Why has Lexus been slow to embrace localization? Is it apprehensive about the adaptability of electric vehicles in the Chinese market? Or could there be another reason? The truth is that great things often take time, and localization is not the sole "escape route" for the Lexus brand.

In recent months, the question of "whether Lexus will localize" has dominated conversations surrounding the brand. Now, the suspense is over. On February 5th, Toyota officially announced its collaboration with Shanghai, establishing a wholly-owned LEXUS pure electric vehicle and battery R&D and production company in Jinshan District, Shanghai.

With this move, Toyota becomes the second automaker after Tesla to set up a fully-owned factory in China. The company stated that the new venture will leverage the advanced industrial chain, robust logistics network, skilled workforce, and vast market size of Shanghai and the Yangtze River Delta region to develop electric models for the LEXUS brand. Production is set to commence in 2027, with an initial capacity of 100,000 vehicles.

Why Localize?

Since the inception of the Lexus brand, officials have indicated that localization would be considered if annual sales in the Chinese market surpassed 30,000 units. However, it wasn't until recently that Toyota fulfilled this localization promise, albeit with a focus on electric vehicles. Currently, Lexus is the only mainstream imported luxury automotive brand in China yet to localize, despite annual sales exceeding 180,000 units.

Industry insiders suggest that Lexus's smooth development in the Chinese market has mitigated the urgency for an electric transformation. Nonetheless, Tesla, domestic new energy vehicle startups, and others have been encroaching on the luxury vehicle market, necessitating a comprehensive electrification strategy for Lexus. Akira Sato, the current president of Toyota Motor Corporation, has emphasized the significance of the Chinese market in the electrification of Lexus, aiming for 100% electrification by 2030. Toyota's latest plan includes the launch of next-generation BEV (battery electric vehicle) products from the BEV Factory in 2026, with Lexus being the first to introduce these new models to the market.

It's worth noting that since Sato took over as president in 2023, contacts between Toyota and Shanghai have intensified. The most recent significant meeting was in June 2024, when Toyota Motor Corporation's chairman, Akio Toyoda, personally visited China to discuss the potential for a wholly-owned factory in Shanghai. This meeting was seen as a precursor to Lexus's localization efforts.

Furthermore, in June 2023, China's Ministry of Industry and Information Technology signaled its commitment to high-level opening-up policies, supporting multinational corporations in China and promoting the full implementation of measures to remove foreign investment restrictions in the manufacturing sector. Bloomberg reported that Toyota Motor Corporation hoped to receive similar incentives as Tesla in China, including tax benefits, policy support, land subsidies, and the ability to operate without a local joint venture partner. After more than half a year of negotiations, Lexus has finally taken the first step toward localization.

Taking the First Step Toward Localization

According to an Auto Review journalist, a significant change within Toyota Motor Corporation may have facilitated the localization of Lexus: the "merger and reorganization" of Toyota China and Lexus China. Li Hui, the former Executive Deputy General Manager of Lexus China, was promoted to General Manager of Toyota China in January 2024, marking the first Chinese general manager since Toyota entered China in 1964 and the only non-Japanese general manager to date.

This move signifies a shift in Toyota's focus on the Chinese market. The reasons behind the merger and reorganization of Toyota China and Lexus China are not entirely clear, but some speculate it could be linked to Toyota's declining sales in China. In recent years, Toyota has faced persistent sales pressure in the Chinese market, with sales declining for three consecutive years.

Despite this, the Lexus brand has performed remarkably well, with cumulative sales in China exceeding 180,000 units in 2024, achieving positive growth and becoming the only imported luxury automotive brand to do so. Li Hui, who is well-versed in the psychology of Chinese consumers and familiar with Toyota Motor Corporation, played a crucial role in this success. To reverse the declining trend, Toyota China plans to establish an independent R&D system in China starting from 2025, further catering to local market demands. Personnel from various departments of Lexus will also undergo large-scale mergers and reorganizations with Toyota China, fostering deeper integration at the business level.

As the cornerstone of Toyota's electrification strategy, Lexus will undoubtedly lead the charge. However, with domestic electric vehicle brands on the rise and fierce market competition, multinational automakers generally face challenges in their electrification transformation. Entering the market hastily could entail significant risks.

Lexus has made its choice, inspired by Tesla's success. However, the "imported luxury" label is deeply entrenched in the brand's DNA. To secure a strong position in the Chinese market through electric vehicle localization, Lexus may have to sacrifice some of its fuel vehicle profitability, which Toyota may find difficult to accept. This is a crucial consideration for Lexus as it advances its electrification transformation. The experiences of Volvo and Cadillac, which have already ventured into this market, serve as cautionary tales.

Note: This article was originally published in the "Hot Topic Tracking" section of the February 2025 issue of Auto Review magazine. Stay tuned for more updates.

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Article: Auto Review

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