2006 Is350 To Have "over 300 Bhp"

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Is Lexus Sexy Enough To Seduce Europe? 

Lexus will amp up its cars' pizzazz and ditch the understated styling

Since Toyota Motor Corp.'s (TM ) Lexus division first broke into the U.S. luxury market back in 1989, its recipe for success has been plain and simple: Lexus' vehicles are understated outside and comfy and quiet inside. And its dealers bend over backwards for customers. While long-established names such as BMW, Mercedes-Benz (DCX ), Audi, and Cadillac battled each other by adding more horsepower and by pushing the limits of styling, Lexus made conservatism its virtue. Americans loved it, buying enough posh cars and SUVs to make Lexus the best-selling luxury brand in the U.S.

But Lexus' lead isn't all that it appears. More than half of the vehicles it sells these days are SUVs, at a time when demand for big SUVs is slowing. Factor that out, and Lexus actually ranks fifth in luxury passenger-car sales in the U.S. Most ominously, an increasing number of luxury-car shoppers are voting for speed and handling over a soft ride. Says Eric Noble, president of Car Lab, an Orange (Calif.) consulting firm: "Boomers don't have a taste for cushy the way the previous generation does."

Lexus, in short, needs to take on the German car companies. That explains why it's about to shake things up. On Mar. 3 at the Geneva Auto Show -- in BMW's Swiss backyard -- Lexus will show off its new IS 250 and 350, luxury performance cars styled to look as if they were molded from a single piece of metal. The IS 350 and the just-launched, aerodynamic GS 430 sedan are the products of a push to make Lexuses faster -- and faster-looking. Lexus boasts that these cars' performance will rival that of BMW's Ultimate Driving Machines. They're also going to jack up prices. The IS 350 will cost a few thousand more than its predecessor. The $43,000 GS 300 and $51,000 GS 430 are about $2,000 more expensive. An exotic sports car with a price tag of over $100,000 may even be on the way.

Not coincidentally, Mar. 3 is two days after BMW plans to unveil the latest version of its 3 Series sedan. Lexus executives vow to steal even more BMW and Mercedes owners in the U.S. and eventually challenge those brands in Europe, where Lexus barely registers today. Says Group Vice-President Dennis E. Clements: "It is our intention globally to become the preeminent luxury car."

Can he pull it off? It's unwise to bet against Toyota. The parent company's market share is growing in Europe and the U.S. Meanwhile, Lexus widened its U.S. sales lead over BMW last year, to almost 30,000 vehicles. Its dealers routinely rank first in J.D. Power & Associates Inc.'s customer-satisfaction survey. And the brand beats all other luxury names when it comes to consumer aspiration, according to California firm Strategic Vision Inc.

SILENT AS A TOMB

But pizzazz has never been Toyota's strong point. The bulbous SC 430 convertible is the closest thing to a styling statement from Lexus; it sells a modestly successful 10,000 cars a year. Toyota flopped with its attempts to draw sports-car fans with the MR2 Spyder, which hit the market in 2000, and the Supra sports car before that. The Supra no longer sells in the U.S., and the MR2 will make its exit after this year. "Lexus equity is tied up in cars that are tomb-quiet, not in [their] performance," says Daniel Gorrell, a partner at Strategic Vision.

Lexus cars were styled cautiously on purpose. Executives saw comfort and reliability, not fashion, as their selling point. In some cases, the cars were created by Toyota engineers, who operated without a styling motif to make the cars look as if they came from the same family. But two years ago, Toyota built a Lexus engineering and design center in Nagoya, Japan. The brand now has several hundred stylists and engineers feeding ideas from satellite studios in the French city of Nice and in Southern California.

That new design effort is key to the emerging European strategy. Make no mistake: Selling cars in Europe -- especially to Germans -- will be Lexus' biggest challenge. The brand sold just 25,000 cars there last year and has a target of 65,000 by the end of the decade. Compare that with BMW's sales of 573,000 cars in Western Europe, up 11% from 2003.

It doesn't help that up till now Lexus has not offered high-performance diesel engines. This will change with the new IS model, which comes with an optional 2.2-liter diesel. But Lexus is relying on its cutting-edge hybrid gas-electric technology to deliver a performance boost. It remains to be seen if diesel-loving Europeans will take to the new technology. Rivals aren't too worried for now. "We are taking them seriously," says BMW Chairman Helmut Panke. "But right now, we have one global competitor, and it's Mercedes."

Lexus has much more at stake in the U.S. In passenger-car sales it trails BMW, Mercedes, Cadillac, and even Honda Motor Co.'s (HMC ) Acura division. And Lexus has performance issues. The current IS 300 struck out against the BMW 3 series and other cars selling for $30,000 to $40,000 because it was smaller and, in some cases, underpowered. Its V-6 engine kicks out 215 horsepower, but rivals such as the Cadillac CTS, Infiniti G35, and the 3 series all sell optional engines with at least 225 hp. The new cars promise to pack much more punch: Lexus says the V-6 in the new IS 350 will have well over 300 hp, and the new GS 300 and GS 430 have at least 245 hp.

THE STRETCH MODEL

Clements says Lexus isn't trying to become BMW. The new cars will offer all-wheel drive, and craftsmanship will still be a priority. (Even in lower-priced Lexus vehicles, all wood in the interior comes from the same tree, so the grain matches.) Still, the styling makeover will be even more pronounced when the new flagship LS 430 sedan hits the market in two years. The most expensive LS 430 now sells for $74,000, but Lexus plans a stretched, $100,000 version to compete with Mercedes' tony S500 and S600 sedans. Dealers have been told to expect a production version of a Formula One-inspired sports car near the same price.

Can Lexus sell cars for six figures? If they deliver the performance that Lexus is promising, surveys indicate buyers will pony up the additional cash. "The Japanese have always played it safe," says dealer Kenneth Meade of Meade Lexus in Lakeside, Mich. "But if you want to run with Mercedes and BMW, you have to have style and performance." For Lexus, this is no time to get comfortable.

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