In one of life's odder ironies, we may have Ronald Reagan to thank for the rise of the Japanese luxury brands.

During the 1970s, the U.S. market share of imported cars rose sharply: from 11.2% in 1969 to 28.2% in 1980. Most of that gain was made by Japanese automakers, principally Toyota, Nissan, and Honda, whose smaller, more fuel-efficient cars fared well during the energy crises of the seventies. At the same time, Ford, Chrysler, and AMC suffered a precipitous decline in revenue that brought them to the brink of collapse. Before long, Detroit was begging Washington for trade restrictions to stem the tide of Japanese imports.

Reagan was ostensibly a free market conservative, but he was reluctant to ignore the outcry of big business. In March 1981, shortly after he took office, his international trade negotiator, William Brock, approached Naohiro Amaya of Japan's Ministry of International Trade and Industry (MITI) to talk about voluntary trade restrictions. Brock made clear that if the Japanese were not willing to voluntarily limit their U.S. exports, the result would be punitive sanctions. Amaya and Brock negotiated a short-term import cap, which would limit the total number of cars each automaker could import to the U.S.

Amaya understood what was at stake, but he also saw an opportunity. Amaya persuaded Brock that the cap should be a fixed number -- initially, 1,685,000 cars -- rather than a percentage of the U.S. market, ensuring that the Japanese would not be penalized if the American market shrank. He also ensured that the agreement restricted only the total number of cars imported, not their size or price.

The deal was a hard sell back in Japan. Toyota executives accused Amaya of being a shill for the gaijin, and Amaya had to prostrate himself in front of Nissan president Takashi Ishihara to convince him not to oppose the agreement. The Japanese automakers finally, reluctantly agreed, and the import cap -- known as the Voluntary Restraint Agreement (VRA) -- went into effect in mid-1981. They were slow to recognize that the deal Amaya had negotiated was actually a golden opportunity.

Up to that point, the Japanese automakers had focused their efforts on the lowest end of the American market. Back in August 1970, Shoji Hattori, then executive vice president of Toyota Motor Sales, told Motor Trend's Eric Dahlquist that Toyota had no intention of moving into new market segments. Toyota did import a limited number of its bigger, six-cylinder Crown sedans, but didn't advertise them, Hattori explained, because it would mean competing directly with American automakers, something Toyota was eager to avoid.

Such self-imposed limitations were more than just a question of business strategy; they seemed to reflect a deep-seated Japanese insecurity about their own products. The postwar Japanese industry was developed with the help of Westerners like W. Edwards Deming, and there were still serious reservations about challenging their one-time teachers head on. Building a market in areas the American automakers largely ignored was one thing, but challenging established Western companies on their own turf was quite another.

That hesitant approach was fine so long as the Japanese could expect their market to grow indefinitely, but now their total U.S. business was artificially capped. The only natural response -- as Amaya had realized during his negotiations with Brock -- was for the Japanese to take their products upmarket.

The process began gradually. Since there were now limits on how many units they could ship, the Japanese automakers ensured that those cars were better trimmed, better equipped, and more expensive than they had previously dared. Toyota launched its six-cylinder Cressida in America, while Nissan introduced the plush Datsun 810 Maxima. Honda got into the act, too, with products like the Accord SE (Special Edition) sedan, with Connolly leather upholstery and fancy Wilton carpets.

The Japanese soon discovered that American buyers whose appetites had been whetted by a generation of solidly built, reliable, frugal economy cars were happy to pay a premium for a better-trimmed version of the same thing -- and were ready to step up to something more.

As galling as the VRA may have been for the management of Toyota, Nissan, and Honda, it seemed to inspire them to bolder things. In 1982, Honda began work on a new six-cylinder luxury sedan, which eventually emerged as the Legend. A year later, in August 1983, Eiji Toyoda, chairman of Toyota, called a secret meeting of his senior executives and proposed the development of a new luxury sedan to challenge the best in the world. Toyoda was not only thinking of challenging the U.S. automakers: he wanted to take on BMW and Mercedes-Benz.

Challenging the Germans was a big step. Even Cadillac, which had enjoyed more than 20 years of virtually unchallenged domination of the American luxury-car scene, was running scared at the growth of Mercedes-Benz. BMW, meanwhile, was rapidly establishing itself as a key status symbol for American yuppies. Ersatz Mercedes grilles were popping up on even the humblest of American sedans, while BMW had become the darling of the automotive press.

Still, as potent as the Germans had become, they were also vulnerable. Their biggest weakness was price. A combination of currency revaluations, inflation, and sheer greed had sent their sticker prices through the roof. By the early eighties, the cheapest of BMW's midsize 5-Series sedans was around $25,000, while most Mercedes were above $30,000 -- three times the price of a Honda Accord sedan, and almost 50% more than a Cadillac Seville. American buyers seemed willing to pay whatever was asked for the BMW roundel or the three-pointed star, but there was a large and alluring price gap between the upper-middle-class American brands and the Germans.

Moreover, despite BMW's and Mercedes' much-vaunted engineering excellence, their products were not entirely in tune with American tastes. People bought them for their prestige, which tended to overshadow the fact that by American standards, most BMW and Mercedes sedans had a rather stiff ride, Spartan interior appointments, and six-cylinder engines. (Mercedes also offered a V8, but it pushed the price even further into the stratosphere.) Car magazines appreciated the Germans' no-nonsense character and bred-for-the-autobahn road manners, but that demeanor entailed significant compromises in routine American driving. That, too, suggested an opportunity.


The Honda Legend (sold as an Acura in North America) was the first really upscale Japanese car for the export market, although it was actually developed in partnership with Rover. Roughly the size of a contemporary Audi 4000, it was powered by a V6 engine: initially 2.5 L (152 cu. in.) with 151 hp (113 kW), later 2.7 L (165 cu. in.) with 160 hp (120 kW). This is a 1990, the last year of the first generation. (Photo © 2007 Kentaro Matsui; released to the public domain by the photographer)

Toyota already made a luxury car of sorts, the large, conservative Toyota Century. Introduced in 1967, the Century was roughly the size of a contemporary American intermediate, with a V8 engine and automatic transmission. It was not a particularly inspiring vehicle, essentially a limousine for conservative executives and politicians. Toyota never exported it, and even at home, wealthy private buyers preferred the snob value and greater "individuality" of foreign makes. To take on the Germans, Toyota would need something wholly new.

The new luxury car was codenamed Project F1 (F for "Flagship," rather than "Formula"). Toyota spared no expense; at its height, the development program involved 24 separate engineering teams and some 3,700 engineers and technicians. All these resources were directed at creating a single product, a clean-sheet"luxury sedan sharing neither platform nor engine with any existing Toyota model.

An American automaker would probably have picked a single target (such as Mercedes' contemporary W126 S-Class sedan), designed something comparable, allowed it to be whittled away by the accountants, and tried to make up the difference with cut-rate pricing. (Indeed, Detroit has applied exactly that philosophy to challenging the imports for almost 40 years.) Toyota's chief project engineer, Ichiro Suzuki, however, was determined to beat Mercedes and BMW in every parameter, from acceleration to coefficient of drag. It was a very tall order, and just setting such a lofty goal spoke volumes about Toyota's ambitions. Honda's Legend, by comparison, was aimed at the Audi 4000, a considerably less daunting target, and even then, Honda had enlisted Britain's Rover for engineering assistance.

Toyota's army of engineers completed the first running prototype of the new sedan in July 1985. A fleet of development mules spent much of 1986 in extensive road testing on both the German autobahnen and on American roads. Toyota eventually built 450 running prototypes, a remarkable number even for a clean-sheet design.

One of the key points of the F1 Project was its engine: an all-new V8. The V8 was an important part of Toyota's plan to leapfrog the Germans, but it was a risky decision. In the fuel-crunched late seventies, many industry pundits believed the V8 would be extinct by 1985, a victim of rising fuel prices and federal CAFE rules. By the time the first prototypes were ready, though, gasoline was again cheap and plentiful in the U.S., and American buyers were rediscovering their love of horsepower. Toyota spent $400 million developing a sophisticated new 4.0 L (242 cu. in.) engine. It was expensive, but it proved to be a wise investment.


The LS400's V8 engine, known to Toyota as 1UZ-FE, was all new. It used an aluminum block and heads and featured dual overhead camshafts, four valves per cylinder, and a sophisticated engine computer that managed fuel injection, ignition, and transmission controls. It was rated at 250 hp (187 kW) and 260 lb-ft (353 N-m) of torque. Toyota has also used this basic design for successful racing engines, and later developed an iron-block version for use in its large trucks and SUVs.

In early 1985, Yuki Togo, then the head of Toyota Motor Sales, delicately suggested that if Toyota wanted to sell cars to a different class of customers, it needed to study those customers more closely. The upper-crust target market for Project F1, Togo pointed out, had a very different set of standards than did Corolla buyers. In May of that year, Toyota dispatched a team of market researchers to explore the upscale market. Perhaps their most unusual stratagem was quietly renting a house in posh Laguna Beach, California, which allowed their researchers to observe the affluent American consumer in its native habitat.

The researchers came to an obvious but politically awkward conclusion: the average Mercedes-Benz or BMW customer would not be caught dead in a Toyota showroom. This revelation undoubtedly caused a great deal of teeth-gritting among Toyota management -- what was the point of a Toyota flagship if it couldn't be called a Toyota?

Honda had already confronted that same problem. In the summer of 1985, the company announced that its new Legend sedan would be marketed in North America through a new brand called Acura (although it was sold as a Honda elsewhere in the world). The announcement was greeted with some skepticism, but when the Acura division bowed in March 1986, it proved to be an immediate success.

In May 1986, Toyota swallowed its pride and hired the consulting firm of Lippincott & Margulies (now simply Lippincott) to help them develop a new luxury brand. Meanwhile, Toyota's ad agency, Saatchi & Saatchi, set up a separate team to handle the new brand's advertising. Lippincott ultimately suggested the name "Lexus."

(Nissan would go through a similar process to develop its Infiniti brand, but that project did not begin until November 1986, after the introduction of Acura.)

The VRA was rescinded in 1985, ending the import cap on Japanese cars. (It was not the end of the trade dispute, however, which led a few years later to a punitive, 25% tariff on Japanese light trucks.) The cap had contributed to the short-term revival of the American automakers. Chrysler and Ford, which had been on the brink of collapse in 1979, enjoyed strong profits in 1984 and 1985. The restrictions had done nothing to save American automotive jobs, however, which continued to drop by 4% per year. The VRA's principal effect was a substantial rise in new-car prices, which ultimately cost American consumers billions.

The VRA also marked a fundamental shift in the market. Before the import cap, Japanese cars had generally been cheaper than their American competitors. Now, they generally cost more, but buyers demonstrated that they were willing to pay a premium for the more sophisticated engineering and greater perceived quality of the Japanese brands. The introduction of Acura in 1986 drove that point home. The Legend was the most expensive Japanese car yet sold in America, over $20,000 to start, but it not only sold respectably, it enjoyed strong resale value and an enviable reliability record, both excellent signs for its future.

The import restrictions and their attendant price increases had swelled the profit margins of the Japanese automakers, which raked in as much as $2,000 more for each car sold. Those profits, in turn, helped to finance projects like the Lexus, whose development costs eventually ran to around $1 billion.

The Lexus project was formally approved for production in May 1987. With the success of Acura, Toyota was more convinced than ever that there would be a market for it.

In Japan, the new luxury sedan would be called Toyota Celsior; Toyota did not attempt to launch the Lexus brand in its home market until 2005. For the rest of the world, the company opted for a European-style alphanumeric designation: LS (for "Luxury Sedan") 400 (for the engine's displacement in deciliters).


The original LS400 was roughly the size of a contemporary BMW 7-Series (E32), and split the difference between the Mercedes E-Class (W124) and S-Class (W126) sedans. It rode a 110.8-inch (2,815-mm) wheelbase, and stretched 196.7 inches (4,996 mm) overall, narrowly avoiding the punitive taxes some countries levied on cars longer than five meters. Curb weight was around 3,800 lb (1,724 kg). In 2005, the wheelbase was stretched to 112.2 in (2,850 mm) and curb weight was trimmed to around 3,600 lb (1,633 kg). Overall length remained the same as before, and the increase in wheelbase provided a slight increase in rear-seat room, at the expense of trunk space.

Toyota decided that introducing a new brand with only a single, relatively expensive model was too risky. Acura had hedged its bets by adding the Integra, a sporty three- or five-door hatchback priced under $13,000. Toyota settled on a deluxe version of its aging Camry sedan, with slightly revised styling, a new interior, and a new name: Lexus ES250.

The Lexus lineup made its debut on the U.S. auto show circuit in January 1989. By the time it went on sale that fall, Toyota had established 70 Lexus franchises, a number that rose to about 150 by January 1990. It was bolstered by an extremely effective ad campaign, including a well-remembered TV spot in which a pyramid of wine glasses was balanced on the LS400's hood.

One of Toyota's goals for Lexus was to offer velvet-glove customer service. This was (and remains) another chink in the armor of the high-end German marques, whose U.S. dealers had a reputation for brusque arrogance. Toyota required that Lexus dealers offer better customer facilities and service, something that became a major part of the brand's marketing.

The arrival of Lexus and its new Nissan rival, Infiniti, were by far the biggest news in the American industry that year. Both brands laid the foundation with teaser ads, which, in Infiniti's case, didn't even always show the car. The LS400 and Infiniti Q45 became media darlings, eclipsing even Honda's ambitious new NSX sports car.

Initial reaction to the Lexus LS400 was generally positive. Its build quality was obvious, but its styling was a well-polished pastiche of Mercedes-Benz cues -- tasteful, but deeply conservative and somewhat anodyne. Nevertheless, the LS400's virtues were clear. It had a ride as serene as any Cadillac, but it had surefooted handling, if not quite the agility of a big BMW. It had ample power, and the new engine and transmission were exceptionally quiet and refined. If its interior was a little plasticky, the Lexus was nonetheless well finished and solidly constructed, rivaling Mercedes' best efforts.

The European press, predictably, was less enthralled. In September 1989, for example, Peter Robinson of Britain's Autocar & Motor called the Lexus highly competent but supremely bland, although he admitted that in many respects, the LS400 was superior to BMW's 735i.

One area where Lexus had a clear-cut advantage over the Germans -- at least in the States -- was price. The LS400 started at $35,000, which was $5,000 more than the priciest Acura Legend, but far less than its German competition. The Lexus's price was slightly misleading, because most cars shipped to dealers had the Luxury Features Group, with leather upholstery, moonroof, and high-end audio system, which brought the tab to almost $40,000. Nonetheless, it was still almost $10,000 cheaper than the less-powerful BMW 735i, and more than $20,000 less than a Mercedes 420SEL. The V8-powered Cadillac Seville was slightly cheaper, but it had 70 fewer horsepower (52 kW less), and its quality was not at the same level. The price made the LS400 a bargain in its class.


The LS400's doesn't look self-consciously "aero," but it had one of the lowest coefficients of drag of any contemporary car -- as low as 0.29 on some models. It did not lack for straight-line speed, although most reviewers found Lexus's claimed 0-62 mph (0-100 kph) time of 6.9 seconds optimistic. Top speed was around 150 mph (242 kph).

Even BMW and Mercedes admitted that the LS400 was an excellent car, although its price prompted accusations that Toyota was selling it below cost. The American public was highly impressed. Toyota's Laguna Beach market-research sojourn had paid off, and Lexus's marketing pitch to high-end American buyers proved to be spot on. In its first year, Lexus sold nearly 64,000 cars in the U.S. This was not quite at the level of Mercedes-Benz, whose U.S. sales were around 75,000, but it was uncomfortably close to BMW. In 1991, Lexus sales rose to 71,206, bolstered by press adulation and awards for initial quality. Most of these sales were LS400s, and many were "conquest" sales to former Mercedes and BMW customers.

Lexus did not have the same impact in the European market. The LS was not priced as keenly in Europe as was in the U.S. In the UK, it started at around £32,000, about the same as a 735i. The class-conscious British market was also skeptical of the new brand, and more likely to perceive Lexus models as fancy Toyotas. The latter point was made most acutely in 1999, when two British customers filed complaints against importer Simon Lerner for selling right-hand-drive, Japanese-market Toyotas rebadged as Lexuses. Lerner was fined £3,000 for falsely badging the cars in order to charge a higher price, which CAR's Mark Walton puckishly suggested was precisely the purpose of the Lexus brand.

Tarted-up Toyota or not, the LS400 caused a great deal of scrambling in Munich and Stuttgart-Untertürkheim. BMW stepped up development of its first V8 engines in more than two decades, while Mercedes moved to expand V8 availability and cut its costs to enable lower prices. The reasons were clear: after more than a decade of ruling the executive class, Mercedes and BMW were now on the defensive.


The LS400's double-wishbone/multi-link suspension was theoretically superior to BMW's contemporary MacPherson strut/semi-trailing-arm layout, but the LS was tuned more for comfort than handling sharpness. Ride quality was excellent, although some critics found it somewhat under-damped, even with the stiffer suspension settings used for European models, and its steering was rather numb.

Toyota quickly began to expand the Lexus lineup. The first additions were the SC300/SC400 coupes (about which we'll have more to say in our next installment), along with a new entry-level ES300 sedan (still a fancy V6 Camry, but a far more convincing effort than before). In 1993, they were joined by the Giugiaro-styled GS300 sedan, aimed at the BMW 5-Series and E-Class Mercedes.

The original LS400 continued with few changes through 1994, although its price escalated rapidly, reaching $51,200 by the 1994 model year. Even if Toyota had not actually "dumped" the original LS400 below cost, it wasted no time in exploring what the market would bear.

The LS got its first revision in 1995. The new edition was almost indistinguishable from its predecessor, but a careful reengineering trimmed its curb weight by about 200 pounds (90 kg), benefiting both performance and fuel economy. Its sales began to slip badly toward the end of its run, thanks in part to skyrocketing prices and internal competition with the second-generation Lexus GS. Redesigned in 2001 and again in 2007, the LS was still a highly competent luxury sedan, but it was no longer as significant as the original.

Toyota did not succeeded in trumping BMW and Mercedes in every area, as Ichiro Suzuki had vowed, but it had managed to establish Lexus as a viable alternative, an impressive feat for a fresh-out-of-the-box car and a new brand. Lexus proved far more successful than Infiniti, which didn't really establish itself until a decade later, and quickly overshadowed Acura, whose sales dropped precipitously in the early nineties.

In 2005, Toyota made Lexus a separate subsidiary organization, with its own design and engineering facilities. In 2008, its worldwide sales totaled 430,000, 270,000 of them in the U.S. That is still well short of BMW, whose worldwide sales were over 1.5 million last year, but Lexus remains a force to be reckoned with in the luxury market.


The current Lexus LS460 is bigger, nearly 600 pounds (272 kg) heavier, and vastly more expensive than its LS400 predecessor, starting at about $64,000. The long-wheelbase hybrid LS600H starts at $106,000, and tips the scales at around 5,100 lb (2,300 kg).

In the second part of our story, we'll look at the second phase of Toyota's assault on the luxury market: the Lexus coupes.

# # #

Our account of the origins of the Voluntary Restraint Agreement comes from David Halberstam, The Reckoning (New York: William Morrow and Company, 1986). Shoji Hattori's comments on competing with the U.S. automakers came from Eric Dahlquist, "Who's Afraid of Vega, Pinto and Gremlin? Not VW, says Stuart Perkins. Not Toyota, says Shoji Hattori," Motor Trend, August 1970 (Vol. 22, No. 8), pp. 65-68 and 103.

The chronology of the LS400's development came primarily from documents prepared by the Toyota USA Automobile Museum for Toyota's 50th anniversary in 2007 (author and date unknown; Toyota USA Automobile Museum, http://toyota50th.com/pdf/ls.pdf and http://toyota50th.com/pdf/lexus.pdf, accessed 13 June 2009). We also consulted Peter Robinson, "Lexus Drives BMW to the Limit" (Autocar, 18 September 1989); and James Cleary, "Easy as One, Two, Three" (Motor Australia, June 1992), both of which are reprinted in R.M. Clarke, ed., BMW 7 Series Performance Portfolio, 1986-1993 (Cobham, Surrey: Brooklands Books Ltd., 2006). Some additional details came from Mike Covello, Standard Catalog of Imported Cars 1946-2002 (Iola, WI: Krause Publications, 2001; Second Edition).

Our information about the Simon Lerner case came from Mark Walton, "The End of Grey Imports?" CAR, July 1999, pp. 106-110, which illustrated both the ephemeral nature of the Lexus brand and the skepticism with which it has been received in class-conscious Britain.

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