Lexus: Too Japanese for the Japanese

Why Toyota's luxury lineup is getting little traction at homewhile German brands remain an obsession

When Toyota (TM) introduced its Lexus brand in Japan three years ago, the company was hoping drivers like Masayoshi Haku would swoon over the luxury lineup. The 46-year-old doctor is a car lover with a $110,000 BMW 750 sedan and a $60,000 Porsche Boxster, so he should have been a prime customer for Lexus. But Haku hasn't taken the bait. Why? Lexus is too Japanese for his tastes. "Lexus makes excellent cars. But if you ask me whether I'd buy one, the answer is no," says Haku. "Foreign brands have more individuality."

For most Japanese car buyers, "foreign" really means "German." Although Lexus hit American showrooms 19 years ago and has been the top-selling luxury nameplate in the U.S. since 2000, it didn't arrive in Japan until 2005. By that time German brands dominated the high end, and Lexus has had a tough time getting a toehold, reaching only 60% of Toyota's initial sales projections. In 2007, Lexus moved 34,800 cars—about what it sold in December alone in the U.S.—and sales so far this year are down.

A big problem was the initial lineup. The company started with just three models: the $52,000 GS sports sedan, the $68,000 SC convertible, and the entry-level IS sedan, starting at about $40,000. All three had previously been available in Japan under the Toyota nameplate—for about 20% less than the Lexus models.

Worse, the buzz Toyota created for Lexus may have benefited the Germans. Following the Lexus launch, rivals say they saw increased interest as customers then visited BMW, Mercedes-Benz (DAI), and Audi (VLKAY) showrooms to compare. "The introduction of Lexus is energizing the luxury car market," says Ashvin Chotai, an independent auto consultant. But few customers have steered away from the German makes. Chotai says 80% of early Lexus buyers were former Toyota drivers; only 5% came from Mercedes or BMW. "Getting Lexus accepted as a bona fide luxury brand seems to be a lot harder in Japan than in the U.S.," says Chris Richter, an auto analyst at brokerage CLSA. "It's one of the rare times Toyota has stumbled."

Japan's German-car obsession shouldn't have been news to Toyota. Wander through Tokyo's upscale wards and you'll find no shortage of expensive German models, even though they're often too big to comfortably navigate Japan's narrow streets. And many of them have the steering wheel on the left, the European standard, rather than on the right, Japan's norm. "I wanted to drive an authentic BMW, like the ones in Germany," says Yoshihiro Nakahashi, who runs a Web site for BMW fans and pilots a left-hand-drive BMW 320si.

Still, few are giving up on Lexus in Japan. After all, Toyota has 45% of the car market there, it has built 160 plush Lexus dealerships at an estimated cost of $10 million each, and it has booked tons of prime-time TV ad slots. Most important, Lexus added the latest version of its flagship, the $77,000-plus LS sedan, to its lineup in September, 2006. Last year it accounted for more than half of Lexus sales in Japan.

Toyota says Lexus' fortunes are improving. In the segments where Lexus competes, the company claims it outsells German rivals. Mercedes' numbers, Toyota notes, include its A-class small car, and BMW sales figures count two SUVs. Lexus doesn't sell an SUV in Japan, though the mid-size RX is due in 2009. And Lexus last year topped buyer surveys by researcher J.D. Power & Associates (MHP). "It's going to take Lexus three to five years to create a brand image to rival Audi, BMW, or Mercedes," says Hiroaki Kihara, editor of magazine Autocar Japan. "But they took many years to establish their brands in Japan, too."

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