Toyota's push for Lexus localization is a rational choice that maximizes benefits from a realistic perspective.

The issue of Lexus localization has been discussed in the industry for years, and a recent Bloomberg report has once again sparked public attention on related topics.

Several insiders from Toyota China revealed that Toyota is in contact with the Shanghai government to discuss the possibility of building a wholly-owned subsidiary.

Key point one is to achieve 100% sole proprietorship. In terms of the operation mode of the new plant/company, Toyota hopes to fund it alone, avoiding many bottlenecks in joint ventures in China, and also eliminating the need to balance the interests of FAW Toyota and GAC Toyota.

Key point two is to emulate the Tesla model. It is reported that Toyota wants to secure special treatment for Lexus in China, similar to Tesla's, including tax incentives, local support from Shanghai, and land concessions, and the new plant's production target will focus on pure electric vehicle models.

Currently, the negotiations are still in a critical stage. Insiders said that although Shanghai is open to attracting foreign investment, providing soil for Toyota to build an independent plant in Shanghai, even if the Shanghai government agrees, higher-level approval is still needed.

This means there are still variables ahead.

Auto Commune also contacted Lexus China in a timely manner, and the official said that they have not received any news about localization. But regardless of the outcome of the plant construction in Shanghai, Toyota's push for Lexus localization is already a rational choice that maximizes benefits from a realistic perspective, and it is also the general trend for Lexus to get rid of its passive situation in the era of intelligence and electrification.

Facing a more competitive environment and the catch-up of Chinese brand luxury cars, how to regain past glory and face the competition from new players like Huawei and Xiaomi, Lexus accelerating localization is a crucial battle to turn the situation around.

Interest balancing behind localization

"A heavy sword without sharpness."

These four words have always been the best summary of the Lexus brand tone, which also means that Toyota and Lexus, with their overall stable and low-key tone, whether in Japan or core markets like China, always plan before acting, and almost all major goals are "spoken and implemented."

In the past few years, although Toyota China and Lexus officials have repeatedly denied localization or set many prerequisites for localization, if we extend the timeline, we find that Lexus' localization has been foreshadowed in official actions and statements, but on the other hand, localization has not made significant progress due to the balancing of interests and market trends, and Lexus has its own considerations.

One of the high points of heated discussions was in 2008.

At that time, Lexus had completed its sales ramp-up period in China, with unstoppable momentum, and its market performance exceeded Toyota's expectations. Lexus project leader Zeng Lintang once publicly stated his position on localization, saying that the company was not opposed to local production in China, but at that time, Lexus' sales were not enough to support a localization plan.

"30,000 to 50,000 vehicles per year is an ideal basis for localization for a premium car brand." This was the prerequisite for localization given by Zeng Lintang, but later, Yuan Zhongrong, executive vice president of GAC Toyota, added a new condition, namely, "only when a single Lexus model reaches 50,000 vehicles will localization be considered," which virtually extended the timeline for localization.

The second high point of heated discussions was in 2012.

That year, Toyota directly addressed the issue of Lexus production in China at a shareholders' meeting. Toyota Akio stated in an interview that keeping Lexus production in Japan could make Japanese production more competitive. Although Toyota continuously increased overseas production capacity, ensuring domestic production in Japan was a priority.

After Toyota Akio's statement, Lexus China executives also accepted interviews with domestic media, and the response was clear: Lexus had no localization plans for the time being. But at the time, another view seemed to better "appease" the industry's curiosity about Lexus localization, namely the latest reference value for localization given by the Chinese management team—

Consider localization when the scale reaches 100,000 vehicles.

In 2013, Toyota China's then-general manager, Hiroshi Onishi, said that Toyota had the intention to produce Lexus in China. However, after that year, even though Lexus' annual sales in China had reached the 100,000-vehicle watershed, the official repeatedly denied localization, maintaining a consistent vague style of speaking and never mentioning the annual sales prerequisite for localization again.

In fact, many years ago, the "New First Production Line Project" of FAW Toyota in Tianjin introduced Toyota's new global TNGA architecture, which could already achieve shared parts with Lexus models and even potentially co-production.

But behind it, the balancing of interests is more realistic.

The first balancing is between north and south joint ventures.

Toyota has two passenger car joint venture partners in China, FAW Toyota and GAC Toyota. The most棘手的问题 for Lexus to produce in China is how to balance the relationship between FAW Group and GAC Group.

The second balancing is profit.

During the golden decade of fuel vehicles, luxury car brands earned a fortune in the Chinese market, and Lexus was no exception. Since Lexus "makes money even when it sleeps," as an imported brand, almost all the profits belong to Toyota. Once localized, the profits Lexus earns in the Chinese market are likely to become the "money printing machine" of its joint venture partners.

The third balancing is the market.

In the early years, many multinational brands chose to localize in China, mainly motivated by seizing market opportunities and reducing costs. But for Lexus, which has already reaped the benefits of the era of fuel vehicles, there is no need to rush into the Chinese market, and producing in Japan is convenient for transportation to China, with costs also within a compressible range.

The fourth balancing is Japan itself.

As mentioned earlier, Toyota's factories in Japan already have sufficient production capacity. Once a new factory is opened in China, it means that some production capacity in Japan will be shifted to China. Furthermore, new cars produced locally in China can also radiate to other Asian countries and regions, which is unfavorable for Japan's domestic capacity utilization and employment.

Replicating Tesla is not a panacea

Comprehensively balancing the market, profits, and partner relationships, it is not difficult to understand why Toyota is promoting the localization process of Lexus at this time.

From a market perspective—

In 2023, Lexus' cumulative sales in China reached 181,400 vehicles, a year-on-year increase of 3%. Although growth is still there, the growth rate has slowed down compared to previous years. In fact, the 227,000 sales in 2021 were Lexus' most impressive results, followed by a continuous decline. In the first half of 2023, Lexus lost its long-held title of the best-selling imported car brand in the Chinese market to Mercedes-Benz.

Compared with other global markets, Lexus has strong growth momentum in North America, Japan, Europe, and Southeast Asia, with Japan's domestic market exceeding 130% year-on-year growth, significantly higher than the Chinese market.

On the other hand, although Lexus achieved year-on-year growth in China last year, like many luxury brands, this was achieved by sacrificing prices for volume. In the terminal market, last year's growth mainly relied on significant price reductions of the Lexus ES. In the long run, if Lexus wants to continue year-on-year growth, it needs to work harder on its products.

The problem still lies in the product.

Toyota Akio first revealed in 2021 that Lexus aims to achieve 100% coverage of pure electric sales in Europe, North America, and China by 2035. This means that in the next decade or so, Lexus will take the lead in transforming into a pure electric brand within Toyota, becoming a "pioneer representative" of Toyota's electric transformation.

However, in reality, Lexus' "pioneer spirit" is only reflected within Toyota. Once the brand competes with other luxury brands or Chinese new forces that aim for high-end routes, its fuel models lack competitiveness, and its electric layout is relatively slow. Especially in the most fiercely competitive Chinese market for electric vehicles, Lexus' new energy models launched in recent years are still a bit behind the "pioneer spirit" of the new era.

Lexus has been "localized" again—

In previous years, whenever the industry heard such rumors, they were waiting for an official response from Lexus and Toyota China. Everyone was concerned about how this luxury brand, which has been making money even when it sleeps and enjoying price increases for years, would land in China for localized production, or what concessions FAW Toyota and GAC Toyota would make in the game between joint ventures and localization.

However, times have changed.

The prosperous scene is no longer there, and everyone's focus has changed. The industry is now more concerned about how successful Toyota's attempt to replicate the Tesla model will be. After localization, how will Lexus maximize its interests in the Chinese market and catch up with its competitors as quickly as possible? Selling cars locally is only one of the goals. How should Toyota plan for the long term through the Chinese industrial chain to radiate across Asia?

Toyota is not unmotivated.

For the Toyota brand, collaborating with Chinese automakers like BYD to make up for shortcomings and using Chinese players' technology to launch hybrid models is one way to keep up with the market in the short term. And just on June 28, GAC Toyota announced at its technology day that it plans to collaborate with Momenta to equip new cars with end-to-end autonomous driving technology, accelerating the pace of innovation in intelligent pure electric vehicles.

For the Lexus brand, securing special treatment for Lexus in China, similar to Tesla's, including tax incentives, local support from Shanghai, and land concessions, and making up for shortcomings through intelligent cooperation, is clearly more beneficial than detrimental.

However, the problems Lexus currently faces are, first, the collective decline of second-tier luxury brands and pressure from price reductions by first-tier luxury brands; second, the intensifying price war, which has weakened Lexus' brand premium; and third, the endless stream of good products from the Chinese army, with fast iteration speeds, such as Huawei and NIO.

To solve any of these three problems is not a one-time fix by promoting localization. Toyota and Lexus still need to do their homework in other areas.