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The Fall of the House of Lexus


The relentless pursuit of BMW and Mercedes.
Lexus, the aspirational marque of Toyota (TM), is soon expected to lose its plum spot as the number one U.S. luxury brand to BMW. For BMW, this is an astonishing feat, even if it only leads rival Mercedes-Benz by a few hundred cars sold. For Lexus, it's an unmitigated disaster and proof that Toyota is in serious trouble. But not so serious that it can't bounce back.

Is Lexus being punished for arrogance?
Allow me to quote at length from a Bloomberg report on Lexus' decline:

"Lexus is in a sort of lull in their product cadence," said Bill Visnic, an analyst with Santa Monica, California-based auto website Edmunds.com....

Lexus generally earns less per vehicle than BMW and Mercedes, with the company's cars and sport-utility vehicles selling for an average of $42,485, according to Edmunds.com. That compares with $48,179 on average for BMWs and $52,695 for Mercedes-Benz....

The higher average selling price give German luxury marques more room to provide greater incentives. Mercedes currently spends an average of $3,625 on deals such as cheap leases and generous trade-in terms, followed closely by BMW's $3,275, while Lexus spent just $1,879...

Doesn't sound like Lexus is doing very good business, does it? Aging products, lower profits than its two chief rivals, and no room in the price structure to offer market-share-juking incentives. How did it come to this?

Well, Lexus was probably too successful for too long. It's held the number one spot for 10 years, after coming out of nowhere to challenge the Germans' historic luxury dominance. With BMW and Mercedes, it shares the highest tier of the auto market; its Japanese competition, Honda's Acura and Nissan's Infiniti, don't even rate. This is kind of thing that breeds complacency.

Painted into a corner
Also, Lexus' brand image isn't particularly nimble. "The relentless pursuit of perfection" (a famous tagline since retired) suited the Toyotafication of the luxury segment: quality and reliability were vulnerable spots BMW and Mercedes didn't even know they had.

But then luxury changed, led by BMW. Affluent customers, who might have been satisfied with a solid, library-quiet Lexus or a plutocratic Mercedes, suddenly decided that performance was important. At about the same time, BMW adopted a radical new design philosophy, authored by the controversial Chris Bangle. And in 2007, BMW began to proactively streamline its business, ahead of its competition.
BMW's new burden
Mercedes could overtake BMW in a few months, so Bimmer may only briefly savor its paramount position. But the company does now have the burden of opportunity to deal with. Lexus is suffering from the same post-Japan-quake problems as its parent, as well as the rest of the Japanese auto industry.

BMW is on track to build only about 250,000 cars this year. Its margins are very respectable, around 10 percent, but in order to grow it will inevitably need to add capacity. This may not be possible on its own. Which brings up the possibility of the merger.

The Honda factor
A Honda-BMW tie-up has been rumored in the past. The two companies are both engineering driven, and joining BMW would provide Honda access to the proven rear-wheel-drive platforms that Acura currently lacks.

This would also signal even more trouble for Toyota, which would then see Honda's mass-market vehicles infused with the BMW-ness that Toyotas sorely lack. However, Toyota has been so battered at this point that it's due for a recovery. Eventually there will be a new Lexus product cycle. And it will be the Germans' turn to worry once again. Lexus' advantage is that all the work it put it to become number one will help it languish at number three for as little time as possible.

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