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Game-Changer Lexus Turns 20

It's difficult to imagine a motoring world without Lexus. But when Toyota Motor Corp. launched its premium brand in the U.S. on Sept. 1, 1989, most industry watchers were skeptical Lexus could compete with the Germans, the uncrowned kings of luxury, or the sales-leading Americans. I remember reading comments made by the likes of Eberhard von Kuenheim (managing director) from BMW (AG) back then, says

It's difficult to imagine a motoring world without Lexus.

But when Toyota Motor Corp. launched its premium brand in the U.S. on Sept. 1, 1989, most industry watchers were skeptical Lexus could compete with the Germans, the uncrowned kings of luxury, or the sales-leading Americans.

“I remember reading comments made by the likes of Eberhard von Kuenheim (managing director) from BMW (AG) back then,” says Joe Phillippi, president-AutoTrends Consulting in Short Hills, NJ.

“He regarded (Lexus) a mere poseur in the marketplace. He basically sniffed and said, ‘They have no heritage.’ A lot of people sort of considered them overreaching.”

Ross Roberts, then vice president and general manager of Ford Motor Co.'s Lincoln-Mercury Div., told Ward's in 1989, “We don't expect to lose many buyers to (Lexus).”

Even some Toyota dealers weren't convinced a luxury brand was the smartest investment for the company at the time.

“Not everybody thought this was a good idea to split out the resources of the company; (they thought) that we should concentrate on growing Toyota,” Dave Illingworth, Lexus' first general manager, says of dealers' reservations.

But Lexus quickly proved naysayers wrong, soon living up to the promise it made to improve luxury-brand customer service and build the best-quality vehicles in the world — all problem points for luxury marques at the time.

By the close of 1991, Lexus had overtaken BMW and Mercedes in U.S. sales, and by 2000 Lexus became the No.1 selling luxury brand in the U.S., Ward's data shows.

In the mid 1980s, Illingworth was working in Cincinnati as a regional sales manager for Toyota when he was promoted to a mysterious new post: corporate manager of special projects. “I didn't even know what it was,” he says.

He later was told Toyota was going to be starting a luxury brand, launching with a large sedan that became the '89 LS 400.

Toyota wanted the LS to be “the finest car ever built, and it was going to be sold in the U.S. first, and they felt it was necessary to start a separate division to sell the car,” says Illingworth, one of five original Lexus U.S. employees.

Toyota's goal with Lexus was to create vehicles that “split the difference” between buyers of domestic and German models, he says, giving them “a high-quality car with a good ride and solid performance at a reasonable price.”

The LS 400 had been in development throughout the 1980s and finally was unveiled at the 1989 North American International Auto Show in Detroit. The vehicle was “extraordinarily impressive,” Phillippi says. “The one thing I noticed was how quiet the car was at all speeds.”

The first LS, assembled at Toyota's Tahara, Japan, plant, boasted a 4.0L V-8 and 4-speed automatic transmission, as well as an astonishing number of engineering features designed to deaden sound. The assembly process incorporated advanced manufacturing techniques such as laser welding.

Many auto reviewers considered Nissan Motor Co. Ltd.'s Infiniti Q45 (the Infiniti brand also debuted in 1989) a better vehicle in terms of performance.

But “Lexus wasn't going after that segment of the market,” Phillippi says. “They were going after people who were buying a luxury car that was supremely competent and extraordinarily quiet. It was all about quality and comfort.”

In addition, Lexus debuted the Toyota Camry-derived ES 250 sedan in 1989, believing it was important to hit “the heart of the market,” Illingworth says.

The upscale LS started in the $30,000 range — undercutting comparable German models in the U.S. by tens of thousands of dollars — while the more moderately priced ES ($21,050) would seek entry-level luxury buyers. Two years later, Lexus added a 2-door coupe to its lineup, the SC 400.

Concern About Profitability

Despite Lexus' rapid ascent in sales, Illingworth says a great deal of tension and anxiety haunted management, “probably even up to three years after we launched,” due to concerns about profitability.

“I don't think anybody ever felt comfortable in those first couple years that we had it made and it was going to work,” he says. “We felt we had to get all the way through the launch of the SC 400, get our reputation established and get our dealers established before we could feel comfortable that we were in something that would work and be there long-term.”

Illingworth says about 75% of the first crop of Lexus dealers also were Toyota dealers, chosen based on their customer-service scores.

“Whether he was a competitive dealer or Toyota dealer, he had to have exceptional customer satisfaction,” Illingworth says.

Property and necessary funds to build a Lexus store, at the time $3 million-$5 million, were important but secondary.

Current Lexus General Manager Mark Templin joined the brand shortly after its inception and says a new Lexus store in Miami is setting back one dealer $75 million.

Templin believes the brand's commitment to customer service, with oft-imitated perks such as loaner cars and free fancy coffees, is at “least half” the reason for Lexus' success alongside the vehicles and their technology.

“When we sold our first Lexus 20 years ago, the people who took a chance on Lexus loved the product. But they loved the experience they got so much at the dealerships that they went home and told everybody about it,” Templin says. “It was the ultimate grassroots movement.”

Lexus' high level of customer service stood in stark contrast at the time to luxury-sales leader Cadillac, says analyst Erich Merkle, president of Grand Rapids-based Autoconomy, noting “their service wasn't any better than you'd get in a Chevrolet dealership.”

An effective advertising campaign also bolstered the brand, while Infiniti stumbled out of the gate with an ethereal Zen-like “rocks and trees” ad campaign that never showed the cars. The Lexus ads were direct, less artsy and focused on brand-building. Infiniti sales typically have trailed Lexus by a wide margin.

‘Relentless Pursuit of Perfection’

An early Lexus TV commercial with champagne glasses stacked in a pyramid formation on a high-revving LS “still sticks with me to this day,” Merkle says. “It really solidified one of the great attributes of the car — the precision and the refinement.”

Lexus' famous tagline, “The Relentless Pursuit of Perfection,” developed by Tom Cordner, then creative director at Lexus' ad agency Team One Advertising, came out of a meeting in Japan between Lexus U.S. executives, advertising-agency officials and engineers.

“We were riding on the bullet train back to Tokyo, and we had just been through a couple days talking to engineers about what they were doing and how hard they were working, trying to make the best cars ever built,” Illingworth remembers. “(Cordner) said, ‘I know what the tagline's going to be after spending these few days with the engineers,’ and he wouldn't tell us.

“(Team One) laid it on us about a week later and that was the line,” Illingworth says. “When this line came out, everybody knew it was perfect.”

The last two years have not been kind to Lexus, as sales have collapsed due to a deep recession that has decimated the U.S. new-vehicle market.

Through July, Ward's data shows Lexus sales down 31.7% to 108,577 units, placing it behind BMW (109,944 units) for the first time in 12 years.

Compared with the first six months of 2007, Lexus sales through June were off 43.8%, just below the industry's average decline of 41.6%.

Templin and other Lexus officials consistently maintain they are not concerned about their loss of standing as the No.1 selling luxury brand in the U.S.

Dealer Ron Joffe, owner of the first Lexus store in New Jersey, predicts brand sales will stabilize this year. “As long as Lexus continues to maintain quality product, it will be a strong company,” says the owner of Lexus of Bridgewater.

But Merkle says the brand has little room for sales growth.

“There's no question it's going to be much more difficult for Lexus going forward,” he says. “Lexus has completely built out their product portfolio. They're pretty much out of whitespace right now.”

New Segments Explored

To expand sales, Lexus studied BMW's playbook and introduced in recent years variants of existing models, trying to carve out a niche in luxury hybrid-electric vehicles, for example.

Lexus now is launching the HS 250h dedicated HEV, an entry-level luxury sedan geared toward fuel economy rather than performance.

And Toyota CEO Akio Toyoda recently confirmed a supercar based on the LF-A concept. It reportedly will start at more than $200,000.

“It's a tiny, tiny slice of the marketplace,” Phillippi says of supercars. “But if you're the No.1 auto manufacturer in the world, and you want to broaden your appeal, you need sort of a halo car like that.”

The attention for such a project is priceless, he says. “You'll get more magazine covers on an LF-A coupe or roadster than you'll ever get on the LS.”

But Merkle thinks the halo effect of such a vehicle will be limited. “Will (a supercar) translate into sales for some of the other vehicles? Perhaps, but I think it'll be fairly insignificant.”

He believes Lexus' best potential for growth lies in embracing design more so than in the past. “A lot of their design is ‘me too,’ and you can see the influence of BMW,” he says. “Is it bad? No. Is it original? No.”

Templin says Lexus dealers are doing “a great job of adapting to the new world” and waiting for buyers to return to showrooms.

Meanwhile, they are going “line by line” through their expenses, rooting out waste, or muda, as is the Toyota way.

“A dealer found a computer system he's been paying for that he's not even using anymore,” Templin says.

And while Lexus stores haven't taken the drastic step of switching to cheap coffee, some now are having employees purchase bagels and pastries in the morning before arriving at work, instead of hiring a caterer.

“I like those ideas,” Templin says. “You've cut your costs but haven't diminished the level of customer service you provide.

Lexus' famous “Balance” commercial for '89 LS.

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