For most of its history, Toyota Motor maintained a fairly traditional approach to business fundamentals by accumulating cash and slowly expanding, but over the past decade it has undergone a tremendous transformation. From a mass manufacturer driven by market share and revenue, it’s grown into a lean, stingy profit-making machine that’s not afraid to tap into a $30 billion war chest to take on GM and every other comer. Starting around 2003, Toyota Motor shed its low-but-steady-profit philosophy in the passionate pursuit of profit. Consider that its operating profit margin increased from a mother of 2% in 1993 to 8% in 2003 (then it fell 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 can be traced, in large part, to a secret board meeting at company headquarters in August 1983. In that top-secret session, Toyota Motor’s top brass debated such a delicate car project was codenamed with a circled letter F, or maru-efu (later known internally as the F1 program, with no relation to the Formula One circuit). That war name it was a nod to its defining status as the company’s flagship, No.1 vehicle. Chairman Eiji Toyoda posed a question to the august gathering of top executives, designers, engineers and strategic thinkers – Toyota Motor’s joint chiefs of staff. “Are we capable of producing a luxury car to face the best?” he asked him. To one man, the assembled generals of the vast Toyota Motor empire responded in unison: Yes – “A ‘yes’ full of conviction. And more: Toyota must rise to this challenge,” as Toyota’s official history 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 doubts. He wanted to stick with what Toyota Motor did best: building 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 past 30 years, why do we spend billions of dollars and thousands of man-hours on research and creative designs to launch a new line of fancy vehicles? Maybe you’ve heard that I don’t like to ride in limousines built by someone else,” he joked to a meeting of American dealers shortly after the debut of the first Lexus. “From now on, I no longer have to travel in vehicles made by Cadillac, Lincoln or Mercedes-Benz.” Eiji Toyoda’s controversial decision to switch categories ultimately hit the jackpot.
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-wide annual profit, but is one of Japan’s most profitable export products. As Fortune wrote with great foresight 20 years ago: “The inside story of how Lexus came to be is rich in lessons for anyone who yearns to develop high-end products.”