Online Extra: Lexus' GM: "You Can Have It All"

Danny Clements talks about the luxury carmaker's coming hybrid SUV, competing against BMW, and where Lexus is going next

In 14 years, Lexus has gone from being an automotive afterthought to the top-ranked marque in the rapidly growing U.S. luxury-car market. Since the original LS sedan debuted in 1989, the brand name has almost become a synonym for luxury. Television ads showing champagne-filled flutes stacked on the hood of a purring LS with nary a drop spilled introduced many Americans to Lexus.

In the years that followed, this Toyota Motor (TM ) division wowed critics and cynics alike by consistently taking top honors in J.D. Power & Associates quality and service surveys. Lexus became the top luxury import in 1991 and the No. 1 luxury car overall in 2000, a title it has kept for three years running.

Next, Lexus plans to introduce a luxury SUV with a twist -- great fuel economy. But while Lexus sales remain strong, some caution signs are flashing. Last year, BMW came within 2,077 cars of snatching the crown as the top-selling luxury brand in the U.S. What's more, BMW sales pulled ahead of Lexus in the first two months of this year.

Denny Clements, a Toyota sales group vice-president and Lexus' general manager, talked recently with BusinessWeek Tokyo Correspondent Chester Dawson about some of the challenges and opportunities that lie ahead. Edited excerpts of their conversation follow:

Q: Sport-utility vehicles have a poor track record for being environmentally friendly. What can you tell us about Toyota's plans to debut a 2005 model Lexus SUV that uses so-called hybrid technology -- combining gas-powered and electric engines?


We're going to put the first application of Toyota's hybrid technology in the RX SUV in less than two years. The [prototype] car is extremely quick. It has the performance of a V8 with the fuel economy of a four-cylinder.

This will be the first application of what hybrid technology can really do: give you great 0-60, low-end torque, great fuel economy, and a fraction of the emissions. You can have it all. Particularly with the concerns about SUVs and the environment, we think we've really hit a sweet spot. You can have the performance and not feel guilty about it.

Q: But why a luxury Lexus SUV and not a regular Toyota brand SUV?


It's going to add to our image for technology. Our buyers don't acknowledge that the environment is high up on their list of what's important, but the [average] household income of owners of the [Toyota hybrid] Prius is over $100,000. So we know that people who have the financial means do care about the environment.

Q: What other new trends do you see developing in the luxury market?


Several market trends really relate to demographics. One is that someone is turning 50 every 8 seconds. These people are entering into their peak earning and spending years. That's driving the mid and high end of the luxury market. That [demographic trend] is going to continue for the next 10 years.

The other trend we see is, for want of a better term, the "democratization of luxury." We see many people [where] the second car they ever own is an [entry-level Lexus] IS 300. They're not as willing to wait as previous generations. It's a function of pricing, incentives, and low interest rates that's allowing people to consider the entry-level luxury market.

Q: What's the near-term growth outlook for the U.S. luxury-car market and Lexus?


We see the luxury market continuing to expand its share of the entire market. That's [part of] this demographic trend. Short term, we see overall sales [in the U.S. market] in the range of 16 million to 17 million and sales of luxury cars at 1.7 million -- 10% of the total market. By 2005, that's expected to grow to 2 million cars, or 12.3% [of the total market]. So it's growing faster than the total industry, obviously. We don't really project share [for Lexus], but we think our share will stay in the range of 13% to 14%. We'll grow with the industry.

Q: Is Lexus gearing more toward higher-end or entry-level cars?


Yes and yes. We look at tremendous opportunity in the upper end for Lexus as a result of the reputation for quality and the ownership experience. If we have the products, we certainly can go upscale and compete with Mercedes (DCX ), which has something like seven products now over $70,000. We don't have any. As our next generation of products evolves, we have an opportunity to make the same statement at the high end as we did in 1989 with the LS 400.

At the other end of the market, there's a phenomenon called BMW. BMW's 3-Series is selling in excess of 10,000 cars a month here. Our car to compete with that is the IS 300, of which we're selling about 1,500 a month. We have one car and one engine. They have multiple engines, multiple transmissions, in coupe, convertible, and sedan. They have almost a monopoly at this end of the market, which is a real growth area.

Q: What can we expect from Lexus in terms of new types of product?


As our future products evolve, all will make quantum leaps. We have eight cars today, and that's probably enough. I don't see the need for a luxury truck or van. You might see some additional crossover vehicles, but they would be within our existing series. We think the IS is a huge opportunity in the next generation. We think we could be very competitive against BMW if we choose to do so.

This generation ES is a baby LS. For its price point it's by far the most luxurious car in terms of interior and ride. The styling has been very well-received. It's a very competitive market. You've got [Mercedes] C-Class and Audi (VLKAY ) -- there are a lot of incentives out there. But we need to have the ES as a near-luxury sedan. Near-luxury sport would be more of the IS 300. We have a two-car strategy where other people try to do it with one.

Q: What about the superluxury sports car, which is said to be under development?


There are a lot of superflagship ideas, and I can't comment on any of them, but we think there's opportunity for us there. I don't know that it's as much of a business case as it is about image. If you're going to do a sports car, it's the performance. Toyota has serious aspirations in Formula One [circuit racing]. That's a statement about engine technology.

If we were to do a sedan, then that's a statement about luxury. If we decide to do that, we can make the same statement as we did in 1989 with the LS 400, which changes the definition of a luxury car. I think we should do it -- but not a $300,000 car.

Our view is that we could build a car for a lot less than that and still make a statement and have a better business case. And I think it needs to be a V12 [engine], too. But we don't have any confirmed product plans. Our parent company is seldom first [out of the gate], but we always seem to finish first.

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