus LS 460 and LS 600h L sedans for an “off- center” steering-wheel condition.

In June, the carmaker briefly halted sales and said it would recall hybrid HS 250h sedans to fix a fuel-system flaw that could lead to gasoline leaking after a crash.

This month, Lexus recalled seven car models in the U.S., Japan and China for an engine defect that can lead to stalling.

Silke Mockert, a spokeswoman for Stuttgart, Germany-based Daimler, said it’s difficult to measure if U.S. customers have switched to Mercedes from Lexus as a result of the recalls.

“Building a strategy on short-term events in the market isn’t possible,” she said.

BMW Line-Up

Markus Sagemann, a spokesman for Munich-based BMW, declined to comment on whether the carmaker is benefiting from Lexus’s woes. BMW sales are growing because “our model line-up is very strong, and we’ll continue to boost it,” he said. “Globally, we’ll have replaced 60 percent of our models by 2012.”

The German brands are also benefiting from a higher rate of leasing among U.S. customers than Lexus, Truecar.com’s Toprak said. More than 60 percent of Mercedes-Benz vehicles are leased, compared with less than 30 percent of Lexus vehicles, he said.

Mercedes’s C-Class cars, the brand’s top-seller in the U.S. and a competitor to the Lexus ES sedan, has been “particularly well received” this year, said Jim Hossack, an industry analyst at researcher AutoPacific Inc. in Tustin, California.

Sales of its E-Class sedans, introduced last year, more than doubled to 27,778 in the first half compared to a year earlier. BMW this year revamped its 5 Series sedans, which compete with Mercedes’s E-Class and the Lexus GS, as the Japanese brand works to fix an engine flaw that’s affected its model.

Discounts on Loans

All three brands are promoting discounts on loans and leases this month, with Mercedes offering leases as low as $345 a month for a $34,000 C300 sedan, BMW promoting a $639 a month lease for its $52,275 535i sedan, and Lexus setting a $449 monthly lease rate for its best-selling RX SUV that starts at about $37,800.

Even with the recent recalls, harm to the Lexus brand may have been limited, Edmunds.com’s Caldwell said. The month after Consumer Reports warned customers not to buy the GX SUV, Lexus sales surged 31 percent from a year earlier.

In the first half of 2009, Lexus appeared poised to fall behind BMW in the U.S., with sales of 90,060 compared with BMW’s 93,563. Lexus ended the year with a 19,473-unit lead over BMW, retaining its sales crown for the 10th straight year.

“I think Lexus can weather the quality issues more so even than the Toyota side,” Toyota’s Lentz said.

Among Lexus vehicles sold in the U.S. affected by the engine-stalling risk, Toyota has found only a 0.2 percent failure rate, he said.

Recalls also haven’t deterred orders for the new Lexus LFA, a V-10 engine supercar. The company has said it’s sold out of all 500 units of the limited-production $375,000 sports coupe.

To contact the reporter on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net; Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net

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