Toyota, sensing an opening, debates building Lexus cars
in China
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[October 05, 2018]
By Norihiko Shirouzu
BEIJING (Reuters) - Toyota Motor Corp, long
opposed to producing its premium Lexus cars in China because of concerns
over quality and profitability, is now considering it to ignite growth
and narrow sales gaps with its German rivals, four company insiders told
Reuters.
The company, which imports Lexus models made in Japan to sell in China,
has spent the last two years researching how to produce them locally.
Toyota also talked to its Chinese joint-venture partners – Guangzhou
Automobile Group Co and FAW Group - last year about Lexus models. It
wasn't clear whether Toyota approached the Chinese companies about a
partnership or vice versa.
Local production would be a major shift for the world's largest
automaker, encouraged by improved China-Japan ties, as well as new
Chinese investment rules that might allow foreign automakers to fully
own or majority-control China operations.
"We're torn over this," said one of the insiders.

"But it makes little sense to let this opportunity slip by," another
told Reuters.
All four insiders declined to be identified because they are not
authorized to speak to the media.
China's planned scrapping of foreign ownership restrictions in the auto
industry is in part a response to criticism that Chinese companies have
been largely allowed to invest freely in outside markets while Beijing
limits foreign firms' access to the world's second-largest economy.
The rule changes - affecting electric carmakers this year and others by
2022 - led Tesla Inc to gain Beijing's approval for a wholly-owned China
manufacturing and sales company in Shanghai. That marked the first time
a foreign carmaker established itself in China without a partner.
Toyota already produces numerous Toyota-brand models, including the
Camry, Highlander, Corolla, Levin and Crown, in China with partners.
Last year it sold 1.29 million cars there, including imported Lexuses.
Toyota had contemplated moving Lexus production to China before - as far
back as 2011-12, according to one of the four insiders.
But it had until now considered a potential erosion of quality too much
of a risk, and didn't want to sacrifice the brand's relatively high
margins by sharing profits with a local partner.
Two of the Toyota insiders said the automaker had identified specific
scenarios for localizing Lexus.
"All the preparation has been more or less completed," one said. "All
we're waiting is a 'go' from management."
TRICKY TIMING
Toyota's preferred option is to own all or most of a localized Lexus
unit, which it could do immediately by building only electric cars.
(Lexus has plans for electric battery and plug-in electric hybrid
versions of existing models.)
But China might not let another brand in when the market has slowed down
significantly, with sales of some foreign vehicles, including Groupe PSA,
Ford and Hyundai, all falling in the gutter in recent months.
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Toyota workers inspect the new Lexus ES vehicles at a Toyota plant
in Miyawaka, southern Japan, July 6, 2012. REUTERS/Yoko Kubota/File
Photo

"You'd still need a good political follow-wind to execute this," one of the
sources said, pointing to help from Japanese Prime Minister Shinzo Abe, who has
a state visit to China planned for this month.
Even as other premium brands - such as Audi, BMW, Mercedes-Benz and Cadillac -
have opened assembly plants in China to gain market share, Toyota has resisted.
That reluctance reflects the company's unwillingness to share with a Chinese
partner a brand painstakingly built since 1989 into a top premium car in the
United States.
Opponents inside Toyota also point to China's lowering tariffs on passenger cars
to 15 percent from 25 percent in July as a reason to keep importing Lexuses.
They also note that the nearest Lexus plant to China is at the northern tip of
Japan's southernmost main island of Kyushu -only two days from Shanghai by sea.
A Toyota spokesman in Tokyo said "the most important task" for Lexus is to
become a distinguished brand in China.
"We always weigh the need for localizing production as part of the consideration
for the Lexus brand's future in China," he said. "But at this point in time, we
don't have any specific plans for producing Lexus cars in China."
Nonetheless, support for localization is growing among Toyota leaders.
China has typically been a difficult market for Japanese companies, but there is
new optimism, especially after an official visit to Japan by Chinese Premier Li
Keqiang in May.
During his visit, Li toured Toyota facilities on the northern island of
Hokkaido, escorted by the company's family scion and chief executive, Akio
Toyoda.
Toyoda has since sought to boost his company's presence in China, including an
effort to significantly expand its manufacturing capacity and distribution
networks, and share more technologies with Chinese companies.
NEED FOR SPEED
China has also proposed limiting new production capacity for automakers, adding
an incentive for Toyota to move quickly if it wants to build Lexus models there.
Nissan Motor Co and Toyota have each recently revealed plans to boost capacity,
much of which will be used to produce electric cars.
Alan Kang, a Shanghai-based analyst for consultancy LMC Automotive, thinks
localizing production is exactly what Lexus needs to start narrowing the big
sales gap with German premium brands.
Mercedes-Benz, for example, last year sold about 610,000 vehicles, compared to
130,000 for Lexus during the same year, according to LMC.
"If Lexus doesn't want to remain a niche, it needs to start investing more,"
Kang said.
(Reporting By Norihiko Shirouzu; Editing by Gerry Doyle)
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