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Toyota’s cash-cow Lexus brand may be tarnished on ‘safety risk’

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Toyota’s cash-cow Lexus brand may be tarnished on ‘safety risk’

Bloomberg News April 14, 2010 - 2:06 pm ET

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TOKYO (Bloomberg News) -- Toyota Motor Corp., struggling to recover from record recalls, may not be able to count on its luxury Lexus brand to bolster earnings after Consumer Reports called the GX 460 sport-utility model a “safety risk.”

The designation, accompanied by a “don’t buy” recommendation from the U.S. magazine, may dampen Lexus sales in the nation, which have risen even as Toyota’s overall deliveries fell amid global recalls of more than 8 million vehicles.

“No one is going to purchase a car that has a ‘don’t buy’ rating,” said Koji Endo, managing director of Tokyo-based Advanced Research Japan. “Worse yet, this will deal a severe blow to the image of the entire Lexus lineup.”

Until now, the Lexus brand was largely unscathed by Toyota’s recalls, which have led to U.S. congressional hearings, a rebuke by Transportation Secretary Ray LaHood, and a proposed $16.4 million fine.

While some Lexus models were called back because of floor mats that might trap gas pedals and cause unintended acceleration, none were involved in later actions to fix sticky accelerators.

Lexus sales in the U.S. jumped 18 percent in the first quarter of this year and accounted for 13 percent of Toyota’s total deliveries in the country. Toyota’s most expensive Lexus models earn at least 10 times the operating profit per vehicle of a Toyota Corolla compact car, according to Advanced Research’s Endo.

Rollover Accidents

Consumer Reports, a non-profit magazine published by New York-based Consumers Union, said Monday that emergency driving tests indicated the 2010 GX 460 model may be prone to rolling over.

The GX’s rear end “slid out until the vehicle was almost sideways before the electronic stability control system was able to regain control” at a Connecticut test track, the magazine said. “In real-world driving, that situation could lead to a rollover accident, which could cause serious injury or death.”

The Lexus division has been the top seller of luxury vehicles in the U.S. on an annual basis for 10 years in a row. The brand tied with General Motors Co.’s Cadillac for the top ranking in a University of Michigan survey of customer satisfaction, the school said in August.

Lexus cars will have the highest average U.S. resale value among 2010 model-year vehicles in five years, according to a study released by Kelley Blue Book in December.

Profitability Pressured

“Buyers who see the Consumer Reports rating may perceive this as a problem across all Lexus models,” said Tadashi Usui, an analyst at Moody’s K.K. in Tokyo. “In that case, because of Lexus’s high margins, we’ll see an impact more on profit than on sales.”

Toyota’s profitability is already being pressured by the cost of incentives the carmaker has introduced to bolster U.S. deliveries. Toyota started offering no-interest loans, discount leases, and free maintenance for some models from March, helping the carmaker raise sales that month by 41 percent from a year earlier. Toyota is extending the offers until May 3.

“These free maintenance offers and such are not adding to Toyota’s bottom line,” said Takashi Aoki, who helps manage about $1 billion at Mizuho Asset Management Co. in Tokyo, including Toyota shares. “And what will happen when the incentive program ends?”


Toyota is facing at least 177 consumer and shareholder lawsuits seeking class-action status and at least 57 individual suits claiming personal injuries or deaths caused by unintended acceleration incidents. The lawsuits will be combined in a federal court in Santa Ana, Calif., a panel of judges said earlier this month.

The uncertainty surrounding the legal cases will push Toyota to be especially cautious with its dividend payments and profit forecast for the fiscal year started April 1, said Yuuki Sakurai, CEO of Fukoku Capital Management in Tokyo, which manages about $7.5 billion.

“Raising the dividend is out of the question,” Sakurai said. “That would actually upset investors who think it wouldn’t be prudent.”

Toyota will announce its fiscal fourth-quarter and annual earnings results on May 11 in Tokyo.

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Good, hopefully people start realizing how they are just dressed up Toyotas and are all hype. The IS is a worse car than the A4, 3-series, G37 and C-class, the GS is also worse than the Infiniti M, the German trio and the Jag XF, the Lexus LS is probably better than the A8, but no as good as any other vehicle in that class. The only Lexuses that are successful are the RX and the ES350 and no one under 67 buys an ES350, so the ES won't be successful for long.


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