Toy­ota con­sid­ers build­ing Lexus mod­els in China

Com­pany sees op­por­tu­nity in change of in­vest­ment rules

Global Times - Weekend - - AUTO -

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 said.

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 Chi­naJa­pan 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 said.

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 China 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 China’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 in the coun­try, in­clud­ing im­ported Lexuses.

Toy­ota had con­tem­plated mov­ing Lexus pro­duc­tion to China as far back as 2011-12, said 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.)

“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 US.

Op­po­nents in­side Toy­ota also point to China’s move to lower 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 slow­ly­grow­ing 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 with 130,000 for Lexus, ac­cord­ing to LMC.

“If Lexus doesn’t want to re­main a niche, it needs to start in­vest­ing more,” Kang said.

Photo: VCG

A worker of Toy­ota Mo­tor as­sem­bles auto parts at the com­pany’s Mo­tomachi plant in Toy­ota city, Ja­pan in July.

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