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 underwent a tremendous transformation. From a massive manufacturer driven by market share and revenue, it grew into a lean, for-profit machine that wasn’t afraid to tap into a $ 30 billion war chest to take on GM and every other corner. Starting in 2003, Toyota Motor abandoned its low but stable profit philosophy in the passionate pursuit of profit. Consider that your operating profit margin increased from a mere 2% in 1993 to 8% in 2003 (then fell back to 0.8% in 2009). That earnings trajectory closely reflects the fortunes of the Lexus brand in the US.
The tectonic shift toward higher-profit 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’s top brass Motor debated such a delicate car project had a code name with a circled letter F, or maru-efu (later known internally as the F1 program, unrelated to the Formula One circuit). That war name was a nod to its hit-or-miss status as the company’s number one flagship (F of) vehicle. President Eiji Toyoda posed a question to the august gathering of senior 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?” I ask. To one man, the assembled generals of the vast Toyota Motor empire responded in unison: Yes, “a ‘yes’ filled with conviction. And more: Toyota must take up this challenge,” as the official Toyota story goes.
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 president, had some initial doubts. He wanted to continue what Toyota Motor did best: build cheap cars for everyone. But Shoichiro, like most of those who may have had doubts at first, later changed his tone. “I have been asked the question that, with all of Toyota’s success in the United States over the last 30 years, why did we spend billions of dollars and thousands of man-hours in research and creative designs to launch a new line? Of fancy cars? You may have heard that I don’t like to ride in someone else’s built limousines, “he joked at a meeting of American dealerships 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 move to a higher level finally took the jackpot.
Lexus is not only Toyota Motor’s most profitable division, one that auto industry analysts estimate accounts for up to a quarter of the company’s entire annual profit, but is one of Japan’s most profitable export products. As Fortune wrote with great foresight 20 years ago: “The internal story of how Lexus was born is rich in lessons for anyone who yearns to develop high-end products.”