The 3-way BMW / Lexus / Mercedes-Benz battle royale for the U.S. luxury car sales lead

As Lexus entered its second decade in the United States in the year 2000, the Japanese carmaker celebrated by taking the luxury brand sales crown that year, a feat it repeated for ten consecutive years after fending off a particularly close challenge from BMW in 2009. As 2010 passes its halfway point, Mercedes-Benz enters the fray, setting up a three-way battle royale that may well see Lexus’ run atop the luxury sales chart finally brought to an end. As Jessica Caldwell, a senior analyst at Edmunds.com reminds us, Lexus, Mercedes and BMW are “really neck and neck” in the U.S. Further illustrating the uncertainty involved in making any predictions is a glance at two contrasting Bloomberg articles written less than two months apart.

The first of these, titled Lexus U.S. Sales Rise 31% to Boost Lead Over Mercedes, BMW, was written by David Welch on 2 June 2010. It proudly trumpets a 31% sales increase in U.S. sales for May 2010 for Lexus, thus helping to widen its year-to-date lead over Mercedes-Benz. Flash-forward nearly two months, to 23 July 2010, and Bloomberg‘s tone couldn’t be more different in a follow-up article by Makiko Kitamura and Alan Ohnsman titled Lexus Recalls Risk Ceding Decade-Long U.S. Lead to Mercedes. By the time of its initial appearance, June 2010 U.S. sales figures were in, and a tally of the all-important first-half-of-2010 (January thru June) sales figures informed us that, while Lexus sales grew 19% to 107,430, Mercedes-Benz reported a larger 25% jump to 106,972 (a scant 458-car lead for Lexus), and BMW within spitting range with 100,632 units sold. Those of you with long memories may recall that, just over a year ago, January-June 2009 sales tallies had BMW leading Lexus by 3503 units (93,563 for BMW versus 90,060 for Lexus), yet Lexus overcame this deficit, and then some, ending the year with a 19,473-unit lead over BMW. Thus, the U.S. luxury marque sales war is far from over for 2010, yet Lexus is widely seen to be in its most precarious position in a decade. But why, precisely? The second Bloomberg article’s very title places the blame squarely on the Lexus recalls, yet the problems and issues involved are more numerous than that. Let’s touch upon them…

The Recalls
This is, of course, the 900-lb gorilla in the room, and proof positive that perception is everything. The well-informed among us, of course, know that the unholy alliance between lawyers of ambulance-chaser, mislabeled “safety expert” and frivolous class-action persuasions; Toyota and Lexus owners seeking a disproportionate share of the carmakers’ profits for themselves turning to said lawyers; and ill-informed sensationalist “journalists” have blown this issue up waaaaay out of proportion. As to the tragic death of California Highway Patrolman Mark Saylor and his family, blame really belongs with the gross negligence, boneheadedness and stupidity of a single not-publicly-named California Lexus dealer whose misplaced love for its ES service loaners’ factory carpeted floor mats led to their being covered by RX all-weather floor mats that slipped forward and trapped the gas pedal.

Personal rant aside, there is no doubt that public perception and, in some cases, hysteria over the recalls have certainly led to decreased sales, even though Lexus sales plummeted far less than the more mass-market Toyota’s. We must note, however, that there is one current notable recall-related sales casualty of sorts: the 25 June 2010 stop-sale order on HS 250h models for noncompliance with Federal Motor Vehicle Safety Standard (FMVSS) 301 that, as of this writing, has no imminent recall solution in sight. Given the HS 250h’s abymal U.S. sales performance, however, coupled with its greater-than-expected level of sales in the more profitable (due to U.S. dollar-yen exchange rate issues) Japanese Domestic Market, this may well turn out to be a blessing in disguise.

Discounted Leases and Financing
With an ever-savvier buying public beaten down by the Great Recession, it’s no wonder that luxury carmakers’ constantly-varying menu of discounted lease rates and reduced-rate financing has such an effect on vehicle sales. The aforementioned BMW-over-Lexus sales lead at the mid-2009 mark was widely credited to BMW’s far more aggressive, almost lineup-wide low-APR interest and subvented lease offers versus Lexus’ traditional reticence in going overboard with these. Jesse Toprak of Truecar.com notes that the German brands are benefiting from a higher rate of leasing among U.S. customers than Lexus, with more than 60% of Mercedes-Benz vehicles being currently leased, compared with less than 30% of Lexus vehicles.

The early-2010 sharp decline in Lexus and Toyota sales due to adverse recall publicity, however, led to increased use of these measures by the Japanese carmaker. Edmunds.com states that Lexus spent $1,656 a car on incentives in May 2010, up 38% from the previous year, with Ernst Lieb, chief executive officer of Mercedes-Benz USA, enviously claiming that Lexus dealers have bigger gross margins than Mercedes dealers do, so they can more easily cut prices to close a deal. Regardless of the veracity of Lieb’s seemingly “sour grapes” whining, you can be sure that BMW, Lexus and Mercedes-Benz will do all that their financial strategist beancounters deem necessary to “move the metal”, to use industry parlance. Lieb’s comments, however do provide a handy segue to a related issue that has some bearing on their sales race and the broader issue of corporate profitability…

Is Mercedes and BMW’s Independence a Liability?
We may well get some flak for this assertion, but it is safe to say that there are only four important full-line luxury brands with a notable worldwide presence: Audi, BMW, Lexus and Mercedes-Benz. Acura and Cadillac lack the breadth of model lineup and are too North America-centric to count. The former can also be said of Nissan’s Infiniti as well as Jaguar / Land Rover; and other brands such as Saab, Volvo and Lincoln, as well as Italy’s Alfa Romeo and Lancia are really playing in the one-notch-down near-luxury arena. And, please note that the full-line disclaimer is also meant to exclude upper-crust brands whose entire model lineup bears 6-figure U.S. dollar price tags such as Maserati, Rolls-Royce, Bentley and Maybach, as well as sports car makers such as Porsche, Ferrari, Lamborghini and Aston Martin.

Our “luxury four” falls into two camps: Audi and Lexus as the uppercrust brands of larger companies (Volkswagen and Toyota, respectively) and BMW and Mercedes-Benz as independent high-end carmakers. Automotive analysts have claimed that, long-term, Audi and Lexus’ position under the umbrella of a mass-market carmaker puts them at an advantage versus the more traditionally prestigious BMW and Mercedes, an advantage that can be summed up in three words: economies of scale. Last year, precisely around the time when BMW was outselling Lexus in the U.S., articles were noting how BMW was pretty much “buying” this market share at the expense of huge cuts to its profitability, worsened by its growth into niches that wound up being answers to questions that nobody asked, such as the X6 and 5-Series Gran Turismo tall hatchbacks.

Audi and Lexus, in spite of their lower worldwide sales volumes versus the more established “old-school” Germans, saw their bottom line helped by the fact that their component costs were kept at bay by judicious sharing with their less expensive siblings sold in higher volumes. This is surely what Mercedes’ Ernst Lieb was alluding to in his earlier “Lexus dealers have bigger gross margins than Mercedes dealers do” statement, namely that Lexus models, by having lower manufacturing costs than their Mercedes rivals, can be offered with a greater dealer cost-versus-Manufacturer’s Suggested Retail Price spread that allows for more dealer discounting (or profitability, depending on circumstances). Mercedes seemingly has a narrower spread between the two figures, presumably to keep their “sticker prices” from being even more stratospheric than they already can be.

Purists and snobs, of course, won’t hesitate to remind us of the potential downside of such parts-sharing: the risks of “diluting” the luxury brands and making them too close to their downmarket siblings. Yet, well-done, such sharing can actually mean that more of a vehicle’s development budget can be spent on those upmarket luxury touches. Still, managing this issue is as much art as science, and the Toyota-to-corresponding-Lexus-model transition has seen widely varying results, from the sucessful (Toyota Camry/Lexus ES, Toyota Mark X/Lexus GS, latest Lexus GX/Toyota 4Runner) to barely distinguishable (Lexus LX/Toyota Land Cruiser) to not-so-great (Toyota Avensis and Sai/Lexus HS). While, in the latter case, we understand Lexus Europe’s refusal to offer the HS, it’s still something of an automotive journalistic double standard that the Audi A3 isn’t called out that often for its closeness to the Volkswagen Golf.

Admittedly, though, calling Mercedes-Benz and BMW true independents in this day and age is a gross oversimplification, and the two, in fact, have made moves towards overcoming their cost-containment and broader economies of scale deficits. Yet, here, too, Audi and Lexus have another advantage: continuity and stability. Lexus was created organically, from scratch from within Toyota just over 20 years ago, while Audi gradually grew into Volkswagen’s upscale full-line marque since their mid-1960s acquisition of the former Auto Union/DKW. Mercedes and BMW’s downmarket moves, by contrast, have been far more turbulent.

Although BMW historically has been as averse as Toyota and Honda to mergers with fellow carmakers, they did take on English patient Rover from 1996 thru 2000, keeping only the foundation of what would become the relaunched MINI. Yet, a cursory look at the revived MINI’s history reveals the musical chairs nature of its powertrain joint-venture sourcing from pre-Daimler Chrysler to Peugeot/Citroën to (rumor has it) Fiat for the 3rd generation. And, speaking of Mercedes’ parent Daimler and Chrysler, their now-terminated alliance hardly bodes well for the recently announced Mercedes/Renault/Nissan/Infiniti combo. Perhaps Mercedes learned some hard lessons from their utter failure in dealing with Chrysler, and maybe the prior success of Carlos Ghosn with Nissan/Renault will help, but still…

New Model Cadence
The final factor in a carmaker’s success during a given model year is their so-called new model cadence, or when a given model is thoroughly revised into a new generation, and when this renewal takes place versus its archrivals. As an example, the launch of the 2nd-generation Lexus IS at the March 2005 Geneva Auto Show at the same time as its archrival BMW unveiled the current E90 3-Series set up quite an interesting battle that may or may not be repeated at the 2012 Geneva show. One segment up, however, Lexus is seriously out of whack when compared to many of its rivals. It was just about a year ago that Mercedes-Benz launched the latest W212 version of their E-Class range, which has seen sales more than double to 27,778 in the first half compared with a year earlier. BMW sales have fallen behind because of the transition between the outgoing E60 5-Series and its successor F10 that has just gone on sale in the U.S. Also just going on sale here is the 3rd-generation Infiniti M sedan. All this, unfortunately, leaves the current 3rd-generation Lexus GS in a very precarious position. Frankly, it has never been a rousing sales success. We can hardly wait another year for its successor to arrive…

So, will Lexus lead in U.S. luxury sales for the 11th year in a row?
Sorry to bail out on you, but I honestly have no clue how this will pan out. The 2010 calendar year for Lexus has been a perfect storm of an exceedingly quiet new-product year (the debut of the 2nd-generation Lexus GX, the Sport version of the LS 460 and, later this year, the F Sport versions of the IS V6 sedans being the only news of note) and a seemingly never-ending multi-recall brouhaha that has been anything but quiet. Yet, through it all, it is only trailing Mercedes-Benz by 458 sales through June. Toprak of Truecar.com believes that “It’s very likely Mercedes-Benz may take over the lead this year. The cumulative impact of all the recalls hasn’t really shown up yet. It’s more likely to be seen in the second half”, while Jessica Caldwell of Edmunds.com concurs with this author’s “too close to call” verdict. Toyota USA’s President and Chief Operating Officer Jim Lentz is realistic about the situation. “It will be a battle. The Lexus customer is really discerning about quality issues”, he says. It’ll probably all come down to whether Lexus prefers to be aggressive with discounted leases and reduced-rate financing for the rest of the year to build sales, as it did in May; or maximize corporate profitability in the face of the succession of costly recalls by cutting back on incentives and just let Mercedes grab the sales lead; or, perhaps, some intermediate strategy. One thing is likely, though: this will certainly be one December to Remember…

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