When shopping last year for his first car, Will Zhang considered a Lexus CT200h and a BMW 320i. Though he preferred the Lexus, he went with the BMW because at 340,000 yuan ($55,400) it was 18 percent cheaper.
“The Lexus has superior quality, performance and fuel economy,” said the 32-year-old manager at a Shanghai property developer. “But I chose the BMW for the price.”
While the Lexus lists for about $600 less than the BMW in the U.S., in China it’s $13,000 more because the German automaker produces its cars in the country, whereas made-in-Japan Lexus faces a 25 percent tariff.
Toyota Motor Corp. (7203)’s luxury brand has “squandered its time” in China, said Zhu Bin, an analyst at researcher LMC Automotive in Shanghai. “They have been too conservative in increasing investment.”
Lexus last year delivered 60,636 vehicles in China, versus 407,738 for Volkswagen AG (VOW)’s Audi, the bestselling premium brand in the country, and 313,638 for Bayerische Motoren Werke AG (BMW)’s BMW, according to LMC. Daimler AG (DAI)’s Mercedes-Benz was third with 207,099, LMC reports.
The three German luxury automakers, which all build cars in China, have quadrupled their local production in the last five years and now account for about 75 percent of the premium cars sold in the world’s biggest auto market, LMC data show.
While Lexus 2012 China sales rose 16 percent -- ranking it fourth in the premium category -- it will soon face more competition. General Motors Co. (GM) started building a new Cadillac factory in Shanghai this year, and Volvo, Land Rover, Infiniti, and Acura all plan to begin manufacturing in China by 2016, the year consultant McKinsey & Co. says the country will overtake the U.S. as the top market for luxury vehicles. Toyota, by contrast, has announced no plans to produce Lexus in China, even though it has five factories making cars for the Toyota nameplate.
“It’s already late” for Lexus, said Lin Huaibin, an analyst at IHS Automotive in Shanghai. “They can’t afford to continue ignoring China as that’s where most of the growth in the premium market will come from.”
When deciding whether to manufacture in a country, Toyota considers demand and the level of technology and performance of its factories, according to Shino Yamada, a spokeswoman for the company in Tokyo. Hiroji Onishi, Toyota’s China head, said in April that he has proposed producing Lexus in the country but that the timing and details haven’t been decided.
Toyota’s approach contrasts with that of Nissan Motor Co. Though Infiniti sells only about a fifth as many cars as Lexus in China, Nissan Chief Executive Officer Carlos Ghosn is planning to produce the premium nameplate’s models there as part of a global expansion. Ghosn hired Johan de Nysschen from Audi to lead a revamp and moved the brand’s headquarters from Yokohama, Japan, to Hong Kong to be closer to mainland China.
Infiniti will manufacture two long-wheelbase models at Nissan’s Xiangyang plant in the central province of Hubei next year to cater to Chinese buyers’ taste for larger cars.
“China is top priority for us,” de Nysschen, Infinit’s president, said in an interview in April. “We have decided to take a far bolder approach and announced manufacturing well before we actually have developed the brand to critical mass.”
Honda Motor Co. (7267), whose upscale Acura brand sold fewer than 3,000 units in China last year, unveiled a concept sport utility vehicle at the Shanghai auto show in April. The Tokyo-based automaker plans to produce the SUV in China in three years, President Takanobu Ito said.
Investors have shrugged off the Lexus China shortfall, pushing Toyota’s shares up 42 percent this year. That compares with gains of 21 percent for Nissan and 11 percent at Honda as Japanese automakers have benefited from a weaker yen that boosts export earnings. Volkswagen and BMW have declined 12 percent and about 10 percent respectively, and Daimler is up 10 percent.
Like Infiniti and Acura, Lexus faces the added burden of its nationality in China. Sales of Japanese cars there slumped last year after a dispute between the two countries over islands in the East China Sea triggered a consumer backlash.
The flare-up in tensions probably delayed Toyota’s decision to localize Lexus production, said Koichi Sugimoto, an auto analyst at BNP Paribas in Tokyo. Lexus’s strong brand recognition and sales in the U.S. also means there’s less urgency to build cars in China, he said.
Toyota may start producing Lexus cars in China in 2015 or 2016, when annual sales will likely reach about 100,000 units, according to Kota Yuzawa, an auto analyst with Goldman Sachs Group Inc. in Tokyo. A single model typically needs to sell 30,000 to 40,000 units a year for local production to make economic sense, he said.
“Toyota still has a lot to do before localization, such as introducing models targeting young luxury buyers, or bigger cars with smaller engines,” Yuzawa said. “They have a lot of things they can do to increase sales.”
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