Toyota: Taking on BMW

Can it lure Japanese yuppies from their German iron?

When young Tokyo professionals shop for wheels these days, chances are they'll drive right past the local Toyota dealership. While Japan's No. 1 auto maker still has half of Japan's high-end car market, affluent 30- and 40-somethings increasingly find its offerings dull and "old." The prestige cars in Japan these days are made by Mercedes-Benz (DCX ), BMW, and Audi. Combined Japanese sales of this formidable trio have grown 34% over the past decade.

The hearty appetite for fancy German metal has Toyota Motor Co. (TM ) spooked. "Higher-priced sedans are a traditional base of strength for Toyota," says Yasuhiko Fukatsu, managing director for domestic luxury sales. "But BMW and Mercedes-Benz are doing a better job attracting younger buyers." Toyota also is increasingly worried about a resurgent Nissan Motor Co. (NSANY ), which is staging a comeback in the sedan niche.

Toyota's answer: Run its rivals off the road. To do so, it is unleashing on Japan a dozen-plus new or improved vehicles. Besides updating such midrange standbys as the Camry, Toyota is bulking up on eye-candy luxury models, most of which sell for $30,000 to $60,000. Among them: fully loaded versions of the muscular and decidedly BMW-ish Verossa, the remodeled Lexus ES 300 (known in Japan as the Windom), and a Mercedes-like sedan called the Brevis. Toyota is even debating marketing cars at home under the Lexus badge, which now exists only overseas.

Aging customers are a problem for Toyota everywhere, but nowhere more than in Japan. Most of the folks buying such luxury Toyota sedans as the best-selling Crown are graying executives who started out with entry-level Toyotas in the 1950s and 1960s. By contrast, upwardly mobile Japanese wouldn't be caught dead in a Crown, a $30,000 sedan often used as a taxi. Consider Shunsuke Kurita, a 46-year-old interior designer who drives a black 1999 BMW 318i. "It's a status symbol more than anything else, but I figure a BMW has better resale value than domestic cars," he says. "Toyota sedans have a fuddy-duddy image."

Still, why all the fuss? After all, foreign imports account for less than 10% of the Japanese auto market. Well, what worries Toyota is that up-and-coming Japanese drivers will develop the kind of loyalty to their German imports that their parents had to Toyota. Were that to happen, Toyota could lose out on future sales to drivers now in their late thirties and early forties.

HOOKING THEM YOUNG. Here, the Germans' global strategy of going downmarket poses a real danger. Car owners can start off with entry-level, semi-lux Bimmers and Benzes for as little as $30,000, perhaps trading up to high-end models later on. Take Kurita: He plans to trade up to a 5-Series BMW next year. As part of their intensive effort to attract more Kuritas, BMW and Mercedes have cut prices on many of the models they sell in Japan--no hardship, given the euro's weakness against the yen.

Toyota, meanwhile, relies on fat margins from luxury models to fund development of less lucrative cars like the Vitz subcompact and to offset losses on slow starters like the Prius gasoline-electric hybrid. Prestige cars are increasingly important to Toyota's bottom line because demand for them at home has held up despite slower sales of more utilitarian models. Toyota's high-end cars also are cash cows in the U.S., where the Lexus line is popular. Due in large part to robust luxury sales, Toyota's global operating income is expected to hit a record high of $8 billion this year.

While Toyota can afford to spend heavily on a new line of luxury models, the strategy could still backfire. "Toyota risks overextending itself with too many similar models chasing after too few customers," says Noriyuki Matsushima, an analyst at Nikko Salomon Smith Barney in Tokyo. The similarity stems in part from the fact that Toyota is sharing platforms with existing models rather than developing new engines and chassis. The ES 300, for instance, is based on the Japanese version of the Camry, and the Brevis shares parts with the midprice Progres.

Company officials acknowledge there may be some overlap but say the strategy reduces risk by substantially lowering development costs. Besides, they add, the cars' fresh new look will help rekindle "latent" demand. "Less traditional styling will bring people back to sedans," says Kyoji Sasazu, Toyota's man in charge of domestic marketing.

Hence the Verossa, a $30,000-plus car that looks and sounds nothing like a Toyota. Featuring a sinewy body and sharply flared grill, the Verossa evolved from a concept sketched three years ago by designer Takayuki Watanabe, who was just 27 at the time. It has a distinctive marque--the stylized claws of a wild beast--and a guttural roar. "We'd really like BMW drivers to take it for a ride," Toyota President Fujio Cho said at the Verossa's July 6 launch.

Toyota's challenge comes not just from BMW and Mercedes but also from a rejuvenated Nissan. In June, Japan's No. 2 luxury auto maker rolled out its sleek new Skyline sedan. The $27,500 car targets those partial to BMW's 3-series and slightly more expensive 5-series cars. "We half-jokingly nicknamed the new Skyline our 4-series car," says Kazuhiko Ieda, Nissan's chief marketing manager for luxury cars. Orders for the Skyline, a revival of a cult classic originally launched in 1989, topped 4,000 units the first month it was on sale.

How are Toyota's new models stacking up against rivals'? So far, the results are mixed. Sales of the home version of the Lexus SC 430 convertible, launched in Japan in April as the Soarer, are double Toyota's initial estimates. Most buyers, however, are not yuppies but moneyed 50-year-olds. TV ads for the Brevis, a long-hooded sedan with a blunt rear, feature a fortyish, jeans-clad narrator and the boomer-friendly 1972 tune Saturday in the Park by Chicago. But despite the middle-age pitch, half of the 5,000 people who bought the Brevis in June were on the other side of 60.

DOWDY. Besides a dearth of yuppie mobiles, Toyota is being hurt by lackluster brand identity at its luxury-car showrooms. No matter what price the Toyota, buyers get the same aftersales service and dowdy showroom. "What Toyota needs is at least two different brands in Japan, like it has in the U.S. with Lexus," says analyst Matsushima.

Toyota has long debated launching the Lexus brand in Japan, but it is wary of alienating dealers. Change may be afoot, though. "It's hard to say if Lexus is right for Japan," says Managing Director Fukatsu. "But we must do more to make our luxury models stand out from the crowd." And beat back those pesky Germans.

By Chester Dawson in Tokyo

    Before it's here, it's on the Bloomberg Terminal.