After a Decade of Growth, Lexus Retooling Its Lineup

By TERRIL YUE JONES

Sept. 10, 2000 12 AM PT

TIMES STAFF WRITER

DETROIT —

A year ago, Lexus was steamrollering toward an unthinkable goal: Just 10 years after its birth, it was the best-selling luxury brand in the U.S., toppling longtime industry leaders Cadillac and Lincoln.

In the end, the division of Japanese giant Toyota Motor Corp. was surpassed by DaimlerChrysler’s Mercedes-Benz and ended up No. 2. But the race, which went down to the wire, served notice: Americans no longer owned the luxury segment.

Luxury vehicles by their nature cater to a limited audience, representing about 1.36 million, or 8% of the 16.96 million new passenger vehicles sold in the U.S. during a record 1999. But sales in the segment build brand awareness for corporate parents such as General Motors Corp., home of Cadillac, and Ford Motor Co., parent of Lincoln. That said, the major auto companies are after more than cachet. Bottom line: Luxury cars--and increasingly trucks--yield tremendous profit, sometimes $15,000 or more per vehicle.

After its stellar 1999, Lexus isn’t sitting still. The brand is introducing a redesign of its flagship LS sedan and is adding two all-new cars, including its first convertible. Lexus says it will build its most popular vehicle, the RX 300, in Canada and is believed to be weighing production of a luxury minivan in the U.S. To top it off, the brand could come full circle and make a move no Japanese luxury division has done: sell cars under its own badge in Japan.

This year Lexus’ performance is a bit more subdued than last; it’s at No. 3 among the luxury brands, behind Lincoln and Mercedes-Benz.

“The car side is suffering from a couple of products getting long in the tooth,” said Christopher Cedergren of the automotive consulting firm Nextrend in Thousand Oaks. The Camry-based ES, in particular, is aging and won’t get refreshed until there’s a new Camry in about another year.

So far this year all of Lexus’ passenger cars--the ES, GS and LS--are down from a year ago, and the LX 470 sport-utility vehicle is up only slightly, leaving Lexus something of a one-truck pony with the popular SUV-like RX 300 shouldering virtually all the sales expansion this year.

And since they are imported from Japan, Lexus vehicles are burdened by the high value of the yen, which makes Japan-made products more expensive in the U.S., notes Takashi Tomioka, an auto industry analyst at Daiwa Institute of Research America Inc. in New York.

“Most of Lexus’ import competition is from Europe, and with the euro currency cheap, the Europeans gain a price advantage here,” Tomioka said.

Call this a reloading year for Lexus. The IS 300--an all-new sedan aimed at younger, entry-level buyers--went on sale in June, and a totally redone flagship LS, its engine boosted to 4.3 liters, goes on sale next month. And in the spring, Lexus will begin selling the SC 430, a high-powered convertible with a V-8 engine.

The LS, IS and limited-production SC “should help resurrect their car sales in 2001,” analyst Cedergren said. “The only weak link is the ES 300, because many potential buyers looking at the ES have gone to the RX. But it’s a very acceptable rate of cannibalization, because with the two together, they’re selling twice as much.”

Not that Lexus is in trouble. It still has sold 8,500 more vehicles through August than it did in the year-earlier period. And fewer than 2,000 units separate Lexus from this year’s sales leader so far, Lincoln.

“We’ve had phenomenal growth,” said Denny Clements, Lexus’ newly appointed general manager. “This year we’ll sell more than 199,000 vehicles, double three years ago.”

But he brushes aside thoughts of becoming the market leader.

“It’s never been an end goal to be No. 1 in sales but to be No. 1 with our customers, relationships and servicing,” said Clements, who joined Toyota 17 years ago from Lincoln Mercury. “It would be easy to crank up volume and become something other than Lexus. But we don’t want to lose what is Lexus.”

In its 11-year existence, Lexus has forged an ironclad reputation, based on the renowned reliability of its Toyota-based engineering, and accolades for its dealership experience.

Lexus consistently tops the rankings in surveys by respected market researcher J.D. Power & Associates of Agoura Hills. In two Power reports released this summer, the brand ranked No. 2 in the sales-satisfaction index, which rates customers’ sales experiences, and No. 1 in the customer-satisfaction index, which surveys impressions after three years of ownership.

The brand is trying to carry that legacy further with the just-released IS 300, which starts at $31,000. With its 3.0-liter, 215-horsepower inline-6 engine, it hews to the “heritage” of European luxury: rear-wheel drive and an emphasis on performance and handling.

The new flagship jumps from the LS 400 to the LS 430, a more chiseled design with a 4.3-liter, 290-horsepower V-8 under the hood. This third-generation version adds space inside while basically keeping its outside dimensions.

It will have taken nearly a dozen years, but Lexus will finally get a convertible with the SC 430 coming next spring. It’s powered by the same engine as the LS 430, tuned to 300 horsepower. The retractable hardtop still leaves room for a set of golf clubs in the trunk. Expect volume to be small, pricing--and profit--to be high.

But the RX 300 remains the division’s bread-and-butter, and as competitors learn from Lexus’ success with the vehicle, so will RX-fighters appear on the market. BMW already has unleashed its not-quite-an-SUV X5, and another German entry, the SUV-like Cayenne from Porsche, is in the works. The MDX from Lexus archrival Acura, a division of Honda Motor Co., is just going on sale.

“The RX is going to get a lot of new competition. The Acura is a world-beater,” said Joseph Phillippi, senior automotive analyst at PaineWebber in New York. “There are dealers in the boondocks who’ve taken orders for a couple dozen. It looks very, very strong.”

Outwardly very similar to the RX, the Acura MDX sports a third row of seats and can carry seven people. A 3.5-liter V-6 engine blows out a booming 240 horsepower. And the MDX gets 17 miles per gallon in the city and 23 on the highway, best in class, compared with the RX’s 3.0-liter V-6 engine that puts out 220 horsepower and gets 18 to 22 mpg.

“If you are going to come late to the party, you better bring a hell of a date,” Dennis Manns, Acura’s assistant vice president for sales, said at the vehicle’s preview this summer.

The price will be comparable to the RX’s mid-$30,000 range.

Clements professes not to be worried, given the growing number of 50-and-older buyers, the luxury maker’s traditional demographic.

But Daiwa’s Tomioka thinks the real victim of the Acura SUV will be American models such as the Jeep Grand Cherokee, GMC Jimmy, Ford Explorer and Mercury Mountaineer.

“Toyota had the Sienna minivan, then Honda came in with the Odyssey minivan, which did extremely well--but largely at the expense of Chrysler’s minivans,” Tomioka said. “I see the same thing happening here: Lexus was first with the RX, then comes Acura, and it’s the Big 3 who will lose market share, not Lexus.”

Production of the Sienna, which boasts the top crash-test rating in the U.S. minivan market, is being moved from Kentucky to Indiana in 2003--and those close to the industry say it could be the basis for another Lexus model. Such a vehicle would fill a gap in Lexus’ lineup, and available factory space and the existing supplier network would allow manufacturing in this country.

Already Toyota has said it will build the RX 300 in Canada starting in 2003.

Whatever happens with the rest of Lexus’ lineup, it’s hard to overstate the influence of the RX 300, which truly created a new niche in the ever-so-niched auto market. Built off the Toyota Avalon sedan platform, the RX is neither truck nor minivan nor true SUV. It is elegant and futuristic, with the famously quiet Lexus ride. Introduced only in 1998, it is expected to reach 100,000 sales in the U.S. this year, accounting for half of all Lexus volume.

Makoto Oshima, the RX’s chief designer, recalled the brainstorming that led to the model.

“We got together a group of thirtysomething designers and wanted to create something almighty for people in their 40s,” said Oshima, himself a sharp-dressing 47-year-old. The goal, he said, was to create a luxury answer to the Toyota RAV4, “which was more for people in their 20s.”

The RX evolved into a “crossover” from the idea that people wanted more utility than offered by a Mercedes but more luxury than comes with an SUV, he said.

Oshima noted with a smile that he has been at work for a couple of years on the second-generation RX, while competitors are barely out with their first-generation crossovers.

Lexus thus wants to keep a step ahead of the competition where it can. Last week it announced it will offer a version of General Motors’ OnStar satellite communications service, becoming the first non-GM brand to use the wireless emergency and concierge service.

Lexus expects 20% to 35% of the sedan’s buyers to purchase the service, which has features that even GM cars do not, including memo recording, notification of loss of car battery power and a backup battery for the system. Acura will offer OnStar on some of its models a year later, in 2001, and industry analysts believe that Toyota and Honda won’t be far behind.

With its booming growth in the U.S. and a steady presence in Europe, Lexus appears ready to enter the one major market from which it is absent: Japan. Of course, Lexuses are sold in Japan--but as Toyotas. The GS is the Toyota Aristo, the LS is the Celsior, the RX the Harrier. It’s as if Lincolns were sold as Lincolns overseas but as high-end Fords in this country.

Toyota dropped a big hint when it showed the SC 430 as a concept car at the Tokyo Motor Show last fall--not as a Toyota but as a Lexus--and brought in its youthful, Greek-born designer to meet the Japanese and international press.

Asked if Toyota Motor would introduce the Lexus brand to Japan, company President Fujio Cho replied, “There isn’t such a plan yet,” then added with a smile: “But we’re working on expanding our network in Japan.”

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Lexus Comes of Age

Since being introduced in 1989, Lexus has seen its sales grow dramatically. Lexus was the No. 1-selling luxury vehicle brand for much of 1999, but it has slipped to No. 3 this year despite stronger sales.

Lexus is a close No. 3 in U.S. luxury vehicle sales so far in 2000:

Lincoln: 134,482

Mercedes-Benz: 133,800

Lexus: 132,561

Cadillac: 128,994

BMW: 120,763

Acura: 92,082

Volvo: 86,031

Infiniti: 55,375

Audi: 54,245

Jaguar: 29,831

Saab: 25,133