Lexus: Made in America?

December 6, 2011: 12:44 PM ET

Squeezed by the the Yen and competitors, Toyota is considering doing something it has long resisted out of pride: making more tony Lexus vehicles in the USA.

By Doron Levin, contributor

FORTUNE -- As Toyota Motor Corp. readies its new Lexus GS luxury car for export to the U.S. in early 2012, the company's chief executive is raising the possibility that more Toyota production will move outside Japan.

The strong yen, which has risen 9% in the past six months alone, is making the economics of building cars -- especially compacts -- in Japanese factories increasingly difficult. That could eventually make building luxury vehicles -- which deliver the fattest profit margins and have provided manufacturers the most leeway in terms of where they are made -- more complicated. Squeezed by currency, emboldened competitors and a changing market, Toyota (TM) is considering doing something it has long resisted out of pride: moving more of its luxury brand manufacturing offshore.

So far Akio Toyoda has is hinting at moving only compact-car production outside the U.S., as well as buying more parts manufactured outside the country. But Lexus production, which is aimed mostly at U.S. buyers could be another category targeted for a move. Two of Lexus's three German competitors have expanded production of Mercedes-Benz and BMW models in the U.S. Volkswagen AG's Audi subsidiary is studying the possibility of U.S. production.

More than mere economics are in play. "I'm sitting on the fence," said Mark Templin, head of Toyota's Lexus brand in the U.S. "This is a complex decision that would come from Japan. But we could build more Lexuses here." Templin said Toyota's "pride," which stems from manufacturing its most prestigious models in its home country, would be difficult to overcome if it decides to shift more Lexus models overseas.

Jeff Schuster, senior vice president for LMC Automotive, a forecasting company based in Troy, Michigan, said Toyota may be looking at a shift to North America "as a hedge for both currency fluctuations as well as external disruptions and disasters. I think it is something they are considering across the Toyota group." Because many Toyota-branded models are already amde here, increased production would likely skew towards Lexus however.

For the moment the most convenient place to move Lexus from a logistics standpoint, if such a decision was considered, would be North America, where the vast majority of the cars are sold. Cars built on this side of the Pacific would instantly be more profitable, on an exchange-rate basis, and could be delivered to customers faster.
Templin declined to disclose a price yet for the new GS, which is designed to compete with Mercedes E-Class, BMW 5 Series and Audi 6. At a press event in Las Vegas on Nov. 30, Templin said the GS will represent a "value" compared to the competition, implying that it will sell for less than comparably-equipped competitors. The E-Class starts at $50,490, the 5 Series at $46,700 and the A6 at $41,700.

To undercut the competition on price, while its costs are denominated in yen, will mean that Toyota may have to accept narrower profits than the company has historically earned. Toyoda has announced the goal of achieving a 5% operating profit for the company, which is lower than its historical average and half the 10% it was able to earn in fiscal 2004 when it was roaring towards dominance.

All Lexus vehicles currently are built in Toyota's plants in Kyushu and Tahara, Japan, except for the RX crossover, which is built in Cambridge, Ontario, Canada. According to J.D. Power & Associates, Lexus sold 376,221 vehicles worldwide in 2010, 83% of which were built in Japan. BMW built 81% of the 1.16 million vehicles it sold in Germany; Mercedes built 84% of its 1.3 million in worldwide sales in Germany.

For Toyota's financial performance to rebound, a broader global consumer base for Lexus is essential. The brand is barely two decades old and must contend with reinvigorated German luxury franchises, which have copied tricks, like white-glove treatment by dealers, that the Japanese used to put Lexus on the map in the first place.

Templin said Lexus dealers in the U.S. now must redouble efforts to increase customer satisfaction beyond the upscale waiting rooms, loaner cars, latte bars and flat-screen TVs in which they've invested. He declined to say what exactly that might look like. "I will tell you this: the most valuable thing in the lives of our customers is their time."