Industry Report: Lexus Undaunted by Lackluster European Sales

Lexus Planning to Triple European Deliveries by 2010

Auto producers have long understood that what may sell in one jurisdiction may only be of little interest in another. This has been true of subcompact cars here in the U.S., which sell extremely well up in Canada, and full-size SUVs which only sell moderately north of the border but have long thrived in the U.S., up until recently at least.

So why hasnt Toyotas Lexus division made a larger dent into Europes luxury segment? After all, Toyota has been selling the Lexus brand across the Atlantic for more than thirteen years, almost as long as it the luxury marque has been available in North America, or anywhere else in the world for that matter. So far this year Lexus has reached a volume of more than 210,000 units in the U.S. And what about Europe? A mere 20,000 and change, hardly enough to write home to Japan about, especially considering the old world

has a larger luxury market than North America. In comparison, Volkswagen AGs Audi division and BMW both sold more than 400,000 units in Western Europe, while Mercedes-Benz delivered close to 530,000.

Of course its no wonder Lexus is having difficulties selling in Europe. Its cars are more about precision engineering rather than passionate styling. After all, Europe is a completely different market, one that has fostered radically individual styling exercises such as the Fiat Multipla, Renault Vel Satis and BMW 7- and 5-Series, and continued to support automakers such as Fiat, Renault, Peugeot, Citroen, and Skoda, among others, that have long since been driven out of North America due to reliability problems and even poorer service.

Today, some of the worst offenders, regarding dependability, are the Europeans according to J. D. Powers and Associates. Land Rover has the dubious honor of placing 37th out of 37 nameplates in the 2004 Vehicle Dependability Study (VDS), while Volkswagen only manages to eke out 33rd spot, ahead of Daewoo (which for the most part no longer exists as a brand), Kia and Isuzu. Volvo, which somehow still has an image of stalwart service only managed 30th place, while Mercedes-Benz, once the hallmark of quality, now places a rather pathetic 28th out of 37. Jaguar is better but not good enough at 25th, while Audi has made great strides to place in 22nd, still below average. The only European marques to place above the industry average set between 15th and 16th positions, are Saab in 14th place, BMW in 13th and Porsche in 10th - the only European to make the top 10. Porsches future doesnt look promising, however, as its initial quality has dropped significantly since the inception of its Cayenne SUV, falling from 7th place in the 2003 Initial Quality Study (IQS) to 35th out of 37 nameplates in 2004, just ahead of Volkswagen which has slid backwards from a poor 24th to a shocking second to last place.

Lexus, on the other hand, sits in 1st place in the IQS and the number 1 position in the VDS, and has for years. Its parent company, Toyota, has done well in European markets, however, showing that Europeans do value reliable service at the lower end of economic scale, but cracking the premium market will require a different strategy than in North America where Lexus is second in sales only to BMW, surpassing Mercedes-Benz and Cadillac while annihilating Audi and Jaguar.

Traditionally, those in the "new world" are quicker to adopt new ideas, and the concept of a Japanese luxury brand rivaling the worlds "greatest" European marques, while initially amusing, has been accepted with open arms now that vehicles such as the LS 430 are seen to match the Europeans in performance and luxury while surpassing in dependability, dealer service, and overall value.

"Lexus has been weak in Europe because the design has not been adapted to European tastes and because we have not had diesel," commented Vice President for External Relations at Toyota Motor Europe James Rosenstein.

Rosenstein feels that Lexus will hit the mark with new designs featuring "a bit more emotion", along with hybrid and diesel powertrains, both which are due to hit the market next year.

The man in charge of reinvigorating Lexus design and engineering is Mr. Takeshi Yoshida, who lives by the motto "make the most of every moment". Yoshida is one reason why Toyota is still bullish on Lexus future in Europe, despite its slow take-up.

Along with adding style, diesel power and hybrid technology, Lexus is planning to offer more sporting suspension setups in its European offerings, after hearing complaints from overseas dealers about handling that biases comfort over high-speed maneuverability.

On the positive, those that have purchased Lexus vehicles give the brand high owner satisfaction marks. While a solid footing to build upon, most industry experts believe traditional European luxury brands will enjoy a few more years of unrivaled success before Lexus gives them a real run for their money. If the Germans, in particular Mercedes-Benz and Audi, can close the quality gap while enhancing customer service, they stand a good chance of maintaining the lions share of the luxury segment even if Lexus cars offer more passion in design and driving dynamics.

That said, news of new diesel and hybrid models, and even more threatening, new diesel-hybrid powertrains, could mean the Europeans will face difficulty in future years. Barring any major advancement making Europes hydrogen highway a reality, and nothing substantive is expected for decades, Toyotas leadership in hybrid powertrains could seriously challenge the likes of BMW and Mercedes-Benz, which have relied on sophisticated, direct-injection common-rail turbodiesel technology to remain the luxury leaders. Combining such high-tech and efficient diesel engines with Toyotas latest Hybrid Synergy Drive system, as applied to the upcoming Lexus RX 400h, would give Lexus the fuel economy and performance edge over its European rivals.

For these reasons Toyota sees Europe as a growth opportunity for its Lexus division, rather than a thorn in its side. And if it does well there, its home market in Japan, just being introduced to the Lexus brand, should follow suit. Japan has had a love affair with German brands for decades, and therefore success for Lexus is not necessarily a given. Still, the automaker is targeting as many as 60,000 Lexus models sold in Japan by 2006 through 180 dealerships. Toyota is also planning to open Lexus dealerships in China in 2005.

In order to strengthen European sales Toyota will spend approximately $650 million in advertising during the next three years, stated a report in the Financial Times. This should help it reach a target of 65,000 to 100,000 European sales, which some industry analysts believe is a conservative estimate.

Then again, throwing money at the European market may prove as fruitless as Toyotas Formula One efforts. Despite being said to have one of the highest budgets in F1, the Japanese automakers Cologne-based team has finished near the back of the pack every season.

Only time will tell if the European market will accept Lexus as a relevant luxury player, and for its targets to be achieved the introduction of the gas-electric version of the RX, and new diesel-powered IS sedan couldnt come any sooner.

Another key ingredient to meeting future sales goals will be Toyotas plan of doubling European Lexus dealerships to more than 400 over the next few years, making the brand more visible and curious Europeans more likely to drop in on their way home from the office.

If Lexus does manage to gain a solid footing in Europe it will most likely be at the expense of marques such as Jaguar, and possibly Cadillac which has been attempting to make moves on overseas markets. Catching up to BMW and Mercedes-Benz will take a great deal longer, and by that time both may offer hybrid-electric diesels of their own, reducing Lexus competitive advantage.