Toyota delays decision to produce Lexus lineup in China

BEIJING (Reuters) — Toyota Motor Corp. likely will delay building Lexus models in China for at least a few years as growth in the country’s auto market slows to a crawl and a weak yen makes it cheaper to ship cars from Japan.

Toyota wants to strengthen the Lexus luxury brand in China and increase sales in the country to well above 100,000 vehicles a year before building a new assembly line, two company executives told Reuters.

The Japanese automaker also is reluctant to share control of the Lexus business with a domestic joint-venture partner, a requirement for foreign car production in China.

“Toyota’s committed to China, and we eventually will start producing Lexus cars here. There’s no doubt,” one of the executives told Reuters. “But we need to do a few things before we take the plunge,” he said, stressing the importance of making Lexus a “more well-recognized name” in China before committing to production there.

Momentum had been building among key Toyota leaders for a decision as early as this year to start Lexus production in China, according to one of the two Beijing-based executives.

Discussions had focused on building the Lexus ES sedan or the RX crossover in China, the executive said.

The growth in China’s auto sales slowed to just 1.4 percent in the first six months. Now it’s unlikely that Toyota will take the plunge for at least another few years, probably until 2018 or later, the executive said.

The delay comes as Infiniti, Jaguar Land Rover and Cadillac have decided to go ahead with plans to begin production in China.

Toyota’s decision also has been spurred by the yen’s persistent weakness, which makes maintaining production in Japan much more competitive, according to the second Toyota executive.

Luxury models

Both company executives said Toyota wanted to expand the reach of the Lexus brand beyond just a few, more affordable “entry-level” luxury models and start selling more premium models like the LS sedan before it begins making cars in China.

According to research firm LMC Automotive, the midsize ES sedan, the compact NX crossover and the RX crossover SUV account for some 85 percent of Lexus’s sales in China. Overall, Lexus deliveries are expected to total 83,700 units this year, up 12 percent.

“When Mercedes-Benz could sell 3,000 S-Class flagship sedans a month in China, we sell five or so LS saloons a month,” said the first source. “Even in a dead market like Japan, we sell a lot more.”

Takanori Yokoi, a Beijing-based Toyota spokesman, said the company was “always trying to find ways to optimize its business, including Lexus in China, including a look at the pros and cons of producing Lexus cars locally in China.”

Another factor in Toyota’s cautious approach in China is the weakness of the yen, which has fallen 50 percent against the dollar since the beginning of 2013. The weak yen has made Japan a more competitive locale for manufacturing.

That was not a primary reason for postponing Lexus production in China, said the first executive, since exchange rates could not be factored into this type of long-term capital investment decision. “Still, with the dollar trading above 120 yen per dollar, there’s no doubt our profitability would take a big hit if we shifted production to China,” the second executive said.

Less competitive

Rising costs have been making China less competitive as a manufacturing base.

According to Boston Consulting Group, recent moves by U.S. retailer Wal-Mart and sportswear maker Nike Inc. to shift production of some goods back to the United States were a response to Chinese labor costs that have hit 61 percent of U.S. levels, compared with 17 percent fifteen years ago.

Lexus is a top luxury brand in the United States. But in China, a market it entered in 2005, Lexus still remains a second-tier premium brand, far behind dominant German brands such as Audi and BMW.

Lexus production in China also would allow one of Toyota’s existing Chinese partners to receive half of the profits Lexus generates there.

“Our Chinese partner would try to have a say in every aspect of the Lexus business in China,” said the first executive. “That would strip us of all the freedom we enjoy today in running the Lexus business.”

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