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Why Lexus doesn't lead the pack in China

EVEN after a series of embarrassing recalls last year, Toyota Motor's Lexus managed to remain the No. 1 luxury vehicle maker in the US - a spot it's held for 11 years running. In China, however, it's an also-ran. Lexus sold just a fifth of luxury leader Audi's tally last year in the world's biggest car market. It also trails BMW and Daimler's Mercedes."

So begins an article that appeared in BusinessWeek on March 24. The authors name a late start and high taxes as the main reasons for Lexus' disappointing performance in the world's largest auto market. We set out to investigate if any other factors were playing major roles through the application of Michael Porter's Five Forces Analysis on Lexus in China, which states that there are five forces determining the competitiveness and profitability of a company. (Below is an excerpt of our findings.)

1) Threat of new entrants - This is not a main problem for Lexus as it could be extremely difficult for a new company to gain enough market share to compete with Lexus in a short period of time because the position of existing firms are strengthened already. The barriers of entrants to the auto market in China include limited suppliers and the protectionism imposed. It is usually difficult to gain recognition and reputation in a foreign country due to the unknown cultural differences. Especially products such as luxury cars, which Chinese people tend to consume for social status.

2) Threat of substitute products - Lexus has a large threat of substitutes in China. It doesn't have great brand loyalty; although it has traded with China before, not many customers chose Lexus because of its relatively poor after-sales service. And when Lexus entered China formally, it had many competitors, such as BMW, Audi and Mercedes-Benz. All luxury car brands offer cars that provide pleasant or desirable features beyond strict necessity. Each brand has its unique selling point. For example, Lexus is famous for its silence in the cabin. However, taking account of Lexus' quality, origin, design and brand image, its prices are quite expensive. Secondly, there is relatively less customer loyalty in the China auto market. People tend to switch to substitute products, as the switching costs are relatively low.

3) Bargaining power of buyers - We would say that the buyers in China's auto market are quite strong. This is due to the relatively large number of luxury car brands in China; this means that consumers can choose from a wide range of supply firms. If they find it easy and inexpensive to switch to alternative suppliers, in this case, from Lexus to other luxury car brands, then buyers have strong bargaining power.

Article by Owen Jian, Lily Yu and Becky Wong, SUIS IB Business and Management Year 11 students


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