Why Lexus is Struggling in China

on July 25 2013 | in Auto | by | with No Comments

Lexus, China, NX

In the United States, Lexus is a luxury car brand that’s considered a peer to the elite German brands BMW and Mercedes. But the brand is struggling in China. Lexus was in fourth place in China behind Audi, BMW, and Mercedes last year at this time. Now, they are all but slipping out of contention for market share.

According to John Rosevear of the website Motley Fool, the cause of Lexus’s problems is simple: “To be competitive in anything but super top luxury cars in China, you have to make your cars there because imported vehicles get hit with these 25 percent import taxes,” he says, “At the super high end – like Ferrari territory – that doesn’t really matter much. But for something like a Lexus compact, that puts it at a huge disadvantage compared to something like a BMW 3-series that is made in China.”

Luxury brands would do well to aspire to Audi’s level of success, he suggests. Audi is the luxury arm of Volkswagen Group. Despite contributing just a small number of vehicles to VW’s overall output, Audi accounts for almost half of the group’s total profits. Audi’s success helped to earn VW the ranking of world’s most profitable big automaker. They outranked Toyota and GM, despite the fact that Toyota and GM sold more vehicles around the world last year than VW.

That’s proof that luxury cars are a big source of profits for the automakers that know how to strategize. Rosevear says, “We talk a lot about luxury cars in China because it’s this huge, booming market where brands like VW’s Audi unit are making a ton of money and because it’s key to the plans of companies like GM with Cadillac and Nissan with Infiniti who are looking to become bigger global luxury contenders and add to their profits.”

Lexus’s – and by default, Toyota’s – problems will only get worse as time passes because they have no plans to open Lexus factories in China. At the same time, GM is sinking huge investments into Chinese Cadillac plants. Nissan is also pushing Infiniti into the market by introducing a new line of low-cost models. “It’s going to cost Toyota in terms of global profits because they’re not going to be getting out of their global luxury brand the sort of profits and margin and scale that they should be,” he says.

photo credit: lexus china

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