Toyota delays move to build Lexus in China

Luxury models

Both company executives said Toyota wanted to expand the reach of the Lexus brand beyond just a few, more affordable

"entry-level" luxury models and start selling more higher-end cars like its LS sedan before it begins making cars in China.

According to research firm LMC Automotive, the mid-size ES sedan, the compact NX crossover and the RX crossover SUV account for some 85 percent of Lexus's sales in China, which are forecast to total 83,700 this year, up 12 percent from last year.

"When Mercedes-Benz could sell some 3,000 S-Class flagship sedans a month in China, we sell five or so LS saloons a month," said the first source. "Even in a dead market like Japan, we sell a lot more."

Takanori Yokoi, a Beijing-based Toyota spokesman, said the company was "always trying to find ways to optimize its business, including Lexus in China, including a look at the pros and cons of producing Lexus cars locally in China".

Another factor in Toyota's cautious approach in China was the weakness of the yen, which has fallen around 50 percent against the dollar since the beginning of 2013, making Japan an increasingly competitive place for manufacturing.

That was not a primary reason for postponing Lexus production in China, said the first executive, since exchange rates could not be factored into this type of longer-term capital investment decision.

"Still, with the dollar trading above 120 yen per dollar, there's no doubt our profitability would take a big hit if we shifted production to China," the second executive said.

Rising costs have been making China less competitive as a manufacturing base.

According to Boston Consulting Group, recent moves by U.S. retailer Wal-Mart and sportswear maker Nike Inc to shift production of some goods back to the United States were a response to Chinese labor costs that have hit 61 percent of U.S. levels, compared with 17 percent 15 years ago.

Lexus has been a top luxury car brand in the United States for years, selling 311,389 vehicles last year, an annual increase of 13.7 percent.

But in China, a market it entered in 2005, Lexus still remains a second-tier premium brand, far behind dominant German brands such as Audi and BMW.

Starting production of Lexus cars in China would also entail allowing one of Toyota's existing Chinese partners to tap into half of the profits Lexus generates there, among other benefits.

"Our Chinese partner would try to have a say in every aspect of the Lexus business in China," said the first executive. "That would strip us of all the freedom we enjoy today in running the Lexus business."