Race Is On for Luxury : Japanese Car Makers Target Upscale Buyers With the ‘Cadillacs’ of Their Lines
Alfred Sloan, the founding father of the modern General Motors, followed one guiding principle--the huge auto company, he said, should be structured to provide a car “for every purse and purpose.”
Thus, GM developed five car divisions so that it could move its customers, as they grew older and richer, from Chevrolets up through Cadillacs.
While GM seems to be having trouble living up to that strategy recently, the Sloan lesson remains valuable and it is one that has not been lost on the Japanese.
In fact, today the three largest Japanese auto makers--Toyota, Nissan and Honda--are all moving aggressively into the luxury car market, trying to shed the perception that Japanese imports are just workhorse cars for the common man.
With Acura, Honda was the first to create a separate luxury car division and dealership network, and now Toyota and Nissan are following suit. Next year, Toyota’s new Lexus division and Nissan’s new Infiniti division will introduce their first upscale models.
As Jim Perkins see it, this new Japanese upscale campaign is no different than Sloan’s classic strategy for GM. “What Mr. Sloan meant was that you give your customers somewhere to go,” he observes. Perkins, who spent 24 years at GM and now is in charge of Lexus, says Toyota and its competitors are simply trying to offer their aging Chevy-style customers Japanese Cadillacs to move into.
“People raised on Toyotas started to look at other things when they could afford to,” adds Perkins. “Those people have to be our prime consideration.”
Toyota and Nissan are joining Honda in the luxury market out of what they see as a demographic necessity: Their original 25-year-old “econobox” customers are now turning 40 and starting to make real money.
“Thirteen million Americans now drive imports,” notes William Bruce, general manager of Nissan’s division. “A lot of those people will move into higher price ranges . . . so the biggest source of our sales will be intercepting Japanese import owners who otherwise would have gone to BMW.”
Honda moved first to catch its defecting customers with the Acura. It has been wildly successful with its luxury Legend and sporty Integra models since they were introduced three years ago.
Now, Acura sits atop virtually every independent measure of customer satisfaction in the auto industry, and has become, almost overnight, the standard by which many consumers judge performance luxury cars.
Already, Acura sales have hit 135,000 a year, and Honda’s goal of 250,000 seems within reach. Especially if it goes ahead with a plan under study to produce the Integra in Honda’s second U.S. assembly plant now under construction in East Liberty, Ohio, thus avoiding quota restrictions on Japanese imports.
Envious of Acura’s success, Toyota and Nissan are now scrambling to catch up.
Toyota’s Lexus division will open next September with two models, the ES250 performance sedan, priced around $20,000, and the LS400, a full-scale luxury sedan in the $35,000 to $40,000 price range.
Price a Factor
By 1991, Lexus will add a sports coupe, now code-named F-3, to be priced around $28,000.
At the same time, Nissan is creating its Infiniti division, also scheduled to start up next fall with two car lines--the M30 sports coupe and the Q45 four-door luxury sedan. Six months later, Infiniti will add a convertible version of the M30 as well.
Infiniti will price its two-door coupe in the “low 20s,” says Bruce, while the Q45 sedan will sell for about $35,000. By 1991, Infiniti will add another sedan, code-named 767, priced in the low $20,000 range.
Such prices should allow both Lexus and Infiniti to come in under the German luxury cars, many of which now sell for more than $50,000.
“There are lots of people who aspire to a Mercedes or a BMW but who can’t afford them now,” notes Perkins. “Some of those people will be able to afford Lexus.” Indeed, some industry analysts believe that this move upscale by the Japanese poses a serious threat to the European luxury car makers.
“The Japanese luxury cars will redefine the market. In some respects, Acura already has,” says William Pochiluk, an analyst at Autofacts, a Paoli, Pa., automotive market research firm. But Infiniti and Lexus are trying to avoid picking a head-on fight with Acura. Neither will offer a high-volume, relatively inexpensive performance car like the Integra, which now has a base price of $11,260. Their top-line models will also be priced far above the Legend, which has a base of $22,600.
Instead, their main objective, following the Sloan principle, is to keep their longtime customers in the fold and away from the Europeans.
“We really haven’t followed Acura, our products are different, and our market is different,” says Perkins. “We’re moving a little further upscale, and we don’t have the lower-end product like the Integra.”
But without such low-cost products, Lexus and Infiniti are sticking to more modest sales objectives than Acura. Lexus expects to sell 16,000 cars in 1989, 75,000 in 1990 and 96,000 in 1991. When it has its planned total of 250 dealers in place, its sales will peak at about 125,000, according to Perkins.
Infiniti, meanwhile, refuses to release its specific sales goals, but outsiders say Nissan expects sales of just 50,000 to 60,000. Infiniti will also have just 165 dealers.
“We don’t aspire to be big, we will not compete with the Nissan division,” says Bruce.
But even with such cautious goals, some observers still wonder whether Nissan and Toyota are getting in too late to an increasingly crowded luxury market.
Luxury car sales have been virtually flat in the past two years, while Mercedes, BMW, Cadillac and Lincoln are all fighting back with better products.
“There is no question that the single most important issue for that segment of the market is congestion, you have altogether too many products in the $25,000 to $35,000 price range,” observes Pochiluk.
Lexus and Infiniti officials argue that luxury sales will expand in the 1990s as baby boomers become more affluent; but others still warn that there isn’t much room left to create completely new franchises.
“The market will be tougher for them to enter than it was for us three years ago,” predicts Tom Elliott, a Honda executive vice president. “We’ve got a three year head start on them.”
“I think ultimately, they will be successful, but it is going to be tough going for them at first,” adds Chris Cedergren, an analyst with J. D. Power & Associates, an Agoura Hills market research firm.
“I certainly think 75,000 a year is going to be hard for Lexus to reach.”
Assistance for Dealers
If Lexus and Infiniti don’t meet their sales goals, their dealers could come under tremendous pressure. Like Acura, both Lexus and Infiniti are demanding that their dealers build separate dealerships to give their new lines a chance to develop their own identities.
With soaring land costs in many big cities, that means an investment of $3 million to $5 million for each outlet.
Both Lexus and Infiniti are offering dealers extensive financial assistance to ease the burden. But even with Acura’s success, some of its dealers are under the gun because of the big investment requirements.
“There are Acura dealers who aren’t making money, and I would think they would have to ask, do I want to go in for Lexus or Infiniti?” wonders Elliott.
Adds Cedergren: “A dealer who buys a Lexus or Infiniti franchise will have to be willing to sit there for a year or two and not make any money.”