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Lexus Dethroned by BMW Seeking Under-50s Buyers With IS

April 07, 2013

Lexus Puts Performance First to Lure Younger Luxury Buyer

Lexus' 2014 IS arrives mid-year with features derived from an intense racetrack analysis with its German rivals. Source: Lexus via Bloomberg

Toyota Motor Corp. (7203)’s Lexus, dethroned by BMW and Mercedes as the U.S. luxury sales leader, aims to remake itself with models more like performance cars and less like family cars, leading to a new IS sport sedan intended to lure entry-level drivers who would otherwise buy German.

The 2014 IS arrives midyear with features derived from an intense racetrack analysis with its German rivals. The redesigned car has a lower seating position, a stiffer frame and a “spindle” grille that’s the new face of Lexus.

“Every development decision was based on achieving and then exceeding, ever higher levels of fun to drive,” Naoki Kobayashi, the engineer who managed its development, said in a briefing in Austin, Texas.

Toyota has made revamping Lexus -- a source of 20 percent of its profit according to analyst Koji Endo with Advanced Research Japan -- a top priority to fuel global sales as demand for luxury models rises in China, Southeast Asia, Latin America and Russia. In the U.S., the company intends to heighten the appeal of Lexus models, which are more profitable than Camry sedans and Prius hybrids, to prevent buyers from defecting to other premium brands when they’re ready to move up from mass- market vehicles.

Akio Toyoda, Toyota City, Japan-based Toyota’s president and chief racing enthusiast, wants Lexus to evolve from a luxury brand embraced by older baby boomers to one people in their 30s and 40s find fun to drive. Though the brand still has the strongest customer loyalty in the luxury segment, German competitors draw those younger buyers who value styling and exciting driving dynamics.

Staying Relevant

“To stay relevant the brand has to be about more than just comfort and security,” said Alexander Edwards, head of San Diego-based consumer researcher Strategic Vision’s auto division. “Design and performance are essential.”

Before the redesign, the IS was put to the test on the racetrack against Munich-based Bayerische Motoren Werke AG (BMW)’s 3 Series and the Mercedes-Benz C-Class from Stuttgart, Germany- based Daimler AG (DAI), Kobayashi said.

“All the comparisons took place at our Higashi-Fuji development center where we could push the cars beyond the limit achievable on public roads,” Kobayashi said. “We evaluated each car on specific sections of the circuit, which revealed key strengths.”

Lexus engineers determined that the IS needed to respond more “immediately and precisely” to driver input, he said. Making the chassis more rigid was also a top priority for better handling.

Young Drivers

Lexus has the oldest average customer of the three leading luxury brands in the U.S., according to Strategic Vision, which annually surveys tens of thousands of car shoppers. The average Lexus buyer is 61, compared with 54 for Mercedes and 49 for BMW.

The current IS draws buyers with an average age of 50, making it particularly critical for the company, Edwards said.

Along with attracting first-time luxury buyers with the revamped IS, Lexus wants to convert drivers of other brands. “IS is a conquest vehicle for Lexus, bringing in people who’ve owned BMW and Mercedes,” he said. By comparison, the ES sedan, the top-selling Lexus car, is bought mainly by drivers who’ve owned an ES previously.

“We can’t underestimate the importance of IS and the entry luxury segment,” Brian Smith, vice president of U.S. Lexus marketing, said in an interview in Austin. “More than just the volume, it’s the kind of buyer it attracts -- IS does a really good job bringing in the young.”

Sales Target

Smith expects Lexus to sell at least 260,000 cars and trucks this year, up 6.5 percent from a year ago and the most since 2008. Lexus deliveries gained 16 percent in the first quarter to 56,740 vehicles.

That pace is not enough to move Lexus from third place in U.S. luxury sales. BMW and Mercedes say this year they’ll exceed their 2012 totals of 281,460 and 274,134, respectively. Those figures exclude Daimler’s cargo vans and Smart cars and BMW’s Mini brand, all outside the luxury category.

BMW may sell 305,000, and Mercedes 308,000, said Jeff Schuster, senior vice president of forecasting at LMC Automotive in Troy, Michigan. Lexus may be a bit under 260,000, “but that’s not an unreasonable target,” he said.

“It’s a tossup between BMW and Mercedes for the lead this year,” Schuster said. “They’ve obviously been duking it out the past couple of years. The other challenges are Audi, which has come on strong, and Cadillac, which is doing better.”

Audi, Cadillac

Audi, owned by Wolfsburg, Germany-based Volkswagen AG (VOW), posted a 16 percent increase in U.S. sales last quarter to 34,186, including 13,253 in March, the brand’s second-best month ever. Detroit-based General Motors Co. (GM)’s Cadillac surged 38 percent for the quarter to 42,712, helped by a 49 percent jump in March. Chief Executive Officer Dan Akerson is counting on Cadillac to help boost operating profit margins in North America to 10 percent by mid-decade, from 7.4 percent the last three years.

The release of the IS and Toyota’s growth goals for Lexus coincide with a drop in the value of the yen against the dollar that enhances the profit on each sale. Since Oct. 1, the Japanese currency’s value has fallen 19 percent against the dollar, the most of any major currency.

Number One

Lexus is not expected to reclaim its No. 1 luxury ranking, which it held from 2000 through 2010, anytime soon. The top spot “is a possibility, but not for a while,” said Jeremy Acevedo, industry analyst for Edmunds.com, an automotive pricing and data company in Santa Monica, California. “I just can’t see Lexus with its current lineup getting back ahead of the Germans.”

Because of its midyear introduction, the IS’s immediate gains will be tempered. “For this year we expect the volume to move up to 32,000 to 33,000,” Smith said. That’s as much as a 19 percent increase from 27,708 in sales last year. “Beyond that I think we’ll see a nice significant jump in 2014,” into the 40,000s, he said, without elaborating.

That won’t match the volume of BMW’s 3 Series, with 99,602 last year, or the 81,697 of the C-Class. Sales of the IS, introduced in 2000, peaked in the U.S. at 54,933 in 2007.

The rear-wheel-drive IS will continue the brand’s performance push that began in 2012 with the revamped GS, a large sedan positioned against BMW’s 5 Series.

Lexus says even the new ES, traditionally a smooth-riding mid-size sedan that shares underpinnings with the Toyota Camry, gained more responsive handling when it was revamped last year.

Pricing for the IS -- which ranged from $35,065 to $42,780, excluding destination charges, for the 2013 model -- hasn’t been set, but probably won’t change much, Smith said.

Driving Dynamics

Along with IS, Lexus counts its front-wheel-drive ES sedan and CT 200h hybrid as entry-level cars, totaling more than 100,000 sales last year.

With three offerings, “we offer something for everyone,” Smith said. “There’s a huge focus on driving dynamics with this new IS.”

To accomplish that, the company is offering an eight-speed transmission on IS 350s that it says can accelerate from 0 to 60 miles (97 kilometers) per hour in under six seconds. IS models sold in the U.S. will be available with 2.5- and 3.5-liter V-6 engines. A four-cylinder version mated to a hybrid powertrain is to be sold only in Japan and Europe for now, Smith said.

For better high-speed performance, the 2014 IS is the first Lexus with a steel frame made with conventional welds, in addition to an adhesive applied to its steel sheets that is further strengthened with “laser screws,” Kobayashi said. This allows for a level of body stiffness not previously found on Lexus vehicles, he said.

Texas Track

Lexus is so confident of the car’s qualities it invited reviewers last month to gauge it against 3 Series and C-Class sedans at Driveway Austin, a Texas track designed by a former Ferrari racer and modeled after famed circuits including Germany’s Nuerburgring and California’s Laguna Seca.

The IS handled well on the Texas track, showing it “hunkers down and barrels through” on twisty roads, Kelsey Mays of Cars.com said in a March 25 review after the test. Still, handling didn’t match that of BMW (BMW)’s 3 Series, “the drift king of this class,” Mays wrote.

The car “nails its ‘fun to drive’ assignment,” Nate Martinez wrote in his review in the April issue of Motor Trend. He cited fresh design and a cabin packed with technology, adding the car’s “chassis and powertrain are as buttoned-down as they come.” Sports car fans, however, may be disappointed to find no manual transmission option, he said.

Another important evaluation is still to come. Akio Toyoda “told me he’s looking forward to trying it on the Nuerburgring,” Kobayashi said.

To contact the reporter on this story: Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net


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