Lexus

The Relentless Pursuit

Chester Dawson

• Publisher: Wiley
• Year: 2011
• Print ISBN: 9780470828045
• eBook ISBN: 9780470828076
• Edition: 2
• Topic: Business
• Subtopic: Business General
• Index: Business

A behind-the-scenes look at Lexus's surprising twenty-year success story—in a revised new edition

In the 1980s, German brands BMW and Mercedes-Benz dominated the luxury car market and had little reason to fear competition from Japan. But in 1989, Toyota entered the market with the Lexus LS 400, a car that could compete with the Germans in every category but price—it was US$30, 000 cheaper. Within two years, Lexus had overtaken Mercedes-Benz in the United States and made a stunning success of Toyota's brave foray into the global luxury market.

Lexus: The Relentless Pursuit reveals why Toyota decided to take on the German automakers and how the new brand won praise and success for its unparalleled quality, unforgettable advertising, and unprecedented customer service. From the first boardroom planning session to Lexus's entry into the mega-luxury supercar market, this is the complete and compelling story of one of the world's most admired brands.

• Includes a new Foreword by legendary designer Erwin Lui, an Afterword with updates since the first edition, and a new Coda by leading Japanese automotive journalist Hisao Inoue
• Covers the racetrack triumph—and tragedy—behind the new US$375, 000 Lexus LFA supercar
• Offers important business lessons for brand managers and executives

For car enthusiasts, business leaders, and anyone interested in branding and marketing, Lexus: The Relentless Pursuit offers an amazing story of excellence and innovation in the automotive industry.

Chapter One

The Toyoda Way

The day was like any other in the waning, achingly humid spasm of late summer on the plains outside the city of Nagoya, in the dead center of Japan. The heavy air barely circulated under a relentless late-summer sun. Wizened farmers with leathery skin worked lush rice fields cut into squares like so many patches on a vast verdant quilt. Surveying their lot in ankle-deep, primordial mud, they prayed autumn typhoons would spare their top-heavy crops before the harvest. For more than a millennium, the farm hands who populate the fertile lowlands in the Mikawa region believed themselves to be at the mercy of mercurial deities. The demon-like Fujin, the wind god with green-tinged skin, and the horn-headed god Raijin, bearer of the thunderclap whip, ruled with an arbitrary hand.¹ They were said to control the fortunes of Japan's rice-dominated commerce up and down the coasts of her four main islands. Today, the archipelago's economy is swayed not so much by the whims of weather gods, but by the tides of global commerce. Yet the agrarian community values of those living in the Mikawa region are much the same as ever. They prize insularity, loyalty and, above all, shrewdness. For nearly 300 years, the area was a conservative-minded stronghold of the Tokugawa dynasty, or shogunate, which ruled Japan until the country was thrust into the modern era in the late 1800s.

It was on this historic firmament that a mighty fortress rose: the headquarters of the modern day equivalent of Mikawa's feudal warlords. Within are the rainmakers who run the world's second-largest automaker. Just upland from thousand-year-old rice paddies, amid the remnants of an ancient red pine forest, lies the Spartan headquarters of Toyota Motor Corporation. And it was here, on a simmering August day in 1983, that the company's senior-most officers deliberated a calculated gamble to tinker with a successful strategy of producing budget vehicles for a mass market, and spending billions of dollars launching a single luxury car.

It was not a decision taken lightly. The populace of Nagoya—and, to a more limited extent, the whole of Japan—looks to Toyota Motor as a powerhouse, one which anchors the economy of the industrial heartland between Osaka and Tokyo. The latter day samurai who run this corporate giant are credited with keeping the sons and daughters of Mikawa off the farm and in high-wage jobs with good benefits. This, in turn, fills local tax coffers and has spawned an industrial complex of thousands of affiliated businesses—from tire makers to taxicab companies. “Companies in this city have long been protected by their parent company, Toyota,” said Nobuhiko Narita, director of Toyota City's industrial and labor policy division. Altogether, this “parent company” alone directly employs some 71,567 workers in Japan. But it employs 320,590 worldwide through its affiliates spanning the globe. Indeed, these days it sells far more cars in North America than it does in its home market. In the past 30 years, Toyota Motor has grown from a niche player in the market for cheap compact cars into the world's largest automaker, surpassing General Motors in 2009. Recently, it boasted a 17% share of the market in the U.S. alone in its quest to clear 15% globally by 2010. Increasingly, the Toyota group has a car for every segment, be it 660cc engine Daihatsu minicars such as the Naked model, designed for the narrow streets of Tokyo, to the hulking and Hummer-like Mega Cruiser (with 37-inch tires), for use by Japanese military forces, or the 20-ton Hino Profia Teravie heavy-duty truck for long-haul cargo. That's to say nothing of the Camry, America's most popular car for the past eight years. In the 2000s, Toyota Motor became one of the most profitable companies on the planet and enjoyed a market capitalization as high as US$147 billion in July of 2008—greater than that of Ford Motor, General Motors and Chrysler combined. GM and Ford in the early-to-mid 2000s both earned more from sideline businesses such as their financing units than through car-making per se. Unlike them, Toyota Motor has remained faithful to its core automotive business, which accounted for more than 90% of its profit and revenue (at one point pre-bankruptcy GM earned only 7.6% of net income from its car-making operations).

Circa mid-2010, the automotive landscape in Detroit has been radically altered. Cerberus Capital Management-owned Chrysler filed for bankruptcy in April of 2009 and later that year handed over control to Italy's Fiat. GM followed Chrysler into Chapter 11 and emerged with a new management team selected by its majority owner—Uncle Sam. Today, the U.S. Treasury Department still owns 61% of GM and 8% of Chrysler. Ford managed to avoid bankruptcy, but has undergone a massive restructuring under former Boeing executive and current CEO Alan Mulally, who has cut the automaker's workforce by 47% since 2006. A streamlined and more fiscally prudent Big Three now pose a much different challenge to Japanese and other import brands, especially since their vehicles' quality ratings are at least as good—if not better—than many Asian and European automakers.²

Of course, Toyota Motor faces an especially steep uphill climb to redeem its good name following massive recalls in late 2009 and early 2010. It seems clear that where it went astray was in deviating from what made it so strong in the first place: its longstanding commitment to what's known in Japan as mono-zukuri, or “making things.” It's an almost quaint conceit that places a higher premium on pride of craftsmanship than profit-making prowess. It is at the heart of Toyota Motor's famous but still too little understood production system and it serves as an important counterweight to the company's better known objective of efficiency. Whereas efficiency lies behind Toyota Motor's success cranking out cars as a mass manufacturer, mono-zukuri is what has made its vehicles so special in the eyes of carbuyers. Teruyuki Minoura, a former senior managing director at TMC and the recently retired president of Daihatsu, has said that, “When we talk about mono-zukuri at Toyota, it is more than just manufacturing. It involves the idea of creating a product. It implies a love of creation. It also encompasses the sense of craftsmanship: making and crafting a product with expertise and with high quality. At Toyota, we believe what makes human beings different from other animals is our desire and ability to ‘manufacture’, in this larger sense.” Expanding on this metaphysical discourse, he went on: “Without manufacturing, we believe, there is no civilization. From the simple tools of the Stone Age to today's high-tech space shuttle, it's all part of the same continuum. In order for human societies to continue to prosper, we must continue to have manufacturing.”³

In other words, what Toyota Motor seeks to do best is harness technology and execute it as if the skill of making things were an art form in and of itself. Most of what Toyota Motor makes is manufactured in-house—or in tightly orchestrated cooperation with its close-knit keiretsu family of suppliers in which it owns large ownership stakes. This includes not only longtime satellite companies, such as instrument-panel manufacturer Toyoda Gosei Co. and brake-maker Aisin Seiki Co., but also foreign companies, which have developed strong working relationships with the group. Ohio-based ball-bearing maker Timken Co., which supplies Toyota Motor's North American factories, is among them. All believe strongly in the importance of actually making the things they sell, and each works hard to forge long-term relationships that extend beyond any one car project. Until the mid-2000s when balance sheet considerations began to take primacy, this meant jointly designing parts for new models under development, and collaborating—not cracking heads—to reduce costs through innovation and greater efficiencies. That was a far cry from pre-2008 Detroit's top-down number cruncher approach, which demanded across-the-board cuts from harried suppliers. Not all U.S. suppliers toed that line. “We are dedicated to the entire relationship; from product innovation to service and support,” John Dix, a Timken vice president of automotive business development, has said.⁴ That sentiment, which harkens back to a day when spreadsheets were called “worksheets” and executives weren't afraid to get their hands dirty on the factory floor, seems to be coming into vogue once again. Not only at the born again Big Three, but also at a newly chastened Toyota Motor.

Origins of Lexus

For most of its history Toyota Motor maintained a fairly traditional approach towards business fundamentals by hoarding cash and expanding slowly, but over the past decade it underwent a tremendous transformation. From a market-share and revenue-driven mass manufacturer, it became a lean, mean profit-making machine unafraid to tap into a US$30 billion war chest to take on GM and all other comers. Starting around 2003, Toyota Motor jettisoned its low-but-steady earnings philosophy in the passionate pursuit of profits. Consider that its operating profit margin rose from a mere 2% in 1993 to 8% in 2003 (then back down to 0.8% in 2009). That earnings trajectory closely mirrors the fortunes of the Lexus brand in the U.S.

The tectonic shift toward higher profit margins vehicles at Toyota Motor dates back, in large part, to a hush-hush board meeting at the company's headquarters in August 1983. At that top-secret session, Toyota Motor's top brass debated a car project so sensitive it was codenamed with an encircled letter F, or maru-efu (later known internally as the F1 program—no relation to the Formula One circuit). That nom de guerre was a nod to its make-or-break status as the company's (F for) flagship, No.1 vehicle.⁵ Chairman Eiji Toyoda posed a question to the august gathering of senior executives, designers, engineers and strategic thinkers—the Toyota Motor joint chiefs of staff. “Can we create a luxury car to challenge the very best?” he asked. To a man, the assembled generals of Toyota Motor's far-flung empire answered in unison: Yes—“A ‘yes’ full of conviction. And more: Toyota must take on this challenge,” as the official Toyota history tells it.⁶ In fact, however, not everyone was sold on it from the start. Shoichiro Toyoda, the son of the company's founder and successor to Eiji as president and chairman, had some initial misgivings. He wanted to stick with what Toyota Motor did best—build cheap cars for the everyman.⁷ But Shoichiro, like most others who may have had initial misgivings, later changed his tune. “The question has been put to me that, with all of Toyota's success in the United States over the past 30 years, why did we spend billions of dollars, and invest thousands of man-hours in research and creative designs to launch a new line of elegant vehicles? Perhaps you have heard that I am not fond of riding in limos built by someone else,” he jokingly told a gathering of American dealers shortly after the debut of the first Lexus. “From here on, I no longer will have to ride in vehicles made by Cadillac or Lincoln or Mercedes-Benz.”⁸ Eiji Toyoda's controversial decision to move upscale ultimately hit the jackpot. Not only is Lexus the most profitable division of Toyota Motor, one that auto industry analysts estimate accounts for up to one quarter of the entire company's annual earnings, it is one of Japan's most profitable export goods. As Fortune wrote with great foresight 20 years ago: “The inside tale of how Lexus came into being is rich in lessons for anyone who yearns to develop up-market products.”⁹

A cousin and protégé of the company's founder, Eiji Toyoda became transfixed by the idea of a luxury car in the summer of 1983 as he sifted through his thoughts while organizing a book to commemorate the company's 50th anniversary. To him, it seemed a natural progression, especially since at that time Toyota Motor had taken an 8.1% share of the global market—more than any other Japanese carmaker at that time. “Toyota,” as the company notes somewhat modestly in a confidential internal analysis, “was on the rise in both size and standing.”¹⁰ But the chairman didn't embark on the odyssey to create a luxury car from scratch on a whim. He knew all too well that any upscale car Toyota Motor produced would have to be every bit the equal of the Mercedes top-end S-Class or BMW's vaunted 7 Series sedans. The downside risks were substantial. It would be fantastically expensive to engineer a luxury car and its new, high-powered engine with little to go on but hunches and a vague sense of marketplace demand. Even if Toyota Motor got everything right under the hood, the car would need to excel in areas such as creature comforts and opulent styling inside and out—areas that were not exactly the company's strongest points as a budget-friendly car maker.

An even greater challenge had to do with reputation. Toyota Motor had no track record whatsoever in the luxury car business. It would be asking a lot of buyers to lay down tens of thousands of dollars on a stepsister vehicle to the comely Corolla. This was a risky proposition considering that the dominant players traded off their established brand names and rich heritages to sell cars. Would anybody pay top price for a Toyota, even one sold under another name? It was an open question. “Getting the Lexus out of Toyota, whose forte is rolling out wheels for the world's millions, is like producing Beef Wellington at McDonald's,” sniped Fortune in a less clairvoyant remark.¹¹

It was more than a philosophical matter for Toyota Motor because of the money involved. The company, while comfortably in the black, could ill afford to pursue a misguided vanity project. But some argued it stood to lose more from staying out of the luxury market than by jumping in when its most loyal customers—baby boomers—were moving into their peak earning years and would soon be looking to buy more expensive cars. Toyota Motor wanted a high-end product line to prevent these loyal customers from defecting to other brands. The idea was to build a gilded bridge between the compact-car buyers of today and the luxury-car buyers of tomorrow. What's more, it also needed to safeguard its revenue in an era of increased U.S. import barriers, to stay neck-and-neck with Japanese rivals who were planning their own luxury lines, and to keep its engineers motivated with new challenges. At home, it sold the stately Century, a boat of a car with a 5.0-liter V-12 engine, used to chauffeur Japanese CEOs and cabinet ministers around the crowded streets of Tokyo. The often empty front passenger seat on this and other Japanese luxury cars was built with a removable cushion so that the back-seat passenger could stretch his legs through to the front seat. But at the equivalent of US$125,000, the car was deemed too expensive to compete in the mass luxury market in the U.S. Besides, Toyota Motor needed to update its export line-up with a car-lover's car designed primarily to be driven by its owner, not a stately limousine to be driven around in.

Most importantly, Toyota Motor smelled opportunity. Existing producers of luxury cars had grown fat, happy and increasingly out of touch with the demands of a new generation of car buyers. So, in a move that spared no expense and cemented his legacy as one of the automotive world's greats, Eiji Toyoda gave the order to move into the luxury market.¹² Six years and half a billion dollars later, the very first Lexus was born. To Toyoda, it was not a matter of cost, only a matter of time. In his words: “For us, this was not only a tremendous challenge and a dream to fulfill but also an inevitable decision.”¹³ Yet even the most zealous proponents of a Japanese luxury-car program in the early 1980s could scarcely imagine what Toyota Motor would unleash upon unsuspecting rivals a decade later. The company's luxury division, the Lexus brand, has grown from a car enthusiast's afterthought into the leading luxury brand in the U.S. It usurped Cadillac for that title in 2000 and has kept it ever since. In its debut year in 1989, sales of the untested brand's two models—the flagship LS and entry-level ES sedans—totaled just 16,302 cars. Two years later it became the best-selling luxury import in the U.S. and had added a third model, the SC coupe. Today, just over two decades since the brand debuted, millions of vehicles sporting the Lexus L are being driven on the roads of America, a testimony not only to the brand's popularity but also the durability of its cars. Indeed, it is not uncommon to see a vintage 1990 model year LS 400 or ES 300. Today, Lexus has expanded from the first two pioneer models to an industry-leading fleet of nearly a dozen different cars and SUVs, three of which have been added within the past two years.¹⁴

Catering to the Masses

Not so long ago the word “premium” was never used in the same sentence as a Japanese brand name. That was true for any number of household products in the 1960s and 1970s. Many of the trinkets stamped “Made in China” today carried a “Made in Japan” stamp back then. But the stigma of being seen as a maker of cheap and bland products was especially true for Japan's small and underpowered automobiles. The key to Toyota Motor's success historically had always been selling large numbers of mid-range cars with mass appeal. While Toyota Motor sought to expand its horizons beyond that with Lexus, it used some of the same basic strategies in the luxury segment as it did in the low end of the market. Rather than seeking to outmaneuver Detroit with larger engines and gimmicks, fo...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Introduction and Acknowledgments
• Foreword
• Chapter One: The Toyoda Way
• Chapter Two: Searching for Bobos
• Chapter Three: Deus ex machina
• Chapter Four: From Tahara to the World!
• Chapter Five: The Lexus Covenant
• Chapter Six: Zen and the Art of Automobile Maintenance
• Chapter Seven: Something Wicked This Way Comes
• Chapter Eight: Lexus Nation
• Epilogue
• Afterword
• Coda
• Appendix: The Lexus Lineage (1990–2011)
• Endnotes
• Lexus: The Luxury Division of Toyota
• Index