Can Lexus be the Rival of Big 3 in Germany?

By Takehiro Yamada : Reporter of Toyokeizai
August 17,2014
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"We now have a product range that can rival the big three in Germany," stated a Lexus international director of Toyota Motor.

This announcement was made on the night of August 7th at a hotel in Kokura, Fukuoka Prefecture, in relation to the NX, the new SUV (Sport Utility Vehicle) created by Lexus, ahead of the line-off ceremony scheduled for the following day.

The NX, launched for sale in Japan on July 29th, is Lexus's first compact, high-grade crossover SUV. This new model is set to compete with the small to medium SUVs from the german big three such as BMW's X1 and X3, Audi's Q3 and Q5, and Mercedes-Benz's GLK. As far as Toyota and Lexus are concerned, the NX has two big missions to accomplish.

The first mission is having the potential to create an influential new genre that can put Lexus closer to becoming a rival to the german big three. The second mission is for Toyota to take the first step in moving away from their long focus on hybrid vehicles, to change direction towards turbo engines.

Since its launch, Toyota has used the Prius as their trump card for their support for the environment. In the Japanese market, hybrid vehicles have won an overwhelming victory. However, they are still no more than a minority in the rest of the world. The biggest bottleneck to its success is its high overall cost, caused mainly by the high system costs, in terms of batteries and the like.

European manufacturers, particularly Volkswagen (VW), are nowadays concentrating on strengthening their competitive power by downsizing the turbo engines, miniaturizing their high-efficiency, direct-injection engines to reduce fuel consumption, and augmenting any deficiency in power with turbochargers. The NX is Toyota's first vehicle to feature a downsized direct-injection turbo engine.

The German Big Three Still out of Reach

As the shift towards small cars continues on in premium market segments, Toyota's increase in profits rides primarily on the shoulders of Lexus.

Lexus was born in 1989 in the United States, becoming greatly successful as an emerging premium car brand. However, in line with the aging of the customer base, and the pressure exerted by European luxury car manufacturers, Lexus's growth started to slow down from the middle of the year 2000. The Lehman Shock then struck a hard blow on Lexus in the fall of 2008. Their yearly sales in 2009 were down by 30%, a great fall compared to the sales achieved by the company in 2007. On the other hand, although the German Big Three also experienced a decrease in sales during this period, with BMW down by 16%, Benz by 15%, and Audi by 5% (compared to 2008), the damage suffered by their business was relatively light compared to Lexus.

After this period, there was also a great difference in the rate of growth of these companies. In terms of number of sales, the German Big Three had all recovered by 2011. Compared to their pre-Lehman Shock peak, the three companies greatly increased their sales in 2013, Audi by 57% (compared to 2008), BMW by 30% (compared to 2007), and Benz by 21% (compared to 2007, considering passenger vehicles only). On the other hand, although Lexus sold a record high of 520,000 cars in 2013, this constituted a mere 1% increase compared to 2007. Although we could say that Lexus has established itself in a good position in the United States and Japan, we have to admit that their presence in Europe is relatively weak.

Mr. Tokuo Fukuichi, Senior Executive Director of Toyota and President of the internal company Lexus International, raises expectations by saying, "NX's role is to raise brand awareness by promoting the originality of the Lexus brand and the excellent quality of goods manufactured in Japan."

NX's target in Japan is to sell 700 cars per month. The number of orders at the time of the launch was already 6,500, constituting a great start for the company. Lexus plans to launch the NX in the United States in November, with an expectation to sell 42,000 cars in the first year. We wonder how much Lexus will be able to expand their sales in the main competitive areas of the Unite States, Europe, and China. Unlike the Prius, Aqua, and Camry, the NX has much less importance in terms of the number of sales it needs to achieve. However, it certainly holds the key to increasing awareness of the Lexus brand.