If the idea of a Japanese sports car would have been laughable in 1965, the thought that a Japanese company might one day take on the finest European luxury sedans would have seemed utterly mad. The idea that it might actually succeed would have been too outlandish to contemplate — yet that’s exactly what happened in 1989. This week, we look at the origins of the 1990-2000 Lexus LS400.
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 in the wake of the 1973–1974 OPEC embargo and the late-seventies energy crisis. 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 Reagan 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 as an alternative to higher tariffs or other more punitive sanctions.
Amaya understood what was at stake and played his cards very astutely indeed. He convinced Brock to accept a short-term voluntary cap on imported Japanese cars, initially set at 1,685,000 a year. The cap was strictly numerical; there were no stipulations on the type of cars that could be imported — or on their prices.
The deal was a hard sell in Japan. Toyota leadership was resistant to the limits and Amaya allegedly had to prostrate himself before Nissan president Takashi Ishihara to persuade him not to oppose the agreement. However, Japanese automakers finally, reluctantly conceded and the import cap — known as the Voluntary Restraint Agreement (VRA) — went into effect in mid-1981. Over the next few years, the Japanese auto industry would slowly recognize that the deal was not so much a limit as a golden opportunity.
A NEW APPROACH
Up to that point, Japanese automakers had focused their efforts on the lower end of the American market. Nissan, of course, had made a splash in the sporty car segment with the Datsun 240Z, but most Japanese imports were compact economy cars.
To some extent, such self-imposed limitations may have reflected a deep-seated insecurity about the Japanese auto industry’s place in the world. As recently as the late fifties, there hadn’t been much market for passenger cars in Japan and the major Japanese manufacturers’ early export efforts had been cautious, halting, and not always particularly successful. The risk of failure and embarrassment may not have deterred smaller companies like Honda or Toyo Kogyo (Mazda), but it was a significant concern for Toyota and Nissan, which were the big fish in the home market.
Beyond that, the U.S. small car market was a comparatively easy target; Detroit’s record with subcompact cars was checkered and its enthusiasm for that segment was limited at best. By contemporary American standards, midsize Japanese family sedans like the Toyota Corona and Datsun Bluebird were tiny, but the Japanese could offer more features and a higher standard of fit and finish (although not better corrosion resistance) than their poverty-spec American rivals.
Those same factors made Toyota and Nissan reluctant to emphasize or even offer their bigger cars in the U.S. In Japan, a six-cylinder Toyota Crown or Nissan Cedric was a big, impressive car — roughly the equivalent of a Ford LTD or Chevrolet Caprice. In the U.S., the Crown didn’t even qualify as an intermediate, vying instead with the likes of the Ford Maverick or AMC Hornet. Toyota did import the Crown in small numbers, but its U.S. marketing was minimal, which Toyota Motor Sales executive vice president Shoji Hattori admitted was intentional. The smaller Corolla and Corona made up the bulk of Toyota’s U.S. sales.
That was fine as long as the Japanese economy was relatively healthy (which for the most part it was through the seventies and eighties) and Japanese automakers could expect their share of overseas markets to grow indefinitely, if gradually. The sudden imposition of a sales cap on their biggest single export market forced Japanese manufacturers to rethink their strategy. If their U.S. sales couldn’t grow (at least until they had established local production, something several Japanese manufacturers were already working on), they would need to shift their focus from sales volume to unit profit. It was time to move upmarket.
The process began gradually. Most of the Japanese cars sold in the U.S. already had high content levels by American standards, including many minor items that were (at least technically) extra-cost options on most domestic cars. Selling “fully equipped” models allowed Japanese automakers to simplify their export offerings while creating an impression of value.
Since those automakers were now limited in the number of units they could ship, each manufacturer began to ensure that each car it did ship was even better trimmed, better equipped, and more expensive than they had previously dared. Toyota brought more of its six-cylinder cars to the U.S., including the latest Mark II sedan (called Cressida in the States) and the Celica XX sports coupe, called Celica Supra in the U.S. Nissan responded with a federalized version of its plush 810 Maxima. Honda eventually got into the act, too, with products like the Accord SE (Special Edition) sedan, which featured 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 small 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.
ROOM AT THE TOP
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 1983, Honda and Britain’s Austin Rover Group began a joint venture to create a new six-cylinder luxury sedan codenamed XX, which eventually emerged as the Honda/Acura Legend.
Around that time, Yukiyasu Togo, the recently appointed president of Toyota’s U.S. sales organization, went to company chairman Eiji Toyoda and suggested that Toyota produce a high-end luxury sedan. Toyoda thought it over and embraced the idea, seeing it as a fitting project for Toyota’s forthcoming 50th anniversary (although as it turned out, the car wouldn’t actually be available until almost two years after that).
Toyota could have restyled its home-market Crown, which was a step up in size and price from the Mark II/Cressida, and taken a few chunks out of the lower end of the American luxury market, but Eiji Toyoda had bigger game in mind. In August 1983, he called a confidential meeting of his senior executives and proposed the development of a new ultra-luxury sedan to go head to head with the world’s finest automobiles. Toyoda wasn’t just after Volvo or Cadillac; he wanted to take on BMW and Mercedes-Benz.
Challenging the Germans on their own ground was a big step. Even Cadillac, which had enjoyed more than 20 years of virtually unchallenged domination of the American luxury car scene, was now 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 avarice 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 in the U.S. and 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, austere 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.
In the domestic market, Toyota already had a high-end car of sorts, the big Toyota Century. Introduced back in 1967, the Century was roughly the size of the shorter-wheelbase S-Class Mercedes and offered a V8 engine, rare in the Japanese market. However, Toyota had never exported the Century and its styling and engineering were dated; Toyota resisted frequent model changes in hopes of insulating the Century from fashion trends. It was an extremely conservative car, sold mainly to business executives and politicians who needed an appropriately formal Japanese-made limousine, so many wealthy private buyers preferred the snob value and greater “individuality” of foreign makes. To do battle with the Germans, Toyota would need something wholly new.
The new luxury car was codenamed Project F1 (with “F” signifying “Flagship” rather than “Formula”). Toyota spared no expense; at its height, the development program involved some 3,700 engineers and technicians in 24 separate engineering teams. All these resources were directed at creating a single product: an all-new luxury sedan sharing neither platform nor engine with any then-extant 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.) However, Toyota’s chief project engineer, Ichiro Suzuki, was determined to beat Mercedes and BMW in every parameter. It was a very tall order, and just setting such a lofty goal spoke volumes about Toyota’s ambitions. The Honda Legend, by comparison, was aimed at the Audi 80/4000, a considerably less daunting target, and even the Legend was a collaborative effort with the British automaker Rover.
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 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 DOHC 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., so American buyers were rediscovering their love of horsepower. Toyota spent $400 million developing a sophisticated new DOHC, 32-valve, 3,968 cc (242 cu. in.) engine, the 1UZ-FE. It was expensive, but it proved to be a wise investment.
A QUESTION OF BRANDING
In early 1985, Yukiyasu Togo, then 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 U.S. Corolla buyers or even Japanese luxury car customers. In response, 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, so their researchers could 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 or, more gallingly for Japanese executives, driving a Toyota. The latter revelation probably caused a great deal of teeth-gritting among Toyota’s senior management. Setting up a new dealer network to cater to luxury customers was one thing — in Japan, Toyota then had six different dealer networks, each with its own distinct products — but 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 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,” which was ultimately adopted.
(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.)
END OF A VRA
In April 1985, the VRA import limit was increased to 2.3 million cars, where it remained until 1991. The limits did probably help American automakers retrench; Chrysler and Ford, which had been on the brink of collapse in 1979, enjoyed strong profits by 1984 and 1985. However, the VRA’s principal effect was to contribute to rapidly increasing new-car prices, already swelled by inflation and exchange rate changes.
The VRA also marked a fundamental shift in the import market. Before the limits were imposed, Japanese cars had generally been cheaper than their American competitors; thanks to the import restrictions and the ever-greater strength of the yen against the dollar, Japanese cars now generally cost more. However, 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 most clearly. The Legend was the most expensive Japanese car yet sold in America, around $20,000 to start, but it sold respectably and 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 LS400, whose development costs eventually ran to around $1 billion.
The Lexus F1 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 the U.S. and most other worldwide markets, Toyota opted to give its new luxury car a European-style alphanumeric designation: Lexus LS400, LS for “Luxury Sedan” and “400” for the engine’s displacement in deciliters. In Japan, the new car was called Toyota Celsior; Toyota wouldn’t introduce the Lexus brand in the Japanese domestic market until August 2005.
Toyota decided that introducing a new brand with only a single, relatively expensive model was too risky. Honda had hedged its bets in that regard by matching the Legend with an Acura version of the JDM Quint Integra, a sporty three- or five-door hatchback priced under $13,000. Toyota opted instead for a slightly restyled and retrimmed version of the recently added Japanese-market V20 Camry Prominent pillared hardtop, fitted with the larger-displacement 2,507 cc (152 cu. in.) 2VZ-FE engine from the U.S. Camry V6. The new model was dubbed 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 hood of a Lexus LS400.
One of Toyota’s goals for Lexus was to offer velvet-glove customer service. This was 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.
MEET THE PRESS
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 Lexus 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 that of any Cadillac, but matched that smoothness with surefooted handling, if not quite the agility of a big BMW. The Lexus 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 was predictably less enthralled than were their American counterparts, but even British critics grudgingly admitted than the LS400 was in some respects superior contemporary German rivals.
One area where Lexus had a clear-cut advantage over the Germans — at least in the States — was price. The Lexus 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, the LS400 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 NEW KID
Even BMW and Mercedes admitted that the Lexus LS400 was an excellent car, although its attractive price prompted accusations that Toyota was selling the LS below cost. The American public was highly impressed. Toyota’s Laguna Beach market-research sojourn had paid off; 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, many of which were “conquest” sales to former Mercedes and BMW customers.
Lexus did not have the same impact in the European market, in part because the LS400 was not priced as keenly in Europe as was in the U.S. In the U.K., for example, the LS400 started at around £32,000, about the same as a 735i. For class-conscious British buyers, the Lexus brand’s lack of pedigree was hard to get past, as was the perception that Lexus cars were just fancy Toyotas with new badges. The latter point was driven home with some irony by the case of British importer Simon Lerner, who in 1999 was charged with fraud for affixing Lexus badges to equivalent JDM models.
Tarted-up Toyota or not, the Lexus 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.
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 (sold as Toyota Windom in Japan — still a fancy V6 Camry, but a far more convincing effort than before). In 1993, these were joined by the Giugiaro-styled GS300 sedan, based on the JDM Toyota Aristo and aimed at the BMW 5-Series and E-Class Mercedes.
The original Lexus LS400 continued with few changes through 1994, although its price escalated rapidly, reaching $51,200 by the 1994 model year. Japanese-market prices remained stable, so it appears the main culprit of the U.S. escalation was the weakness of the dollar relative to the yen, which made Japanese-made cars more expensive.
The LS400 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. However, 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 and established a new Lexus dealer network in the home market. In 2008, worldwide Lexus 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.
In the second part of our story, we’ll look at the second phase of Toyota’s assault on the luxury market: the Lexus SC coupes.
NOTES ON SOURCES
Our account of the origins of the Voluntary Restraint Agreement comes from David Halberstam, The Reckoning (New York: William Morrow and Company, 1986); and Masaaki Sato, The Toyota Leaders: An Executive Guide, trans. Justin Bonsey (New York: Vertical, Inc., 2008). Shoji Hattori’s comments on Toyota’s U.S. sales strategy came from Eric Dahlquist, “Who’s Afraid of Vega, Pinto and Gremlin? Not VW, says Stuart Perkins. Not Toyota, says Shoji Hattori,” Motor Trend Vol. 22, No. 8 (August 1970), pp. 65–68 and 103. Other information on the Japanese automakers in this period came from Rich Ceppos, “Cadillac Cimarron,” Car and Driver Vol. 27, No. 2 (August 1981), pp. 33–40; Michael A. Cusumano, The Japanese Automobile Industry: Technology & Management at Toyota & Nissan (Cambridge, MA: The Harvard University Press, 1985); Guide to Motor Industry of Japan 1967 Edition (Tokyo, Japan: Japan Motor Industrial Federation, Inc., 1967); Guide to the Motor Industry of Japan 1990 (Tokyo, Japan: Japan Motor Industrial Federation, Inc., 1990); and Jack Yamaguchi, “Japan: The Year of Uncertainty,” World Cars 1979, ed. Annamaria Lösch (Rome: L’Editrice dell’Automobile LEA/New York: Herald Books, 1979), pp. 61–66.
The chronology of the LS400’s development came from documents prepared by the Toyota USA Automobile Museum for Toyota’s U.S. 50th anniversary in 2007 (Toyota USA Automobile Museum, toyota50th. com, accessed 13 June 2009); “The Lexus LS Chronology,” pressroom.toyota. com, accessed 16 June 2009; Toyota Motor Corporation, “A 75-Year History Through Text: Overall Chronological Table,” www.toyota-global. com, accessed 19 January 2014; 75 Years of Toyota Vehicle Lineage: “Camry Hardtop (1st),” “Camry Sedan (3rd),” “Celsior 1st,” “Celsior 2nd,” “Celsior 3rd,” “Lexus ES Sedan (1st),” and “Vista Hardtop (2nd),” 2012, www.toyota-global. com, accessed 30 January to 8 March 2014; and Toyota Motor Sales, “Celsior” [Japanese brochure] October 1989; “Celsior” [Japanese brochure], October 1994; and “V6 Prominent: New Camry V6 4-door Hardtop” [Japanese brochure 141104-6308], August 1988. We also consulted “Barge Poll (Giant Test),” CAR November 1991: 84–95; Patrick Bedard, “Preview: Lexus LS400,” Car and Driver September 1989: 50–55; William Jeanes, “Comparison Test: Finding the Best Sedan in the World,” Car and Driver November 1990: 112–128; Maryann N. Keller, “Streetwise: Amati: What’s in a Name?” Motor Trend Vol. 44, No. 2 (February 1992): 118, and “Streetwise: Lexus Versus Infiniti: Luxury Battle—Round Two,” Motor Trend Vol. 42, No. 12 (December 1990): 130; “Lexus LS400 (The Autocar Road Test Number 4107),” Autocar 18 January 1995: 40–46; Kevin Smith, “Road Test: Lexus ES250,” Car and Driver May 1990: 91–96; 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 BMW 7 Series Performance Portfolio 1986-1993, ed. R.M. Clarke (Cobham, England: Brooklands Books Ltd., ca. 2006). Some additional details came from the Auto Editors of Consumer Guide, Auto ’90 Vol. 516 No. 1 (1990); Mike Covello, ed. Standard Catalog of Imported Cars 1946-2002, Second Edition (Iola, WI: Krause Publications, 2001); and Mark Walton, “The End of Grey Imports?” CAR July 1999, pp. 106–110, which discussed the Simon Lerner case.
Historical exchange rate equivalences were estimated based on data from Lawrence H. Officer, “Exchange Rates Between the United States Dollar and Forty-one Currencies” (2009, MeasuringWorth, http://www.measuringworth.org/exchangeglobal/; used by permission). Please note that all exchange rate equivalencies cited in the text are approximate and provided for illustration and general informational purposes only; this is an automotive history, not a treatise on currency trading or the value of money, and nothing in this article should be taken as financial advice of any kind!