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Toyota realizes ‘profitable hybrid vehicles’

From Nikkei Business| May 29,2007

Toyota Motor Corp launched new hybrid models of its Lexus LS series in Japan on May 17. The “LS” (formerly called Celsior) is the flagship model of Lexus, Japan’s top automaker’s luxury-car brand name.

Before Toyota made this announcement, the automaker had already received orders for 4,000 units of the new models. This was actually the annual sales target set by the automaker for 2007 in the domestic market.

The combination of a 5-liter engine and high-powered electric motor enables the new Lexus sedans to perform as well as a conventional model with a 6-liter engine, while realizing better fuel efficiency equivalent to that of a 3-liter engine vehicle. The price of the new hybrid model starts from 9.7 million yen.

“These are the top-of-the-line Lexus models,” said Toyota President Katsuaki Watanabe at the press conference held that day.

The new Lexus models are available in eight classes depending on the equipment and the length of the body. Surprisingly, approximately 1,200 of the reserved 4,000 units, or about 30% of the total orders, are for the most expensive model, priced at 15.1 million yen. The body of this model measures 12cm longer than the standard model, offering extra rear-seat space. In addition, it is equipped with footrests and seats with massaging functions.

Previously, Toyota’s most expensive model was the “Century,” which carries a price tag of 11.13 million yen. It is difficult to make a straight comparison between the new Lexus LS and Century because of the many differences between them, such as the equipment. However, the prices of the new Lexus LS models do surpass those of the Century.

Toyota introduced Lexus in the domestic market in August 2005. Initially, sales of these luxury vehicles were sluggish partly due to the one-year delay of the launch of the flagship ”LS” model.

“With the launch of the high-end models, we’ve finally got a full range of our product line,” said Toyota Senior Managing Director Yoichiro Ichimaru, who is in charge of domestic sales. “We will step up efforts to expand sales of our brand products.”

Toyota officials are hopeful that some of the owners of the automaker’s Celsior sedans will switch to new Lexus LS sedans. In addition, they count on some of the owners of other automakers’ high-end vehicles, such as Mercedes-Benz and BMW, to switch to the new Lexus LS models as well.

At the same time, some of the owners of other Lexus models are likely to upgrade to the new ones. This means that Toyota’s used car business will play a significant role in its Lexus-brand business, Ichimaru said.

Lower prices of used Lexus vehicles could lead to a declining number of Lexus customers, resulting in a drop in the prices of new Lexus vehicles. Some customers purchase a new vehicle by using a car loan in which they repay the amount equivalent to the difference between the price of the new vehicle and the estimated value of the vehicle three years later.

This type of car loan is popular among buyers who plan to sell their luxury vehicle three years later. In this case, if the price of the used vehicle drops below the estimated level, the automaker must cover the loss.

For this reason, Toyota has launched a new used-car business in which the company links Lexus dealers throughout the nation via the Internet. Traditionally, the dealers operated their business independently and have managed their inventory on their own.

But in order to promote efficient distribution of Toyota-brand used cars, Toyota is shifting its traditional used-car sales system to the new one, in which it manages all the inventories across the nation in a unified fashion. The success of Toyota’s new hybrid LS sedans depends on whether its new sales system for propping up the prices of new vehicles will work well.

Toyota cuts development costs by using same-design engines for multiple models

In the development process of new models, Toyota is making efforts to improve efficiency. The non-hybrid LS models are equipped with a 4.6-litter engine. Toyota boosted the displacement of the non-hybrid LS sedan’s engine to 5 liters by replacing only three parts, including a piston-related part, and used this engine for the hybrid LS cars.

In addition, Toyota has developed the 4.6-litter engine by making some improvements to the 3.6-litter engine that is used for other Lexus models. One specific example of the upgrade is to boost the number of engine cylinders.

Toyota plans to produce a limited number of hybrid LS models. For example, it has set a monthly sales target for the hybrid models at 300 units in Japan. If the automaker had developed the new engines for the hybrid vehicles from scratch, it could not have recouped the development cost.

That is why Toyota used the same basic design for developing the engines of more than one model so as to cut the development costs. Moreover, the automaker is cutting its production costs by producing engines for several models on the same production line.

As a result, Toyota is expected to generate more profits from the hybrid LS models than from non-hybrid ones, although the hybrid models are generally less profitable than non-hybrid models.

Toyota launched its hybrid LS sedans about two years after the introduction of the Lexus series in the domestic market. But owing to the delay, the automaker could release the new hybrid models under favorable conditions, such as higher oil prices and share prices.

Currently, the Lexus dealers are striving to recover a substantial amount of their costs, which they incurred for opening outlets. They have long been waiting for the high-end hybrid models that can bring profits, by taking advantage of the current favorable situation.

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