Lexus is considering building cars in China, according to a media report.

Currently they are assembled in Japan, Canada and the US.

Toyota had long been opposed to producing Lexus in China because of concerns over quality and profitability but is now considering it to boost growth and narrow sales gaps with German rivals, four company insiders told Reuters.

Audi, BMW and Mercedes are all built in China in joint ventures with SAIC and FAW, Brilliance and BAIC respectively. most models have extended wheelbase to suit local requirements.

Reuters said Toyota has spent the last two years researching how to produce locally Lexus models currently imported from Japan.

The report said Toyota also talked to its Chinese joint-venture partners – Guangzhou Automobile Group and FAW Group – last year about Lexus models but it wasn't clear whether Toyota approached the Chinese companies about a partnership or vice versa.

Local production would be a major shift for the world's largest automaker, encouraged by improved China-Japan ties, as well as new Chinese investment rules that might allow foreign automakers to fully own or majority-control China operations.

"We're torn over this," one Reuters source said.

"But it makes little sense to let this opportunity slip by," another said.

China's planned scrapping of foreign ownership restrictions in the auto industry is in part a response to criticism that Chinese companies have been largely allowed to invest freely in outside markets while Beijing limits foreign firms' access to the world's second-largest economy.

The rule changes – affecting electric carmakers this year and others by 2022 – led Tesla to gain Beijing's approval for a wholly-owned China manufacturing and sales company in Shanghai. That marked the first time a foreign carmaker established itself in China without a partner.

Toyota already produces Toyota models like the Camry, Highlander, Corolla, Levin and Crown, in China with partners and last year sold 1.29m cars there, including the imported Lexuses.

Toyota had contemplated moving Lexus production to China before – as far back as 2011-12, according to one of the four Reuters sources.

But it had until now considered a potential erosion of quality too much of a risk, and didn't want to sacrifice the brand's relatively high margins by sharing profits with a local partner.

Two of the Toyota insiders said the automaker had identified specific scenarios for localising Lexus.

"All the preparation has been more or less completed," one said. "All we're waiting is a 'go' from management."
TRICKY TIMING

Reuters said Toyota's preferred option is to own all or most of a localised Lexus unit which it could do immediately by building only electric cars.

But China might not let another brand in when the market has slowed down significantly.

"You'd still need a good political follow-wind to execute this," one of the sources said, pointing to help from Japanese prime minister Shinzo Abe, who has a state visit to China planned for this month.

A Toyota spokesman in Tokyo told Reuters "the most important task" for Lexus was to become a distinguished brand in China.

"We always weigh the need for localising production as part of the consideration for the Lexus brand's future in China," he said. "But at this point in time, we don't have any specific plans for producing Lexus cars in China."

Alan Kang, a Shanghai-based analyst for LMC Automotive, thinks localising production is exactly what Lexus needs to start narrowing the big sales gap with German premium brands.

Mercedes-Benz, for example, last year sold about 610,000 vehicles, compared to 130,000 for Lexus during the same year, according to LMC.

"If Lexus doesn't want to remain a niche, it needs to start investing more," Kang told Reuters.