Lexus Origins: What Lexus Fans Need to Know

For most of its history, Toyota Motor maintained a fairly traditional approach to business fundamentals by accumulating cash and slowly expanding, but over the last decade it has undergone a tremendous transformation. From a mass manufacturer driven by market share and revenue, it has become a lean, mean profit machine not afraid to leverage a US$30bn war chest to take on GM and all the other corners. Starting around 2003, Toyota Motor shed its philosophy of low but steady profits in the passionate pursuit of profit. Consider that their operating profit margin increased from a mother of 2% in 1993 to 8% in 2003 (then dropped back to 0.8% in 2009). That earnings trajectory closely mirrors the fortunes of the Lexus brand in the US.

The tectonic shift toward higher-margin vehicles at Toyota Motor dates back, in large part, to a secret board meeting at company headquarters in August 1983. In that top-secret session, Toyota Motor’s top brass discussed such a delicate project car was codenamed with a letter F surrounded, or maru-efu (later known internally as the F1 program, unrelated to the Formula One circuit). That name of war it was a nod to its defining status as the company’s flagship, the No.1 vehicle. Chairman Eiji Toyoda posed a question to the august gathering of top executives, designers, engineers and strategic thinkers – the joint chiefs of staff of Toyota Motor. “Are we able to produce a luxury car to face the best?” he asked him. To one man, the assembled generals of Toyota Motor’s sprawling empire responded in unison: Yes – “A convincing ‘yes.’ And more: Toyota must rise to this challenge,” as the official Toyota story tells it.

In fact, however, not everyone was convinced from the start. Shoichiro Toyoda, the son of the company’s founder and Eiji’s successor as president and director, had some initial misgivings. He wanted to stick to what Toyota Motor did best: build cheap cars for everyone. But Shoichiro, like most others who may have had initial doubts, later changed his mind. “I’ve been asked the question, with all of Toyota’s success in the United States over the last 30 years, why did we spend billions of dollars and invest thousands of man-hours in research and creative design to launch a new line of fancy vehicles? You may have heard that I don’t like riding in someone else’s built limousines,” he joked to a gathering of American dealers shortly after the debut of the first Lexus. “From now on, I will no longer have to travel in vehicles made by Cadillac, Lincoln or Mercedes-Benz.” Eiji Toyoda’s controversial decision to switch categories finally won the lottery.

Lexus is not only Toyota Motor’s most profitable division, one that auto industry analysts estimate accounts for as much as a quarter of the company’s entire annual profit, but it is one of Japan’s most profitable exports. As Fortune wrote with great foresight 20 years ago: “The inside story of how Lexus came to be is rich in lessons for anyone yearning to build high-end products.”

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