According to an interview with Auto Express magazine in November 2011, Koji Sato, deputy chief engineer for product planning said: “We are working on a number of solutions to offer low CO2 emissions and these include a small hybrid.”

At present, the E-Segment hybrid model in the Lexus line-up is the newly-launched GS 450h, with a 3.5-liter V6 gasoline engine, capable of 0-100 km/h (62 mph) acceleration in 5.9 seconds.  However, most luxury sedans sold in the European market need to lower their carbon dioxide emissions in order to lower the annual road, company car and registration tax burden on their purchasers. 

• An example includes the BMW 520d.  It is priced competitively, at £30,030 in the UK (US$47,000), capable of a respectable 0-100 km/h time of 8.1 seconds.  Its combined cycle (EU) fuel economy is a segment leading 4.7 l/100 km (50.0 mpg) and emits 123 g/km of CO2 with the optional 8-speed automatic transmission.
• In comparison, the GS450h is more expensive at £44,615.00 in the UK (US$69,500), and can only achieve 7.7 l/100 km (30.5 mpg) and a higher 179 g/km of CO2 emissions.
• The result for a UK purchaser is that the annual road tax for the BMW 520d is £115 (US$180) less than for a Lexus GS 450h.  Savings for company car usage is even greater, at 18% Company Tax instead of 26% (based on Benefit-In-Kind rates) in the UK.

Lexus needs to make its GS sedan more competitive, not just in Europe but worldwide, as all consumers seek fuel efficiency to cope with the rising cost of fuel.  The brand has to broaden from its high performance-led strategy and embrace smaller, more economical and low emitting powertrain options for its hybrid models. 

• This has already begun with the launch of the smaller CT and HS hybrids, based on the powertrain platform of the Toyota Prius.

Lexus has indicated that it will not expand diesel powertrains to other models.

The brand has only one diesel model in its line-up, the IS 200d in Europe, equipped with the Toyota AD Series 2.2-liter turbocharged diesel engine.  Toyota does not assemble a larger diesel engine, except for the commercial vehicle segments.

It is likely that it will deploy a smaller capacity, four-cylinder gasoline engine to its hybrid platforms to meet the new strategy.

• The Lexus/Toyota hybrid platform is mostly integrated in its transmission modules, involving two electric motors, and can thus be mated to any combustion engine.
• The smallest gasoline engine in the Lexus line-up, in the IS 250, is too powerful to bring about the fuel economy needed by the new strategy.  This is a V6 2.5-liter unit producing 153 kW (208 bhp).
• A likely choice would be a modified 3ZR (four-cylinder 2.0-liter) engine from Toyota, to match the 135 kW (184 bhp) generated by the diesel engine in the BMW 520d. 
• Another candidate is the 1.8-liter Atkinson Cycle engine in the Toyota Prius, but uprated to match the performance required by the Lexus brand.
  The final decision on the new engine will be announced in the summer of 2012, before sales begin for the GS sedan in Europe.

Strategy Analytics has analyzed the decision to pursue an all-hybrid approach to the Lexus’ dilemma and believes the brand has taken the correct course of action.

The reasons are:

• Lexus is experienced in the development of hybrid powertrain technology and is well-known among consumers for it.  Sato said: “Lexus has a strong association with hybrid and we want to continue to develop this.”
• With current hybrid platforms in place, it would be more cost effective to develop less-powerful but more economical hybrids than to develop new diesel models virtually from scratch.
• By widening its hybrid offerings, it can also raise volume in hybrid powertrain production and bring about economies of scale across the hybrid line-up.
• Nitrogen oxide (NOx) emission standards have been tightened in recent mandates, involving the adoption of new emission control strategies for large segment diesel models, such as the injection of AdBlue in the exhaust to meet Euro-6.  Although not as complicated as hybrid powertrains, the fear is that NOx controls would become too severe, and thus too costly, for Lexus to develop on its own.
• If Lexus is unable to develop new diesel powertrains, by sourcing from outside suppliers it would undermine the brand’s reputation and lose control of its powertrain design.
• The volumes required for the new strategy may be limited, given that Lexus is a luxury brand, and may not justify the additional investment needed to develop new diesel powertrains – Infiniti are to source from Mercedes-Benz and the Chrysler 300 features a V6 diesel engine supplied by VM Motori (a joint venture with FIAT and General Motors), but only in limited volumes.
• Away from Europe, the new strategy is relevant in North America where the CAFE fuel economy mandate has got tougher (for 2025) and following the lower uptake of diesel there.
• Diesel powertrains are increasingly being threatened by the development of new, more efficient gasoline powertrains, such as stratified combustion, which would negate any investment in new diesel powertrains.
• Hybrid powertrains are perceived to be more refined and relevant for the Lexus brand than diesel powertrains.
• Zero-emission drive, although for very short distances, can give Lexus the advantage should Chinese and European mandates appear to ban combustion-driven vehicles from city centers, as already seen for motorcycles in Beijing.

While competing luxury brands are already successful with diesel powertrains, this does not mean they should follow the Lexus strategy – It is a problem unique to Lexus, which requires a strategy that is unique to Lexus.

For further information relevant to diesel and hybrid powertrain strategies, please refer to the following products from Strategy Analytics:

EV/HEV Technologies Supply & Fitment Database
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=6729

Hybrid Technologies Legislation/Support
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=6726

Analog Semiconductor To Get Market Boost From HEV/EV Growth
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=6623

Economies of Scale - Driving Affordability In Electric and Hybrid Vehicles
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=6244

Auto Shanghai 2011: Domestic Car Makers Face Tougher Battle Ahead (commentary on the BMW 5-Series plug-in hybrid)
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=6324

Automotive Gas Sensors: Emission Mandates Boost Demand
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=5981

Hybrid and Electric Vehicles: OEM Strategies Reviewed
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=5365

Sensors for Advanced Powertrains: Efficiency Solutions Drive Demand
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=4435

HCCI: The Single Solution For Combating Both CO2 And NOx (commentary on stratified combustion technologies)
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=3614

Diesel Challenges Hybrids in the US
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=3368

BMW Sets The Pace in Engine Efficiency
http://www.strategyanalytics.com/default.aspx?mod=reportabstractviewer&a0=3250