The Near Death and Revival of Lexus

Toyota had high expectations for Lexus, and could you blame them? It took them six years and $1,000,000,000 to bring the LS400 luxury sedan to market. I’ve actually covered the development of this car in extensive detail in a video that you can watch here. If you’d rather read about it, then I’ll link an article in the description. The super saloon wouldn’t be touching down in the United States by itself. Launching a new marque with just a single model would have looked a bit strange, so Lexus developed a companion model that would soak up buyers at a lower price point. 

The ES250 uses a similar naming convention as its stablemate. ES is short for Executive Sedan while 250 represents its 2.5L V6 engine. This was no LS, to put it lightly. While that car was designed from the ground up to decimate the competition in every conceivable metric, the ES was a rush job. They took the Japan-exclusive Toyota Vista hardtop, gave it a few upscale touches, and called it a day.

1990 Lexus ES 250. Lexus Pressroom

The first cars hit dealerships on August 2nd. The LS400 had a starting price of $35,000 while the ES250 was a touch over $21,000. The official launch wasn’t until September 5th, but retailers had the go-ahead to sell them as soon as they got them in. Stores would need this extra time if they had any hope of meeting the aggressive sales targets. Lexus wanted at least 16,000 units moved by the end of the year. Money and recognition would serve as fine incentives for this endeavor, but employees at their headquarters in Torrance were working for something else. If they could manage to do so, then Lexus General Manager Dave Illingworth said that he would do karaoke. This was something that everyone needed to see to believe.

Not everyone was optimistic about their prospects. Competitors did whatever they could to tear them down. Karl Gerlinger, BMW’s head of North American operations, said that it was “flattering” that Lexus was aiming at them because it meant that they still saw them as the leaders in the luxury world. Saab’s American chief thought that the LS and ES would be nothing but a pair of “bland Japanese sedans.” Jaguar polled 739 Americans on whether they’d be willing to purchase a Japanese car. Only 39 percent said that they would. I’m not sure how much stock you can really put into this considering that they were directly competing with Lexus, but it could hint at some reservations among car buyers. Even General Motors chairman Roger Smith tried to play dumb. 

“It’s the customer that benefits from the increased competition, so I say to Lexus – or whatever its name is – come on aboard.”

— Roger Smith, Chairman of General Motors (1981-1990)

Dealers couldn’t waste any time thinking about this. They had cars to sell. Instead of waiting for people to stroll into their showrooms, they got in touch with potential customers to gauge their interest in scheduling test drives. Some of them went as far as to bring the cars to their houses for that purpose. It didn’t take long for their hard work to start paying off. Lexus sold all 1,000 of the cars that were delivered to dealerships in August. That wasn’t all. Many Lexus buyers were actually defecting from other brands. A New York Times article by Doron P. Levin contains just a few testimonials. 

“At Lexus of Brookfield, a dealership that opened two weeks ago near Milwaukee, Jack Safro, the owner, said he was not shocked by the scores of buyers who have been willing to spend more than $35,000 to buy Toyota's new luxury cars. What surprises him, he said, is to see what many buyers are trading in: late-model Cadillacs and Lincolns.”

Another passage reads: “Mr. Safro estimated that he had taken about 10 Cadillacs, several Lincolns, and many European luxury cars in trade. ''We've got sore throats and worn-out jaws from talking about the car,'' he said, describing consumer interest in the Lexus. ''It's been nonstop.''

It was also a hit in Japan. Toyota couldn’t use the Lexus badge in this market because it was too close in appearance to Nissan’s own Laurel emblem. As a result, it would have to be sold as the Toyota Celsior. Sales in their home country weren’t likely to suffer from this. The company offered everything from the subcompact Starlet to the range-topping Century.

Lexus LS 400. Lexus Pressroom

Three trims were on offer. Type A was the least expensive way to into one. It came with basic options including air conditioning, 8-way power seats, and a conventional suspension setup. Antilock brakes were optional here, but traction control was off the table. Type B and Type C trims had both of these features as standard equipment. The biggest difference between these two was their suspension setups. They both had variations of the Toyota Electronic Modulated Suspension, or TEMS. This essentially allows for the car to automatically adjust itself based on road conditions. Type C examples had the standard version of this, which was normally soft and got tighter as needed. Type B cars had Piezo TEMS systems, which were normally stiff and loosened up depending on the circumstances.

Lexus was making waves in both markets. With strong sales and impeccable service, it seemed all but guaranteed that the brand would meet its 16,000 unit quota, but it all nearly slipped away. 

THE PERFECT RECALL

The Lexus head office received a panicked call from a San Diego dealership late in September. A salesman and a customer were on a test drive when the cruise control system malfunctioned. It sped up and didn’t stop even when the driver slammed on the brakes. The salesperson sitting beside them had enough wits to disengage it manually, but the situation could’ve ended in tragedy. Lexus hardly had any time to take this in. More calls came in soon after. A store in Texas told them of a malformed tail light housing. Another concerned a dead battery. 

All of this had the potential to derail their fast start. Lexus needed to act quickly. They launched an investigation and wrapped things up by the end of November. The brake light housing lost its shape because of a combination of heavy usage and prolonged exposure to the sun, the battery died because of a loose connection to the alternator, and the faulty cruise control system was the result of a manufacturing defect. They hadn’t received any more calls about serious build quality issues, but Lexus employees were still worried. Surely there were other faulty cars out there. Just imagine if there was another faulty cruise control system out there. 

This wasn’t a chance that they were willing to take. They needed to perform a recall, but there was no way for them to know which cars were affected, if any. Lexus also couldn’t wait around for something else to go wrong. So on December 1st, 1989, the company issued a recall of all 8,000 LS400s that had been sold up to that point. Some among their ranks didn’t think that this was necessary. No high-profile car launch goes off without a hitch. In their minds, they were lucky that they only had those issues to contend with. 

Lexus was not about to sweep this under the rug. Not after what happened with Audi. A few years before this, a few Audi 5000 owners complained that their cars would suddenly accelerate when shifted from “park” to “drive” or “reverse.” The company couldn’t replicate the problem in their own testing and, rather than issuing a recall, placed the blame on the owners. This was just about the worst thing that they could have possibly done. This went from a dust-up between a handful of owners to a national affair. New York Attorney General Robert Abrams stepped in to field the ever-growing pile of complaints. A 60 Minutes special brought the entire country into the drama. Owners even formed an Audi Victims Network in order to pressure the company to issue a recall. They finally folded after a year. Governments worldwide later determined that it was actually due to driver error. This didn’t help them feel any better. The upscale image that they’d spent decades building up was gone. It took them decades more to recover. 

The Audi 100 was sold in the American market as the Audi 5000. Audi MediaCenter

For Lexus, a complete recall was the only choice on the table. This required a herculean level of planning and coordination. To get everyone on the same page, the office in Torrance organized a massive conference call with every principal franchise owner. One of them was tuned into the conversation while on his yacht off of the Florida Keys.

There was a very tight turnaround window. Lexus wanted all of the parts replaced by Christmastime. Dealerships were very proactive in letting every owner know of the impending recall, first with a phone call. If that didn’t work, then they’d receive a letter in the mail urging them to bring their cars in for repair. Once they were checked in, retailers had loaner cars on demand to make up for the inconvenience.

Lexus was able to turn this disastrous situation into a public relations boon. A 1990 Time article by S.C. Gwynne describes the lengths that some of the dealers went to in order to get the parts replaced.

“To serve 10 Lexus owners in Grand Rapids, 150 miles away, dealer Meade flew in technicians, rented garage space, fetched the cars, fixed them, washed them, and sent them back home.”

It all went off without a hitch. Lexus managed to replace the parts for 95 percent of the cars in time for the holidays. What happened to the other five percent? Dick Chitty, the man that oversaw the whole endeavor, has the answer.

“The only reason it wasn’t a 100 percent completion rate is that GM, Ford, and Chrysler bought several of the cars and had them dismantled [for study]. We couldn’t believe they bought that many.”

TheHear. Lexus managed to move 16,302 cars. I think you know what’s coming up next. I’ll let Chester Dawson, author of Lexus: The Relentless Pursuit, take it from here.

“Illingworth kept mum about his pledge until one morning in March 1990 when, most unusually, he called in sick. He left word with his secretary that someone would be filling in for him, but didn't say who. Later that day, a stranger wearing sunglasses and a black fedora strode regally into the spacious, two-story atrium of the Lexus Division building in Torrance, followed by a three-man band. Before anyone realized what was happening, the sound of Illingworth's off-key crooning sounded throughout the building, as he belted out his take on the Elvis Presley hit and karaoke standby “Hound Dog.” He had fulfilled his part of the bargain, semi-incognito. Not surprisingly, he was never again asked to reprise the role.”

EARLY SUCCESS

The early 90s were very eventful for Lexus. They launched in the United Kingdom at the turn of the decade. Their operations out here were surprisingly low-key. Only 41 dealers were established when Lexus launched, and while they were standalone locations, all of them shared space with Toyota shops. The LS was their sole offering in this market. Lexus didn’t offer the ES, and they wouldn’t do so until 2019.

Lexus LS 400. Lexus Pressroom

The LS wasn’t the screaming deal here that it was in the United States. Import taxes brought the asking price to just over 34,000GBP. Some European officials thought that even heavier fees were needed. They believed that Toyota was “dumping” the car onto the market at a loss in a bid to gain market share. France’s minister of European Affairs wanted additional taxes on a car. Anything less would mean “the murder of the European car industry.”

The car was well-received, all things considered. Magazines praised its smooth ride and overall refinement but knocked its steering feel and light brake pedal. Its “prestige”, “image”, and “heritage” were scrutinized, but these could only be brought up to speed with time.

Their fortunes were even better across the Atlantic. In 1990, their first full year of sales, Lexus sold 63,534 cars. 

A third model was added to the range the following year; the SC400. I’ve actually touched on the development of this car in my article on Calty Design Research. If you’d like more information then be sure to give it a read. In some respects, this car was nearly as revolutionary as the LS. The coupes in European model ranges commanded a premium over their sedan counterparts. They also shared bodywork among their model lines. This was just how the industry operated until the SC400 hit the scene. It looked worlds apart from anything else in their lineup and also cost $1,500 less than the LS400. The SC300 launched a few months later, which brought the asking price of the luxury coupe down even further. The line found an opening between premium offerings like the Acura Legend Coupe and high-end machines like the BMW 8-series. It even took home Motor Trend’s Import Car of the Year award that year. 

Lexus SC 300. Lexus Pressroom

Lexus added another car to their range in September; the ES300. It replaced the Camry-derived 250 and was a much stronger attempt at an entry-level luxury sedan. About 71,000 cars found buyers this year. This was good enough to make them the country’s top-selling luxury import. While they were a bit behind their sales target of 75,000, it was as much as they could have asked for considering everything they’d been through up to this point. This was in spite of increased costs. The LS400 quietly crept up from its original base price of $35,000 to about $42,000 by fall. It could exceed $50,000 with all of the options installed.

They had a 7.1 share of the luxury car market, which was a significant increase from the 1.5 percent share that they had in 1989. The end of the year was capped off by a trio of awards from J.D. Power. Lexus ranked first in customer surveys on sales satisfaction, initial quality, and customer satisfaction. It was the first time that anyone had achieved this feat. 

DECLINE

No one could have predicted their meteoric rise. Their unraveling was equally unexpected. It started inconspicuously enough. The Lexus flagship received an update in September of ‘92 that pushed the price to $46,660. It was nudged out of its original price point and now had to make a very different proposition to consumers. Lexus needed something that would slot into that $35,000 vacancy.

This came in the form of the GS300. The Italdesign-styled sports saloon was less of a “mini LS” and more of a focused sports sedan in the same vein as the BMW 5-Series. It was lauded for its driving dynamics and tidy exterior, but there was one glaring issue that spoiled its introduction and hamstrung its success in the market: its price. The $37,500 base price was actually $3,000 higher than a comparable BMW 525i. It didn’t matter how good it was. Being more expensive than the quintessential mid-size sports sedan was a death sentence. It became an also-ran as soon as it was released in 1993. Sales peaked at a little over 19,000 in 1993, tumbled to 14,000 in 1994, and then to about half of that by ‘95. Other Lexus models were losing the numbers game as well. By 1994, the LS was selling for more than $50,000, the SC and GS for more than $40,000, and the ES for well over $30,000. 

Lexus GS 300. Lexus Pressroom

The competition only exacerbated the issue with redesigned cars and reduced prices. German automakers were gunning for Lexus, but a new segment of vehicles was also gaining favor with car buyers. Mainstream automakers like Nissan, Mazda, and Mitsubishi were creating luxurious full-size luxury sedans that appealed to cash-conscious consumers. 

Perhaps the biggest threat to Lexus was… Lexus. Used models were starting to hit the market and they presented an unbelievable value. Their quality was a blessing and a curse. Why would someone pay for a new model when they could pick up a second-hand one for much less? The company was at least able to plug up this hole. They pioneered the concept of “certified pre-owned” cars. Dealerships took in many of the trade-ins that would otherwise go to third parties, inspected and reconditioned them, and sent them onto the lot with an extended warranty. All of this justified a higher price in their eyes, which dissuaded people from buying used a pushed them to spend a bit more for a new one. This, in turn, softened the blow of depreciation because the certified program propped up the prices of used models.

Even with this program in place, Lexus was still deep in the hole. Fortunately, work on the next-generation LS was well underway. They had the chance to shore up some of the car’s weaker aspects and create something really compelling. Initial design work reflected this. Some of the scale models that came out of their Japanese design studios previewed a radical revision to the LS. As the development cycle progressed, it became clear that a more conservative redesign was all but inevitable. The final three proposals weren’t very far removed from the outgoing model. You might consider this to be a squandered opportunity, but the company was more focused on building upon what it already had. Chief exterior designer Makoto Oshima said:

“Our greatest aim for the exterior was to improve the level of comfort. We tried out totally different looks and were sometimes excitedly convinced that this was how the new generation should be. But when we examined the idea more calmly, we realized that this was not the LS400. We wanted to be told that the new LS was a deeper interpretation of the original.”

Kazuo Okamoto, the person in charge of the entire project, emphasized the importance of establishing an identity. 

“This Second Generation LS400 is the first step towards establishing a tradition, so we needed to carry that over and deepen the LS’s identity. A tradition cannot be founded if you reject the First Generation”

— Kazuo Okamoto

2nd Generation Lexus LS400. Lexus Pressroom

The car was mechanically superior in every way to the previous model. It had a lighter, more powerful, more efficient engine. They also managed to bring down the already impossibly low coefficient of drag down to .28, which was the lowest of any production car sold in North America. Weight was reduced by five percent. Costs were an obvious pain point, so exotic metals like aluminum were off the table. Instead, they reduced the total number of components by 10 percent. This was achieved through the use of larger parts and stampings. Despite all of this, it didn’t have nearly the impact of its predecessor. That car was a revelation. This one was just very good. The Japanese Yen and improved competition made the prospect of reinventing luxury automobiles impossible. Instead of becoming an icon, it simply fell in line. 

Sales fell from a record high of 94,677 cars in 1993 to about 87,000 cars in 1994. This was well below expectations. Toyota estimated that the brand was going to move 100,000 cars that year. Things looked downright cataclysmic in 1995 when they sold just 79,000 units. Slowed growth would have been concerning. Stagnation would have been disturbing. Contraction of this magnitude? Absolutely devastating. To make matters worse, their profit margins were getting slimmer because the bulk of their sales came from the gateway ES300. It was definitely looking bleak for Lexus, but car companies have come back from worse situations before. So Lexus dusted itself off, got its bearings together, and… saw Bill Clinton climbing onto the top rope. 

Crumbling trade relations between Japan and the U.S. were finally coming to a head. Japanese automakers were asserting their dominance in the American market. At the same time, foreign cars made up just three percent of overall sales in Japan. Politicians in the United States sought a greater balance. Negotiations were at a standstill for two years. Things didn’t get off the ground until 1995 when the Clinton administration proposed aggressive tariffs on Japanese imports. Luxury cars were a prime target. US trade representative Mickey Kantor proposed duties no lower than 25 percent and as high as 100 percent. Every Lexus model on offer would be affected. If the tariffs were on the high end of the spectrum, then the base price of the LS400 would shoot up to about $62,000. A fully-loaded model would approach six figures. The worst part? These tariffs would have retroactively applied to anyone that purchased a car as far back as May 19th. The two countries would have to act quickly if they wanted to come to a compromise before the June 27th deadline.

(1993) Bill Clinton, half-length portrait, facing front, at podium. , 1993. 17 Feb. [Photograph] Retrieved from the Library of Congress, https://www.loc.gov/item/95509403/.

The mere threat was enough to affect the market. While sales of Japanese cars fell as a whole, Lexus actually experienced a slight bump in their numbers. Many people thought that this would be the last time they’d be able to get one at their current price–or at all. This would be a small consolation. With prices going through the stratosphere, sales would dry up and jeopardize their future prospects. Acura and Infiniti stopped shipping cars to the States. Lexus took a different approach.

They continued to send cars to the country in the face of impending doom and gave dealerships emergency subsidies on the chance that the provisions went through. They also reduced ad spending and offered the GS300 to rental agencies. These moves gave them a financial parachute, but they also blemished their reputation. Some within the company were willing to go a step further in order to ensure their survival. Talks of selling Toyota models that wouldn’t be subject to the duties in Lexus showrooms were floated around. When chairman Eiji Toyoda was presented with this plan, he just sat silently in his seat, stonefaced and shocked that someone would even consider that course of action. Someone else present at this meeting surmised his superior’s feelings on the matter.

“From the standpoint of Toyota Motor’s financial wherewithal, we can take the loss of revenue [from any sanctions]. But what we can’t take is the torpedoing of Lexus’ carefully-crafted reputation as a luxury brand.”

The United States and Japan were deadlocked. The tariffs seemed unavoidable, but they came to an agreement at the 11th hour. Considering all of this pandemonium, the conclusion was a bit anti-climactic. Japan agreed in principle to ramp up car production in the States, import more American-made parts, and put more effort toward selling foreign vehicles. The details didn’t matter to Lexus. The important part was that the tariffs were off the table… for now.

RESURGENCE

The trade debacle was probably a good thing for Lexus. They were actively searching for ways to circumvent future tariffs, should they find themselves in that situation again. At the same time, a new trend was taking hold of the automotive industry. Sport utility vehicles were exploding in popularity. Cars like the Ford Explorer and Jeep Grand Cherokee were establishing themselves as industry heavyweights. Slim pickings at the high-end of this segment meant that buyers had little choice but to get a purpose-built off-roader. Lexus owners wanting a car like that were defecting to other manufacturers. A Lexus-branded sport-utility was the obvious next step.

1991 Ford Explorer. Ford Media Center

They fast-tracked the development of the car, so creating something from scratch wasn’t considered for long. Lexus identified three Toyota products that would serve as a suitable foundation. The intermediate 4-Runner and international Prade were considered, but, in the end, Lexus decided to go with the Land Cruiser. They couldn’t do too much to differentiate the Land Cruiser from the LX450, but it did at least have a softer suspension, additional soundproofing, leather, wood trim, and dual airbags. It also had a base price of $47,500, which was nearly $8,000 more expensive than its sibling.

A lot was riding on this product. By the time the LX450 went on sale at the beginning of January, Lexus hadn’t launched a new product in about 20 months. By the end of the month, they’d completely sold out of their stock of the car. At year’s end, they moved 7,528 of them. This represented about 10 percent of their sales in ‘96. 

This was just the first step the company took to regain its composure. Lexus also pulled the GS300 from rental lots and introduced a new ES300 in September. At under $30,000, it was $2,500 cheaper than the outgoing model. 

TOP TO BOTTOM: LX 450, ES 300, GS 300. Lexus Pressroom

It was joined by a completely redesigned GS300 in the middle of 1997. Sales of the outgoing model were so dismal that Lexus actually considers dropping it. They decided against this and instead redesigned it from the ground up. It came in at a more competitive price that actually undercut that of its rivals. Year over year sales nearly quadrupled from 7,718 in 1997 to 30,622 in 1998. A new LX470 gave them a second wind in the luxury SUV space.

Lexus was definitely back on its feet, but none of the aforementioned cars were nearly as important as their next one. The breakaway successor the RAV4 had them wondering if there was untapped potential in the SUV market. Product planners envisioned something that combined the ride height and clearance of an SUV with the driving dynamics and fuel economy of a sedan. They wanted a crossover. The blueprint for this kind of car wasn’t fleshed out in the early 90s. A few months before the design had to be finalized, product planning manager George Borst flew to Japan to check the progress of the car. He hated it. My sources differ a bit here. Lexus, The Relentless Pursuit says that he told them to start over from scratch. They mostly ignored him and only implemented some of his feedback. The Lexus Story, meanwhile, says that they crushed the product and started over.

Lexus RX 300. Lexus Pressroom

At any rate, the RX300 was a smash hit as soon as it hit the market in March of 1998. 42,000 found new homes by December. In 1999, they sold about 73,000 of them. And in the year 2000, they sold nearly 90,000 of them. Lexus broke the 200,000 unit mark, overtaking BMW and Mercedes to become the top-selling luxury brand in the United States.