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Carmakers revving up for higher profits

With its new F cars, Lexus is joining Mercedes, BMW and others in the high-performance luxury car club. It's easy to see why Lexus wants to crash this party.
Image: Lexus IS F
Lexus IS FLexus
/ Source: Business Week

In March, Lexus is launching a high-performance division. Called the F—for "Flagship"—the first model will be the sporty, $56,765 Lexus IS F. Several more F models are in the pipeline, including a luxury sedan and an SUV-wagon crossover.

This represents a radical departure for Lexus, which has enjoyed enormous success as Toyota's luxury brand, despite being often faulted by driving enthusiasts for making cars that are unexciting, albeit attractive, well-built, and competitively priced. Now obviously Toyota's top brass wants to change this impression—and that is something that should concern executives at the high-performance divisions of its luxury rivals, specifically Mercedes-Benz, BMW, and, increasingly, Audi.

Mercedes offers an AMG version of nearly every model it sells, including light trucks. BMW only offers M versions of the 3, 5, and 6 Series and the Z4 Roadster, but not its flagship 7 Series, its SUVs, or its entry-level 1 Series. And Audi has its RS4 and recently introduced its $109,000 R8 supercar.

It's easy to see why Lexus wants to crash this party. In recent years, Mercedes' and BMW's high-performance AMG and M cars, respectively, have become a way not only to build brand loyalty with their wealthiest customers but also to drive profits.

High-performance models typically tack on tens of thousands of dollars, sometimes a lot more, to the price tag. For example, the base Mercedes E350 sedan costs around $52,000; its AMG counterpart, $86,000. Further up the food chain, the Mercedes S550 sedan with a V8 stickers for around $87,000. The AMG version, the V12-powered S65, costs double that at $194,000. Today, AMGs make up about 10% of sales for Mercedes-Benz USA. Total U.S. unit sales for Mercedes-Benz in 2007 were a record 253,316. The company doesn't report AMG sales separately, but that suggests around 25,000 AMG models sold.

Of course, that's not all profit. For starters, it costs more to build the AMG and other high-performance models than the base models. But under the skin, the cars share parts and development costs.

Tom Purves, chairman and CEO of BMW (U.S.) Holding Corp., said that without sharing costs with other models for mundane items such as air-conditioning systems and wiring harnesses, BMW could "never, ever" build and sell cars like the $54,575 BMW M3 Sedan at a price anyone would be willing to pay. Purves, based in Woodcliff Lake, N.J., is responsible for BMW and Mini in North, Central, and South America.

The U.S. market accounted for about 23% of worldwide sales for the BMW brand in 2007, with record U.S. sales of 293,795. But the U.S. market has a much richer model mix, including about half of all M models sold worldwide. That's still a relatively small number. For the last 10 years, M models accounted for an average of about 4% of BMW's total U.S. sales, a spokesperson said.

Relatively speaking, BMW M models are pretty comfortable, but bred for racing and tight handling. AMG models tend to stress straight-line acceleration and every conceivable high-tech option and creature comfort.

"Mercedes AMG customers and Audi S model customers clearly are happier with their vehicles, are stronger brand advocates, and earn almost three times more than their non-AMG/S cohorts," said Alexander Edwards, president, automotive, for San Diego-based market research firm Strategic Vision.

How much more? Median household income for all Mercedes owners is $170,004, for instance, but $392,756 for AMG owners, Edwards said.

And in an environment of nearly universal price cuts, rebates, lease deals, and other incentives, specialty cars command a big premium relative to standard models. That's key to why Lexus and other rivals are creating or more heavily promoting high-performance specialty divisions.

"M and AMG certainly rule the roost in that category," said Scott Oldham, editor in chief of Edmunds' Inside Line. "But Mercedes has been so successful with them, housewives in Orange County and Palm Springs drive AMG cars. They went in and bought 'the sporty one,' and [AMGs] became the mainstream choice," he said.

Lexus will be a formidable competitor in this mix. Lexus has been the No. 1-selling luxury brand in the U.S. every year since 2001 (although, if you include Mini sales, BMW was No. 1 in 2007). The Lexus success is largely built on lower prices than the European imports, combined with a reputation for bulletproof quality. Since it was launched in late 1989, Lexus has been No. 1 in the J.D. Power & Associates Initial Quality Study for 11 out of 18 years.

And Lexus isn't the only gate-crasher, by any means. Audi of America is promoting its Quattro GmbH division more aggressively, and recently introduced its first semi-exotic sports car, the R8. General Motors' Cadillac division launched high-powered V models (Cadillac italicizes the V) in 2004. And even Ford's Jaguar offers a high-performance XKR version of its XK.

In higher-volume segments, other domestic brands offer high-performance, low-volume variants such as Ford Shelby Mustangs; the 2008 Chevrolet HHR SS Turbocharged crossover; plus SRT models, for "Street and Racing Technology," from Chrysler, Dodge, and Jeep.

Looks like the ranks of the high-performance luxury car club are only going to get bigger.

See the “slide show” link above for a look at the new breed of high-performance luxury cars.