Lexus Boss Mark Templin Predicts a Dismal Future For His Brand

By Chris Haak

Auto executives are, by nature, an optimistic bunch of people.  They’re always on the verge of catching onto the next big trend, of turning around operations, yadda yadda.  Therefore, I raised my eyebrows more than a little bit when I saw what Lexus general manager Mark Templin had to say about his brand’s future.  It wasn’t optimistic; it was downright melancholy.  In an interview with Automotive News, he conceded the luxury-vehicle sales crown for 2011 with seven-plus months remaining in the year.  The reason?

He’s blaming the Japanese earthquake, which has done great harm to the auto industry supply chain, but in particular, to Japanese auto manufacturers.  Many Japanese OEMs still are not running at full production, including heavyweights Honda and Toyota.  Toyota, in fact, said that it was not likely to resume normal production until November, a full eight months after the March earthquake.  Lexus is particularly affected, though, because the majority of the brand’s models, with the sole exception of the RX crossover, are built in Japan.  In post-tsunami Japan, local auto production is a disadvantage.

Before the earthquake and tsunami hit Japan, however, Lexus was having issues.  Not the least of those issues was the recall crisis of 2010.  Remember how, triggered by the fatal August 2009 crash of a Lexus ES 350 service loaner, nearly the entire Toyota US lineup was recalled for one safety fix or another?  Remember how Toyota executives were called to testify before Congress about the safety of their cars and about the company’s reaction to the crisis?

The recall crisis last year made Toyota’s 2010 results suffer.  Lexus held its title as the bestselling luxury brand in the US, but only barely.  The final 2010 numbers:

Lexus:  229,329
Mercedes-Benz:  225,007 (4,332 behind Lexus)
BMW:  220,113 (9,216 behind Lexus)

The momentum is not in Lexus’ favor.  The results a year earlier show the Lexus did not have momentum on its side:

Lexus:  215,975
BMW:  196,502 (19,473 behind Lexus)
Mercedes-Benz:  190,604 (25,371 behind Lexus)

So yes, the Japan parts crisis has all but sealed the deal that Lexus will lose its title as the top luxury brand in the US, but blaming it on the parts crisis is definitely simplifying the issue.  Lexus was probably going to lose it anyway this year, even if the earthquake and tsunami had never happened.  Just look at the year to date numbers for the same three brands through March 2011 – when the disaster’s effects had not yet worked their way to US dealers:

Mercedes-Benz:  56,095
BMW:  52,616 (3,479 behind Mercedes-Benz)
Lexus:  47,356 (8,739 behind Mercedes-Benz)

Beyond the disaster and its far-reaching effects, and beyond the momentum that Lexus’ competitors have been enjoying, there are further dark clouds on the horizon for the one-time darling of the US luxury-car market.

First, Lexus’ product line is getting old.  Its three sedans, the IS, GS, and LS (or Small, Medium, and Large, if you will) have been on the market since model years 2006, 2006, and 2007, respectively – or are currently in their sixth, sixth, and fifth model years.  Forget “dog years,” luxury cars in their sixth model years are getting biweekly membership pleas from the AARP.  And why are the sedans so geriatric?  Lexus has wasted energy on slow-selling distractions like the HS 250h, CT 200h, and has completely revamped its SUV and crossover lineup, with a new RX (2010), GX (2010), and LX (2008) all enjoying more recently refreshes than the sedans did.  It’s conceivable that you could have leased a 2006 GS sedan in late 2005, turned it in for a new one in late 2008 and gotten basically the same car, then might turn that car in for a leftover 2011 model later this year.

Or, you get tired of seeing the same GS, and go down the street to the Mercedes-Benz dealer to pick up a nee E-Class, or to the BMW dealer to pick up a new 5 Series.  When that happens, minus one sales for Lexus, plus one for the other guys.

The German competition’s relentless assault on the US market has led those companies to rapidly expand their lineups, filling almost every niche, and even inventing several of their own (say hello to the BMW 5 Series GT, the Mercedes-Benz CLS, BMW X6, among others.)  Lexus still doesn’t have a “four door coupe” in the mold of the CLS, despite that car now moving on to its second generation.

Then on the other end of the spectrum, competition from Hyundai with the Genesis and Equus is basically copying Lexus’ original LS400 formula (copy the top-dog, improve upon it, and undercut him by $15,000 to build volume) with those two cars.

Templin also pointed out that his competitors are shifting their focus down-market into smaller cars – something he attributes to ever-stricter CAFE requirements.  Audi sells far, far more four cylinder A4s than it does A8s.  Same with BMW and the 3 Series against the 7 Series.  But with Lexus having the ability to roll its CAFE numbers into the greater (and more efficient) Toyota average, it doesn’t really need to go downmarket.  BMW, as an independent company, can’t be a rounding error for a larger concern.  Meeting CAFE numbers for BMW means introducing the i sub-brand, making MINI more efficient, and making the core BMW brand more efficient.  That’s why we’re about to see more four cylinders beneath hoods with blue and white roundels and why BMW is likely to move to some front wheel drive-based models.

So Templin contends that this move downmarket will boost volumes, perhaps even to the half-million mark.  But it’s interesting that he would call out his competitors for moving downmarket and chasing volume, when he’s selling a re-bodied Prius (the CT 200h) and a rebodied Camry Hybrid (the HS 250h).

He’s saying the right things about not wanting to force his dealers to further expand, and not wanting to grow the dealer network further.  Keeping it its current size means reasonable per-store volumes (and less likelihood of an intramural price war) and allows the brand to maintain some exclusivity.  Lexus has a long road in front of it if it hopes to remain in the top tier of luxury brands.  We didn’t include Audi’s numbers in the sales figures above because they’re a lot smaller than the big dogs’, but Audi’s are also growing much more rapidly than the established players’ are.  Lexus needs to not rest on its laurels and past accolades.  It needs to not only relentlessly “pursue perfection,” but also – to borrow another tagline – build some excitement.  Being the number-one selling luxury brand is nice to brag about, but worrying about the title means that you’re not worrying enough about the solid execution that got you there in the first place.  Lexus can’t afford to take its eye off the ball.