So the story goes on Reddit that when Toyota
released the first Lexus (レクサス) LS 400 in 1989, Cadillac engineers from GM took the car apart. Their analysis concluded that such a car could not
be built using their company's existing methods. I cannot confirm this story, which appears in
a business strategy book without provenance. But nevertheless, the LS 400 and its
cohort changed automotive history. It was an incredible car at an amazing price. In this video, we look at how Toyota blew open the
luxury car market with the legendary Lexus LS 400. ## Beginnings It is the 1980s and the American
market was in a bit of a funny state. In the prior decade, a confluence of things
staggered Detroit and propelled Japanese-made car imports to prominence. The Oil Crises
of the 1970s and the new fuel standards that followed. The major quality gaps between
Japanese and domestic American cars. So on. The US government eventually intervened. In 1981,
the Reagan administration negotiated the voluntary export restraint - capping the number of cars
imported into the United States from Japan. As I covered in a previous video, the new
Voluntary Export Restraint incentivized Toyota, Honda, and Nissan to open factories in the US.
So that was in progress throughout this timeline. But the VER also incentivized them to
make luxury import cars. These compete less on price than on distinctive
features like performance, "feel", or comfort. So they tend to have better profit
margins, and so are more suited for imports. The Japanese carmakers also saw
a potential danger. In 1981, BMW entered Japan’s luxury car market.
It started off slow, but by 1987, BMW was Japan's top-selling foreign car
with over 15,000 units sold each year. It was a warning to the Japanese car companies
that tastes can change. And they were, in fact, changing. If they did not go upscale,
then someone else might do it first. ## American Luxury Cars
The big issue however was that Toyotas, Hondas, and Nissans were still largely perceived in
the American market as small, economy cars. And the existing competition was
substantial. In the mid-1980s, the American luxury car market was dominated by
companies from two countries - the US and Germany. 70% of luxury car sales were from the
American companies - General Motors and Ford. From General Motors, you had
the flagship luxury Cadillac division. The Cadillac brand dates back to 1902 and
is known for its comfort and prestige. From Ford, there was the Lincoln luxury brand,
which competed head-on with the Cadillac. General Motors' corporate strategy
targeted various niches using brands. So "below" the Cadillac, General
Motors had the Buick and Oldsmobile luxury car brands. These were entry-level
luxury brands, a bit more understated. So that was 70% of the market. Most of the rest
were German cars - Mercedes Benz, BMW, Audi, and Porsche. People who bought those cars appreciated
how fun and enjoyable they were to drive. I'll get into more of the differences later,
but generally speaking. The American luxury cars focused on comfort and prestige, and
the European cars focused on raw oomph and performance. Image matters so much here.
As the President of Porsche America said: > "Nobody needs a Mercedes-Benz. Nobody needs a Porsche. These decisions are
made on very emotional factors" ## Honda and Nissan As seems to be so often the
case, Honda took the first step. In 1983, they started a new division
- originally code-named Channel II and later renamed Acura. Its slogan
was "Precision Crafted Automobiles". The design intent was to make sporty cars
with the goal of satisfying the most demanding drivers. To sell the brand, Honda set up an
entirely separate automotive dealer network. The first Acura cars arrived in 1986 - the Legend
and the Integra. With their flagship Legend car, Acura wanted to make a big, luxurious
car that competed with the Europeans. The base price was around
$19,500 or $55,000 today. This was a few thousand dollars below
the American and German luxury cars, targeting up-and-coming consumers who
still can't yet afford those cars. The Integra on the other hand was upmarket
but still affordable. Reviews called it an all-around good sporty hatchback that
impressively managed to squeeze a lot of performance out of a smaller engine. Its base
price was $10,500 which is about $30,360 today. In its first full year of sales in 1987, Acura
sold 109,000 cars - more than Mercedes-Benz or BMW. About half of those were the
flagship high-margin Legend cars. Acura's success validated the strategy.
The difficult 1970s were over. Americans were indeed getting richer, and
they wanted to show it off. Nissan began working on their Infiniti luxury
brand. And then there was Toyota ... ## The Toyopet Crown Debacle Toyota had actually once tried to break
into the luxury car segment many years ago. In 1958, they brought their "high-end" Toyopet Crown car to the United States - their
first import. The car had sold well in Japan and Toyota management felt confident
that it could compete in the United States. They launched the car with great fanfare and
high expectations. It looked like a Cadillac, and the first units were displayed and
sold in glamorous Hollywood, California. The price was set at $1,999. With the
average American family making about $5,100 annually back then,
it was definitely a luxury. But the Crown flopped in America. The car
could not live up to its lofty price. Famously, it suffered severe engineering issues in America. The Crown had been designed for Japan's
then-unpaved roads. But on American roads, the Crown was very underpowered. Its
top speed was about 60 miles an hour, and thus it could not keep up
with other cars on the highway. And if it did hit that speed, the
car's body would shake so violently that you supposedly could not look
out through the rear view mirror. There were also cultural issues with the
name. "Toyopet" worked fine in Japan but it contained two words that people did not
think of as luxurious - "toy" and "pet". In its first year, Toyota sold only 287
units. Sales improved the next year, but not enough. After less than two years and 1.4
million dollars lost, Toyota withdrew the car. As a result of the debacle,
the company later adjusted its product development and launch
strategies. It was a hard lesson for the company in fully understanding
and catering to local driving cultures. After adjustments, the Crown did eventually
find success as hardworking taxi and police cars. Today, it is one of the
oldest nameplates still on sale. ## The Meeting Going into the 1980s, Toyota did
not have a luxury car on sale. Toyota's most popular car was the $13,500
Camry. Their most expensive car was a $16,000 Cressida. Both of these are small
compact cars with a relatively low max speed. But in 1983 - the same year that Honda began work on the Acura brand - Eiji Toyoda held a
secret meeting at Toyota's headquarters. Eiji Toyoda was the cousin of Toyota Motor founder
Kiichiro Toyoda. He succeeded the company after Kiichiro's passing. Eiji had recently stepped
down as President but remained Chairman. In this secret meeting, he asked the company's
top designers, engineers and managers, "Can we create a four-door luxury
car to challenge the very best?" The team said "yes", and they truly believed that. But just because they could doesn't
mean they should. This effort would cost hundreds of millions of dollars
and thousands of man-hours of R&D. Shoichiro Toyoda - Kiichiro's son and Eiji's
successor as President - had wondered at the time if Toyota should stick to its
bread and butter of making good, cheap cars. Would Americans buy
a high-end machine from Toyota? But Eiji Toyoda believed that the time had come.
Toyota and other Japanese cars had come a long way. Their engineers craved a new challenge -
something to push the limits. And thus started the top secret Project F1. The "F" stood for
"Flagship", and the 1 stood for number one. The name has nothing to do with
the Formula 1 brand. It was also sometimes called "Circle F" because
that was how they drew it in the room. The F1 would be Eiji Toyoda's legacy. Over
twenty years after the Toyopet Crown debacle, Toyota will try the luxury car space again. If it failed then it would be a long long
time before they can try once more. ## The F1 Project For a typical new car project,
Toyota assigns a team of 200 engineers at the most and budgets
the project at about half a million. The F1 Project would eventually involve
1,400 engineers as well as 2,300 technicians, 200 support staff, and 60 designers.
And it would cost upwards of a billion dollars. But rumors hinted at
numbers up to three times that. Toyota designed the F1 car from the ground-up to cater to the tastes of a specific type
of American luxury car buyer. In 1985, Toyota sent a market research group to the US
to interview dealers and hold focus groups. The team determined that American
luxury car buyers aged 60 years or more would stick to their Cadillacs and Lincolns. But there was a segment of customers
less beholden to old brands. They were about 45 to 54 years old with an annual
household income of $100,000 or $270,000 today. They desired the performance of
a European car but at a lower price. To craft a high-performance design
that appealed to this buyer, five designers moved to Laguna Beach, California
to study American luxury lifestyles in person. They rented a house overlooking
the Pacific, ate expensive food, watched Asianometry videos, and rented
luxury cars. Sounds pretty nice. But they reasoned that to design something for
that lifestyle, they needed to live it. As it turns out, Toyota management did not
like the designs from that trip. They felt it was "too American" - too aggressive and sporty. So they made it a bit boxier and
taller - with a distinct front grille to make it look more
like a "classic luxury car". ## No Compromises Performance-wise Toyota wanted no compromises. European luxury cars were fast, but less
fuel-efficient. A BMW or Mercedes-Benz can hit 130 or 140 miles an hour but can
only do 20 miles per gallon, or less. In the US, any car that does under 22.5 miles per
gallon would be subject to a gas-guzzler car tax. American cars like Cadillac had better
fuel efficiency - 23 miles per gallon or better. But those cars' maximum
speeds were lower - maybe 115 to 120 miles an hour. As I mentioned earlier, they
emphasize luxurious comfort and prestige. Toyota and its Chief Engineer Ichiro
Suzuki - no relation to the Mariners star but I badly wish there was
- wanted a car that was both. Fast - a top speed of 155 miles which was
higher than what the BMW 735i and Benz 420 SE did. AND fuel efficient - 25 miles
per gallon on the highway. This not only avoided the up to $3,800 gas guzzler tax but
fit the "no compromises" part of their plan. Furthermore, high performance means more
than just speed and efficiency. Toyota also wanted reliability, ease of service, low
weight, low noise, smoothness and flexibility. ## The Engine Key to this was the engine -
the heaviest, most expensive, and thus most important part
of the car. That was a ride. Early in the process, the team chose to use a
compact eight-cylinder engine - called a V8. V8s are well-balanced engines and what all the
other sports cars had. But what size V8 engine? Early iterations in 1985 had a 3.8 liter
V8 engine. It allowed a top speed of 150 miles an hour and just barely skirted under
the gas guzzler tax. It seemed satisfactory. Then suddenly at the last second,
Suzuki received news. Toyota's rival Nissan was also doing a luxury car brand -
Infiniti. And it was rumored - correctly, as it later turned out - to
have a big engine, 4+ liters. So Ichiro flipped his bat and upscaled the F1 car engine to 4 liters. That gave you
more power, but also means a bigger, heavier engine that you must somehow stuff into
the existing design. But Ichiro demanded it. To reduce the engine weight, the team cast the
engine block - which contains the cylinders - in aluminium alloys. They did the same for
key internal parts like the cam covers, cylinder heads, cam followers, and so on. Some of these components - like the cylinder
heads - had never been done this way before. Entire factories had to be retooled with
machine tools and custom-made equipment. Suzuki had to personally approve any
weight gain over a third of an ounce. The final engine - named the 1UZ-FE -
weighed 3,759 pounds - well under the 4,000 pound threshold needed
to beat the gas guzzler tax. In the end, Toyota built 973 prototype engines for the F1 car. It is considered one
of the best V8 engines of its time. ## Manufacturing During the manufacturing stage, Toyota
produced 450 running prototypes and drove them over 2.7 million miles. A hundred of those
car prototypes were crashed for safety tests. At Toyota's flagship car factory Tahara,
the company added 300 more inspections than what any previous Toyota had. The company
designed a new laser-based welding system for it. Unique plates were bonded between the
steel panels in order to cut down on sound. The interior was designed to strike
a luxurious atmosphere between that of American - too plushy - and European
cars - too hard. It took two years to decide on the right wood grains,
tanning methods, and textures. They looked at interior car gadgets like a trip
computer or a TV but vetoed them in the name of simplicity. Just a stereo and cellular phone.
Even the stereo, Toyota said that they spent three years developing - working with the Japanese
Hi-Fi company Nakamichi on a custom option. I can go on and on, and I think there
are some great stories. Like how Suzuki would not give his final approval to
the car unless he personally drove it from Los Angeles to Florida ... via Chicago. But the overarching point is that they put a
lot of effort into this car. Let’s move on. ## The Rollout Toyota first unveiled their luxury
ambitions at the 1987 Frankfurt show, targeting a 1989 release date. To market the car, their advertising
agency Saatchi & Saatchi created a separate sub-team to handle the
marketing. The Lexus brand was finally unveiled on January 2nd,
1988 at the Greater LA Auto Show. There were 1,500 applicants for a Lexus
dealership. Only about a hundred were chosen out of this initial lot.
Toyota focused on applicants who really cared about the customer buying experience. Dealers had to invest up to $5 million in the showroom - including even a media wall
to properly tell the "Lexus story". Later that November, the car was finally
unveiled to the press and given the LS 400 name. LS standing for "Luxury Sedan" and
400 referring to its 4 liter V8 engine. Toyota backed this rollout with a massive
war chest. In its first year of sales, Toyota spent $50 million to
advertise their new line of cars. Adverts played on tropes of masculinity and
up and coming success in the business field. Urban white collar workers who were
getting richer and previously had not thought about owning a luxury vehicle
- as indicated by ad headlines like “Introducing a Lexus for Those Who’ve
Never Seen Themselves in a Lexus". So it was a bit anxious for them
when the Lexus name - chosen for its "luxury" connotations - got into
a legal kerfuffle later in 1988. A company in Ohio - Mead Data Central
- sued them for diluting the trademark for their legal research database product - Lexis. A judge put a temporary injunction
on using the name. Toyota finally won that trademark suit in May 1989 after
a few nail-biting months. Had they lost, the backups would have been Lucidia, Luxul,
Luxel, and Lexia. Which all sound pretty terrible. ## The Response When Toyota first unveiled the LS 400 in
November 1988, Buick's general manager remarked: > "It's not a foregone conclusion Lexus will
succeed ... it's not as good as won. We've been outselling the Honda Acura so we aren't
shaking in our boots. It's one more competitor. The general feeling in the industry had
been similar. Then the car came out, and it was so different that people
could not possibly see it as just another Toyota. Reviews liked its comfortable
ride, agility, turn of speed and quiet travel. The price got a lot of attention. Its
launch base sticker price was $35,000, pushed up in part by a stronger
Japanese yen. People and the press went nuts over this. Who would
ever pay so much for a Japanese car? But the LS 400 was priced $30,000 less
than a Mercedes 420SEL. $10,000 less than a Jaguar and BMW. Buyers flocked to what
they saw as an amazing deal for the dollar. And in true luxury fashion, they paid for
the best possible configuration. At launch, Toyota also had the Lexus ES
250 alongside the LS. Despite being priced at a more reasonable
$21,000, it did not sell well. Basically, the ES suffered the iPhone 5C
effect. The customers simply wanted the better car and could afford it. They
even bought the higher end version with better interiors, straining
Toyota's leather trims suppliers. ## Taking Off Toyota sold over 4,000 LS 400 cars
in the first month of its debut. It seemed like an auspicious start.
But just three months into the launch, disaster struck. Three types
of defects were reported, including two cases involving the
cruise control not turning off. Toyota decided to recall all 8,000 Lexus
LS 400s sold up until then. Toyota sent every LS 400 owner a letter personally signed
by Lexus division manager Dave Illingworth. Then they picked up every car at the owner's home
- leaving behind a replacement car for them to use. After repairing the car, they returned it
with a wash and full tank of gas. All for free. The whole thing was done in 20 days. Dealers
marveled at how efficiently the whole thing was run. The recall turned out to be one of those
things that boosted the Lexus brand in the long run - though I am pretty sure Toyota would
have preferred it not happen in the first place. It did not dent sales momentum. In 1990, its
first full year of sales, Lexus sold 63,000 cars - 3,000 more than its expectation. Unit sales
soared to 95,000 units three years later in 1993. The incumbent luxury carmakers now
faced a set of Japanese competitors offering 90% of the performance
or better for 60% of the price. Combined with a relatively weak auto
market in 1989, the effect was rough. In 1989, Mercedes sales declined by 18%
- despite offering sales incentives of $5,000 or more. Audi sales also dropped
by 21%. And sales of Porsche cars - whose lower end cars faced especially
heavy competition - fell 48%. Sales would later rebound after 1991 as the
Europeans car vendors adjusted to this new competition on the market. For the Americans,
Cadillac and Lincoln declined throughout the late 80s and early 90s. And the long-term shift into
SUVs and trucks began during this period of time. By 2000, Lexus was the top selling
luxury nameplate in America - topping the JD Power and Associates
surveys throughout the 1990s. ## Conclusion Before we conclude ... would you like
to know more? I want to recommend two fascinating books that I leaned on for this video. First was Brian Long's "Lexus: The Challenge
to Create the Finest Automobile"; And second, Chester Dawson's "Lexus: The Relentless
Pursuit". They weren't the only things I read for this, but I enjoyed them
nevertheless. Go buy these books today. Anyway, Lexus and the Nissan Infiniti
brand - which launched just a few months later with a similarly
massive ad blitz - surpassed consumer expectations of what
Japanese cars were capable of. And it blazed the strategy for later car companies trying their own moves up
into the luxury high end. In 2003, Hyundai followed the playbook for the
launch of their high-end brand - Genesis. They even created a Michelin restaurant
inside a car showcase for potential customers. I wouldn't be surprised if
the Chinese EV makers aren't studying it right now for their own future
leap into the American high end. I am going to end it here. Today, Lexus remains
a top tier luxury car brand. And its pioneering LS 400, a legendary car well-liked
by those who owned it. Its launch, a massive leap forward for
the Japanese car industry.
